Firaxis Games
Source: Take-Two Interactive / Firaxis Games

Publisher Take-Two Interactive (we’ll use its ticker symbol TTWO for short) — the parent company of Rockstar Games, 2K Games, Zynga, and Private Division — reported Q3 F2023 earnings on February 6th. The stock initially fell slightly in after-hours trading, but it jumped the following day by roughly 6.5%, closing at nearly $114.

The slumping mobile market — or, more specifically, TTWO’s acquisition of Zynga — which has begun to stabilize (although not necessarily grow), appears to now be priced in. And despite lower-than-expected performance in the PC/Console segment (due to both macro and execution issues), the market hasn't punished the stock as severely as it did last quarter. TTWO’s recovery is likely at least partially explained by the cost-cutting initiatives management has scheduled to start Q4 F2023, which we’ll explain more below. 

Despite the post-earnings pop, however, TTWO shares have taken a beating this past year. In the last 12 months, shortly after Zynga acquisition talks started, the stock shed a third of its value, and the market cap sits below $20 billion again. As of the writing of this report, shares are trading at roughly the same price as they did five years ago, making a convincing argument that the Zynga acquisition, in particular, has destroyed significant shareholder value over the past year.

But what else happened in Q3? And how should we be thinking about TTWO’s future? Let’s dig in to find out.

What Happened? In Short…

  • Performance for the quarter was below guidance for bookings (actual: $1.38 billion; the guidance low point: $1.41 billion) largely due to disappointing results from new releases in PC/Console and softness in recurrent consumer spending (RCS), excluding NBA 2K23. 
Performance for the quarter
  • Management cut guidance for the 2023 fiscal year. The guidance range for the fiscal year is now $5.2 - $5.25 billion in bookings. This is the second time in a row TTWO has slashed guidance, which is historically uncharacteristic of the company.
  • A new cost reduction program to be introduced in Q4 F2023 will deliver savings of $50 million. This is in addition to the $100 million in cost synergies the company expects to realize through its acquisition of Zynga. The program will affect personnel, which likely means layoffs, but it also entails further efficiencies around processes and infrastructure. 
  • The bookings in the current quarter are made up of mobile (52%), console (39%), and PC (9%). Clearly, TTWO is now a much more mobile-heavy company than it was previously, but expect the percentages to widely fluctuate when major console/PC games get released.
Net Bookings by Mix
  • Among TTWO’s flagship titles, NBA 2K23 continues to deliver on full-game sales (8 million units sold to date, up 3% YoY) and recurrent spending (MyTeam users grew 50% YoY). GTA V (175 million-plus in lifetime unit sales) and Red Dead Redemption 2 (50 million-plus in lifetime unit sales) had an uptick in full-game sales this quarter. But apart from NBA 2K, the rest of the portfolio performed below expectations in RCS. Newly released titles — specifically, Marvel’s Midnight Suns and New Tales from Borderlands — disappointed. 
  • Perhaps related, both the studio head of Firaxis (the studio behind Marvel’s Midnight Suns and XCOM) and the game director of Marvel’s Midnight Suns are departing. It’s also worth noting the blockbuster holiday success of multiplayer juggernaut Activision’s Call of Duty Modern Warfare 2 and single-player smash hit Sony’s God of War Ragnarök was difficult for many publishers to compete against. 

What Does This All Mean?

How we got here

CEO Strauss Zelnick described his company as an “organic growth” story prior to Zynga's acquisition. Strategically, this deal made sense — it allows TTWO to become one of the top players in mobile and transforms the combined entity into one of the top pure play gaming companies in the world. 

Additionally, the PC and Console segments have generally “suffered” from lumpy sales figures, providing an uptick in sales during launch quarters but with fewer long tails — although the industry has begun to move toward longer-lasting live service business models like that of GTA Online. Mobile gaming, on the other hand, has often provided more stable revenue streams through IAP and advertising, adding a stream of predictable, recurring, and high-margin sales to a company’s overall portfolio.

