Take-Two Interactive (TTWO) Q2 FY27 Earnings Call Transcript

Nicole Shevins00:00

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 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.

Prepared remarks

Strauss Zelnick00:48

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. We delivered second quarter net bookings of $1.6 billion, which was slightly below our guidance range of $1.62 to $1.67 billion. While NBA 2K27 launched successfully, and achieved the second highest net bookings performance in the history of the series, it was below our forecast for the period. Our mobile business performed in line with our plans, and the Grand Theft Auto series exceeded our forecast ahead of next week's eagerly anticipated launch of Grand Theft Auto 6. We're reiterating our fiscal 2027 outlook for net bookings of $8 to $8.2 billion.

Strauss Zelnick01:15

Preorders for Grand Theft Auto 6 are tracking far in excess of our initial expectations, and we know that the numbers will speak for themselves soon enough. Our outlook also includes the launch of new mobile and previously announced sports titles, and growth in recurrent consumer spending for NBA 2K27 during the second half of our fiscal year, driven by the largest slate of post-launch content in franchise history.

Strauss Zelnick01:18

Turning to highlights from the period.

Strauss Zelnick01:40

Grand Theft Auto 5 continued to expand its audience, and to date, the title has sold nearly 235 million units worldwide. The series grew a double-digit percentage for both recurrent consumer spending And average monthly members for GTA+, as players enjoyed the latest major update, the Court Center Heist, along with monthly events, new races, and more.

Strauss Zelnick01:55

In September, Rockstar Games unveiled No Pixel 5, the next evolution of Grand Theft Auto 5's roleplay community with an entirely overhauled experience, new locations, and graphic enhancements focused on player immersion.

Strauss Zelnick02:11

To celebrate the launch throughout the month, players were able to earn exclusive items within Grand Theft Auto Online by watching select roleplay streamers on Twitch. Rockstar Games will continue to support Grand Theft Auto Online with new content and ongoing events for its vast community.

Strauss Zelnick02:26

Grand Theft Auto 6, coming to the world on November 19th, promises to be not only highly engaging, but in fact the biggest and most detailed groundbreaking experience that Rockstar Games has ever created.

Strauss Zelnick02:31

As you've undoubtedly seen, marketing for the title is well underway across the globe.

Strauss Zelnick03:19

And has included an extended look at the game, which premiered on Netflix and became the platform's most viewed title for the week, drawing in 31 million consumers in just its first 4 days. An array of in-depth features and magazine covers, the reveal of the official soundtrack, which included 3 tracks that debuted in the top 10 of their respective Billboard charts, the announcement of a special night Vice City in partnership with the NBA, where the Miami Heat will play as Vice City versus the Milwaukee Bucks, and a series of unique in-person activations celebrating Vice City in Miami. Miami. We're immensely proud of the team at Rockstar Games for their unparalleled commitment to and passion for elevating our art form and all entertainment.

Strauss Zelnick03:33

2K and Visual Concepts once again delivered the most realistic and authentic NBA experience in interactive entertainment with NBA 2K27, which has sold over 4 million units so far.

Strauss Zelnick03:56

The launch window was unusually busy with numerous entertainment experiences competing for players' attention. We expect an acceleration of net bookings and engagement during the second half of the year as 2K and Visual Concepts Concepts plan to introduce a robust slate of in-game content, including exciting themed seasons, all-new college basketball experiences, and innovation within MyTEAM.

Strauss Zelnick04:20

During the quarter, Borderlands 4 offered new downloadable content and introduced several promotions which are driving improved engagement and player retention. The Borderlands franchise has now surpassed 100 million units sold, marking an incredible milestone for Gearbox and 2K. We look forward to even more content for Borderlands 4 and what lies ahead for the series.

Strauss Zelnick04:37

During the period, 2K released add-on content and updates for Mafia: The Old Country, Sid Meier's Civilization VII, PGA Tour 2K, and WWE 2K, which enhanced gameplay and player engagement further for these titles.

Strauss Zelnick04:53

Mobile performed in line with our expectations, underscoring the importance and impact of our diversified business. As we had anticipated, net bookings for Color Block Jam decreased double digits compared to its peak performance during last year's second quarter.

Strauss Zelnick05:08

Net bookings for Toon Blast grew 4% over last year's record second quarter results, driven by a new in-game feature called Beam, which assists players while solving puzzles and has been increasing engagement and level progression.

Strauss Zelnick05:23

Words with Friends benefited from a multiplatform collaboration with the hit TV show Wheel of Fortune, including a dedicated on-air theme week and in-game puzzles and online events for players, which drove net bookings growth of 6%.

Strauss Zelnick05:30

Our advertising business improved sequentially as we successfully attract new partners and increase ad yields.

