speaker
Operator

Greetings and welcome to Take-Two's first quarter fiscal year 2023 conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Shebbins, Senior Vice President of Investor Relations and Corporate Communications. Good afternoon.

speaker
Nicole Shebbins

Thank you for joining our conference call to discuss our results for the first quarter of fiscal year 2023 and to June 30th, 2022. Today's call will be led by Strauss Zelnick, TQ's Chairman and Chief Executive Officer, Carl Sladoff, our President, and Lanie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at takegeekgames.com. And now I'll turn the call over to Strauss.

speaker
Strauss Zelnick

Thanks, Nicole. Good afternoon and thank you for joining us today. I'm pleased to report that fiscal 2023 is off to a great start, highlighted by first quarter net bookings of $1 billion. Our performance demonstrates the quality of our games and our ability to engage audiences across the globe despite the impacts of various macroeconomic and geopolitical factors. This has been a milestone period in the history of our company as we closed our combination with Zynga. This transaction firmly establishes Take-Two's position as one of the largest pure play interactive entertainment companies in the world. We're home to the industry's top creative talent, and we own and control an exceptional, diverse portfolio of intellectual properties encompassing all key platforms and genres. We're exceedingly optimistic about the long-term growth potential for the mobile industry, as well as our ability to create greater shareholder value as a combined entity. Over the past few months, we've made significant progress in our integration efforts. Zynga, which is being run by the label's president, Frank Chabot, established its ongoing leadership structure. Alongside Frank, we're fortunate to have numerous proven senior executives who will be instrumental in overseeing Zynga's day-to-day operations and taking our combined mobile business to the next level of success. The integration of our corporate functions and systems has been tracking well, and we're pleased that our day one plans were executed seamlessly with no disruptions to our business operations or player communities. While it's still early, we're confident that we can realize $100 million of annual cost synergies within two years post-close, and we're exploring additional areas of efficiencies. Our creative teams are in active discussions about potential projects, and we remain committed to delivering over $500 million of annual net bookings opportunities over time. There are several meaningful drivers in mobile that we believe our teams can begin to activate this fiscal year, including implementing new bold beats driven by new content and other live service enhancements, user acquisition optimization, creating a centralized library for development technologies and tools, enhancing the monetization of in-game advertising, and continuing to invest in our ad tech platform with ChartBoost. Over the intermediate and long term, our vision is to introduce mobile games for some of our most popular and proven intellectual properties that have the potential to be greatly additive to our financial profile. We've observed positive signs that some mobile players are looking for more sophisticated and immersive content, and we look forward to participating in this trend that should continue for the foreseeable future. We also see a tremendous opportunity to establish more meaningful presence in key mobile-first emerging markets. Turning to our first quarter results on a pre-combination basis, our net bookings of $731 million were within our previously stated outlook range, led by the outperformance of NBA 2K22 and WWE 2K22. Zynga's offerings complemented our results significantly for the period. NBA 2K22 continued to dominate as the industry's leading basketball game with sell-in of over 12 million units to date, exceeding the series sell-in from the prior year. During the first quarter, engagement with the title remained strong, with average games played per user increasing 16% year over year. In addition, NBA 2K22 Arcade Edition remains the number one game on Apple Arcade since its launch in October 2021, and downloads of NBA 2K Mobile remained robust. driven by the courtside pass updates and content surrounding the NBA playoffs and finals. Our partnership with the NBA remains incredibly strong, and we look forward to the launch of NBA 2K23 in September. Throughout the first quarter, 2K and Visual Concepts released a series of DLC packs to support WWE 2K22, which brought even more fan-favorite superstars into the ring for what has been hailed by critics and consumers alike as our best WWE offering in the series. Engagement with the title has been outstanding, with more than 330 million in-game