Take-Two Interactive Software Inc (TTWO) — Q2 2023 Transcript

Good afternoon. Thank you for joining our conference call to discuss our results for the second quarter of fiscal year 2023 ended September 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 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 we delivered another consecutive quarter of solid results with net bookings of $1.5 billion. We experienced healthy player engagement, driven by exciting new game releases, post-launch content updates, and bold beats for many of our mobile offerings, even as consumers continue to navigate the effects of various macroeconomic and geopolitical factors. We made excellent progress with our integration of Zynga, and we remain highly optimistic about the vast long-term growth potential for the mobile industry, which is expected to reach over $160 billion in gross bookings within the next four years. Some of our key achievements in the period include: we successfully reached our 100-day integration milestone at the end of August. Zynga's President, Frank Gibeau, and his leadership team have evaluated our mobile portfolio, including existing games and titles in development, and they've identified numerous opportunities to enhance our performance. These initiatives include reorganizing several teams, sharing development tools, resources, and best practices across our mobile studios, conceptualizing new bold beats, and leveraging Zynga's highly valuable publishing platform, which is now even stronger following the recent acquisition of Storemaven. We're also starting to expand our direct-to-consumer efforts more meaningfully across our mobile portfolio further to enhance profitability. We remain committed to delivering $500 million of annual net bookings opportunities over time. The Zynga team has been working with our other labels to explore potential creative projects. As part of this process, we've identified certain underrepresented genres in our mobile portfolio that we believe we can pursue more aggressively over time. Our efforts to deliver cost synergies are tracking extremely well, and we're now confident that we can achieve over $100 million of annual savings within the first two years post close. I'd like to thank Frank, his leadership team, and all of our new colleagues at Zynga once again for helping to make our combination happen so seamlessly. We're thrilled to have Zynga as part of our Take-Two family. Turning to our second quarter results. Our net bookings performance was within our guidance range, led by Grand Theft Auto V, which exceeded our expectations and to date has sold more than 170 million units worldwide. Starting July 26, Grand Theft Auto Online launched its latest major update, The Criminal Enterprises, introducing expanded gameplay across the Criminal Careers of Executives, Bikers, Nightclub Owners, and Gunrunners, as well as the opportunity to work with federal agents to uncover a criminal conspiracy in the new Operation Paper Trail series of Contact Missions. The update also featured a range of new vehicles, and more, including the new Community Series, showcasing some of the most fun and unique experiences created by players across the globe. This major update also delivered a host of overall improvements to the gameplay experience, including increased payouts across a wide array of activities and several other player-requested features. The Criminal Enterprises was very well received, and we have seen millions of players engaging with significant new features such as the ability to run Sell Missions in Private Lobbies, New Weapon Wheel Controls, and more. In addition, Rockstar Games GTA+ subscription service continues to grow its members who enjoy a rotation of numerous exclusive in-game benefits, including vehicles, upgrades, and gear every month. On September 9th, 2K and Visual Concepts successfully launched NBA 2K23, with the title earning an 80+ Metacritic rating at launch, and receiving praise for raising the bar on the top-selling sports title in the U.S. To date, NBA 2K23 has sold-in nearly 5 million units, alongside significant growth in virtual currency sales and a higher average selling price compared to NBA 2K22. Player engagement has been very strong, with more than 2 million daily active users, and 4% growth in average days played. We believe that NBA 2K23 will continue to grow its audience, as the title provides a year-round experience for its fervent community of players throughout the world. I'd like to congratulate the teams at 2K and Visual Concepts for once again delivering such a stellar basketball experience. The franchise’s momentum extends beyond the core console experience, with NBA 2K22 Arcade Edition for Apple Arcade remaining the #1 game on the platform, and our recent launch of NBA 2K23 Arcade Edition offering many new features and improvements. Furthermore, NBA 2K Online in China continues to be the #1 PC online sports game in the country with nearly 59 million registered users. Red Dead Redemption 2 is continuing to impress, with sell-in of more than 46 million units worldwide to date and more active players in this second quarter than we have seen for the comparable period in previous years. 2K supported WWE 2K22 and Tiny Tina’s Wonderlands with the final downloadable content packs for each title, which were made available individually and as part of the games’ Season Passes. During the quarter, recurrent consumer spending rose 76% and accounted for 80% of net bookings. Zynga continued to experience strong engagement amongst its active players, and we believe that we are maintaining our market share globally. Our mobile business delivered mid-teens growth in advertising bookings on a year-over-year basis, outperforming the broader industry. At the same time, in-app purchases continued to be under some pressure due to current macroeconomic conditions. Some key highlights of our mobile offerings during the quarter include: The Rollic business remained very strong and exceeded our plan. Notably, Rollic surpassed 2 billion lifetime downloads worldwide and has now launched 19 titles that have reached the #1 or #2 most downloaded game position in the U.S. App Store. Several of Zynga’s titles celebrated milestones, including the 2nd anniversary of Harry Potter: Puzzles and Spells; the 10th anniversary of Farmville; and the 15th anniversary of Zynga Poker. Each of these anniversaries was supported with an array of in-game events and unique content offerings. Zynga unveiled several high-profile brand integrations, including Socialpoint’s partnership with AMC Network’s The Walking Dead in Dragon City and Monster Legends; CSR2’s debut of Pagani’s new multi-million-dollar Utopia hypercar; and Game of Thrones Slots Casino launched a new in-game event, Week of the Dragon, in conjunction with HBO’s new hit fantasy series, House of the Dragon. Turning to our outlook, we now expect to deliver net bookings of $5.4 billion to $5.5 billion in fiscal 2023. Our reduced forecast reflects shifts in our pipeline, fluctuations in FX rates, and a more cautious view of the current macroeconomic backdrop, particularly in mobile. Lainie will provide more detail on our outlook shortly. Despite these headwinds and their effect on our guidance for the year, we remain highly confident in our diverse and extensive development pipeline that we expect will deliver us sequential growth and record performance over the next several years. Take-Two has a proven strategy and consistent track record of success, driven by our core tenets: We aspire to be the most creative, the most innovative, and the most efficient entertainment company in the world. As we strive to capitalize on the numerous opportunities ahead of us, we are committed to creating significant long-term value for our shareholders. I will now turn the call over to Karl.

