All right. Thank you all for being here today. My name is Doug Creutz. I'm the Senior Media and Entertainment Analyst here at TD Cowen. As a PSA, I'm sure you all know the Extel voting window is open. TD appreciates your vote, as do I. I'm very pleased to have with me here today the Chairman and Chief Executive Officer of Take-Two Interactive, Strauss Zelnick.
Thanks, Doug. Nice to be here.
I have been joking with clients that artificial general intelligence is like "GTA VI." It's always 12- 18 months away. I'm going to have to retire that joke because we are now less than six months away from "GTA VI." We do think it's going to be the biggest entertainment launch of all time, which is a high bar. How do you define success for a product like that beyond revenue units? How does Rockstar define success, and what's their ambition for the product?
We are aiming to make, in everything that we do, the greatest entertainment on Earth. That's our goal. Our goal is to make phenomenal entertainment. Our strategy is to be the most creative, the most innovative, and the most efficient company in the entertainment industry. Each of our labels, in its own way, tries to create something extraordinary in everything that they do. Sometimes we fall short, of course. You probably put a fine point on that at Rockstar, given the Metacritic scores that they've always enjoyed and the breathtaking success of Grand Theft Auto and Red Dead, and other intellectual properties that Rockstar has brought to market over its 25-year history. You can imagine that the ambitions are very high, both for Rockstar and for Take-Two.
I think you would define success, you can't help it in terms of the scores that it gets, the reviews it gets, and the unit sales.
Do you think about it in terms of engagement over the long term?
Well, of course, we can't help thinking that way because Grand Theft Auto V has thrived through three console generations and has sold in 230 million units and has been around for the better part of 13 years and shows no signs of abating. Grand Theft Auto Online, of course, remains a very powerful property. You've seen the economic effect of that title when Rockstar generates meaningful unit sales year in, year out, and also has significant recurrent consumer spending year in, year out. We've also guided to significant recurrent consumer spending going forward for Rockstar.
Yep. You anticipated my next question. You had on your earnings call last week said.
It's amazing how you can anticipate the next question.
It's amazing.
when you provide them to our head of IR, Nicole, in advance. It is extraordinary.
We like to be prepared. Come on.
I have this incredible mental capacity to read.
You're giving away our secrets.
I'm sorry.
Yeah, you did guide to GTA.
Well, for us to see if you guys are awake. At these conferences, just to get a smile out of you all is challenging. I'm so gratified. I got you all.
I do stay on the entertainment-.
You must be caffeinated. I don't want to be in the third slot today. Sorry. Go ahead.
You did talk about GTA recurrent consumer spending growing this year. I know you're not going to divulge sort of what the plans are for the GTA VI launch, can you talk about what Rockstar has learned from GTA Online and Red Dead Online in terms of running a successful live service title, what they may have learned from observing other parts of your portfolio like NBA 2K and Zynga, or even looking at some other high-profile live service launches in the last few years that haven't gone well?
Remember, we have live services at Rockstar now, right? We have GTA Online, we have GTA+, we have the FiveM business. We already have that in market. We expect those businesses to continue to thrive. There'd be no reason that they would not. What have we learned? Give consumers something great, and they show up for it. We've learned the oldest lesson in the entertainment business.
In terms of how getting the mix of-
By the way, that leads me to a story, which is true. I started in the movie business and the television business. I worked at Columbia Pictures. I bet there's no one here who knows this, but the head of Columbia Pictures in its heyday, Columbia Pictures was a B studio going back into the old days. The head of Columbia Pictures was a guy named Harry Cohn. Anyone know this?
True.
This is a true story. Harry Cohn was detested, reviled in the movie business by everyone, and so much so that there was some amusement at the fact that people were at his funeral. Two stories about that. One is someone said to, I think Jack Warner, but I'm not sure, "Why do you think there's so many people at Harry Cohn's funeral?" He did say, "You give people what they want, they come out for it." True story. The rabbi who officiated at the funeral was a famous rabbi in Los Angeles named Rabbi Magnin. Someone went up to him and said, "Rabbi, you must be able to say something nice about Harry Cohn." I mean, this was the rabbi at the funeral. He said, "He's dead." Okay. I digress.
You give people what they want, they come out for it.
That is true.
You can look it up. Both are true stories.