Strauss Zelnick05:49

2K's mobile offerings also continued to perform well with solid downloads and engagement across key titles. NBA 2K All-Star, our mobile title in partnership with Tencent in China, Surpassed 11 million registered users since launching last year and is yielding strong profit margins.

Strauss Zelnick06:24

We continue to see strength in our mobile and direct-to-consumer channel, which remains a significant driver of revenue and margins as we include new titles, foster direct relationships with players, and reduce payment friction to enhance the user experience and drive repeat purchases. These efforts position our direct-to-consumer platform as a durable and expanding engine for net bookings growth and long-term profitability. Looking ahead, Zynga continues to develop and test many new titles, and several look promising based on their initial performance and soft launch, including Top Goal.

Strauss Zelnick06:30

We believe that fiscal 2027 will be an historic year for Take-Two.

Strauss Zelnick06:35

Driven by our unwavering commitment to delivering the highest quality entertainment experiences.

Strauss Zelnick06:49

Guided by our core pillars— creativity, innovation, and efficiency— we're confident in our ability to build on this incredible year and to set new benchmarks as we deliver on our plan for long-term success.

Strauss Zelnick07:01

I'd like to express my gratitude to our 13,000 colleagues around the world for their dedication to our common mission and for making our company what it is today and what we will be tomorrow.

Strauss Zelnick07:05

I'll now turn the call over to Karl.

Karl Slatoff07:14

Thanks, Strauss. I'd like to thank our teams who do their best work every day in the pursuit of our creative, financial, and operational goals.

Karl Slatoff07:31

I'll now discuss our recent and upcoming releases. On October 8th, 2K and Gearbox released Risk of Rain 2: Hallowed Concepts, which introduced 2 new playable survivors, new regions to explore and expanded gameplay mechanics to deepen the player experience.

Karl Slatoff07:45

2K continued to innovate its mobile offerings for the NBA 2K franchise. On October 20th, NBA 2K Mobile Season 9 launched with new modes that connect in-game action to real-world NBA schedules.

Karl Slatoff07:50

A rewind feature that allows players to enjoy historic and iconic NBA moments.

Karl Slatoff07:53

And real-time PvP matches.

Karl Slatoff08:11

Additionally, NBA 2K27 Arcade Edition made its debut last week, offering WNBA Play Now, new expansion teams, deeper career journeys and progressions, 5v5 experience and exclusive GOAT skills and rewards.

Karl Slatoff08:33

On October 28th, 2K and Visual Concepts continued their post-launch content for WWE 2K26 with the release of Ringside Pass Season 6 and the standalone Street Fighter Elite Pack, which marks our first ever collaboration with Capcom and includes signature character moves and themed cosmetic creation parts.

Karl Slatoff08:43

2K also released Season 13 for WWE Supercard last week, which has now been downloaded nearly 40 million times since its initial launch.

Karl Slatoff09:03

Firaxis announced new content for Sid Meier's Civilization VII for 2027, including Ark of Tomorrow, a comprehensive free update extending gameplay into the atomic age, and Earthrise, Rise, the title's first major premium expansion featuring extended core mechanics and space era progression.

Karl Slatoff09:10

These additions will provide players with more ways to take one more turn in this iconic strategy series.

Karl Slatoff09:21

In the coming months, 2K will provide updates on PGA Tour 2K27 and WWE 2K27, both of which are slated to launch later this fiscal year.

Karl Slatoff09:34

Zynga will continue to focus on enhancing its existing mobile portfolio with bold beats and updates, as well as releasing new titles, including Topgolf, which is currently in soft launch.

Karl Slatoff09:44

It's incredibly exciting to be just days away from Rockstar Games' launch of Grand Theft Auto VI, and preloads are rolling out across the world.

Karl Slatoff09:49

This is a defining moment for our company and the entertainment industry.

Karl Slatoff09:53

Our teams are proudly supporting this global phenomenon.

Karl Slatoff10:05

With our robust and diverse long-term product development pipeline, we are well positioned to capitalize on our many opportunities on the horizon to engage audiences throughout the world.

Karl Slatoff10:08

I'll now turn the call over to Lainie.

Lainie Goldstein10:20

Thanks, Karl, and good afternoon, everyone. Our 2nd quarter net bookings were $1.6 billion, which was modestly below our guidance range of $1.62 to $1.67 billion.

Lainie Goldstein10:31

Recurrent consumer spending was down 9% for the period compared to our guidance of a 5% decline driven by NBA 2K and accounted for 81% of net bookings.

Lainie Goldstein10:38

Compared to last year, NBA 2K and mobile each decreased while the Grand Theft Auto series was up.

Lainie Goldstein10:52

GAAP net revenue decreased 16% to $1.5 billion. Cost of revenue decreased 20% to $637 million, and operating expenses decreased 9% to $978 million.