I'd like to begin by thanking our teams for delivering another strong quarter, which reflects our ability to captivate and engage audiences consistently by delivering the highest-quality entertainment experiences across all platforms. I’ll now discuss our recent releases. On October 14th, 2K and HB Studios launched PGA TOUR 2K23, the latest entry in our golf simulation franchise, to positive community sentiment and great critical acclaim, including GameSpot calling the title 'The best simulation golf game ever made'. PGA TOUR 2K23 features golf icon and all-time sports great, Tiger Woods, and celebrates his legacy by introducing him as both a playable in-game pro and an Executive Director who advised the game’s development team. The game features several new additions and improvements, including an enhanced roster of male and female pros; the ability to play as NBA legends Michael Jordan and Steph Curry; a Topgolf mode; a deeper array of personalization options and gear; licensed courses and the ability to design original courses; and multiplayer offerings. HB Studios will continue to support the game with additional pros and courses, as well as seasonal updates and the Clubhouse Pass. On October 21st, 2K and Gearbox Software released New Tales from the Borderlands, a choice-based, narrative adventure game that is a successor to the beloved Telltale Games title. The franchise has always been an incredible canvas for storytelling, and we are pleased to add this new offering to the portfolio. On November 2nd, Private Division and Roll7 released Finding the Flowzone, the second and final DLC expansion for the critically acclaimed skateboarding action-platformer OlliOlli World. The release has received praise from critics including Eurogamer who commended Finding the Flowzone as a 'fond goodbye to this magnificent game,' and stating that the expansion 'is completely rad.' Now, I will discuss our announced offerings for the balance of Fiscal 2023 and beyond. On December 2nd, 2K and Firaxis Games will launch Marvel's Midnight Suns 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. In support of the upcoming launch, 2K has produced five short videos that are being released weekly on Marvel Entertainment’s YouTube channel, which provides the backstory of how the game’s lead character, Lilith, became the Mother of Demons, and how Super Heroes like Blade, Magik, Ghost Rider, and Nico Minoru came together to form the young core of the Midnight Suns. During the fourth quarter, 2K and Visual Concepts will launch WWE 2K23. Building upon the success of 2K22, which had nearly 450 million matches played and 10 million hours of game content viewed on Twitch, fans can look forward to the series once again redefining interactive entertainment within the squared circle. We are grateful to have such a supportive and collaborative partnership with WWE, and 2K will have more to share about WWE 2K23 in the coming months. On February 24th, Private Division and Intercept Games will launch Kerbal Space Program 2, the sequel to the beloved rocket building sim, in Early Access for PC on Steam, Epic Games Store, and other digital storefronts. KSP2 will bring an array of content at the launch of Early Access, making this the most visually impressive KSP game yet. The game will also feature improved tutorials and user onboarding to provide players with the necessary knowledge to excel at space flight. Built from the ground up, KSP2 will also introduce the ability to customize and paint vehicles, leading to deeper personalization and expression in every build. Those who purchase KSP2 in Early Access will help inform the future development of the game by providing feedback directly to Intercept Games leading up to the full launch of the title. We can’t wait for the incredibly passionate KSP community to take flight in this new entry to the series. Throughout the balance of the fiscal year, Rockstar Games will continue to support Grand Theft Auto Online with additional major content updates, alongside popular annual seasonal-themed offerings and more. In mobile, Zynga’s Rollic studio will continue to release a consistent cadence of titles, while the label’s other studios remain hard at work on a variety of offerings, including several titles that are currently in soft launch and expected to release in Fiscal Year 2024. Turning to eSports, the NBA 2K League is currently gearing up for its sixth season, which will tip off in Spring 2023. Last month, the League announced a landmark agreement with Australia’s National Basketball League to launch an expansion team, NBL Oz Gaming. Not only is this the first time an Australian professional sports league has joined a global eSports league, but it also marks our third expansion team from outside of North America. We remain very excited about the continued growth and success of the NBA 2K League. In closing, we believe that Take-Two is home to the best talent in our industry across all segments of interactive entertainment. With an expanding portfolio of the most exciting and commercially successful owned intellectual property, and the ability to deliver consistently deeply engaging and captivating entertainment experiences to a broad array of audiences around 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 second quarter before reviewing our guidance for fiscal year 2023 and our third quarter. Please note that our second quarter results include our combination with Zynga, which affects the comparability of our results relative to last year. Additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our combination with Zynga is tracking very well, from the progress we are making against our integration milestones with the net bookings and cost synergy realization that we are working towards and our highly complementary company cultures. We have great confidence that over the long term, our portfolio is poised to benefit from the significant expected growth in mobile gaming, evolving player dynamics towards more immersive mobile content, and our massive combined scale, which