Take-Two Interactive Software Inc (TTWO) — Q1 2023 Transcript

Good afternoon. Thank you for joining our conference call to discuss our results for the first quarter of fiscal year 2023 ended June 30, 2022. Today's call will be led by Strauss Zelnick, Take-Two’s Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie 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 take2games.com. And now, I’ll turn the call over to Strauss.

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 are 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 are 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 have made significant progress in our integration efforts. Zynga, which is being run by the label’s President, Frank Gibeau, established its ongoing leadership structure. Alongside Frank, we are 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 are pleased that our Day 1 plans were executed seamlessly, with no disruptions to our business operations or player communities. While it’s still early, we are confident that we can realize $100 million of annual cost synergies within two years post-close and we are 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 have 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 a 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 #1 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 are 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 V for PlayStation 5 and Xbox Series X/S, Grand Theft Auto Online standalone, and the launch of GTA+, 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 at a new normal that is 49% higher than the pre-pandemic first quarter of fiscal 2020. Sales of Grand Theft Auto V also remained 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 is determined to once again 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 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 Tina’s Wonderlands 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 Tina’s Wonderlands 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, OlliOlli World, from Roll 7. The expansion earned an 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 are 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 & Spells featured an in-game event to celebrate the cinematic release of 'Fantastic Beasts: The Secrets of Dumbledore.' Empires & 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. Rollic launched 11 games in the quarter and Colors Runners! reached the #1 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 billion to $5.9 billion, which includes Zynga for part of the year. Our pipeline for the year continues to look very strong, and we are 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. Lainie 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 have identified through our combination with Zynga, we see a path to engage even greater audiences around the world, grow our scale, and enhance our margins. I will now turn the call over to Karl.

Thanks, Strauss. 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 7, 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 Dam 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, Commander Azeez, 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 Rollerdrome, 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 and 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 Edition. 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 have made the decision to move back the launch timing of Marvel's Midnight Suns to ensure the teams at Firaxis Games and 2K deliver the best possible experience for our fans. The title will launch later this fiscal year on Windows PC, Xbox Series X|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, Rollic 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.

Thanks, Karl, 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 contribution 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 Strauss 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 synergies and we continue to expect approximately $50 million to be achieved within the first twelve months post-close. The largest opportunities include reducing duplicative corporate overhead and 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 $700 million to $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 the 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, 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, as well as the outperformance of our pre-combination portfolio, led by NBA 2K22, Tiny Tina’s Wonderlands, and Top Eleven. Digitally-delivered Net Bookings 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. GAAP 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 our 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 Nordeus, business acquisition costs and higher personnel and marketing expenses. And our GAAP net loss was $104 million, or $0.76 per share, which was largely impacted by $117 million of amortization of acquired intangibles and $165 million of business acquisition costs. Our GAAP net loss benefited from a reversal of expense of approximately $48 million related to forfeitures of previously granted stock awards. In the first quarter last year, our GAAP net income was $152 million, or $1.30. 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 excluding the impacts of the Zynga transaction exceeded the high end of our guidance range by $0.06, despite the impairment charge taken during the quarter and the higher tax rate. We ended the quarter with over $1.3 billion of cash and short-term Investments and $3.3 billion of debt. Turning to our guidance, I’ll begin with our full fiscal year expectations. As Strauss mentioned, we are initiating new guidance that includes our combination with Zynga for approximately 10 months of our fiscal year. We now expect to deliver Net Bookings of $5.8 billion 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 V, Empires & Puzzles, Rollic’s hypercasual 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 our former T2 mobile titles, 37% 2K, 17% Rockstar Games, and 1% Private Division. We forecast our geographic Net Bookings split to be about 60% United States and 40% International. We now expect recurrent consumer spending to grow by 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 GAAP net revenue to range from $5.73 billion to $5.83 billion and cost of revenue to range from $2.74 billion to $2.79 billion, which includes approximately $700 million of amortization of acquired intangibles. Total operating expenses are expected to range from $3.37 billion to $3.38 billion as compared to $1.5 billion last year. This increase 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 a GAAP net loss ranging from $398 million to $438 million, or $2.50 to $2.75 per share, which assumes a basic share count of 159.2 million shares. We expect our 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 billion 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 V, Empires and Puzzles, Rollic’s hypercasual mobile portfolio, and Toon Blast. We project recurrent consumer spending to grow approximately 85% and digitally-delivered Net Bookings to increase approximately 70%. Our forecast assumes that 73% of console game sales will be delivered digitally, up from 65% last year. We expect GAAP net revenue to range from $1.37 billion to $1.42 billion and cost of revenue to range from $700 million to $719 million, which includes approximately $200 million of amortization of acquired intangibles. Operating expenses are expected to range from $849 million 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, GAAP net loss is expected to range from $144 million 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 and we believe that our combination 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 Zynga’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 Strauss.