Lainie Goldstein11:02

On a management basis, operating expenses declined 9% year over year. This was favorable to our forecast due to lower personnel and user acquisition costs.

Lainie Goldstein11:51

Turning to our outlook, we are exceedingly optimistic about the rest of the year and are reiterating our fiscal 2027 net bookings outlook range of $8 to $8.2 billion. The launch of Grand Theft Auto 6 is only 10 days away, and the level of preorders generated is extraordinary. Additionally, 2K and Visual Concepts plan to deliver the most innovative array of in-game content ever released for NBA 2K. which gives us confidence that recurrent consumer spending for the franchise will accelerate during the 2nd half of the year. The largest contributors to net bookings are expected to be the Grand Theft Auto series, NBA 2K, 2K, Toon Blast, Match Factory, Empires and Puzzles, Words with Friends, Red Dead Redemption series, Color Block Jam, WWE 2K, and Zynga Poker.

Lainie Goldstein12:00

We continue to expect recurrent consumer spending to be in line with fiscal 2026, representing 65% of net bookings.

Lainie Goldstein12:23

This assumes strong growth for the Grand Theft Auto series, largely due to our outlook of robust sales of Grand Theft Auto 6 Ultimate Edition, which includes add-on content, and high single-digit growth for NBA 2K. We continue to expect a decline in mobile due to last year's success of Color Block Jam and our assumption that trends will moderate for several of Zynga's mature mobile titles.

Lainie Goldstein12:46

We project the net bookings breakdown from our labels to be roughly 37% Rockstar Games, 34% Zynga, and 29% 2K. We remain on track to deliver operating cash flow in excess of $1 billion of $1 billion and to be in a net cash position by the end of the fiscal year. Our expectation to deploy approximately $290 million of capital expenditures is unchanged.

Lainie Goldstein13:02

We expect GAAP net revenue to range from $7.98 to $8.18 billion, cost of revenue to range from $3.68 to $3.8 billion, and operating expenses to range from $4.08 to $4.1 billion.

Lainie Goldstein13:14

On a management basis, we now expect operating expense growth of approximately 5% year over year, which is favorable to our prior forecast due to lower user acquisition costs, part of which is related to timing.

Lainie Goldstein13:21

The expense growth compared to last year is primarily driven by marketing for Grand Theft Auto 6 and higher R&D costs.

Lainie Goldstein13:26

Now moving on to our guidance for the fiscal 3rd quarter.

Lainie Goldstein14:03

We project net bookings to range from $3.35 to $3.5 billion compared to $1.76 billion in the prior year. The largest contributors to net bookings are expected to be the Grand Theft Auto series, NBA 2K, Toon Blast, Match Factory, Empires and Puzzles, Words with Friends, Red Dead Redemption series, Color Block Jam, Singer Poker, and Toy Blast. We expect recurring consumer spending to increase by approximately 12%, which assumes significant growth for the Grand Theft Auto series driven by sales of Grand Theft Auto 6 Ultimate Edition, growth for NBA 2K, and a decline in mobile.

Lainie Goldstein14:33

We expect GAAP net revenue to range from $3.27 to $3.42 billion, cost of revenue to range from $1.65 to $1.73 billion, and operating expenses to range From $1.16 to $1.18 billion. On a management basis, operating expenses are expected to grow by approximately 21% year over year, which is primarily driven by marketing costs to support the launch of Grand Theft Auto 6. In closing, we are extremely optimistic about our path ahead.

Lainie Goldstein14:52

Next week's launch of Grand Theft Auto 6 is just the beginning. We believe that we can take our core franchises to the next level of success by releasing engaging new content and enhancing our live service offerings All while launching new hit titles, expanding our geographic footprint, and pursuing accretive M&A.

Lainie Goldstein15:02

As we execute this extensive multifaceted strategy to drive growth, we feel confident in our ability to unlock greater earnings power and deliver long-term shareholder value.

Nicole Shevins15:27

I'd like to thank our talented, passionate colleagues around the world for their hard work and for getting us to this pivotal moment in our multi-year growth story. I'll now turn the call back to Strauss. Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to once again thank our colleagues for their contributions to our success and to our shareholders. I want to express our appreciation for your continued support.

Nicole Shevins15:30

We'll now take your questions. Operator?

Questions and answers

Operator15:40

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand.

Operator15:51

To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.

Operator15:59

If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster.

Operator16:10

Your first question comes from the line of Andrew Marok with Raymond James. Andrew, your line is open. Please go ahead.

Andrew Marok16:27

Hi, thanks for taking my questions. You mentioned the GTA 6 marketing mega campaign. Obviously a lot of innovative ideas going on there. Just in general, how is that trending versus as your expectations in terms of building awareness around the launch date and hype for the game?