Initially, TTWO’s management knew the Zynga acquisition would take time to get integrated and unlock extra value, but leadership very much underestimated the impact of Apple’s App Tracking Transparency (ATT) and therefore overestimated Zynga's near-term growth and profitability potential. This led to paying an unjustified premium for Zynga and its IP. Adding to the extravagant price tag, the deal relied heavily on company stock, which was heavily dilutive to shareholders. Clearly, the timing was a miscalculation. If TTWO waited even six more months, it likely would’ve been able to attain a more compelling price, because Zynga (whose games target heavy spenders) was particularly susceptible to the effects of ATT. Some have claimed that Zynga’s hypercasual developer, Rollic, is an exception, but as the hypercasual market falls under pressure too, it’s perhaps not the same catalyst many thought it might originally be. It’s safe to say that, so far, the Zynga deal has cost TTWO several billions of dollars in value.

Change in Consumer Behavior

Last quarter, TTWO cut yearly bookings guidance by about $400 million, stating shifts in the pipeline and mobile were responsible for 70% of this cut. This quarter, the bookings guidance was cut by another $225 million — this time also blaming the overall “operating environment.”

TTWO Yearly Guidance

It was a disappointing holiday season for TTWO, similar to peers Electronic Arts and Ubisoft. The company attributed its miss to a shift in consumer spending and other continued macroeconomic effects weighing down the sales performance of its franchises, especially those lacking the strongest IPs. TTWO said this transition also took away revenue from the newly released titles in its catalog, in particular Marvel’s Midnight Suns, New Tales From Borderlands, and PGA 2K23. Recurring spending in PC/Console titles (IAP, add-on content, etc.) also took a hit, with the exception of NBA 2K. As we know, RCS now makes up the majority of TTWO’s sales (78% in Q3 F2023).

There is some merit to the idea that consumers increasingly prefer established franchises and popular IPs. Recent examples, such as the successful launches of God of War Ragnarök and Hogwarts Legacy, support this notion — and it makes sense that in harder economic times consumers lean more into what they already know they’ll enjoy. Yet when it comes to games like New Tales From the Borderlands, an established franchise with a new entry this past quarter, TTWO’s catalog is still underperforming. The game received low scores from critics and fans, setting it up as a potential (but likely) financial flop. In this case, TTWO can’t rely on its established IP to make up for lackluster gameplay or narrative design, and competition from brand-new IPs like Elden Ring, Stray, and others this past year is putting pressure on major publishers to deliver higher-quality games in both established and fresh franchises. 

Marvel’s Midnight Suns, despite the Marvel name attached, didn’t stick the landing. The title was developed by Firaxis Games, which has a track record of creating solid hits but in the more niche tactical and turn-based RPG and strategy genres. Midnight Suns, a major departure in genre for the studio, had a buggy launch, and, according to Zelnick himself, an ill-timed release window. The title was heavily discounted a month after release, and TTWO even offered a free trial of the game on Steam this past weekend.

In the Q&A portion of this quarter’s earnings call, Zelnick said the expected addressable market was smaller than TTWO had anticipated for some of its newer PC/Console titles. He didn’t name Midnight Suns outright but heavily implied that the game, alongside PGA 2K23, hadn’t reached its desired fanbase.

a quick comparison of PGA World Tour 2K23 with its predecessor showcases a quicker discount period for this game was reached after the release date
(As an aside, a quick comparison of PGA World Tour 2K23 with its predecessor showcases a quicker discount period for this game was reached after the release date, supporting the argument the game sold below expectations.)

One of TTWO’s biggest selling points to investors is its robust pipeline of new releases slated for the next few years. Although its last few releases falling so flat may be the beginning of a more worrisome trend, the company has much to look forward to. We should also note that TTWO has always had a mixed track record when spinning up new franchises; sure, there’s always room to improve, but the simple notion that TTWO continues to try new things is a sign that the company is still looking to grow in new ways. It doesn’t want to be entirely reliant on its current, most important franchises. 

Overall, analyst consensus is that consumers tend to be gravitating more toward established IP, and that robust live services combined with such IP is a winning combination for achieving long-term player retention. That isn’t necessarily new, but this, in turn, makes it harder for newer titles to break through and establish new fanbases with growth potential. Some also think for TTWO that this is just the new normal, and this is a regular occurrence for the PC/Console segment rather than a temporary macro situation. However, in a capital markets context, it’s wiser to step back and look at a company’s long-term prospects rather than be over-influenced by short-term turbulence, and Zelnick said as much to assuage investor concern on the call. 