will enable our teams to cross-promote titles and build stronger tools to connect with new users. During the quarter, we identified additional cost savings opportunities, and we now feel confident that we can deliver over $100 million of annual synergies within the first two years post close. We're also evaluating other efficiencies across our core businesses while ensuring that we have the appropriate resources to deliver on our significant growth prospects. Our second quarter results were solid, and we delivered net bookings of $1.5 billion, which was within our prior guidance range. The movement in foreign currency exchange rates negatively affected our net bookings by approximately 1%. With consumers navigating ongoing macroeconomic uncertainties, we believe that our financial performance truly demonstrates the incredible quality of our games and the significant value that our interactive entertainment experiences provide to our players. During the period, recurrent consumer spending rose 76% and accounted for 80% of net bookings. NBA 2K and Rollic’s hyper-casual mobile portfolio outperformed our plans, while we experienced some softness across other parts of our portfolio as the interactive entertainment industry faced continued headwinds. Digitally delivered net bookings increased 62% and accounted for 94% of the total. During the quarter, 73% of console game sales were delivered digitally, up from 65% last year. GAAP net revenue increased 62% to $1.4 billion, and cost of revenue increased 56% to $714 million. Operating expenses increased by 144% to $932 million, primarily driven by the addition of Zynga; and business acquisition and higher personnel costs; which was partly offset by lower console and PC marketing expenses. And, GAAP net loss was $257 million, or $1.54, which was impacted by $320 million of amortization of acquired intangibles and $37 million of business acquisition costs. 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. 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 revising our guidance, and we now expect to deliver net bookings of $5.4 to $5.5 billion. Approximately 70% of the downward revision reflects lowered expectations for our mobile business and shifts in our release slate, while the balance reflects an updated view for the rest of our portfolio based on current business trends across the interactive entertainment industry. Our guidance reflects $50 million of FX headwinds. 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 hyper-casual 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, 36% 2K, 18% 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 90% and represent 77% of total net bookings. Our digitally delivered net bookings are expected to grow by approximately 70% and represent 96% of the total. Our forecast assumes that 75% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $650 million in non-GAAP adjusted unrestricted operating cash flow, and we expect to deploy approximately $150 million for capital expenditures. We expect GAAP net revenue to range from $5.41 billion to $5.51 billion and cost of revenue to range from $2.61 billion to $2.64 billion, which includes approximately $694 million of amortization of acquired intangibles. Total operating expenses are expected to range from $3.4 billion to $3.42 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 we anticipate will be slightly offset by our expected cost synergies. In light of the current economic backdrop, we continue to monitor our costs prudently to find potential areas of savings this year while being mindful of the resources we need to support our robust multiyear release schedule. And, we expect a GAAP net loss ranging from $631 million to $674 million, or $3.95 to $4.22 per share, which assumes a basic share count of 159.8 million shares. Our revised forecast includes an increase in amortization for intangible assets acquired from Zynga based on updated valuation estimates. We expect our management tax rate to be 18% throughout the year. Now, moving to our guidance for the fiscal third quarter: We project net bookings to range from $1.41 billion to $1.46 billion, compared to $866 million in the third 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 hyper-casual mobile portfolio, and Toon Blast. We project recurrent consumer spending to grow approximately 125% and digitally delivered net bookings to increase approximately 80%. Our forecast assumes that 72% of console game sales will be delivered digitally, up from 63% last year. We expect GAAP net revenue to range from $1.43 billion to $1.48 billion and cost of revenue to range from $690 million to $710 million, which includes approximately $198 million of amortization of acquired intangibles. Operating expenses are expected to range from $897 million to $907 million. At the midpoint, this represents a 126% increase over last year. This increase reflects the inclusion of Zynga; business acquisition costs; and higher marketing, which we believe will be slightly offset by the realization of some of our anticipated cost synergies and cost savings efforts. And, GAAP net loss is expected to range from $142 million to $160 million, or $0.85 to $0.95 per share, which assumes a basic share count of 167.7 million shares. In closing, we continue to focus on our execution against an uncertain economic backdrop, and we are highly optimistic about our future growth trajectory. Our long-term development pipeline is stronger than ever, and we are excited to deliver high-profile sequels and engaging new properties that have the potential to enhance our financial profile even further. At the same time, we are confident in our ability to create significant shareholder value as we continue our integration of Zynga by collaborating on new creative projects, leveraging our combined scale, unlocking greater potential from their mobile platform, and entering new business models and geographies. 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 another solid quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?