matches played and over 8.5 million hours of WWE 2K22 content viewed on Twitch. We greatly value our partnership with the WWE and we're thrilled about the long-term opportunity to grow the franchise further together. Rockstar Games capitalized on the momentum from last quarter's releases of Grand Theft Auto 5 for PlayStation 5 and Xbox Series X and S, Grand Theft Auto Online Standalone, and the launch of GTA Plus as the experience continues to captivate players. Latest generation console players of Grand Theft Auto Online grew over 40% this quarter and are monetizing at a rate 36% higher than players on the previous generation. GTA+, the premium membership available exclusively on those consoles, has seen consistent growth since launch. The GTA Online community remains strong, and its audience size is operating in the new normal that is 49% higher than the pre-pandemic first quarter of fiscal 2020. Sales of Grand Theft Auto V also remain strong, and to date, the title has sold in nearly 170 million units. With development of the next entry in the Grand Theft Auto series well underway, the Rockstar Games team has determined once again to set creative benchmarks for the series, our industry, and for all entertainment, just as the label has done with every one of their frontline releases. We were also pleased with the performance of Red Dead Redemption 2, which continues to expand its audience and to date has sold in more than 45 million units worldwide. Tiny Team is Wonderland exceeded our expectations and continued to sustain healthy player engagement due in part to its robust post-launch content, which will continue throughout the fiscal year. The title has resonated with core fans and new audiences with nearly 40% of players having never before played a Borderlands title. Additionally, Tiny Team is Wonderland launched on Steam in June alongside its previously released DLC offerings. Also in June, 2K and Supermassive Games launched The Quarry, an all-new horror narrative game where every choice, big or small, shapes your story and determines who lives to tell the tale. The title launched to strong reviews with NPR declaring it this summer's best horror game and Variety calling it every horror fan's dream video game. And Private Division released Void Riders, the first expansion for their critically acclaimed skateboarding action title Olly Olly World from Roll7. The expansion earned it 87 on OpenCritic, which was even higher than the base game's excellent review scores. Private Division will share more details regarding the game's second expansion later this year. Recurrent consumer spending rose 48% and accounted for 73% of net bookings. This was significantly above our prior guidance due to the inclusion of Zynga for part of the quarter, which was not included previously, as well as outperformance from our core portfolio. During the period, Zynga continued to experience strength in player engagement and retention, and we believe that we're maintaining our healthy market share on a global basis. Additionally, we delivered significant growth in advertising net bookings, which was offset by some pressure on in-app purchases due to current macroeconomic conditions and seasonality. Some key highlights of our mobile offerings during the quarter include Harry Potter Puzzles and Spells, featured an in-game event to celebrate the cinematic release of Fantastic Beasts, The Secrets of Dumbledore. Empires and Puzzles introduced the game's fifth season, Dynasty of Dunes. Zynga Poker released the Omaha update, giving players a new way to enjoy the popular game. Words with Friends introduced Clubs, a new feature that expands the game's social experience by offering shared spaces that players can enjoy together. Rollick launched 11 games in the quarter, and Color Runners reached the number one top free downloaded games position in the U.S. App Store in June. Turning to our outlook, we now expect to deliver net bookings of $5.8 to $5.9 billion, which includes Zynga for part of the year. Our pipeline for the year continues to look very strong, and we're excited to expand significantly our mobile presence with a best-in-class platform. Our new forecast also takes into account some movement in our release slate for the year, foreign currency pressures, and macroeconomic uncertainty. Laney will provide more details shortly. Looking ahead, our long-term vision is clearer than ever, and we believe that our combination with Zynga will enable us to capitalize better on the evolving dynamics of the interactive entertainment industry. As we deliver our expansive, diverse pipeline and pursue the vast opportunities that we've identified through our combination with Zynga, We see a path to engage even greater audiences around the world, grow our scale, and enhance our market. I'll now turn the call over to Carl.