Although it’s hard to create new IP that resonates and connects with audiences, TTWO does have an independent label dedicated to that initiative in the form of Private Division. Established in 2017 and spearheaded by Michael Worosz, TTWO’s head of corporate development and independent publishing, Private Division marked a significant expansion of TTWO’s publishing portfolio and commitment to supporting diverse and innovative games of varying scopes and sizes. 

The label focuses on the space between smaller indie developers and larger AAA studios. These studios are typically led by developers with previous AAA games under their belts but who want to create a product with less budget and speedier development cycles. Some of the critically acclaimed titles Private Division published include Obsidian Games’ Outer Worlds, which sold more than 4 million units and a physical release for Supergiant Games’ rogue-lite hit Hades. 

Private Division’s Pipeline & List of Partnerships
Private Division’s Pipeline & List of Partnerships

According to Worosz, Private Division is a long-term play. “You always have to be planting the seeds for new intellectual property,” he told VentureBeat in 2020. “Our industry really depends on sequels for the bigger economic opportunities. But if you’re over-dependent on sequels, I think you can wring the opportunity dry. And you have to plant the seeds to harvest tomorrow.”

The label has been publishing games since 2018, with seven releases so far and two more planned for 2023. For TTWO, the potential ROI on a Private Division-published title may be quite large given the lower-budgets of the label’s projects so far. While none of these games will likely be as lucrative as GTA or NBA 2K, they do provide TTWO an avenue to explore new opportunities and potentially strike gold. 

Cost-Cutting Efforts

As we’ve now covered, TTWO is operating in the midst of near-term challenges, and it doesn’t have any new mega-hits planned (that we know of) for the next few months. It’s under this context that management will look to identify areas of excess in the corporate structure. The new cost reduction program is “expected to yield over $50 million of annual savings, which will begin to be realized in the fourth quarter of its Fiscal Year 2023.” 

This approach follows the trend we’ve seen in other gaming and technology companies, as both industries have increasingly tried reigning in expenses as growth expectations began to decline. The initiative is already underway within TTWO, with the goal of making the company more efficient across personnel, processes, infrastructure, corporate departments, and publishing.

Firstly, let’s take a look at where TTWO is standing compared to its peers from a profitability standpoint to try and understand why the company may turn to cost-cutting efforts.  To have a long-term view of these businesses, we are taking an average of the last three years. When we compare the results, we see that TTWO, because of its costly Zynga acquisition, is behind its peers. (Note: we recognize this is an imperfect comparison because Zynga’s impact is only present in 2022, but it’s still an instructive exercise)

All metrics normalized
All metrics normalized

Secondly, let’s see how much even modest cuts move the needle. It’s unrealistic to expect the end goal of such cuts to be fully realized immediately, but what kind of impact would $150 million in cost savings have? In short, if management expects $5.2 billion in bookings for this fiscal year, $150 million in theoretically additional profit amounts to a roughly 300 basis point increase in net income margins. If we simply go by the average net income margin of the past 3 years, that would take it from 11.6% to over 14% — or a nearly 20% increase in average profits. Of course, 11.6% isn’t necessarily the perfect baseline to extrapolate from — after all, 2022’s weakness is abnormal and Zynga does change the ongoing margin dynamics — but it does show that $150 million in savings is still meaningful. And since the stock market ultimately prices companies based on their long-term cash flows, it’s understandable why the effort to increase profits sent the stock up as it did, despite the challenges elsewhere.

What’s next?


Among new releases, GTA VI is arguably the most anticipated game of the 2020s. TTWO has already confirmed twice, first during February 2022 and then in an earnings report last summer, that subsidiary Rockstar is at work on developing the next entry in the Grand Theft Auto series. 

The new entry is rumored to release for next-generation consoles and eventually PC port some time in 2024 or 2025. The game is also rumored to feature a larger, more dynamic map that Rockstar will update over time. Unprecedented leaks from September of last year suggest the game will take place in Vice City, the locale from Rockstar’s 2005 GTA release, and feature a male and female pair of deuteragonists inspired by Bonnie and Clyde. 

GTA V, released back in 2013, has gone on to sell a staggering 175 million units as of TTWO’s most recent quarter, thanks to releases on numerous platforms. Even though the title had an impressive launch of nearly 30 million units in its first six weeks, what’s even more impressive is the game’s long tail. Plus, in addition to hooking in players with its core single-player mode, it was the evolution and surprise success of GTA Online as a true live service pioneer that has helped transform the franchise into one of the most lucrative of all time. 