Could you provide some insight into the mobile business? Do you believe we are nearing a stabilization for that part of the business? We've been hearing various reports regarding the mobile space, particularly that while top games are performing well, smaller games are facing challenges. Are you experiencing difficulties with maintaining daily active users, or is it more about spending? Any information you can share would be greatly appreciated.

Engagement remains very stable for us at Zynga, supported by many strong hit titles. Unlike other mobile companies of similar scale, our revenue is not heavily reliant on just two or three games; we have over ten significant titles and more on the way. Engagement is very solid, although we are experiencing some pressure on in-game spending. On the advertising side, our bookings have increased by mid-double digits year-over-year, indicating several positive aspects in our business. The key takeaway is that people enjoy mobile games, especially ours, and their engagement remains consistent across our titles. Predicting changes is difficult, and while I believe we may face three to six more months of downward pressure, I am optimistic that by the end of 2023, we will be in a stronger position.

Great. That's helpful. I wonder, just as a follow-up, it looks like just going between your company presentations, it looks like your pipeline of games from fiscal '23 to fiscal '25 is unchanged. Is that a pretty fair assessment?

It is. We have 87 titles coming across mobile, PC, and console. And it's the most robust pipeline we've ever had certainly and one would argue, one of the most robust pipelines in the industry.

There seems to be a lot of frustration. Earlier this year, you released the S-4. We've seen two cuts recently, and the changes in the pipeline contribute to this situation. Can you share anything that gives you confidence in growth for next year, particularly in the core Take-Two? It appears that part of the cut is related to 2K, if my calculations are correct. I'm just curious about what is instilling this confidence or any information you can provide that might reassure us.

It's driven by the pipeline, of course. So we know what the release schedule is and we feel really good about it. And if we didn't, we wouldn't call for a sequential growth and record results in the next three years. But I understand the frustration. And look, we call it as we see it and I think we're known for that. Had we expected where we were right now, then we wouldn't be guiding down. We're guiding down because things have materialized in a way that's different than our expectations. Some of that is related to the pipeline, but frankly, not most of it. Most of it's related to mobile, a significant amount of FX as well. But there have been some modest pipeline shifts. So the good news is those titles are, of course, coming.

Got it. If I could just add a follow-up, your company has a reputation for quality, and I suspect many of the delays or shifts are due to the need for refinement. However, is there something you’re experiencing that suggests it's simply too much happening? Can you walk us through your thought process regarding this? It seems like COVID may have had a larger effect. It has been two or three years now with a strong pipeline, and we are all trying to be patient.

I understand the concern and the question. We are not experiencing any productivity issues. We have very high quality expectations, which is evident in our consistent performance. This company consistently delivers successful releases, and we haven't faced a disappointing release in a long time. That is the most crucial aspect. Given the choice, I prefer our current situation, where we've encountered some delays and adjusted our guidance downward, over having to deal with failures. That is the key in this industry. We have experienced similar issues in the past, where delays were ultimately justified because the final results made the wait worthwhile, and the timing did not diminish the outcomes we achieved. I hope this will be the case again now.