speaker
Nicole

Thanks, Ross. I'd like to begin by thanking our teams for a great start to the year, driven by their tireless passion, creativity, and commitment to deliver the best entertainment experiences in the world. I'll now discuss our recent releases. On July 7th, 2K and Supermassive Games launched an update to the popular horror experience, The Quarry, which introduced several new features, including Wolfpack, a new online multiplayer mode where the host can invite other players to help shape the story as a collaborative group. In addition, all six episodes of the bizarre yet bonafide podcast featured in the Quarry are now available in-game and in their entirety. The podcast, which was previously available only on select streaming platforms, follows two fictional paranormal investigators as they delve into the troubling secrets of the Quarry. On July 19th, 2K and Visual Concepts released the fifth and final DLC pack for WWE 2K22, entitled The Whole Damn Pack. The update features pop culture icon Machine Gun Kelly, social media megastar Logan Paul, and high-flying, hard-hitting WWE Hall of Famer Rob Van Dam, alongside franchise debuts from LA Knight, Xia Li, Amanda Radiz, and Sarray. We are very proud to have delivered such a stellar WWE offering this year and to support the title with our fans' most beloved superstars. On July 26th, Rockstar Games continued to grow and evolve the world of Grand Theft Auto Online across all platforms with the launch of the Criminal Enterprises, a sweeping update bringing new business prospects for criminal careers, plus new elaborate contact missions, auto showrooms to test drive and purchase vehicles, and many other upgrades rolling out all summer long. The update also delivers highly requested experience improvements as well as increased payouts across a range of gameplay, offering players more choices and freedom as they climb their way up the criminal ranks. We remain incredibly excited about our pipeline for fiscal 2023 and beyond. On August 16th, Private Division and Roll7 will release RollerDome, a brand new third-person single-player shooter. This stylish, high-octane game combines adrenaline-fueled skate stunts with intense combat in a retro-futuristic world. The title will be available on Steam for PlayStation Plus members for an introductory price just under $20, after which it will retail for $29.99. Additionally, PlayStation Plus Premium members will be able to play a free trial of the game when it launches. On September 9th, 2K and Visual Concepts will launch NBA 2K23, the next offering from our industry-leading NBA series. Phoenix Suns shooting guard, three-time NBA All-Star, and 2021-22 Kia All-NBA First Team Selection, Devin Booker, is featured on this year's Standard Edition and Cross-Gen Digital Deluxe Editions. The iconic Michael Jordan appears on the cover of the NBA 2K23 Michael Jordan Edition and the brand new NBA 2K23 Championship Edition, which retails for $149.99 and delivers incredible value by including a 12-month subscription to the NBA League Pass for the first time. In the U.S. and Canada, players can purchase the WNBA Edition as a GameStop exclusive featuring Phoenix Mercury superstar Diana Taurasi along with Seattle Storm legend Sue Bird. 2K has partnered with Every Kid Sports to support greater representation of females in basketball with a $100,000 donation that will enable girls across the U.S. to participate in youth sports. 2K will reveal more details of NBA 2K23 in the coming weeks. We've made the decision to move back the launch timing of Marvel's Midnight Suns to ensure the teams of Firaxis Games and 2K deliver the best possible experience for our fans. The title will launch later this year on Windows PC, Xbox Series X and S, and PlayStation 5. The Xbox One, PlayStation 4, and Nintendo Switch versions will follow at a later date. During the fourth quarter, Private Division and Intercept Games will launch Kerbal Space Program 2 on PC. The game's dedicated community can look forward to more information about the game and its new features from the title's ongoing gameplay reveal video series. 2K's teams at Visual Concepts and HB Studios remain hard at work on their upcoming launches of WWE 2K23 and PGA Tour 2K23. 2K will have more to share on these annual sports offerings shortly. Zynga has a handful of games that are currently in soft launch, with more on the horizon, and we expect some of these titles will begin launching worldwide in our next fiscal year. This includes Star Wars Hunters, which is continuing to regularly roll out new content updates and features as it progresses through to a more mature phase of soft launch in strategic territories. At the same time, Rollup will continue to release a high volume of mobile titles as it has done previously. Turning to eSports, the NBA 2K League Championships tip-off will take place in Indianapolis at the Pavilion at Pan Am with 3v3 play August 17th through the 20th and 5v5 play August 24th through the 27th. We remain excited about the continued success and growth of the NBA 2K League. In closing, we believe that our company today is the strongest and most diverse it has ever been. With approximately 11,000 of the industry's best and brightest talent, the most exciting and commercially successful portfolio of owned intellectual property, and the ability to deliver deeply captivating and engaging entertainment experiences on any platform anywhere in the world, we believe that we are well positioned to deliver long-term value for our shareholders. I'll now turn the call over to Laney.