While GTA VI is destined to be a blockbuster success — and is TTWO’s clear #1 catalyst — it’s not clear whether its release will have the same long-tail of sales or how it will impact GTA Online. There are a few routes TTWO might take to try and retain GTA Online’s robust audience while also trying to introduce new players to the title and, eventually, grow the online component into an even larger live service platform. 

GTA Online’s current version could continue operating on its own — after all, Rockstar released GTA Online as a standalone game in 2021 and conceivably could keep the game separate from GTA VI.  In this scenario, TTWO might release an all-new online platform built around Vice City (similar to Activision’s approach to new Call of Duty games). In another scenario, however, Rockstar could cease updating the old version of GTA Online and instead migrate old players and direct new ones to a new version, even potentially replacing the older GTA Online with a new one (similar to Bungie’s approach to Destiny and Destiny 2). 

The former option may keep loyal fans of the current version of GTA Online happy, but it may also cause some cannibalization, while the latter could disrupt the massive investment of time and money players have spent in the existing world of GTA Online. There is also the prospect of turning GTA Online into a proper UGC platform to better compete with games like Fortnite, Roblox, and Minecraft. 

In essence, even though there’s plenty of reason for TTWO shareholders to be excited about the launch of GA VI, we’ll have to wait and see what new elements it will bring to the table and how it will impact the broader GTA ecosystem. We expect management is tackling GTA VI super mindfully of how GTA Online fits into the equation, but exactly what that will look like is something we’ll have to update you on in future quarters. 

Zynga, Growth Pains and M&A

It seems the initial bullishness for publishing new titles on mobile using TTWO’s existing PC/Console hits has (rightfully) started to wobble. Compared to the company’s ambitions when the deal was first closed, when Zelnick talked about launching PC/Console titles on mobile, he is now more conservative: "The vast majority of hits in mobile are native to mobile. They are not based on existing IPs. They do not come from a console. I'm very optimistic that we're going to give it a try, and I'm really hopeful that we'll do well with it. But it's not a slam dunk,” he said on the earnings call. This isn't a great sign for claimed revenue synergies, which were largely based on mobile releases of existing Take-Two PC/Console IP. However, it’s not at all surprising — as we’ve seen in all other similar M&As, the goal of porting PC/Console IPs to mobile is always easier said than done. 

Going forward, especially given recently disappointing game launches and the value-destructive Zynga acquisition, it's imperative that GTA VI is a hit and that TTWO’s other PC/Console titles attached to established IP deliver strong results. It seems unlikely Zynga will make a meaningful comeback in the near future, despite making up the majority of the company’s recent revenue (52% in Q3). Management noted they don’t expect Zynga to recover by the end of the fiscal year, while Zynga hopes ad revenues will offset declines in IAP revenue. In the long term, however, Zynga will have to address ongoing issues around UA to see a return to growth. Although the exact timing is impossible to predict, we expect that the mobile market will start to normalize over 2023 and then return to growth — and Zynga will be right there with it.

Will TTWO be looking around for more acquisitions? I think the answer may be a tentative yes, especially in mobile, but with increased caution after the challenges of the Zynga acquisition. The company may look at future M&A as they did with Popcore, strengthening their ad revenue generation capabilities since these types of companies (complementary to Rollic) can turn around investments in ad spending quicker as opposed to longer ROAS timelines, like Peak and IAP-focused companies will have. These developers are also less reliant on targeted advertising since they appeal to a larger, more casual consumer base. TTWO may also look at acquiring already-established companies with well-known IP, but as we’ve seen with Private Division, the company may favor an approach of acquiring up-and-coming studios. What’s perhaps most likely is a mix of both — of course depending on whether management finds responsible deals it likes (and wins the bid).

TTWO now has approximately $1.5 billion in net-debt — with ~$1.5 billion in cash and short-term investments and ~$3 billion in debt — so it’s extremely doubtful the company will look to hunt anything as big as Zynga for the foreseeable future. Instead, TTWO may follow a more disciplined strategy that’s also accretive to the bottom line. They also might focus on paying off debt and getting back to a net-cash balance sheet again. Lastly, and this is purely speculative, if the Activision Blizzard deal with Microsoft falls through — leaving Activision with a multi-billion dollar break-up fee — it’s not out of the realm of possibility that Activision would look to merge with TTWO. It’s an intriguing thought, but don’t bet on that.