If we look beyond "GTA VI," I'd imagine a few things are probably true.
I'm trying to divert you. It's just not working.
I know.
I'm doing the best I can.
I know. I know. I'm going to talk-- We're going to-
Okay
we'll move on.
Anyway. Yes.
GTA VI" in a second. I would think Rockstar would probably, beyond "GTA VI," not like to have another 13-year gap between "GTA" releases. Maybe not. Obviously "GTA V" has done very well. I assume Rockstar has other ideas that they'd like to pursue beyond just "GTA." How are you and they thinking about how they evolve over the next 10 or so years to best serve their audience and create value for the company organizationally.
The only way I could answer that is to say these are the very conversations we always have with all of our labels, Rockstar included. We have a plan. Our plan might not be to have a specific cadence around our properties because we're not a cadence-driven company. We never have been. I didn't show up at Take-Two nearly 20 years ago and say, the way everyone else was, "We're going to annualize our products like clockwork." To the contrary, and I was an outlier at the time, I said, "The only products we're going to annualize are sports entertainment properties. We are specifically not going to do it with everything else." That was very unheard of in the business at the time. The thesis was that if you do that, A, you're going to burn off your intellectual property because you're in-market too often.
You can't possibly deliver the kind of quality you need to deliver to deliver an A-plus property by doing that. I'm not going to name the properties, but we've seen that some very competitive properties have had good annual releases and bad annual releases because it's just so hard to do. Also, if you take a look at the intellectual property landscape when I joined Take-Two in 2007, GTA was not the number one property. It was a top five property, but it was not the number one property. Take a look at what happened to the properties that were higher up in the food chain that were annualized to see what happened. We set a new standard in the business, which is you have to make stuff that's great, and creating some anticipation on the part of the consumer is a good thing.
That doesn't mean that we said there should be an X-year gap between releases. What has driven the gap is the amount of time it takes to do something that is as good as it can possibly be for that intellectual property. Sometimes, for example, with Borderlands, Gearbox has done a great job coming to market somewhere between two and four years after a release, and generally speaking, has succeeded mightily at doing it. In other instances, for example, BioShock, it's taken longer than we would like. In the case of GTA V, it was not a simple story of, "Wow, guys, took you a long time to come back to market," because look at what Rockstar launched. Again, they relaunched and they actually remade the title for PC. They relaunched and remade the title for each new generation.
They launched GTA Online, plus other services that were either required to launch. To the extent that GTA has become a thriving business, that's an ongoing business. It's not as simple as, "Wow, what have you been up to for 13 years?" The answer is they've been up to quite a lot. I think one of the reasons that GTA VI is so widely anticipated is that we now have a GTA ecosystem that Rockstar built.
I would imagine that it's not as simple as saying, "Oh, let's just pour more resources into Rockstar." They probably are finding the right people to work in that environment is probably not the easiest thing in the world.
Look, again, not to name names, but a very big resource-heavy company went into the video game business about, what, 12 years ago. They've had one title that was moderately successful. It is not about headcount. It is not about technology. I know you'll get to that. It is about the intersection of talent, passion, and resource that creates hits. It isn't as simple as let's hire more people. Obviously, you have to hire the right people and then manage them the right way with the right creative vision in the first place. With daily attention to execution.
Yep.
Which is ultimately my job, right.
Let's move on to NBA 2K, another very big franchise. You had a tremendous run over the last couple of years, double-digit RCS growth. Can you talk a bit about?
A huge year this year.
Yeah. What they've gotten right to drive all that growth. You did guide to, I think, 7% growth in the coming fiscal year. What lends you the confidence that you can continue to grow it off of such a tough comp from last year?
We hate talking about what we got right because I'm a big believer that arrogance is the enemy of continued success. The team at Visual Concepts, if Greg Thomas were sitting here, he would be happy to tell you all the things that we got wrong and all the things that we need to do better at. I sort of would dive in. Because I didn't actually create the title, I can compliment the team appropriately. I think what they got right is this wonderful intersection of phenomenal sports simulation game with the creation of a culture and the importation and enhancement of the world surrounding basketball. That you have the ability to show up in that title in NBA 2K and NBA Online and play the game or engage with the culture of the game or both.