Thanks, Lainie and Karl. 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.

Two questions. First, Lainie, 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 Sun versus what's changed with FX and macro.

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 significant to the change in the guidance.

Great. 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 in this year. And wondering as you look at Zynga's portfolio and combining it with your portfolio, how fast can you integrate sort of the ad network? Are things changing relative to what you were thinking maybe at the time the acquisition closed or even when you first made the acquisition?

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 if you are feeling the pinch of inflation, specifically with regard to nondiscretionary 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. 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 of 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, Take-Two Mobile Games has been folded into the Zynga division, which is operated by Frank Gibeau 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 and 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.

Maybe two, if I could. First one, Lainie, I've been 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 Zynga. I'm curious kind of what that number was without 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 would be helpful.

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 NBA 2K 22, Tiny Tina's Wonderlands, and top eleven versus our guidance for the quarter. So those three titles did better than we had expected.

In relation to the pipeline, we have experienced some shifts in titles that impacted our pipeline and certain results for fiscal '23. We take these shifts seriously, and while they have occurred before, our priority remains to deliver the best game we can, as that is crucial for building franchise value and driving our organization's success. Therefore, waiting is worthwhile. Generally, this is the best economic decision we can make. I would describe the pipeline shifts as typical; while they may affect specific years, they haven't altered our overall outlook on growth in the intermediate and long term.

I have two. So I guess just kind of following up on the Chartboost 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 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 5-year process to get those done? What might that timing look like?

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. So that's all upside if we're able to achieve that. But I feel very good about the exercise. And yes, we'll 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 it in a particular time. And of course, all product announcements do come from our labels.

Great. The first one is just a follow-up on the full year guidance, the updated one with Zynga. I was hoping if you could help kind of clarify what items are kind of moved around within the Zynga side. I know that Star Wars: Hunters got pushed back. It sounds like macro weakness deepened a little bit. So any other color you can provide in terms of the Zynga side would be great.

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 experienced some pressure. So those are most of the changes that we saw in our numbers over the last few months.

Okay. And then a 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?

Yes, it is indeed.

First, I was wondering if you could share what Zynga's pro forma revenue would have been for the entire quarter. Secondly, Google is making some changes to its advertising formats, and there has been speculation that this might negatively affect the hypercasual ad business. What is your perspective on that? Do you see any risk, and do you think you can manage through it?

We're going to manage their business as one combined entity. Therefore, we won't provide a separate breakdown for Zynga's performance for the quarter. It hasn't been our practice to disclose results for prior acquisitions, and we will maintain that approach here as well.

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.

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.

In terms of Chartboost, it currently engages with third parties. We haven't announced any changes in that regard, but we are very excited about this area. The growth of the business will enhance the platform's value. It will certainly have significant internal technology benefits, and we believe it is a great product. Whether it has strong growth potential in the third-party market is still uncertain, but that is something we are considering.

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

In terms of the changes in our guidance, when we look at our operating expenses, there is an increase related to our Zynga acquisition. However, we are also seeing lower marketing and headcount expenses due to fewer new hires because of timing. These are the significant changes between our current operating expenses and our previous guidance.

On the revenue side, there are obviously some short-term factors that Lainie and Strauss have frequently discussed that can influence our expectations, comparing the present situation to what it was in January. However, our mid- to long-term growth prospects for the business remain unchanged. We continue to be very optimistic about these prospects.

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 Zynga, particularly versus the rest of more PC and console facing part of Take-Two in terms of headcount increase or any other support infrastructure you have in plan after integration?

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 we expect to, and we have an expectation to grow very significantly in the next 3 years, I assume we will increase our development headcount somewhat.

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

Yes. Essentially, we only shift the release of games to a later date, not earlier, depending on their development status. We wouldn’t delay a game that is ready to launch due to general economic trends or market conditions. We might adjust a game’s release by a week or two for marketing purposes, but typically, we release a game when it is ready.

A couple of 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, PC would be if we came into more of a macro environment? It seems that would be a little more resilient than free-to-play type of models on the mobile side. And then a quick follow-up, kind of an odd question. Does your PGA Tour business, is it seeing any impact from the Live Tour and the noise around that?

So on your first point, I've been asked about the potential impact of the recession on our business since I started with these conference calls some 15 years ago. And over and over again, I said I don't believe the entertainment business is recession proof or even necessarily recession resistant. And I think we're seeing now the decline in consumer spending and 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 the 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.