Strauss Zelnick16:37

We do track awareness and anticipation and everything is trending very positively.

Andrew Marok16:58

Great. Then maybe a kind of related question perhaps, but without commenting on the timelines of any specific titles, was wondering if you could speak to this concept of AI-assisted reverse engineering and decompilation of games. How does that affect your approach to things like development, security measures, and things like that? Thank you.

Strauss Zelnick17:13

Highly focused on that, obviously. Look, this business has been largely immune to piracy concerns forever because of file sizes, complexity of piracy, being connected to servers and the like.

Strauss Zelnick17:41

And undoubtedly it would be very difficult to replicate the experience of consuming our game as intended because of technical limitations. That said, it's going to become more of a challenge As you said, and we're aware of that. So we are utterly focused on enhancing our technical defenses and enhancing our legal activities appropriately.

Strauss Zelnick18:00

And at the same time, without in any way being cavalier, every entertainment business that exists is subject to some element of piracy. So this, this is likely to invade our business to a greater or lesser extent. I think it will be manageable and we are focused on it.

Operator18:14

Your next question comes from the line of Doug Creutz with TD Cowen. Doug, your line is open. Please go ahead.

Doug Creutz18:40

Hey, thank you. There have been earnings calls in the past, and I forget how long ago they were, but you, at one point, you had said that you expected to be able to grow revenue and earnings for the company in the year after you launch GTA 6. I was just wondering, is that a comment you still stand by, or have things evolved such that you don't want to stand on that comment anymore? Thank you.

Strauss Zelnick19:06

Tempting as it is, Doug, I'm not going to give you guidance for fiscal '28 today. We have said that we expect to set a new baseline for performance going forward. And we do think that there's a great opportunity for growth. There's so many wonderful things ahead for us. We have the most diverse and powerful portfolio of intellectual property in the industry.

Strauss Zelnick19:19

And there are more— there's more than one sort of defining item of what's next for us. So many elements of our business plan offer opportunity for higher net bookings and earnings power.

Strauss Zelnick19:34

So despite the fact that many of our franchises— and to be clear, we have 15 that have sold at least 5 million units in an individual release in our PC and console business— despite that, so many have achieved this massive commercial scale.

Strauss Zelnick20:29

We think there's enormous opportunity ahead for many of them, including GTA. We think the world's going to look dramatically different over the next decade because With the backdrop of our commitment to releasing the highest quality entertainment experiences, we think we'll be able to reach gamers in new ways, for example, including streaming in new geographies. And also we'll be able to continue to engage with consumers post-launch, which has stayed a part of our strategy since the beginning of what we call recurrent consumer spending. We're also one of the few interactive entertainment companies who's willing and able to take the risk of investing in new intellectual property. It is the riskiest thing that we do. It's also paid for Paid off for us mightily over the past 19 years, even though we certainly haven't always been successful.

Strauss Zelnick20:53

In addition, we've taken a disciplined approach to M&A. Our deals have been accretive and successful across the board. We think there are selective opportunities going forward, especially because our balance sheet is aimed at being very conservative and very strong. By year-end, we expect to be in a net cash position again. Right now, we're geared at less than 1x LTM EBITDA.

Strauss Zelnick20:59

And finally, we have numerous strategic initiatives we're working on that range from big to very big to huge.

Strauss Zelnick21:03

That are under consideration and in development.

Strauss Zelnick21:07

So we think the future is really bright across the board.

Doug Creutz21:10

Great. Thank you.

Operator21:22

Your next question comes from the line of Eric Handler with Roth Capital Partners. Eric, your line is open. Please go ahead.

Eric Handler21:53

Good afternoon. Thanks for the question. I think we'll start with an accounting question for Lainie. Given the strong growth in console RCS expected in the 3rd quarter, which you attribute to the GTA 6 Ultimate Edition. Should we assume that, you know, if the standard edition is $80 bucks, the Ultimate Edition is $100. That $20 goes to count as RCS?

Lainie Goldstein22:02

Yes, so the add-on content can be also purchased separately, so it's allocated to RCS.

Eric Handler22:21

Okay, that's helpful. I guess I'll throw you an NBA 2K question. I'm just curious, you know, the decline that you saw in 2Q, would you attribute that to maybe just not having the prior-gen SKUs, or was there something else in there that maybe didn't resonate with fans?

Karl Slatoff23:09

This is Carl. So there, it's a, first of all, it is the 2nd highest launch we've ever had. We're very excited about the launch and we do expect NBA to accelerate going to the second half of the year. We've kind of seen this before on a number of different occasions, and it's really hard to know exactly what has caused a little bit of softness versus our expectations in the launch. There's other things going on in the market, both inside and outside the gaming media. But given the slate of content that's coming up and the hard work that VC is doing right now on the game over the next half of the year, we're pretty confident that we're going to see a rebound, which we've seen before in the past as well. So we're very excited about it. NBA is off to a great start, and we think it's going to get even better as the year goes on.