speaker
Ross

Thanks, Carl, and good afternoon, everyone. Today I'll discuss the key highlights from our first quarter, before reviewing our financial outlook for the fiscal year 2023 and second quarter. Please note that our first quarter results include Zynga's financial performance for 39 days of the quarter, which impacts the comparability of our results relative to last year, as well as to our prior guidance, which did not include the contributions from Zynga. Also, any references to Take-Two's pre-combination results are referring to our financial performance, excluding the acquired Zynga business. Additional details regarding our actual results and outlook are contained in our press release. As Jeff mentioned, this was a momentous quarter for our organization, as we closed our transaction with Zynga and made significant progress on our integration efforts. Our teams created detailed plans to realize at least $100 million of annual cost energy, and we continue to expect approximately $50 million to be achieved within the first 12 months post-close. The largest opportunities include reducing duplicative corporate overhead in contracts, consolidating systems, rationalizing our real estate footprint, and leveraging Zynga's marketing functions across our other mobile titles. We are also exploring additional areas of efficiencies. At the same time, we delivered strong first quarter results driven by net bookings of $1 billion. On a pre-combination basis, our net bookings were $731 million. which grew 3% compared to last year and was within our guidance range of $750 million. The movement in foreign currency exchange rates negatively impacted our net bookings by approximately 1%. We were also pleased with Zynga's contribution for part of this quarter. With consumers today navigating various macroeconomic and geopolitical factors, we believe that our financial performance truly demonstrates the resiliency of our business model driven by the incredible quality of our games and the significant value that our interactive entertainment experiences provide our players. During the period, the current consumer spending rose 48% and accounted for 73% of netbooking. This is significantly above our prior guidance due to the inclusion of Zynga as part of this order, as well as the outperformance of our pre-combination portfolio led by NBA 2K22, Tiny Tina's Wonderland, and Top Eleven. Digitally delivered netbooking increased 41% and accounted for 95% of the total. During the quarter, 77% of console game sales were delivered digitally, up from 73% last year. Gap net revenue increased 36% to $1.1 billion, and cost of revenue increased 32% to $436 million, which included a $20 million impairment charge related to the decision not to proceed with further development of a title from an unannounced new franchise. Operating expenses increased by 125% to $704 million, primarily driven by the addition of Zynga and a full quarter of Nordea, with acquisition costs and higher personnel and marketing expenses. And our gap net loss was $104 million, or 76 cents per share, which was largely impacted by $117 million of amortization of acquired intangibles and $165 million of business acquisition costs. Our GapNet loss benefited from a reversal of expense of approximately $48 million related to forward shares of a previously granted stock award. In the first quarter last year, our GapNet income was $152 million, or $1.30 per share. Our management tax rate for the period was 18% as compared to 16% in the prior year as a result of our combination with Zynga. On a pre-combination basis, our management results, including the impacts of the Zynga transaction, We see that the high end of our guidance range by 6 cents, despite the impairment charge taken during the quarter and the higher tax rate. The end of the quarter with over $1.3 billion of cash in short-term investments and $3.3 billion of debt. Turning to our guidance, I'll begin with our full fiscal year expectations. As Shroff mentioned, we are initiating new guidance that includes a combination with Zynga for approximately 10 months of our fiscal year. We now expect to deliver net bookings of $5.8 to $5.9 billion. Our assumptions take into consideration some shifts in our pipeline for the year, as well as movement in foreign exchange rates and the uncertain macroeconomic backdrop. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Empires and Puzzles, Rob's Cybercasual mobile portfolio, Toon Blast and Red Dead Redemption 2 and Red Dead Online. We expect the net bookings breakdown from our labels to be 45% Zynga, which includes the former T2 mobile titles, 37% 2K, 17% Rockstar Games, and 1% private division. We forecast our geographic net booking split to be about 60% United States and 40% international. We now expect our current consumer spending to grow approximately 110% and represent 77% of total net bookings. Our digitally delivered net bookings are expected to grow by approximately 80% and represent 96% of net bookings. Our forecast assumes that 74% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $700 million in non-GAAP adjusted unrestricted operating cash flow, and we expect to deploy approximately $135 million for capital expenditures. We expect gap-net revenue to range from $5.73 to $5.83 billion, and cost of revenue to range from $2.74 to $2.79 billion, which includes approximately $700 million of amortization of acquired intangibles. Total operating expenses are expected to range from $3.37 to $3.8 billion, as compared to $1.5 billion last year. This increase reflects reflects the inclusion of Zynga, business acquisition costs, and higher personnel, marketing, and IT expenses, which is slightly offset by our anticipated cost synergies for the year. And we expect the gap net loss ranging from $398 to $438 million, or $2.50 to $2.75 per share, which assumes a basic share count of 159.2 million shares. We expect the management tax rate to be 18% throughout the year. Now moving to our guidance for the fiscal second quarter. We project net bookings to range from $1.5 to $1.55 billion compared to $985 million in the second quarter last year. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Empires and Puzzles, Solid, Hypercasual, Mobile Portfolio, and Toon Blast. We project recurring consumer spending to grow approximately 85% and digitally delivered netbooking to increase approximately 70%. A forecast assumes that 73% of console game sales will be delivered digitally, up from 65% last year. We expect GapNet revenue to range from $1.37 to $1.42 million, and cost of revenue to range from $700 to $719 million, which includes approximately $200 million of the amortization of acquired and tangible. Operating expenses are expected to range from $849 to $859 million. At the midpoint, this represents a 125% increase over last year. This increase reflects the inclusion of Zynga and business acquisition costs, as well as higher marketing and personnel expenses, which we believe will be slightly offset by the realization of some of our anticipated cost synergies. And gap net loss is expected to range from $144 to $160 million, or $0.86 to $0.96 per share, which assumes a basic share count of 166.4 million shares. In closing, we had a great start to the year when we believe that our competition with Zynga will enhance our positioning as one of the top interactive entertainment companies in the world. As our teams continue to leverage the core competencies from Bing's publishing platform, we believe that we will be able to engage our player base more deeply, add new dimensions to our existing portfolio, and deliver significant long-term growth and margin expansion for our shareholders. Thank you. I'll now turn the call back to Jeff.

speaker
Strauss Zelnick

Thanks, Lainey and Carl. On behalf of our entire management team, I'd like to thank our colleagues for delivering an excellent start to the year. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

speaker
Operator

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from Eric Handler with MKM Partners. Please proceed with your question.

speaker
Eric Handler

Good evening, and thanks for the question. Two questions. First, Lainey, I wonder if you could sort of size the changes in guidance in terms of how we might have been thinking about Marvel's Midnight Suns versus what's changed with FX and Macro.

speaker
Ross

So for the difference in the pre-combination business, we had some shifts in the pipeline for the year. And then there was a movement in the foreign exchange rates. And then there's also the uncertain macroeconomic backdrop. So I would say that the shifts in our pipeline were the most meaningful to our numbers. So I would say we had some titles that moved within the year. And that was Marvel Midnight Sun. And then there was an unannounced title that moved out of the year as well. So I would say definitely the pipeline changes that were the most meaningful to the change in the guidance.

speaker
Eric Handler

Great, thank you. And then Strauss, I wondered if you could talk a little bit about the state of the mobile industry right now. There has been a little bit of headwinds with growth for the industry this year. And wondering as you look at Zynga's portfolio and combining it with your portfolio, how fast can you integrate, you know, sort of the ad network? Are things changing relative to what you were thinking maybe at the time the acquisition closed or, you know, maybe even when you first made the acquisition?