I also think that Greg and his team at Visual Concepts do a great job of listening to the consumer and making sure that enhancements are in service, not of enhancing revenue, but in service of creating a better experience. If we create a better experience, the revenue should follow. While we're happy here at an investor conference to talk about setting records for unit sales and revenue related thereto and recurrent consumer spending, that comes from meeting the consumer's needs, exceeding their needs, exceeding expectations, and getting up the next day and doing it again. In certain instances, making changes when we've gotten feedback that like, "No, this isn't what we want." I think the reason the game has done so well in the past couple of years is it's an amazing game. Just a great game.
Do you feel like the-
Not the only great game in market. We're running scared at all times and our friends at EA have the number one sports title worldwide in FC. We know what the competition has and we know what we got to do to continue to win.
Do you feel like there's still a lot of untapped opportunity outside the U.S. with NBA?
Huge. Basketball is a growth sport. It is growing outside. There's no secret that there's a lot of attention around growth in Europe. We're very optimistic about where European growth could lead, but also growth in developing markets. That's a broader theme at Take-Two, where we're very focused on growing developing markets. Remember, the nature of a multinational interactive entertainment company today, unless you're a Chinese company, is that 80% of your revenue comes out of the U.S., U.K., Western Europe, and little pockets of Asia. You're not serving at all in a meaningful way, Russia, Latin America, India, Africa, and the Middle East. We want to change that. We're aggressively building up our international markets presence. Which is challenging because it requires you to invest in advance of revenue, something we hate doing, but we are doing that.
Can you talk a bit about opportunity with college basketball that you see?
There was a mode. I think the team at 2K and Visual Concepts did a great job getting to market so quickly on college basketball, and the consumers loved it. It's early days yet. There's much more to come.
Yeah.
Yeah, I think there were 16 or 17 universities represented. It was a really great start.
As a Duke basketball fan, I'm excited to see what you bring.
There, more to come, much more to come.
Let's talk about some other things that you've talked about coming in the AAA side. You've announced "Judas." You've announced Project ETHOS. I think you said last week that you would have seven AAA sequels in total in fiscal 2028 and 2029, which I assume includes the "BioShock" sequel that you've talked about. As you mentioned earlier, "BioShock's" been brewing for a long time. "Judas," I think you announced in 2022. When you think about value creation of the company beyond GTA, how important are these titles to that?
Incredibly important. Lainie's sitting here, but I think in the past few years, GTA as a total business has been less than 15% of our overall net bookings, if I have that right. 85% of the company has not been about GTA, and that is no way to detract from its importance as a title. Obviously, it's to make the note that we're a big, diversified company with lots of hits, and we have half of our business is mobile, of course, and half is console and PC. Our job is to grow in all directions because we're serving consumers everywhere. Every kind of consumer, wherever they are and however they want to engage. That's our job. That's what we're trying to do. That's our mission. In this past year, past fiscal that we just reported, of course, all of our labels did better than expected.
The goal is not to work on one title at a time, right? The goal is to build up our business by delivering great hits and to have largely owned intellectual property that we can bring to the consumer over and over again. We have 11 franchises that have each sold over 5 million units. Do I have that right? Sorry?
I think it's 13.
It's up to 13. When I showed up here, the number was one, to be clear. It was one. This is really hard to do. I'm not really in the business of patting our collective selves on the backs, but no one else has done that. No one else has done that. We have invested heavily and sometimes had failures and missteps in so doing. The reason our company is as valuable as it is because we have all these franchises that deliver over and over again, and in most instances, actually sell more units with the new iteration than the prior release. Not every situation, but most, which is a real outlier in the business. Again, a reflection of our willingness to invest behind quality.
I'm sure you've seen some execs and former execs in the last several years have said that they think AAA development costs are becoming unsustainable in terms of the amount of money that has to be poured in and the risk of failure. How do you think about that issue?
They're not wrong. It's odd that you would say this, the cost of making the best entertainment on Earth is actually an entry barrier. You don't want to go up against that from the outside. When you're in the inside, if you're judicious and you're careful about your capital allocation, one could argue it's actually a benefit because you have fewer high-end competitors. That's reliant upon the fact that the money is well spent, which is to say that you're making hits. It is a game for the big boys. The entertainment business in maturity is always a top 10 or 20 business. Always. If you think otherwise, you're kidding yourself. It is not a long-tail business. It's a long-tail business when you're in the top 10 business. That's great. We have a terrific catalog.