Eric Handler23:10

Thanks, Carl.

Operator23:21

Your next question comes from the line of Chris Schoell with UBS. Chris, your line is open. Please go ahead.

Chris Schoell23:53

Great. Thank you. You cited unprecedented and extraordinary preorders. With several more months of preorder data now behind you, can you just help us understand maybe what keeps you from incorporating some of that strength into guidance And as console prices continue to rise, how are you thinking about maximizing the accessibility and reach of the franchise— of a franchise like GTA beyond the traditional console audience? Does the higher cost of hardware increase the importance or potentially accelerate the timing of expanding availability through other platforms like PC or streaming? Thank you.

Strauss Zelnick24:24

Thanks, Chris. On the first point, we're days away from the launch of GTA 6, and we tend to avoid claiming success before it occurs. So as soon as we have some experience post-launch, we're going to be very happy to describe what's going on and how we see it. There is really no need to update numbers right now. On the second point, any information about new SKUs and the like will always come from our labels.

Chris Schoell24:39

Okay, great. Thank you. And maybe if I can just fit in one more. Lainie, it appears the gross margins are down slightly in the full year guidance. Can you just help us understand the drivers there?

Lainie Goldstein24:48

Sure, it's due to the mix of the business and it's being offset by some changes in the operating expenses.

Chris Schoell24:53

Okay, great. Thank you.

Operator25:03

Your next question comes from the line of Brian Smelnick with JPMorgan. Brian, your line is open. Please go ahead.

Unidentified speaker25:23

Great. Thanks for taking the question, Strauss. I believe you mentioned that Rockstar will continue to support GTA Online with new content and ongoing events for its community. Can you just elaborate a bit on the role of No Pixel user-generated content, not only across GTA but across the broader video gaming industry going forward, in your view? Thank you.

Strauss Zelnick26:07

We're really excited about the launch of No Pixel 5, which is really a professional version of the RPG business that we purchased with 5M. And look, we're thrilled that there are hundreds of thousands of consumers who like to engage with Grand Theft Auto Online in this way. And And we think there's plenty more opportunity to be seen here. So it's early days and it remains to be seen how this develops. Any time our community wants to engage with our intellectual property. We want to be supportive if we can be, and I think this is a great example of that.

Unidentified speaker26:20

Great. Thank you. And Lainie, curious, I think you called out more favorable user acquisition trends versus initial guidance a few times. So could you just elaborate a little bit more on your comments there? Thank you.

Lainie Goldstein26:34

I'm sure we talked about the operating expenses being a little bit lower, and that was due to lower user acquisition costs. And some of that was due to timing, and that is mostly due to some of the movement and some of the new releases for our mobile titles.

Unidentified speaker26:38

Great. Thank you both.

Operator26:48

Your next question comes from the line of Mike Hickey with StoneX. Mike, your line is open. Please go ahead.

Mike Hickey27:08

Hey Strauss, Carl, Lainie, Nicole. Congrats guys on the upcoming release. I can only imagine how excited all of you are. Just on the preorder demand, And curious, Strauss, what you think is driving such strong preorders here that have now exceeded your expectations?

Strauss Zelnick27:39

Look, the title is so widely anticipated and consumers appear very, very excited and all the press so far has universally positive. So I'm— makes me nervous even saying those words, Mike, but they are true. And we still aren't ready to declare victory. Hopefully we'll be able to do that in the fullness of time, and you don't have to wait too long, I don't think.

Mike Hickey28:02

Pretty exciting. I guess maybe just last topic question, Strauss, maybe if you could just speak to Rockstar's competitive advantage As you see it moving forward, especially in an AI-influenced world that seems to be evolving right in front of us? Thank you.

Strauss Zelnick28:15

Look, technology benefits us. It's always been true. We've always created our entertainment inside computers with technology.

Strauss Zelnick28:22

All advances have benefited us, and I don't expect that that will change. In fact, I hope it'll accelerate.

Strauss Zelnick28:39

I think at the same time, what we're known for here is the desire to make the best entertainment on Earth and the fact that more often than not we succeed. And the creativity that drives that that success is human creativity harnessing technology.

Strauss Zelnick28:42

And I think that's what you'll see in the future.

Strauss Zelnick28:51

Undoubtedly, some of the most recent technological advances that you've seen have made it easier to create assets.

Strauss Zelnick29:20

Well, that is consistent with the story of our business. When I started in interactive entertainment longer ago than I would like to say, you know, it was really difficult to create an asset A computer today, it's a whole lot easier. But you know what's not easier? Making a big hit. Making a big hit was hard then, it's hard now, and it's going to be hard in the future. And hit creation remains the purview of human beings.