speaker
Strauss Zelnick

Thanks, Eric. There's a lot there. We are seeing some softness in the mobile market. The good news is I think we're doing better than most, if not all. And I think we're seeing an offsetting increase in our market share. I think the reason we're seeing probably a bit more softness in mobile than in console is in console, to participate, you have to buy. And in mobile, by definition, you're in a free-to-play environment. You can play without paying. And if you are feeling the pinch of inflation, specifically with regard to non-discretionary expenditures like fuel and food, you could imagine that if you're playing the game, you might choose to spend a bit less or spend a bit less frequently. That said, we think Zynga's highly diverse portfolio of terrific games is a meaningful offset. And as I said, I think we're outperforming the market. That's our belief. We're also seeing growth in advertising revenues. And because I think we under index in advertising, that's an opportunity that will be offsetting to the broader market, even if we see ongoing softness. But as you know, we always call it the way we see it. And what we're seeing is overall some softness in the marketplace. You know, when you have 50% of big bank economists saying, we think we might be in a recession in the next quarter or two, my attitude is the market believes we're in a recession right now. And as a consumer-facing company, we are seeing some softness. With regard to the integration, I'm not sure you asked about how it's going, but it's going really well, and we expect to meet or exceed our cost synergy expectations, both in terms of magnitude and timing. And more importantly, we fit really well together culturally. And I think all of us at Zynga and now all of us at Take-Two are very excited about the combination, the way things are going, and how well the teams do fit together. And we had a sense of that during the diligence period, but it's always nice to know post-closing that that's the case. And I think you alluded to whether we can sort of create one broader integrated platform. As you know, T2 Mobile Games has been folded into the Zynga division which is operated by Frank Chabot and his team highly independently. And one of their key priorities is to create an integrated platform that will bring the best out in all of our games. So enhance our acquisition, enhance our conversion, enhance our retention, enhance our lifetime value, and also enhance, as I said, our advertising revenue. Zynga has a proprietary ad tech platform driven by their ChartBoost division, and we're excited about what that can bring to Zynga and also bring to all of Take-Two.

speaker
Operator

Our next question comes from Matthew Thornton with Truist Securities. Please proceed with your question.

speaker
Matthew Thornton

Hey, good afternoon. Thanks for the question. Maybe two if I could. First one, Lane, I'd be wondering if you'd be able to give us what the RCS percentage of bookings was for Legacy Take-Two for the quarter. I think it was 73% total with Zing. I'm curious kind of what that number was for the quarter. And then just secondly, Strauss, any movement in the out-year pipeline, if we think about how things are progressing and developing, I guess, what's your general sense about progress? Maybe when we last talked three months ago, that'd be helpful. Thank you.

speaker
Ross

In terms of the RCS for the pre-combination, we're not really breaking that out anymore. We're really looking at the business overall as one business. But I can tell you that we did outperform on NBA 2K22, Tiny Teen is Wonderland, and Top 11 versus our guidance for the quarter. So those three titles did better than we had expected.

speaker
Nicole

And in terms of the pipeline, as Blaney mentioned, we did have a number of titles that have been shifting around. that have affected our pipeline and some of our results for fiscal 23. Generally speaking, we obviously don't take these shifts lightly. We have seen them before. The most important thing for us is always to put out the best game we possibly can because that's what builds franchise value and ultimately that's what drives the success of our organization. So it's work the wait. Typically that is the best economic decision that we can make. Excuse me. I would say, though, I'd characterize the pipeline shifts as while these things do move around and you may have, you know, that may affect a specific year, it hasn't really changed at all our overall perspective on the growth in the intermediate or long term.

speaker
Operator

Our next question comes from Matthew Cost with Morgan Stanley. Please proceed with your question.

speaker
Matthew Cost

Hi, everyone. Thanks for taking the questions. So I guess just kind of following up on the chart boost point, I think you mentioned in the prepared remarks and then just now in the Q&A about leveraging those marketing capabilities inside Zynga across other titles. I guess what are you envisioning that looks like and is that something that can be used to promote titles or cross-promote titles on PC and console in addition to mobile? And then just on the commentary I think in the press release about the $500 million of synergies, now that you kind of have your, you know, your hands dirty, you've gotten under the hood with Zynga. Do you have a sense of how long it will take to establish feasibility and start working through those projects to get a sense of how long they might take? Is it a five-year process to get those done? What might that timing look like? Thank you.

speaker
Strauss Zelnick

Thanks. Look, I think to the extent that Zynga succeeds in building a robust ad tech platform, then it will affect all of our live services businesses, not just Zynga's live services businesses. And we're really optimistic about that. To be clear, we haven't baked any of that into our cost synergy expectations. And as you know, we've not included our revenue synergy expectations in our forward-looking projections. That's all upside if we're able to achieve that. But I feel very good about the exercise. And yes, it will cross over to the entire company's live services offerings. In terms of the timing for new projects, very hard to call that now. There's a lot of excitement internally. We're working on a lot of interesting potential ideas. And certainly, the development for mobile is much quicker than it is for console. But it would be premature to state a particular time. And of course, all product announcements do come from our labels.

speaker
Operator

Our next question comes from Mario Lou with Barclays. Please proceed with your question.

speaker
Mario Lou

Great. Thanks for taking the questions. The first one is just a follow-up on the full year guidance, the updated one with Zynga. I just was hoping to get help kind of clarify what items are kind of moved around within the Zynga side. I know the Star Wars hunters got pushed back. Sounds like macro weakness deepened a little bit. So any other color can provide in terms of the Zynga side would be great.