Value Drivers in 2023 & Stock’s Performance

Currently, the biggest value driver of TTWO is its development pipeline, with GTA VI towering over the other entries. Going forward, for the PC/Console segment, it’ll be crucial for these most important titles to come out polished and uncompromising on gameplay quality and, when applicable, live ops as well. This is, of course, nothing new; TTWO will continue to thrive (or not) by the quality of its most important games.

For the PC/Console segment to keep growing, TTWO should also keep taking shots at creating new IPs (or new types of games around existing IPs). The company has one of the largest IP catalogs in the business, including dormant brands like BioShock, Borderlands, Civilization, Bully, L.A. Noire, Max Payne, and Midnight Club, to name just a few. Some of these will remain untapped while Rockstar remains occupied with GTA VI, but it’s likely just a matter of time before we start hearing about the next steps for some of these franchises.

Despite the post-COVID and ATT mobile recession, mobile gaming remains an imperative part of executing a growth strategy that drives value for the company. Mobile gaming is a huge sector, with more than $90 billion in revenue generated in 2022, making up more than 50% of all gaming revenue. Zynga has a diversified portfolio of evergreen titles such as Empires & Puzzles (Match-3 RPG), Merge Dragons! (Merge / Puzzle), Zynga Poker (Casino) and Golf Rival (Arcade/Sports). Zynga will likely continue to be an anchor on the company’s results in the near-future, but as management mentioned, performance is stabilizing, so we’re likely near a bottom.

Additionally, TTWO has the resources, ad spending, and talent only a select few rivals in the industry possess, thanks to its existing studios and now Zynga. Overall, TTWO is in a strong position to take advantage of a growing industry that’s going through some turbulent times. Zynga has Star Wars: Hunters as its next release, a game that has already been delayed twice. I believe it’ll be better for Take-Two to wait before they take a shot at using their existing PC/Console IP for a mobile port that’s F2P. Prior to Apple’s privacy changes, in order to control more of the pie in user acquisition, Zynga acquired ChartBoost. However, it’s not even clear if management’s strategy with Chartboost — creating it as a tool for third parties versus creating adtech that helps much more inwardly — is the right call. We expect the adtech focus will continue to evolve in the coming quarters and years.

Undoubtedly, looking out to the next few years, GTA VI and the accompanying boost to GTA Online will prove to be the biggest value driver for the company.  It’ll be very important for the TTWO to build on launch momentum around the game and develop a strong pipeline of new content to boost RCS and drive player growth and retention. Ultimately, GTA VI will give the company a jumping point, and if they can manage the boost well, they will have meaningful upside. 

 Take-Two will need to achieve the following to exceed long-term expectations: 

  1. GTA VI will need to be a hit in full-game sales and become a great funnel for whatever the future of GTA Online looks like, boosting Take-Two’s high margin recurring revenue contribution. 
  2. Upcoming releases surrounding their notable IPs will need to come out with great core gameplay and stories, incentivizing players to commit and spend more in DLC or online components. 
  3. Zynga needs to return to growth, which will simply take time. The mobile market is undergoing a reset, but once the market returns to growth, Zynga has the proper leadership, IP, and resources to create value and turn into a catalyst again. We’ll of course be looking for new successful games, whether made internal or acquired.
  4. Keep planting the “seeds of tomorrow” by seeding new AAA IPs, planning how existing franchises can expand, and by taking risks with independent developers through Private Division to ultimately create new successful gaming IPs. 
  5. Get back to the basics of smart capital allocation. Build up a cash position, repurchase shares when the stock oversold, and then deploy a methodical M&A strategy when rare opportunities present themselves. TTWO’s M&A strategy doesn’t have to be defined forever by Zynga.

These are all achievable goals for TTWO, and in many ways these are repeatable of the past. Assuming TTWO executes on these strategies, the GTA maker will keep creating value for its shareholders and the next five years are poised to be much brighter than the last five. 

A big thanks to Enes Ertekin for writing this essay! If Naavik can be of help as you build or fund games, please reach out.

Don’t miss our next issue!

Sign up to receive the #1 games industry newsletter, straight in your inbox.