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Take-Two Interactive reported revenues for its third fiscal quarter ended December 31 today that beat expectations, with net bookings of $866.1 million, up 6% from a year ago, when pandemic lockdowns resulted in a spike in gaming.
Take-Two is poised to play an even bigger role in gaming with its pending acquisition of Zynga for $12.7 billion — a move that will make more than half of all bookings come from the fast-growing market for mobile games.
The company said that existing titles as well as Grand Theft Auto: The Trilogy — The Definitive Edition helped grow revenues in the quarter, in spite of complaints that the remastering of the early Grand Theft Auto titles was buggy.
The company’s Rockstar Games label teased that it is working on Grand Theft Auto VI last week. That’s unsurprising but comforting for gamers who have been waiting for years for word of the title.
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Grand Theft Auto V’s total sales have now surpassed 160 million copies, up 5 million from the previous quarter. Since its 2013 release, GTA V has generated more than $6 billion in revenue. Red Dead Redemption 2 has sold 43 million copies.
Revenue for the New York video game publisher came in at $903 million (up 5% from a year ago) on a GAAP basis for the third fiscal quarter ended March 31. The company reported GAAP net income of $144.5 million, or $1.24 a share for the third fiscal quarter, compared with $182.2 million, or $1.57 a share for the same quarter a year ago.
Overall, Take-Two said holiday season results were driven by new and existing titles, as well as strong ongoing engagement from player communities that continue to immerse themselves in their favorite experiences and new content updates.
The better-than-expected performance was driven primarily by Grand Theft Auto: The Trilogy — The Definitive Edition, Red Dead Redemption 2, Red Dead Online, and NBA 2K22.
Take-Two CEO Strauss Zelnick said in an interview with GamesBeat that Take-Two did not detect any change in gamer behavior as a result of the Omicron wave of COVID-19 happening during the holiday season.
“I feel like in terms of demand, we’re in a normalized state now,” Zelnick said.
As for the Zynga deal, he said in our interview, “[Zynga CEO Frank Gibeau] and I have known one another for years. And I think a moment occurred where we both felt that it made sense to combine for customers and our shareholders. And we were able to come to terms and we’re thrilled that we have been able to do so and expect the combination to close in the first fiscal quarter of next year.”
Analysts expected Take-Two to report non-GAAP earnings per share of $1.23 on revenues of $879.6 million for the third fiscal quarter ended December 31.
Zelnick said the third fiscal quarter performance was outstanding, and the company was raising its net bookings guidance for the fiscal year ending March 31 from $3.37 billion to $3.42 billion. Titles coming up in the next quarter include OlliOlli World, Tiny Tina’s Wonderlands (a Borderlands game), and GTA V for the PlayStation 5 and Xbox Series X/S.
“We remain highly optimistic about the future of the interactive entertainment industry and our multi-year growth trajectory. From investing in talent to acquiring some of the industry’s leading creative studios and announcing our transformational agreement to combine with Zynga, we are taking exciting steps to diversify our business, gain market share and enhance our positioning as one of the world’s top three pure-play publishers of interactive entertainment,” said Zelnick, in a statement. “Together with our incredible pipeline of new intellectual properties and eagerly anticipated sequels, we are confident that we are positioning our business for long-term success and shareholder value creation.”
During the third fiscal quarter, recurrent consumer spending — a good measure of gamer loyalty in games with ongoing live operations — rose 2% over last year, which was in line with our expectations of a slight increase, and accounted for 57% of net bookings. The ability to captivate and deeply engage audiences with offerings remains a distinguishing characteristic, the company said. NBA 2K and Grand Theft Auto Online were the largest contributors to recurrent consumer spending and many of our free-to-play offerings were notable drivers as well.
The pandemic effect and the gaming boom
Take-Two said it has 7,639 employees now, up from 7,215 in the previous quarter. During the quarter, the company added more than 300 developers. The company also acquired Roll7 and Elite3D (Valencia, Spain).