speaker
Ross

Sure. There were some movements in their pipeline. There was some changes in the FX rate. The Russia sales were removed from their financials and then also there was some overall ad market that the ad market has experience and pressure. So those are most of the changes that we saw in their numbers over the last few months.

speaker
Mario Lou

Okay. And then follow up on the recurring consumer spending. I just wanted to make sure. For mobile advertising revenue, that's all included, right, in RCS, or is that categorized somewhere else?

speaker
Strauss Zelnick

Yes, it is indeed.

speaker
Operator

Our next question comes from Doug Krutz with Callen. Please proceed with your question.

speaker
Doug Krutz

Yeah. First, I was just wondering if you're willing to share what Zynga's pro forma rev would have been for the entire quarter. And then secondly... Google is implementing some advertising formatting changes, and there's been some speculation that this could negatively impact the hypercasual ad business. Just wondering what your take is on that. Do you see any risk there? Is this something you think you can manage through? Thanks.

speaker
Ross

So we're going to manage their business as one combined entity, so therefore we're not going to break out the Zynga piece for the quarter. So it's not been our practice to break out our results with our prior acquisitions. So we're not going to do that here as well.

speaker
Strauss Zelnick

And with regard to a change in ad formats with Google, I don't have a point of view yet about how that may or may not affect us. I would say we're not concerned at the moment.

speaker
Doug Krutz

Okay, thank you.

speaker
Operator

Our next question comes from Omar Dasorsky with Bank of America. Please proceed with your question.

speaker
Omar Dasorsky

Hi, two questions. So just a little bit of clarification on the business plan for ChartBoost specifically. Could you clarify whether you're intending to turn that into a third-party broker advertising network that cross-promotes third-party games on third-party ad inventory similar to companies like IronSource, Applovin, or Unity, or it's more of an internal advertising technology tool? That's my first question.

speaker
Nicole

So in terms of ChartBoost, ChartBoost does actually deal with third parties today. We certainly haven't announced any changes. But that is one area that we're very excited about. Look, the bigger the business is, the more valuable the platform is going to be. It's going to be certainly valuable from a tech perspective internally, but we think it's a great product, and whether or not it's got great growth prospects to the third-party market remains to be seen, but that's certainly something that is under consideration.

speaker
Omar Dasorsky

Okay, thank you very much. And then the second question is, with regards to the mobile game market and specifically the Zynga assets, If you think about, you know, what your outlook for the growth and the expense base was in January when you announced the acquisition versus, you know, what you're guiding today, you know, is it about the same? Is it significantly lower, you know, given that in the first half the mobile video game market, you know, seems to have not performed terribly well?

speaker
Ross

In terms of the changes in our guidance, when we're looking at our OpEx, there's an increase in terms of our expenses from Zynga, but then also in terms against our guidance, we have some lower marketing and some lower headcount expenses due to less new hires due to timing. So that's the big changes between our operating expenses between this guidance and last guidance.

speaker
Nicole

And on the revenue side, obviously there are some things that happen in the short term that Lady and Strauss have already spoken about that can affect what our expectations are, where they are today in the short run versus where they were in January. But overall, our mid- to long-term prospects, growth prospects for the business have not changed.

speaker
Lady

We're still very excited about the prospects.

speaker
Operator

Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question.

speaker
Martin Yang

Hi, thank you for taking my question. My first question is on your investments into the development resources in the future. Can you maybe talk about your plan for mobile or for Zynka particularly versus the rest of more PC and console facing part of the Take-Two in terms of headcount increase or any other supporting infrastructure you have in plan after integration?

speaker
Strauss Zelnick

I think the good news is that we have a very robust team now. We have 11,000 colleagues around the world, and we have the ability to pursue a very ambitious program of development and publishing. And at the same time, we're a growth business, and we expect to continue to grow. So we don't have expectations that we will significantly increase our headcount anytime soon. At the same time, assuming we grow in the way that we expect to and we have an expectation to grow very significantly in the next three years. I assume we will increase our development headcount somewhat.

speaker
Martin Yang

Thank you. One more question if I may. Can you maybe give us more details on the pipeline shift intake too? Is there more conventional reasons like the game is not ready or is there any, you know, any macro factors play into that decision in terms of, you know, You feel that market isn't ready for the game. You want to wait until the broader consumer spending environment becomes more friendly to the games released.

speaker
Nicole

Yeah, I mean, it really is simply that the games, to the extent that we're moving games, they're shifting later, which is when we have pipeline shifts, that's typically the case. We typically don't move games up. But that is really based on where the game is in development. We would not hold a game that's ready to release. based on any overall economic trend or something going on in the market. Potentially, we would maybe move a game a week or two, depending for marketing windows, but generally speaking, when the game is ready, that's when we release it.

speaker
Operator

Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question.

speaker
Brian Fitzgerald

A couple quick ones, maybe rifting on that macro theme. For a long time, we've accepted the narrative that gaming spend is really resilient in a recession because of the low cost per hour of entertainment. But at the same time, the model has shifted towards digital and RCS. Strauss, you hit upon mobile consumer discretionary, mobile advertising. How resilient do you think overall RCS consumer is? PC would be, if we came into more of a macro environment, seems that would be a little more resilient than free-to-play type of models on the mobile side. And then quick follow-up, kind of an odd question. Does your PGA Tour business, is it seeing any impact from the LIV Tour and the noise around that? Thanks.