It generates revenue and cash flow year in, year out. We have terrific live services, generates revenue and cash flow year in, year out. The locomotive for all that is the front line, and the front line has to include sequels and new intellectual property if you want to be in a more powerful position in 10 or 20 years than you are today. That's our goal. This management team has never looked at the business quarter to quarter, as you know. I don't. As you know, we're willing to do things that other people would see as unnatural acts because we don't look at things quarter to quarter. We're building this business for five, 10, 15, 20 years hence, even though the odds of my sitting in the seat in 20 years are reasonably low. Hey, you never know. That's the goal.
The reason that we have the market cap we have today is because I looked at that 20 years ago when we had a $700 million market cap. I wasn't playing quarter to quarter. We made a lot of really hard decisions. By the way, we were in the wilderness for quite some time. We were undervalued for quite some time where people were like, "Is this real?" Finally it began to come to fruition, but did not happen overnight. Now we're in this incredible position of luxury. What a terrible shame it would be if we incinerated it by now thinking short term. Yes, we're going to have to invest a lot of money behind our creative teams if we still want to be delivering the best entertainment on Earth. We have to be judicious about capital allocation.
We have to be thoughtful, and at times we're going to have to take hits because we were wrong. If we get it right, and I do believe we'll get it right with Grand Theft Auto and with BioShock, and I hope with Project ETHOS and with many other titles. We do get it right with NBA 2K. These are immensely profitable enterprises despite high production costs and high marketing costs.
I think I've always said to clients, there's no amount of money you can spend on a hit that's too much, and no amount of money you can spend on a flop that's too little.
That's right.
That's just how you have to approach the business.
We try not to spend much on flops. The best thing is when you put out something that doesn't work and you run into someone. This has happened to me. Also in the movie business more typically, but I run into someone at a cocktail party and they're like, "Why did you make that horrible flop?" It's like, "Because I thought it was going to be a hit." Like, what do you think? I thought, "That'd be a good idea. Let's do that even though it's going to be a flop." Because I thought it was going to be a hit. Where it's a little more complicated is mobile, because you kind of don't know. The way we have addressed that is meaningfully to reduce our exposure pre-launch in mobile.
When we took over Zynga, they had a couple of projects that had huge numbers attached to, that were legacy projects. We don't do that anymore because the hit ratios are so low in mobile, it just doesn't make sense. Really to focus mightily on fewer than 10 new launches a year in hopes of having one or two hits a year. That strategy has paid off. It's what led to Color Block Jam and Match Factory!, and some titles that are doing really well that are somewhat smaller than that. We hope that we'll be able to do that year in, year out. What we have done in mobile is gotten out of the business of spending massive amounts of money where the hit ratios just don't bear up.
Mobile is essentially a direct marketing business on the marketing side, whereas PC and console releases feel more like brand marketing still. We do a bunch of performance marketing, but when you market a PC or a console title, it's a lot like marketing a movie release in the old days for me. Marketing a mobile title is much more performance, direct marketing. I have a whole history in the old fashioned direct marketing business, and one thing about direct marketing is it's very difficult to predict. It's the data that tells you the answer. If you're in a situation where you can't predict We doubled down on GTA because we believe, okay, if we get this right, it should do really, really, really well. You can't double down on a mobile title because the hit ratios are just too low.
I can't tell you the numbers, but it cost us, it was like a rounding error to get to market on Color Block Jam. It was just very, very, very low. You have to invest in marketing. Equally, Match Factory! wasn't a rounding error, but it was an inexpensive title, but then we had to really spend on marketing and we made no bones about it. We were public about it. It takes a while to get your money back when you do that too.
Yeah, and you've had a great year in mobile. You grew 13%.
Frank Gibeau and the team at Zynga have done a phenomenal job.
You've also talked about your new titles, Toon Blast, which is a much older title.
That's 14 years old and just set a record. It's incredible.
Yeah. What's been the driver of that incredible growth spurt this long after launch?
It's been engaging with the legacy consumers. It's less about DAU growth and much more about engaging with the consumers who love the title and giving them what they want.
You talked about how much you have to invest in marketing to have a mobile title have a chance of success. Is that as much of a barrier to entry on mobile as development costs are for console?