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

The change in IDFA is a new reality that we have been navigating for some time. Our extensive consumer database provides us with an advantage through in-house proprietary information that will enhance our marketing efforts. Additionally, the ad tech platform that Zynga is developing, including Chartboost, will further improve our performance. I'm not worried about the post-IDFA landscape. Regarding macro trends, the economy typically moves in unison, and we aren't noticing any significant geographic changes that would impact our company.

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?

I think you nailed it. It's hard to call what's going on because it would normally be early 3 years in, but it has been because of the incredible supply constraints. What we have seen though is when people are buying new consoles, they're highly engaged. So the users, for example, of GTA 5 who are on NuGen 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.

Congratulations on the quarter and on your acquisition, which is very exciting. I have two questions. The first is about your new mobile games based on existing intellectual property. Are you considering more casual spin-offs, like a Red Dead Poker or GTA Casino, or are you focusing on more core mobile game releases from your IP? If you are leaning towards core games, do you believe you have the necessary resources now that you've added Zynga, or would you need to hire, create new teams, or partner up? That’s my first question. The second question relates to Gen Z and Gen Alpha. Besides their relevance to your major IP and historical performance, I’m curious about what you see as the biggest opportunities and challenges presented by this emerging generation of gamers.

Thank you, Mike, for your comments and your question. Regarding the development of new mobile titles based on legacy Take-Two IP, it is still uncertain how those will take shape. This will depend on the passion and talent of the teams involved. To address your question about Zynga's capability to handle that development internally, I believe they certainly can. Zynga has a variety of talented studios globally, which sets them apart from nearly all other mobile developers and publishers. This is one of the aspects we find most exciting about the company right now. As for the next generation of gamers, the evidence indicates that they play more and are more engaged. This is logical since what was new technology 15 years ago is now part of their normal experience. They have grown up with it, much like fish in water, as children are starting to use smartphones as early as they do blocks. Therefore, I am confident that interactive entertainment will continue to expand faster than other audiovisual entertainment sectors. There is consistent evidence showing that it remains the fastest-growing segment within the entertainment industry, and I believe this next generation will further highlight that trend. Our mission to engage them remains unchanged: we aim to provide the highest quality entertainment experience available, and that’s what motivates us daily.

Maybe for Strauss or Karl. 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?

Development cycles are constantly evolving and vary from game to game. The games are becoming larger and more complex, and there is new technology available for us to utilize. This leads to a steep learning curve. However, I would note that the changes in development cycles are not unfamiliar; the games are simply larger and more intricate, which adds to the workload. This complexity is what makes our business so exciting.

In terms of debt reduction, we have a strong cash flow. The business will be generating a lot of cash this year. We look at paying down as much debt it 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 look to do that. So I'd love to see what it looks like at the end of the year based on what the needs are during the rest of the year.

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 gains? Is that about market share? And then I 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 a cross-platform just because the platform is listed as TBA in the release?

In the advertising business, the overall market has seen year-over-year declines primarily due to ad tech consolidation and reduced spending on digital advertising. Our advertising revenues have decelerated from the previous quarter, but they still grew significantly compared to last year. We believe we outperformed the industry trends, and we expect this situation to improve throughout the year due to natural seasonality and the optimizations we're implementing in our network mix and pricing. As for the release of Star Wars: Hunters, it is essential to ensure that the game is delivered at the highest quality, and we have not made any changes regarding the platforms.

Two for me, please. Given the Criminal enterprises in the last few 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 changed marketing strategies ahead of some of your frontline releases?

Thank you. Rockstar Games has been providing regular content updates for Grand Theft Auto Online since its launch in 2013. The latest update was positively received, and they continue to deliver excellent content. Any announcements about upcoming properties are made by the labels, so we usually don't discuss them here. Regarding your question about advertising costs, it's a valid one. If there's a decline in the market, does that mean we can market our titles at a lower cost in the future? The answer is that we might see some slight adjustments in our cost structure, but ultimately, we invest significantly in supporting our major console launches, and I don't believe a decline in the ad market will have a substantial effect on that.

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 mix as we head into this kind of preorder window? I guess in light of some of the softness in free-play mobile. I guess the question back, do you have any flexibility to maybe go a bit more aggressively with bundled virtual currency in the preorder window?

Yes. I don't think there's anything in the market that will change our approach to how we package our product. We are always experimenting with new models and pricing strategies to optimize our situation. However, I don't see a specific opportunity driven by market changes. You will continue to see us trying new things.

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

There will be some changes in mix, but we haven't discussed it at this point.

We'd 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.