Mike Hickey29:23

Good luck, guys.

Operator29:34

Your next question comes from the line of James Heaney with Jefferies. James, your line is open. Please go ahead.

James Heaney29:48

Thank you. In the press release, you mentioned you're looking to explore new business opportunities. Is there anything in particular you can say about this comment? And what are areas that maybe you haven't explored in the past that potentially could look interesting to you?

Operator30:41

Ladies and gentlemen, we are currently experiencing technical difficulties. Please stand by as we resolve the issue.

Strauss Zelnick36:33

Not been able to reach economically in the past. So there's a massive population of people who play video games in India and Africa and Asia outside of the countries we currently monetize. which include China, South Korea, Taiwan, and Vietnam, but not so many others. We don't sell much in Russia right now for obvious reasons. Not much in Latin America. So our business still remains largely a US, UK, Western Europe business with a couple of pockets in Asia. And yet interactive entertainment Entertainment is, is the world's pastime and is only becoming more so in the future. So if we can find out how to reach people who don't necessarily have the latest and most expensive technology, and if we can reach people outside of the most developed geographies, we could see our business grow materially.

Strauss Zelnick36:37

Equally, we think

Strauss Zelnick37:08

Equally, we think that we haven't yet scratched the surface on what's potentially available creatively. The current expression of interactive entertainment through PC consoles, digital and mobile is super exciting, but we haven't reached the creative asymptote that other entertainment industries have. And I don't think we will for years. That's what we call around here the unknown. And Lord knows we're trying to find it. And then there's a whole bunch of other stuff we're working on that I'm not going to share with you.

James Heaney37:23

Yeah, thanks for that. And maybe if we could just get an update on the progress you've made on transitioning to D2C within the mobile portfolio, just how you characterize the benefits you're seeing both through revenue growth and margins. Thanks.

Strauss Zelnick37:56

It's not a transition. It's an evolution. And we still have third-party partners. We value them greatly. We don't expect to transition away from them. I have not described the percentage of our business that comes direct-to-consumer mobile. It is significant and it is growing and obviously has a very meaningful margin and bottom line impact It also allows us to interact directly with our consumers, to market to them directly, and that's positive as well.

Operator38:11

Your next question comes from the line of Omar Dessouky with Bank of America. Omar, your line is open. Please go ahead.

Omar Dessouky38:26

Hi, thanks a lot. So your rationale for the Grand Theft Auto series RCS guidance being up year on year has changed slightly from your description last quarter.

Omar Dessouky38:34

You've now additionally disclosed that robust sales of Ultimate Edition add-on content as the driver of growth.

Omar Dessouky38:56

So when you gave the GTA series RCS growth guidance for the full year in August, was it also based largely on Ultimate Edition add-on content or were Are there other contributors to growth that may now have been pushed out into fiscal '28? And I have a follow-up question, please.

Lainie Goldstein39:26

There was a change to what we said last quarter to what we're saying now. We talked about the Ultimate Edition last year because we had the Last quarter we had the SKU plan and we said that it had additional add-on content. And since I mentioned before that could be purchased separately, so that was allocated to the RCS and that was the only component That was in the RCS included as well as GTA Online.

Lainie Goldstein39:28

And that hasn't changed.

Omar Dessouky39:41

Okay. And just my follow-up question is, is what is your strategy to retain the first wave of gamers that play Grand Theft Auto VI after they finish the content?

Omar Dessouky39:53

For example, do you expect players to continue playing Grand Theft Auto Online on the San Andreas map once they finish the Vice City single-player missions?

Omar Dessouky40:01

Or for example, do they— would they just continue to replay Grand Theft Auto VI single-player missions?

Strauss Zelnick40:29

You just described an array of high-class problems. So look, there's so much to be done in all things Grand Theft Auto. I've literally never had to answer the question about what do we do when we finished, because you can always keep going. There's so much fun to be had. I think that will be the case in this situation as well.

Strauss Zelnick40:33

Thank you very much.

Operator40:42

Your next question comes from the line of Jason Bazinet with Citi. Jason, your line is open. Please go ahead.

Jason Bazinet41:05

About 3 weeks ago, there was an interview on Bloomberg with Rockstar's head of publishing that said that the development costs for GTA VI were not more than $1.5 billion, and it sparked a bit of a debate on the buy side about whether that figure was for the standalone version or also encompassed the online version. Any, any comment you have on that? Thank you.