Maybe I could just go back to the mobile business for a minute. In terms of what you've learned about the mobile business over the last 12, 15 months, some of before the close and since the close in Zynga, how do you think about what you need to build for the long term versus some of the elements of change that you can see on some of the distribution platforms from Apple and Google, and how that might impact what you need to build and scale on either the acquisition front or the monetization front for the long term?

It's Karl. So really, what it means to us, what we're working on building is Zynga and this is what's happening obviously well before we merged with the company, as we're working on building the mobile platform. And one of the most exciting things and obviously, Zynga has got some amazing forever franchises and some great IP and some good titles and some great titles coming out. But a huge part of the value is that platform and the ability to manage the customer life cycle very effectively. And you can see the company investing in that over time and we continue to invest that. And as we bring together the databases across our entire company, that power of data management, particularly in the context of IDFA and some of the challenges that privacy rules may send to us, the better your data, the broader your data set and the better the bigger and broader your platform and the more capabilities you have in your platform will enable you to mitigate those effects. And we're already seeing some of that. And that's been a focus for Zynga for quite some time, and we're going to continue to invest in that. You saw it with the acquisition of Chartboost, the acquisition of Storemaven, but also bringing all of the Zynga portfolio and the new Take-Two portfolio onto the centralized Zynga platform is going to yield significant results for us.

I have two questions. The first is for Strauss. You mentioned consecutive years of growth and record performance. Can you clarify what specific metrics you are referring to, such as EBITDA, earnings per share, or margins? Any additional details would be appreciated. The second question is for Lainie. You indicated a $50 million impact from currency headwinds on the full year guidance, but you also mentioned some movement in the pipeline. Could you provide more details on that impact for the year?

Yes. What I was referring to is top and bottom line, so net bookings and income, however you describe EBITDA as a handy measure.

Yes. And for the full year, I mentioned that about 70% of the downward revision is the mobile business and the release slate together, and about $50 million is for the FX currency headwinds.

And is there any color on what slipped in the pipeline? And I'm sorry if I missed that.

Sure. There were several changes in the release schedule during the quarter. One mobile title from 2K was moved, and the Gen 8 and Switch versions of Marvel's Midnight Suns have been postponed to fiscal '24. Additionally, KSP2 has now shifted to early access this year. These are the major changes in the release schedule.

Just on the PC console business, are you seeing a divergence between the performance of Grand Theft Auto and NBA 2K, specifically where NBA 2K RCS is outperforming Grand Theft Auto? And if so, can you give any more color on the player and consumption dynamics you're seeing in GTA? And then on the mobile side, you highlighted how the advertising business is hanging in there and growing a fair bit better than that purchases. Do you expect the advertising to materially outperform in-app purchases over the next couple of quarters? The reason I ask is because presumably, a lot of those ad dollars are coming from other game companies. And then I wonder if eventually that feels the pain from in-app purchases across the industry going down.

Yes. Thanks for your questions. Look, GTA Online and NBA 2K are very different animals. GTA Online has been around for nearly 10 years. It's beloved by a massive audience. GTA V, the underlying title has sold in more than 170 million units. NBA 2K is an annualized release, and so we get an annual snapshot of how virtual currency is doing. Engagement is very high indeed. Virtual currency is up in NBA 2K23. The mobile advertising business, look, these are two different businesses and the vast majority of our net bookings at Zynga comes from in-app purchases still. So yes, we expect the growth rate in advertising probably to exceed the growth rate in in-app purchases, certainly for the next year. Beyond that, I think it's too early to say.

Maybe just piggybacking off the last question, asking more broadly. With your guidance update and the impact from more cautious macro backdrop, if you isolate your console PC business, can you discuss it in any way you change your view on RCS for this part of the business, so excluding mobile? And then separately, can you talk about the decision to close Playdots? And is this, in any way, factors into that $100 million-plus of cost synergies that accompanied the Zynga transaction?

So for RCS, we did lower our expectations. Most of it was for mobile since our prior guidance assumed that mobile would experience some improvement in the second half of the year. But we no longer expect that since the current data for the industry and our real-time performance has shown that we think it will lower in the second half of the year. But we are also assuming some softer performance for several of our large non-mobile titles that are meaningful contributors to RCS. So that's why our expectations for RCS are to come down in the second half of the year.

And with regard to Playdots, we've relocated the operations of our successful game, Two Dots to another studio. And yes, that was driven by the integration benefits that we felt we could achieve.