It's a great question. The answer is yes, it really is. The good news is you can actually, especially with AI, you can develop a mobile title really cheaply and get it to market. If the payback period for the marketing is two years, there are companies that think two years is too short. We have direct competitors who spend up to five-year paybacks, as far as we can tell, which we think is insane. Either way, think about what you have to spend to start getting positive cash flow. The entry barriers are enormous unless you create something that's actually a viral hit, that doesn't really happen anymore. There are outliers, they really are very few and far between. I can't think of one. Our friends at Scopely, for example, spent a massive amount of money on Monopoly Go!.
Now it paid off. It's a very profitable title. It's a huge title. They spent an enormous amount of money supporting the marketing before the money came back. We spent a lot of money on other titles.
Okay.
Yes, it's a huge barrier to entry in mobile. There's a whole business actually growing up of independent companies that are financing UA for mobile companies.
I don't know if you know this, but they're all private, so I'm not going to help you all out. There are probably five companies that have raised private capital, and they finance UA, and then they take it back off the top.
Is their edge that they are really skilled at it?
That's their idea. I mean, if they're not really skilled at it, they're not going to be around very long. So far, one of the guys doing it that used to work for me is super talented, and it's still a small business because he does have to be very selective, but it's working.
All right. You've talked about direct to consumer as an important margin growth vector for mobile, and we've seen there are some companies that report their DTC as % of total revenue. It does seem like there's been a big acceleration at companies like Playtika in the last year in terms of they're getting up to 40%. How is that going for you? Do you see a lot of continued runway there as a margin growth driver?
It's going really well. We are not direct to consumer on every one of our mobile titles, but we're nearly there. We don't talk about the percentage, but it's meaningful. In fact, if you go back to the comments I made during the Zynga acquisition when we talked about synergies, and particularly revenue synergies, I outlined as one of the areas of revenue synergy going direct to consumer, and we vastly exceeded our expectations that we laid out at that time. At that time, direct to consumer at Zynga was 0% of their revenue. It's a whole lot higher than that. At the same time, our strategy is not bring people to our company store to increase margin.
Our strategy is to be the best entertainment company on Earth by delivering more hits than anyone else and delivering them to consumers where they are and how they want to consume our titles. That's our job. If they want to buy stuff from a store, as long as that store treats us fairly and protects our intellectual property, we're going to be in business with that store. I do think that third-party distribution costs will go down, partially for regulatory reasons, partially as a result of litigation, and partially, and probably most appropriately, as a result of competition. Third-party stores are important to us because they market our titles too, and they are really good partners to us. You can't ask someone to be a good partner on the one hand and then grab their wallet on the other hand. It's a balance.
There are consumers who want to engage with us directly. Great. We'll do that. There are consumers who want to buy through the store. We'll do that. We just want to be treated fairly when we're at the store.
Do you feel like the third-party distributors are already becoming better partners because of the pressure that they're seeing from potentially losing?
Well, they've always actually been really good partners. They've just been pricey partners. I do think third-party distributors understand now that those costs have to come down. Yeah.
Okay. Just stepping back a bit, there's been a lot of hand-wringing about the video game industry over the last few years. Obviously, there's been a lot of layoffs across the industry.
At least a perceived lack of market growth, whether that's true or not.
It's actually not the stats I've recently seen from Newzoo. The growing market.
I agree.
Yeah
This is what I hear, and this is.
Well, you're really referring to.
You read the headlines, right?
to what Matthew Ball wrote.
Yeah.
Actually, it's not been borne out in what we're seeing. We've done incredibly well, much as I would love to take full credit for that, I think we have felt industry tailwinds. We really have. We certainly have not felt headwinds. We felt a lot of headwinds in 2022, mid 2022 in both mobile and console. We saw it post-pandemic.
Yeah.
That's not what we're seeing now. We're feeling modest tailwinds.
You feel if you looked at the next five years where you think the opportunity is for the industry, you feel good about?
Oh my God. I mean, it's breathtaking. I'll give you two big reasons. Put everything else to the side. Streaming and developing markets. Those are two areas of focus for us. Will streaming technology bring PC content to consumers who previously couldn't get it because they didn't have PCs? You bet. What is a big barrier? It's obviously latency, and there are numerous companies, both domestically and internationally, that are addressing that. In the U.S., I think it'll be edge network driven. Outside of the U.S., it'll be driven by things like Starlink. It won't work for every title, but it'll work for some.