Strauss Zelnick41:37

We haven't spoken about budgets at all. Obviously, we've invested heavily in Grand Theft Auto VI, and I hope in the fullness of time that will prove to be sound investment. I would like to point out that someone saying something is not more than something does not mean it's close to something, half of something, a quarter of something, or a tenth of something. So I wouldn't— I wouldn't arrive at a conclusion based on what that— what the correct answer to that question that was offered before.

Jason Bazinet41:40

Thank you.

Operator41:52

Your next question comes from the line of Drew Crum with B. Riley. Drew, your line is open. Please go ahead.

Drew Crum42:04

As a reminder, make sure to unmute your device locally.

Operator42:23

Your next question comes from the line of Clark Lampman with U.S. Bank BTIG. Clark, your line is open. Please go ahead.

Unidentified speaker43:18

Thanks very much for taking the question. You know, I guess following up on Jason's last question, that same interview, there was a reference to sort of GTA VI being a foundation upon which you can build content at a faster pace. It seems that that comment seems like it's sort of in keeping with your answer around sort of building, you know, more high-quality content As a part of those sort of new business opportunities, just curious if you could help us understand whether the comment is in sort of relation to live services updates being more frequent than we've. had in the past with precedent GTA titles, whether this opens the door to a shorter cycle, I guess, between releases for major franchises or perhaps both. Just would be curious if you could help us understand sort of what the specific opportunities are.

Strauss Zelnick44:20

Look, we've said since the launch of recurring consumer spending that our goal is to stay engaged with our consumers in between huge releases. And now, of course, our business has been transformed. The vast majority of our net bookings comes from recurring consumer spending, comes from ongoing live engagement with our hit titles and big, huge releases. are additional tentpoles to support that. And I think what I was saying earlier is that I think that this model will continue to evolve and that our teams more and more have the ability to, because of the quality of our franchises, to engage with consumers in a way that, you know, consumers love and want more of. You know, if you're making something that's no good, no one wants any more of If you're making something that's great, people want more of it. And if you're making something that's the best in the world, then there's nearly an unlimited appetite as long as everything else

Strauss Zelnick44:49

You make remains the best in the world. Is technology our partner in accelerating this engagement and accelerating this development and accelerating the marketing related there too. Yes, it is. But at the end of the day, what's going to drive this success is our human creativity harnessing the technology at hand, focused on making the best entertainment on Earth.

Unidentified speaker45:20

Thank you for that, Strauss. And if I, if I maybe could follow up, I guess, on the mobile business, a lot of the growth that we're seeing across the industry right now has been driven by in-app advertising. I wanted to see, you know, maybe similar to the update that you gave us around DTC, this might be sort of part of the evolution of that business, but the prevalence of advertising and I guess you Your sort of growth outlook for that component of the business, I guess, would be appreciated. Thanks a lot.

Strauss Zelnick46:20

Yeah, I think we're really only talking about our mobile business here or largely about our mobile business here. And I do think there's a great opportunity for advertising. You know, historically, advertising in mobile has been endemic. It's been advertising in mobile games for mobile games. And I think more and more brands are seeing an opportunity to engage with consumers through the lens of their love for interactive entertainment. If we're able to expand our business meaningfully into brand advertising and we already have started, then that should be a terrific opportunity for us. Also, our view is that we ought to be monetizing all of our engagement. You know, historically, mobile video games monetized under 20% of the audience, typically 10% of the audience through in-app purchases. We have the ability technically to serve people what they want. And if they want a free experience, they can be served ads. And if they want an ad-free experience, they can make

Strauss Zelnick46:37

Purchases. But what, you know, what doesn't make a whole lot of sense is serving consumers for free at a cost to us. So I think there's a huge opportunity for us in the ad business. Our numbers reflect that. And I also think the nature of the business will change in a way that's positive for us.

Strauss Zelnick46:40

Thank you, Jeff.

Operator46:50

Your next question comes from the line of Drew Crum with B. Riley. Drew, your line is open. Please go ahead.

Drew Crum47:23

Okay, thanks. Try this again. Good afternoon, everyone. So as part of your outlook commentary for fiscal 3Q, you noted continued growth in the installed base for PlayStation Next You know, as we think about attach rates or tie ratios for GTA 6, is there a figure you can share that's embedded in your guidance with price increases on console hardware? Has that changed? And how does it compare to that number around the launch of GTA 5? Thanks.

Strauss Zelnick48:25

Well, I understand that clarity on the question would benefit your models. It really doesn't do anything for us, so we don't spend a lot of time on it. You know, our job is to make the best entertainment. And then bring it to consumers around the world. And obviously, the better we do at that job, the more units we're going to sell. As we provide guidance, naturally we have to look at the installed base to make sure that what we're, what we're projecting is sensible. And we have done that. But we tend not to be slavishly devoted to estimating tie ratios because it doesn't change anything that we're going to do around here. So right now, Rockstar has completed the development of GTA 6. That may not come as a surprise to you since we're 10 days away from the release. They have done their very best work and it's going to come to consumers soon. And they're in the middle of their marketing campaign, which also unsurprisingly is fully baked.