Wanted to ask about mobile. With the full year guidance, 70% of it coming from mobile but Rollic outperformed in the second quarter. So is there some main factors you can point to that separates Rollic from the rest of the mobile portfolio? Is it being kind of immune to IDFA? Is it competition? And then lastly, just curious to hear your thoughts on potentially leveraging the success of Rollic with perhaps cross-promotion to other mobile games?

So Mario, 70% is mobile and the movement in the release schedule, so it's a combination of both of those two items. So it's not only mobile. But you're right, Rollic did outperform in Q2 so that business is doing really well.

Some of the reasons that Rollic is performing well include its advertising-driven model, which has seen success in terms of both efficiency and inventory availability. Additionally, due to the nature of the hypercasual business, it is less reliant on targeted advertising, making user acquisition growth easier. Unlike in other market segments, the impact of changes like IDFA does not affect the Rollic and hypercasual business in the same way. I apologize, I didn't catch the second question. Could you repeat it about cross-promotion?

Yes, the question was, your thoughts on potentially leveraging the success of Rollic to cross-promotion or view that as an acquisition channel to other mobile…?

Yes, there are certainly opportunities to do that. You can make an argument that it's a different kind of a customer. I think there's obviously overlap. There may be some differences. But the fact that you've got a large funnel of players coming into your database always going to be something that's going to help your UA strategy across your entire enterprise and specifically on the mobile side of the business.

Just regarding the $500 million of revenue synergies with Zynga, which you reiterated, any early opportunities you're seeing across your portfolio to execute on this? And then Lainie, you mentioned other potential cost opportunities that could come up. Is that something that's factored into your guide or would that be incremental to it?

Yes. On the first question, yes, there are a number of early opportunities that we've identified, including our approach directly to the consumer on the mobile business, which is pretty exciting and could generate material benefits. And we're working on a number of properties as well. It will take longer to bring some titles to market but that's super exciting.

And in terms of the operating expense synergies, we do have some of the synergies with Zynga included in our guide. But in terms of the other areas of efficiencies, we don't have those in our guide yet. We have some ideas that we're looking at. So like on a multiyear basis, we're evaluating our real estate footprint as we adopt flexible work policies. We're also looking at identifying some core functions that we can centralize across our labels, determining the necessity of some opening to hire positions and also negotiating some vendor contracts more effectively across the company. So those are additional opportunities that we're seeing in our cost structure. So we'll be looking at achieving those in the next year or so.

Just to tie a couple of things that have already been said together. You mentioned that you've been assuming that mobile would improve in the back half of the year and now you're not assuming that. Is it simply to say that you thought it would get better isn't or that it's actually continued to deteriorate since the last call?

It's the former.

My first question is on NBA 2K's ASP trends. You mentioned there's some year-over-year improvement. Can you maybe dig into details on what contributed to the ASP improvement?

Yes. We released a Championship Edition this year. Each year, we offer different marketing packages or SKUs. This year, we had a particularly successful one featuring prominent basketball players, which carries a higher average selling price and is impacting the ASP. It’s really just about the SKU mix of the title.

Got it. And then a follow-up question regarding your mobile synergy. Is there any milestones you could share with us updating where the teams are at? Are new teams being formed to build mobile game space on your core IP? Is there any games in aviation phase or any other milestones will be appreciated?

We don’t have anything specific to announce right now, and I understand your question is likely about releasing Take-Two intellectual property or games. There are numerous smaller initiatives we can pursue with leads as well as efficiencies in merging T2 Mobile and the acquired Zynga component. There are many conversations happening and ideas being exchanged between teams. While we have nothing to announce at this moment, these discussions are progressing well and are quite exciting. It’s difficult to predict when something will materialize, as the creative process varies in duration. What’s crucial is that we have game concepts that are commercially viable and aligned with our brand. The teams are currently engaged in those discussions, so please stay tuned.

First question on NBA units. So it sounds like, if I heard correctly, that the unit number so far is very similar to what you said a year ago. So could you just confirm, has it been broadly similar? Has there been any slight growth or decline on that? And then on the live services revenue, could you give us any color in terms of how that revenue is currently split between MyCAREER and MyTEAM and maybe how that's trending over time?

Yes. It's roughly the same number of units year-over-year, and virtual currency spending is up. And we don't split out the spending in the different modes for the purpose of this call.

Lainie, you talked to this a little bit. But in terms of labor, how do you think about things improving as the market cools off a bit for tech employees? And how are you thinking about headcount growth and retention from here? Does the cooling labor market give you any leverage in terms of getting developers back to the office? Does that help things? Any color there would be great.