Adding more employees has been hard due to a shortage of game developers during a historic boom for gaming as more people play due to the pandemic. And Zelnick said in our interview that growing in mobile and finding talented developers were both big reasons for buying Zynga.
Zelnick said Zynga is like Take-Two in that it has a great collection of owned and controlled intellectual property in the mobile space.
“And they’re a top five player worldwide and mobile. So we like the fact that the net bookings not only are significant but that they come from multiple intellectual properties,” Zelnick said in our interview. “And Zynga has many studios or create really high quality interactive entertainment. We do think that there will be an opportunity to bring some of Take Two’s storied intellectual property to the mobile business brew development that is done by Zynga studios.”
Take-Two said it had already identified $100 million of annual cost synergies that it expects to achieve within the first two years post-closing and over $500 million of annual revenue opportunities that it can deliver over time. In an analyst call, Zelnick said the Zynga deal will add a billion new gamers that the company target with marketing, despite Apple’s emphasis on privacy over targeted ads.
More than $85 billion was been invested in games in 2021 (according to Drake Star), through investments in startups, acquisitions, and public offerings. Drake Star believes we’ll see another record in 2022 with more than $150 billion in game deals this year. And thanks in part to the Zynga deal (and Microsoft’s $68.7 billion pending deal with Activision Blizzard) the game industry has already exceeded that in the first month of 2022.
Regarding the Activision Blizzard deal, Zelnick declined to comment directly. But Take-Two can probably view that Microsoft deal with some relief. It removes Activision Blizzard from Take-Two’s list of third-party publisher competition, as Microsoft’s goals as a first-party game publisher are likely very different from Activision Blizzard’s views of building games for every platform. And the Zynga deal could give Take-Two the breadth to come within striking distance of the next-largest third-party game publisher, Electronic Arts.
Game results
For upcoming games in the fiscal 2022 (year ended March 31, 2022) to fiscal year 2024 (year ending March 31, 2024), Take-Two has 23 games in the works. It has six independent games coming from Private Division partners, 20 mobile games, four mid-core games (hardcore in nature but with short gameplay sessions), and nine iterations of previously released titles (remakes and remasters).
Take-Two said NBA 2K22 has 1.9 million players playing every day, up 10% from a year ago. And recurrent consumer spending is up 10% from a year ago, despite the tough comparison to the pandemic year. It saw an 8% increase in in-game purchasers and a 30% growth in new-to-franchise spenders.
Zelnick said that the GTA trilogy remaster exceeded expectations, but he regretted that the game’s quality didn’t meet the company’s expectations and that the company continues to work on fixing bugs.
“There were [quality issues] and we addressed that head on,” Zelnick said in our interview. “We definitely had some quality issues. We have more updates coming. And it’s always our goal to release only the highest quality projects. If we fall short, it’s terribly disappointing for all of us. We did fall short on that occasion. And we’ve begun to address it and we’re happy that we began to address it. There’s more work to be done.”
Zelnick noted that The Contract pack update for GTA Online broke new ground. From a design standpoint, it has six exclusive new tracks by Dr. Dre and consumers love it, he said.
Outlook
Analysts expected fiscal Q3 (for the fourth calendar quarter ended December 31) earnings per share of $1.23 on revenues of $879.8 million, and full-year fiscal results of $4.81 a share on revenues of $3.49 billion. For the fourth fiscal quarter ending March 31, analysts expected $1.15 a share EPS on revenues of $918.47 million.
In after-hours trading, Take-Two’s stock is down 3% to $169.25 a share. In an analyst call, Zelnick said that returning to the office is a “location by location question,” dependent on what local authorities are saying. The company is expecting to be able to return to the office and yet it hasn’t had a quality lapse in remote work.
Zelnick noted that cloud gaming had not changed market demand for games dramatically.
Last quarter, I also asked Zelnick for his latest thoughts on the metaverse and nonfungible tokens (NFTs), the biggest buzzwords of the moment.