speaker
Strauss Zelnick

So on your first point, I've been asked about the potential impact of a recession on our businesses. since I started with these conference calls some 15 years ago. And over and over again, I've said I don't believe the entertainment business is recession-proof or even necessarily recession-resistant. And I think we're seeing now that a decline in consumer spending, an increase in inflation will have an impact on the industry. You've seen it from our report today and from our competitors' reports as well. I think conceptually, The impact is probably greater on free-to-play for the reasons that I said earlier in the call, that you can play those titles without spending money, and you may just decide to spend less frequently or less in aggregate. With regard to a console experience, you have to buy the game to play. And so I think if you want the title, you're going to buy it. And as you point out, it's a very good value for consumers. And on your second point, no, we haven't seen any impact on our ongoing sales or engagement with PGA Tour based on, as you put it, the noise around this new offering.

speaker
Operator

Our next question comes from Maddy Litjun with Bernstein. Please proceed with your question.

speaker
spk12

Hello, good evening. A question on IDFA. Now, you pointed out your outperformance on mobile. Now, just wondering if the chart boost stack that Zynga has would have helped you perhaps navigate some of the headwinds that some of your mobile peers have pointed out regards to IDFA. So could that user acquisition advantage maybe help there with the outperformance? And then, you know, just to check on that macro pressure on the business, Are there any interesting geographic trends in terms of differences, for example, between the US market and elsewhere as you look at those macro headwinds you're seeing so far this year? Thank you.

speaker
Strauss Zelnick

Look, the change in IDFA is the new reality, and we've been operating within that new reality for some time. I do think that our massive consumer database gives us a benefit. in that we have all kinds of in-house proprietary information that will help us with our marketing. I do think that the ad tech platform that Zynga has and is building further, including ChartBoost, will help us, as I said earlier, do even better. I'm really not concerned about this post-IDFA world. And in terms of the macro trends, Now, the world tends to kind of move in lockstep on an economic basis, so we don't see any particular geographic changes that meaningfully influence our company.

speaker
Operator

Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question.

speaker
Eric Sheridan

Thanks for allowing me to ask a question. Maybe I'll ask a big picture one. Strauss, we're coming up on the beginning of the third year of this console cycle at the end of this year. Any thoughts about what you've seen from new console adoption and what it's meant for overall gaming habits among your users? And how do you think longer term about aligning some of your more interesting content until we get much deeper into the penetration curve? Because this console cycle has been very different because of elements around the supply chain dynamic. Thanks so much.

speaker
Strauss Zelnick

I think you nailed it. It's hard to call what's going on because it wouldn't normally be early three years in, but it has been because of the incredible supply constraints. What we have seen, though, is that when people are buying new consoles, they're highly engaged. So the users, for example, of GTA V who are on new gen are much more engaged than prior gen users. Now, that may simply be because they have new machines and They're excited about them. But it may also be, and it wouldn't surprise me if this were the case, that because the new consoles offer a better experience, it's a more engaging experience. And that historically has been the case, that our business has grown coincident with the growth and exploitation of increasingly robust technology. And I would expect that to continue for some time to come.

speaker
Operator

Our next question is from Mike Hickey with the Benchmark Company. Please proceed with your question.

speaker
Mike Hickey

Hey, Strauss, Carl Lainey. Congrats on the core, guys, and congrats on your acquisition. Pretty exciting. Two questions for me. First one on your new mobile games from existing IP. Are you sort of thinking casual spin-offs here, like a Red Dead Poker or a GTA Casino? Are you thinking more core games? mobile game releases off your IP? If it is core, do you feel like you have the resources now that you've added to make kind of core mobile games, or would you need to be in a position to hire or create new teams or partner? That's sort of the first question. And the second question on Gen Z and Gen Alpha, Besides being very useful, when you think about your biggest IP and where you've had the most last year over the decades, I'm curious what you think your biggest opportunities and challenges are for this emerging new generation of gamers.

speaker
Strauss

Thanks, guys.

speaker
Strauss Zelnick

So thanks, Mike, for your comments and your question. With regard to the creation of new mobile titles based on legacy Take-Two IP, it remains to be seen what those expressions will look like. It will be driven by the passion and the talent of the teams. And to your question regarding whether Zynga has the ability to do that development in-house, I think the answer is unquestionably they do. Zynga has any number of talented studios all around the world. That distinguishes Zynga from virtually all other mobile developers and publishers, and it's one of the things that we found most exciting about the company, now the label. In terms of the next generation of gamers, the evidence is that they play more. They're more engaged and they play more, and that makes sense because what was new technology 15 years ago to them is just part of the landscape. They've grown up and it's like fish in water. Kids start playing with smartphones as early as they can play with blocks. So I have to believe that interactive entertainment will continue to grow disproportionately to the rest of the audiovisual entertainment businesses. There's ongoing evidence that it is and will remain the fastest-growing segment within the entertainment industry, and I think this next generation will just put a finer and finer point on that. In terms of what we have to give them to engage them, that is still the same, which is the highest-quality entertainment experience that is available on the face of the earth, and that's our job, that's our mission, and that's what drives us all every day.