It certainly does not mean if you've got, whatever, I don't know, if there are eight billion people and you've got two or three billion phones, and you've got an install base of console of under 200 million, it does not mean you're going to 10x the market, obviously, because avid consumers are in the console business or in the PC business. It does mean, though, that I think you're going to meaningfully address consumers who previously could not consume your products. Streaming should be really huge for us. The second thing, as I mentioned earlier, developing markets. We've got well over one billion people that we can serve in India that we do not serve now, just by way of one example. 500 million people in the Middle East.
We do serve the Middle East, but not as effectively as we aim to do in the future.
We can't have a TMT conference these days without discussing AI.
Nope.
And an executive-
By the way, I got invited to a dinner, and it was one of these think tank dinners, and it was like, "Would you please come to dinner on June blah, blah, small group of people to talk about AI." I am very polite person, which you know, and generally, I would say, "I'm sorry. Thank you very much for the invitation, but I can't make it." I just couldn't help myself. I wrote back and I said, "I can't spend five minutes having another discussion about AI, but thank you for the invite." I did actually say that. I said, "Cannot do it." Clearly the person I sent it to did not read the response because they're like, "Oh, you'll come on another occasion.
It was probably an AI bot.
Not to discuss AI, I won't. Anyway, I'm going to. We only have 25 seconds left.
Yeah, we have 25 seconds on-.
Thank the Lord. I've never liked a clock so much.
Yes.
Please go ahead.
An executive in another company I cover said that AI is ultimately going to allow a team of three people to develop a GTA class game within a week. What's your view on that statement?
Wouldn't that be great for us? No, that's not tongue in cheek.
Yeah.
We have three-part strategy. Be the most creative, be the most efficient, be the most innovative. If we have tools that allow us to be more innovative, more efficient, and more creative, we're all in. That's what we've used tools for before. I think the problem with the conclusion that people reach when the executive says that is and therefore they will make a hit that's as big as GTA. There's zero evidence for that because we've had technology forever that would allow people to recreate what we do. Maybe it's not done in a week, but who cares? Given how much GTA is worth, if you could make something that's as good as GTA and performs as well, would it bother you that it currently takes 13 years? Of course not. Why wouldn't you do that? People have tried. Anyone run into Assassin's Creed?
People have tried to make titles that competed directly with GTA. By the way, this isn't by way of my saying no one could ever compete with us. To the contrary. I'm simply saying that the ability to use tools to create intellectual property is totally different than creating hits. It's just a different exercise. Anyone see the 007 early reviews and early scores? It was done by my friend Casper Dougard and his team, and it looks phenomenal. It looks great, and they're outside of the major studio system. It is absolutely possible to make something of great quality, and if tools allow you to do that, great, but they'll also allow us to increase our quality and increase our efficiency. Making a hit is different than making an asset. They're just different things.
I have no doubt that technology's going to allow us to make better assets more efficiently. That's the history of technology. Making hits seems to get harder and harder and harder as entertainment industries mature. We do not have a monopoly in hit creation. As I said earlier, arrogance is the enemy of continued success. I don't believe for a minute that technological advances give someone else an edge or give us an edge. It's just the tool set. It's available to everyone. The key thing is that all this is going to be totally commoditized. Show me one AI company, just one, who's offering their services or products to companies on an exclusive basis. They don't exist.
When that executive has that button to push, I'll have the same damn button, the folks at Rockstar seem to be able to make these massive hits, lots of other people have tried. Lots and lots, including former Rockstar employees. So far, they haven't been able to do it. Doesn't mean they can't in the future, by the way. We're always running scared. It won't be technology that changes the game. That won't be the change. What'll change is that some extraordinarily creative individual or individuals are going to show up and do something astonishing. Our goal is to get those people to work within the Take-Two system. If we fail to do that, we fail.
If we continue to be the home of creativity, the company that welcomes and encourages and supports and finances the best talent in the business, then the rest will take care of itself. Technology's in service of those goals, not at odds with them.
That's great. I don't think that was five minutes. Thank you so much for being here today.
Thanks for having me.
Yes.
Thanks so much. Thanks, all.