Well, we don't really look at our relations with our colleagues as one of leverage, so we probably wouldn't describe it through that lens. I do think that it's probably going to become easier to hire people when a lot of tech businesses are laying people off. We don't expect a rip and we don't have a hiring freeze. We're always judicious about the people we bring on board. We pride ourselves on being highly efficient, and we believe we are highly efficient now. So I do think that this may make it somewhat easier to hire really talented people, but we wouldn't use these times to apply leverage. We believe that we have great relationships with our workforce, and those are terribly important to us.

My question is about mobile advertising efficiency. How has mobile advertising efficiency in the September quarter trended versus the March and the June quarters, especially at Zynga? And what are your go-forward assumptions for the December and March quarter? And what I mean by advertising efficiency is the kind of in-app purchase bookings divided by the advertising spend?

Just to be clear, you define advertising efficiency as in-app purchases divided by advertising spend?

Yes, or the reciprocal of that. So like the total advertising spend as a percentage of bookings. Sorry, I should have said it that way.

I think we don't specifically break that out, and I wouldn't necessarily describe it as efficiency, but it could be an interesting metric to consider. As we've mentioned, we've seen strong growth in our advertising business while facing some pressure on in-app purchases. Therefore, it seems likely that the ratio would favor advertising over in-app purchases. This isn't necessarily a long-term trend, just what we're observing in the short term. We anticipate that in-app purchases will recover at some point in the future. As Strauss mentioned earlier, it's difficult to predict when that might occur, but that's our expectation. I don't believe those ratios will remain fixed over time or move in a specific direction, as it will depend on broader market conditions.

The first one is on your guidance for '23. I mean, obviously, a couple of revisions here. Do you feel like you're sort of being conservative enough? Obviously, a lot of uncertainty on the macro mobile, but is there still downside risk and where would that be? And then on '24, you said growth sequentially. You've given us some data on the S-4 and I think on your presentation with Zynga. Street is looking for $8 billion in revenue, $759 in ETFs. Obviously, that's a pretty big step-up. Guessing it's coming from premium as mobile is slowing here. Obviously, live service is not great. Is it just one, two, three titles on premium or any sort of granularity, I guess, on the '24 growth would be great. And then the second question is on the very unfortunate GTA League. Just curious how you and your teams are sort of managing through that impact, if you feel that there's a residual advantage or not and how you sort of move forward and think about timing.

In terms of our guidance for 2023, we always base it on the information available to us at that time. I wouldn't categorize it as overly conservative or risky. We provided the best insights we have right now, and while I hope things improve, this is our current assessment. Regarding the compounded annual growth rate and the numbers shared in the S-4, we typically do not disclose long-term growth targets in our standard operations. We only did so previously due to the pending merger with Zynga. Given the fluctuations in our release schedule, it isn't practical for us to provide long-term projections regularly, as we have not done that historically. However, we are very optimistic about our pipeline and the strong titles we have in development, with many large projects in progress. The potential of these titles remains unchanged, and we are confident they will yield consecutive years of growth and record performance in the coming years.

And with regard to the leak, it was terribly unfortunate and we take those sorts of incidents very seriously indeed. There's no evidence that any material assets were taken, which is a good thing. And certainly, the leak won't have any influence on development or anything of the sort. But it is terribly disappointing and causes us to be ever more vigilant on matters relating to cybersecurity.

I guess two. It seems like the legacy Take-Two mobile games are holding in a bit better than the legacy Zynga. I guess, what would you attribute that to? Is it just kind of a life cycle of where those titles are relative to kind of when IDFA ATT dropped? And then secondly, just curious, Strauss, I think Phil Spencer was talking about Game Pass and essentially implying that they were nearing saturation, I guess, relative to kind of where the Xbox console installed bases. Just curious if your thoughts about subscription models relative to the traditional premium window have changed over time? I think his comments generally, I think, could be characterized as lining up maybe what your view of the value proposition for a subscription product.

In comparing the legacy Take-Two mobile business with the Zynga business, we don't disclose specific details, so it's difficult to assess that behavior. I can say that we don't view it in those terms because there are various games in the Take-Two legacy portfolio and the Zynga portfolio; some are performing better than others, with some excelling and others lagging. Therefore, there's a lot of variation within the portfolio itself. I wouldn't characterize it as the Take-Two mobile businesses outperforming Zynga or the other way around. That's not how we evaluate the business anymore.

It's all one, it's all Zynga. It's managed by the Zynga team and we have a lot of great titles.

Yes. We are specifically hopeful that with the T2 mobile titles, as we begin to see collaboration, they will be able to leverage the strength of the Zynga mobile platform, which presents some exciting opportunities for us to enhance efficiency and take advantage of consumer lifecycle management.