speaker
Operator

Our next question is from Drew Crum with Stifel. Please proceed with your question.

speaker
Drew Crum

Okay, thanks. Hey, guys. Good afternoon. Maybe for Strauss or Carl. Guys, are you seeing any changes with the development cycle? And specifically, has COVID in any way elongated the time it takes to complete a game? And is that something that could put the development pipeline at risk? And then separately, guys, what is the company's plan around debt reduction for fiscal 23? Thanks.

speaker
Nicole

So in terms of development cycles, I think development cycles are ever-changing, and obviously it varies game by game. The games are getting bigger. They're getting more complicated. There's new technology out there that we can avail ourselves to. And all of that's a learning process. And that learning curve is often very steep. But I would say there's nothing specific about the changing development cycles that we haven't seen before. It's just that the games are bigger, and they're more complicated, and there's more to do. And that's actually what makes our business so exciting.

speaker
Ross

In terms of debt reduction, we have a strong cash flow. The business will be generating a lot of cash this year. So we look at paying down as much debt as makes sense to at the end of the year. But at the same time, we look at acquisition opportunities as well. So if there's something that makes sense for us to buy during the year, we would also love to do that. So we'll have to see what it looks like at the end of the year based on what the needs are during the rest of the year.

speaker
Operator

Our next question is from David Karnofsky with JP Morgan. Please proceed with your question.

speaker
David Karnofsky

Hi, thank you. Just following up on mobile advertising at Zynga, I think you mentioned you were up year over year. Given the overall mobile environment is seeing macro pressure, just wondering how you kind of reconcile that with the advertising games. Is that about market share? And then wanted to see if you could just speak to the decision to delay the full launch of Star Wars Hunters beyond its initial timeline, and is that game still slated for cross-platform just because the platform is listed as TBA in the release? Thanks.

speaker
Nicole

So in terms of the advertising business, yeah, the overall advertising market, generally speaking, has experienced year-over-year declines due to ad tech consolidation and the lower spend on digital advertising. Our advertising revenues have the growth that decelerated from the last quarter, but they grew notably versus last year. And we believe we outperformed the industry trend. We expect this trend to improve over the course of the year with natural seasonality and optimizations we're making in our network mix of pricing. So what was the second question? Yeah, in terms of Star Wars Hunter's delay, it really is just a matter of making sure that the game is delivered at the highest possible quality. and we have not changed anything around platforms.

speaker
Operator

Our next question is from Andrew Murok with Raymond James. Please proceed with your question.

speaker
Andrew Murok

Hi, thanks for taking my question. Two for me, please. Given the criminal enterprises in the last two GTA Online expansions have been received pretty well, how should we be thinking about the GTA Online content pipeline or philosophy as development on the next premium GTA ramps and resources are reallocated? And then second, could softness in the ad market create opportunities for lower cost marketing or change marketing strategies ahead of some of your frontline releases? Thank you.

speaker
Strauss Zelnick

Thank you. You know, Rockstar Games has been supplying ongoing content updates for Grand Theft Auto Online since its release in 2013. The most recent one was well received and they continue to put out terrific content. Any announcements about upcoming properties do come from the labels. We don't tend to talk about them here. And the great question about advertising costs, and I think it's a fair one, which is if you're seeing softness in the market, does that mean you can market your titles more cheaply going forward? And the answer is we might see some minor adjustment in the cost profile, but at the end of the day, we spend a lot to support our big console launches, and I don't think that softness in the ad market would probably have a material impact on that.

speaker
Operator

Our next question is from Clay Griffin with Moffitt Nathanson. Please proceed with your question.

speaker
Clay Griffin

Hi, good evening. Notwithstanding the impact of the higher ASP on the championship edition of 2K, I'm just wondering if you're seeing any material change in Nix as we head into this kind of pre-order window. I guess in light of some of the softness in free-to-play mobile, I guess the question begs, do you have any flexibility to maybe go a bit more aggressively with bundled virtual currency? in the pre-order window?

speaker
Nicole

Yeah, I don't know that there's anything specifically in the market that would change our philosophy on how we package our product. We always are trying new models and new pricing practices to try to optimize the situation. But I don't really see a market-driven specific opportunity arising. But you'll see us experimenting all the time.

speaker
Clay Griffin

And no real change in mix versus last year normalizing for this championship edition?

speaker
Lady

There'll be some changes in MIPS, but we haven't really talked about it at this point. Okay, thanks.

speaker
Operator

We have reached the end of the question and answer session. I'd like to turn the call back over to Strauss-Zelnick for closing comments.

speaker
Strauss Zelnick

We just like to thank you all for joining us. We're really proud of how the company is performing. Our combination with Zynga is off to a terrific start culturally, financially, strategically, and creatively. And I want to reiterate my appreciation to our colleagues all around the world. We'll be talking to all of them tomorrow in our various town hall meetings. These results are thanks to their hard, dedicated, and creative work. Thank you all.

speaker
Operator

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

-

-