Strauss Zelnick48:42

So at this point, it's the job of the organization to make sure that we do an A+ job technically in delivering this product to consumers. And then, of course, Rockstar will focus on— will come Comes next, and they'll announce that in the fullness of time.

Drew Crum48:44

Thanks, Strauss.

Operator48:57

Your next question comes from the line of Ron Song with Wolfe Research. Ron, your line is open. Please go ahead.

Ron Song49:25

Good evening, guys. I think this is a question for Lainie, but taking a different angle on the OpEx question. When we look at it on a management basis, it does look like the 4Q OpEx is going to be implied up in like the 10% range. So is there anything you can share on like the drivers there as we exit the GTA 6 launch next week, whether it's on the potential R&D side, marketing for both the title and just the broader organization? Thanks.

Lainie Goldstein49:37

It's mostly being driven by increases in R&D as well as some modest growth in selling and marketing and also investment in IT expenses.

Operator49:53

Your next question comes from the line of Martin Yang with Oppenheimer. Martin, your line is open. Please go ahead.

Martin Yang50:23

Thank you. Thank you for taking that question. Your PC player seems to engage with GTA a bit differently than console. There are roleplay options Over time, do you think you want to close the player experience gap between console and PC, or do you view 2 platforms as more independent? dependent because of their respective technical capabilities?

Strauss Zelnick51:09

I'm not sure I agree with the way you phrase that. I do think certain titles, for example, Civilization, is a title that existed on PC and then spread out to console. There are other titles like NBA 2K which are available on basically all platforms simultaneously. And of course, GTA 6 is available on 2 consoles when it launches on November 19th. So it really varies title by title. But generally speaking, the experiences on console and PC tend to be roughly the same. You know, this can vary, but generally speaking, Generally speaking, the capabilities of a PC platform today aren't different materially from console capabilities.

Martin Yang51:38

Got it. Thanks. I have a quick follow-up on marketing. How do you think about the marketing for GTA after launch? Should we view marketing expense more weighted Towards later in FY27? I see you have the music experience for the launch weekend. Should we expect more marketing going, still maintaining strong pace after GTA 6 launch date?

Strauss Zelnick51:50

The majority of the marketing will be around the launch in Q3, but we will have some ongoing marketing into Q4, but most of it will be in the Q3 quarter.

Strauss Zelnick51:54

Thanks, Lainie.

Operator52:03

Your next question comes from the line of Jim Callahan with Piper Sandler. Jim, your line is open. Please go ahead.

Jim Callahan52:18

Thanks for taking the question. I had to follow up on some of sort of like the console jailbreaking that's going on. I guess if we keep the actual piracy part aside, I think there's clearly a lot of consumer interest in sort of modifying their own versions of games.

Jim Callahan52:29

I understand the investments behind role-playing, but I'm curious, does this change how you think about GTA Online at all, or does this open up new potential monetization opportunities?

Strauss Zelnick52:30

Thank you.

Strauss Zelnick53:30

It's a really great question. And again, our purchase of 5M reflected our support of consumers, certain consumers' desires to engage a creator with our intellectual property. And we've allowed modding in many of our other games. We're just not religious on the topic. You know, the 5M business is a profitable business for us. It does create economic opportunity. But the way we run the business around here— and I think it's the last question, so I'll finish on this thought— is at the risk of being very repetitive, the mission of this company is to create the best entertainment on earth and bring it to consumers around the world. If we do that right, the monetization takes care of itself. And I think that you're going to see that from us in this fiscal year and in future fiscal years. I think we're, we're likely to be off to a really great start for the rest of this year very shortly.

Operator53:34

Great. Thank you.

Operator53:44

There are no further questions at this time. I will now turn the call back to Strauss Zelnick for closing remarks.

Strauss Zelnick54:26

First, thanks for joining us today, and thank you so much for your patience during our technical lapse. Again, I apologize for that. I want to just take a minute to express my gratitude to our 13,000 incredibly hardworking, dedicated, and committed colleagues around the world. It's a great quarter. We feel terrific about the rest of the year and the years forward. And And the only reason I can say those words with confidence is because of the A+ team that shows up every day, our creative groups, our executive groups, groups in numerous offices all around the world.

Strauss Zelnick54:41

I also want to say thank you to our shareholders for their support, and thank you today for attending the call. I want to wish you a happy and healthy upcoming holiday season, and I know you are going to have a great time playing GTA 6 while you're at home for the holidays.

Operator54:45

Thanks, everyone.

Closing

Operator54:51

This concludes today's call. Thank you for attending. You may now disconnect.