The US games giant is riding high after posting its two strongest financial years ever back-to-back, and selling in 52m units of GTA V. Now, with over $1bn in the bank, what's next for Take-Two? Christopher Dring asks CEO Strauss Zelnick
The popularity of GTA Online and your digital sales in general have smashed your expectations. How come it's taken you so much by surprise?
I think we are more delighted than surprised. We always had very high hopes. The year is very pleasing. With digital distribution representing over a third of our non-GAAP net revenue and recurrent consumer spending being about half of that. It's a real sign of several important things. The first is that digital distribution continues to grow in importance. Secondly, and much more significantly, is that recurrent consumer spending is becoming a bigger and bigger part of our business – that is a line of business was not something that even existed four years ago, this continued consumer engagement after release. And third, the associated higher gross margins. Our gross margins were around 50 per cent, which is extraordinary in the year.
Do you think we should be sharing this digital data more, if we want to paint an accurate picture of the strength of the games market?
Actually I think that's a good point. More information is better. I am chairman of the ESA and I think the ESA is focused on providing more industry information. Sometimes the news that comes out is sort of damped down as if there is negative news. But the fact is this is a growth industry, the wind is at our back and it is great to have such good results. It's also great that when the wind is at your back, you can try new things and more often than not they go well.
GTA V's sales have been incredibly high. It's just broken through 5m units in the UK. How do you view this performance internally?
We are quite happy to bend over backwards to count all these records, but we are not in the business of congratulating ourselves. The nature of this team is that we are always looking to do better and better the next time out. The folks at our labels and the folks at our corporate office are simply focused on what they can do to delight consumers next.
Throughout your financial statements you use the phrase ‘delight consumers' a lot. How do you guarantee your games live up to your quality expectations?
Quality is the topic we spend most of our time talking about. The bulk of the employees at Take-Two are creative employees – the vast majority, as they ought to be. We primarily focus on encouraging them to pursue their passion and making sure they are operating at the highest quality, and that we are giving them the resources to do so – otherwise it is just empty words.
You now have more than $1bn in the bank. What are you going to do with this money? Are you going to be acquiring some businesses?
There are at least three things we can do with our capital. The first thing is to support our organic growth. We are really an organic growth story. It really wasn't that long ago, in 2007, when our net revenues for our core business was around $100m, and you can now see that our net revenues for the past year is over $1.6bn. That's extraordinary and that is almost all organic growth. I don't think anyone else can tell a story like that in this space. So supporting organic growth is a key activity.
We are also contemplating returning capital to our shareholders. We have authorised a $10m share buy-back, and we have a history of doing that when it makes sense.
And the third, of course, is in-organic growth via acquisition. We are very disciplined folks, we have done some moderate to small deals so far. And we are not ruling anything out.
You mention in your financial statement that you will be releasing fewer games this financial year, and your current release schedule certainly appears slight. Is this going to be the norm going forward, or just an anomaly for the 2015/2016 financial year?
We would love to say that it is a gently upward sloping curve at all times. But that is not the real world in an entertainment company. We had an amazing release schedule last fall, and we are super excited about this year's schedule. But it does have a fewer number of releases. That is not a reflection of things to come but it is also not, not a reflection of things to come. We have ten franchises that have each sold over 5m units with one release. And every year since 2007 we have delivered at least one new massive intellectual property. If we keep doing that then this company will continue to grow, and it has been a great growth story so far. However, we can't guarantee that every year we will continue to grow. And I am not sure we need to. I think over a multi-year period that we really do deliver growth.
Some of your rivals, such as Square Enix and Konami, are planning to focus more of their energies on mobile development and less on triple-A console software. Is this a trend that you will be following?
No. The trend at Take-Two is to deliver the highest quality interactive entertainment onto the platforms that consumers use. Mobile is kind of a misnomer, because the world is heading to be unplugged. Mobile to most people tends to mean free-to-play, and we tend to focus less on free-to-play, although we do have some offerings in that space. We have had ten offerings for tablets and smartphones across a variety of genres over the past fiscal year, so we do have a number offerings. But our goal is to offer consumers the highest quality interactive entertainment, and the bulk of our releases, people pay for those.
Are you planning to continue supporting Xbox 360 and PS3?
Selectively, when it makes sense we will. We have announced that NBA and WWE will both be available for Xbox 360 and PS3, as well as new-gen consoles.
In the UK, pre-ordering appears to be in decline. Is this something you have noticed?
No. We haven't seen it yet. But some industry trends we tend not to see because of our quality levels. For example, as last-gen was winding down, a lot of people had problems with their catalogue sales, we did not experience that because our catalogue tends to sell more units per SKU than anyone else in the business. We think that is driven by our higher quality levels. Metacritic says we have the highest quality levels of any third party for the past five years, and we agree with that. So some trends like that we might not necessarily see.
What can we expect from you at E3?
The only thing is we are doing differently is that we are going to delight customers with entirely new games than what we showed last year. It is a great show. We are thrilled to be there. Consumers can look forward to seeing Battleborn. We think that will excite a lot of people.