This time, I asked if he had changed his thinking on NFTs (nonfungible tokens that use the blockchain to authenticate virtual goods in games) and the metaverse, the universe of connected game worlds as envisioned in novels like Snow Crash and Ready Player One.
“I think it depends on which thinking you’re referring to. I’ve been boringly consistent as I always am. We certainly believe in all goods, depending on how you define the word metaverse. We very much believe in the metaverse and we’re probably the biggest metaverse company out there from a revenue point of view, given that Rockstar’s Grand Theft Auto Online, Rockstar’s, Red Dead Online, and NBA 2K Online are all massive metaverses with engaged consumers,” he said.
He added, “Depending on how you define yourself, I might have skepticism but I certainly don’t obsess as defined in the entertainment business. With regard to digital goods, how could we not believe in them? We sell billions of dollars of digital goods every year. Applying rarity and durability with digital good makes all the sense in the world. That said, if I had any concerns, they surrounded the speculation that overlaid some NFTs and all speculations come to an end, usually in a good way for early participants and in a bad way for later participants. And we have no interest in engaging in speculations or purveying them to our consumers because we have a responsibility to our consumers. When that market normalizes, we think there will be great opportunity.”
I asked if he was surprised to see resistance from hardcore gamers on NFTs announced so far. We’ve seen backlash to NFTs proposed by GSC Game World (on Stalker 2), Ubisoft (on Ghost Recon: Breakpoint), and Team17.
“I think what hardcore gamers resist is a speculative experience, but isn’t entertaining, quite properly. And anything that feels exploitive would be unappealing. We always want to deliver real value and we always want to deliver more value than what we charge,” Zelnick said.
For the record, here’s what Zelnick said last quarter:
“You’ve used two buzzwords and there are a few others that you could use. It all depends on how you define these terms,” he said. “So if you define metaverse as today’s version of Second Life, I’m not very optimistic about how it will turn out. I think those who bought real estate in Second Life probably regret that they did. If you define metaverse as the entire physical world will become a digital world, we will never leave our homes, we’ll be strapped into a chair in the morning, put on a headset and everything we did out there in the real world we’ll now do at home — I don’t believe in that.”
He added, “Those of us were stuck at home during the pandemic, which is to say all of us, were thrilled when we could get outside again. If you define it as a digital world that you can inhabit in a very real and in an ongoing basis, where you can be entertained or entertain in real time, where you can engage with friends or make new friends where you can build communities where you can be told stories or tell stories where you can ride bicycles or motorcycles or cars and perhaps race them where you could engage in criminal activity or you could be a police officer stopping that criminal activity where you could have conference calls or sit at a casino table if you define it that way — then we have metaverse is here at Take-Two.”
And he said, “We have GTA Online. We have Red Dead Online. We have NBA2K’s online world. And I would argue that if you define the metaverse that way, we not only already are a metaverse company. We’re probably the largest metaverse company. In fact, I don’t know who would be larger as a metaverse company in terms of revenues and profits.”
Zelnick said Take-Two would continue to stay on the cutting edge of that definition of the metaverse.
As for NFTs — which use the transparency and security of the digital ledger of blockchain to authenticate unique digital items, he said he is a believer. As for the rate at which the big game companies are going to move into NFT games, Zelnick said some will move early and some will move late. He said people will learn what it takes to create a great NFT, just like people have learned how to create a great collectible.
“If you believe in physical collectibles, which I do, then you should believe in digital collectibles,” he said. “All collectibles rely on two things. Rarity. And they rely on quality for their perceived value. So if you think that just by creating a digital asset that’s rare, you’re going to create value that will inexorably go up, you’re mistaken. That’s speculation. And people will be disappointed if they believe in that. If on the other hand, you believe that there are digital goods that are both singular or rare and really great, I can subscribe to that notion. I’m very much a believer in NFTs, but quality is going to be of paramount importance.”