On the subscription front, we have been very open to collaborating with both Sony and Microsoft on their offerings when it aligns with our interests. My perspective on subscriptions has remained consistent since I first started discussing them about four years ago. The interactive entertainment industry is quite different from the linear entertainment sector. Consumers engage with interactive entertainment for far fewer hours each month compared to linear entertainment, and within those hours, they engage with fewer titles. This raises the question of whether subscription models are as suitable for interactive entertainment as they are for linear formats, and I still express skepticism about this. Additionally, I question the logic of releasing frontline titles simultaneously with those on a subscription service, which I believe has never made sense and still doesn’t. It is becoming increasingly clear that this approach misses opportunities for publishers. While I won't speak for my colleague, Phil, I can confirm that our views have not changed. There may be a subscription model, likely a catalog model, that appeals to very dedicated consumers who want access to a variety of titles. However, I don't think it serves as a mass-market option that could replace the interactive entertainment industry as we know it, and there is currently no evidence to suggest otherwise.

Maybe two quick follow-ups. First one on coming back to mobile, again. Maybe this is for Strauss. How do you think about what's currently going on from a macro perspective as opposed to just a user acquisition perspective, given what's going on in the iOS environment, in particular? Is there a way to tease apart what percentage of the pressure is from one versus the other? And relatedly, what's your level of confidence that we come out of? I mean, macro will resolve itself. But from a UA perspective, from an ecosystem perspective, what's your level of confidence that you can kind of control coming out of this doldrum? That's the first question. The second one is a really easy one. Given where the stock price is, I'm kind of curious your appetite around buybacks. I know you guys have been fairly opportunistic in the past. Obviously, we've taken on some leverage with Zynga, but I'm kind of curious how you're thinking about that, given where the share price is.

Yes. From a broader viewpoint on mobile, you're correct that there's a distinction between acquiring users, retaining them, and converting them. Regarding user acquisition, both we and others will likely be more discerning to enhance efficiency. For retention and conversion, it's evident that many users are not spending on mobile; over 90 percent of consumers do not make in-game purchases. When consumers face higher costs for essentials like fuel and food, they may be inclined to cut back on entertainment spending, especially since enjoyable gaming experiences are still accessible without financial commitments. As such, we plan to adjust our user acquisition spending to improve efficiency, which is a positive move. We might see some challenges with in-game purchases temporarily. While I emphasize that this is just my opinion and not something you can take as a guarantee, I anticipate economic and geopolitical factors will put pressure on spending for about three to six months. I am optimistic that by the end of 2023, things will stabilize and begin to improve. Lainie will address the question regarding buybacks.

Sure. So we continue to believe in returning value to the shareholders and via share buyback, but we'll only do so when the conditions are right. And obviously, we believe that there is deep value in our market price currently. But in order to do a share repurchase, we would need to do it in an open trading window and also have the optimal capital structure that supports the purchases. So we'll see when it makes sense for us to do it. So that's how we see it.

This is a question referring to your earlier definition of Take-Two’s identity as a hit factory. I want to know if you hold a similar view over your mobile game portfolio. Do you feel there's a need for a portfolio review on mobile games based on the quality and future potentials?

Yes. At any given time, we're always reviewing our portfolio, both in terms of the performance of the current titles and the potential for new titles that we're working on. And Frank and his team are very focused on making sure to optimize the current title lineup and to make sure that our development for new titles is as effective and poised for success as it possibly can be. Good news is we have a terrific lineup of great titles and our mobile titles all make money.

I'm going to quickly ask a question here. I apologize if Karl has already addressed this, but regarding part of your synergies coming from utilizing PC console intellectual property in the casual mobile market with Zynga's development resources, you previously mentioned an example such as a Red Dead Redemption poker game. Are the mobile games you are considering aimed at fans of the existing PC console franchises like Red Dead, or are they intended for mobile-first casual gamers who typically play games like Zynga Poker or Empires & Puzzles?

I think it's a great question, thank you. And I think the bottom line is you're probably not going to convert a console player to become a mobile player. You have to appeal to a mobile player. And we believe that legacy IP, when properly developed as a great title, can do just that. But it's not a slam dunk by any means. It's still got to be a great game. But you're not going to convince someone who never plays a mobile title to play a mobile title just because it's based on console IP.

Want to thank everyone for joining us today. I want to say thanks particularly to our dedicated team of colleagues all around the world who continue to do a great job. While it would be nice always to have the best possible news in an upward sloping curve, this is a business that occasionally does present us with challenges. This team is well suited to challenges. We have a great pipeline, we have a great team. We have the ability to deliver, and we wish you all a great holiday season. Thank you for joining us. And thank you for your support.