How CEO Strauss Zelnick Resurrected Take-Two Interactive

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Strauss Zelnich, Take-Two Interactive CEO
Take-Two CEO Strauss Zelnick combines a knack for identifying talent and management skills to achieve success. (Take-Two Interactive Software)

First things first: Strauss Zelnick is neither a gamer nor a designer of the imaginative video games that put the company he leads, Take-Two Interactive (TTWO), on the forefront of digital entertainment.

He insists as much. What's more, he is neither an entertainer nor a creative type of any kind.

"I know what I'm not good at," he said in a recent interview from the New York offices of the video game publisher he has guided for more than a decade. "I always wanted to be an entertainer, to be creative, but I just didn't have the requisite talent on that side."

What he does have is an abundance of management skill, a knack for identifying talent and a passion for developing it.

With both a law degree and an M.B.A. from Harvard University, Zelnick, 60, built an executive career that spans decades and various corners of the entertainment industry — from a four-year run as president of motion-picture power 20th Century Fox in the 1980s, to heading music giant BMG Entertainment when the recording industry still thrived in the 1990s, to his current role leading Take-Two.

Zelnick has been executive chairman of Take-Two since 2007 and CEO since 2011. The company publishes the wildly popular Grand Theft Auto and NBA2K series of video games.

All of his business leadership endeavors have proved successful. Analysts say his latest stands out as particularly impressive.

Take Two For Take-Two

Back in 2007, when Zelnick agreed to help turn around Take-Two, the company was mired in woe. It was coming off an annual loss that approached $200 million, its former chief executive had pleaded guilty to falsifying records, regulators swirled with demands, and its stock was battered.

The company had its Grand Theft Auto franchise of games but not much else. Zelnick said he focused first on the things he had to do: Rein in costs, shore up controls, rebuild Take-Two's reputation and push the company out of the shadow of controversy.

Zelnick said his previous experience taught him an important lesson: Do not put off tough decisions, and act swiftly when changes are necessary or problems need fixing.

It's About The Talent

Along the road to redemption for Take-Two, Zelnick focused intently on recruiting talent — and in some cases parting with underperforming employees — both on the creative and business sides. He created a vision and worked to build a team that bought into it.

He believed that video game technology at the time was powerful. It enabled designers to incorporate into games not just impressive graphics but also rich characters and evolving stories that users found engrossing, even gratifying.

And Zelnick believed that, as long as Take-Two's games evolved with fast-developing technology and expanded in number to meet the interests of a wider audience, the company would not only recover but also flourish. He was right.

It took time and an infusion of prominent video game developers. Zelnick ensured that the creative forces of the company had the resources and runway to develop the best games possible. And when a new offering was ready to go public, he made sure the company was ready to market it aggressively and shrewdly.

Easy Access

Pressed to set aside what appears an instinctive modesty, Zelnick acknowledges that he is uniquely gifted at identifying talented people and unwaveringly committed to making sure they get the backing needed to excel.

"I'm very devoted to the success of the enterprise," he said.

Accessibility and responsiveness to staffers' needs and questions, Zelnick added, go a long way toward successful retention. "We have very low turnover," he said. "I don't want it to be hard for anyone to get to me. It needs to be easy. That makes a big difference."

From Bust To Boom

Today, Take-Two has annual revenue of about $2 billion, nearly three times the level it was at when Zelnick took over. It has no debt and is flush with cash.

The company has nurtured and made increasingly sophisticated its GTA series, and it continues to generate robust sales. "Grand Theft Auto 5," released in 2013, had sold more than 90 million copies by early 2018. It is the best-selling console video game ever made.

"It was — and remains — the standard-bearer for the industry as far as quality, entertainment and fun," Zelnick said of GTA.

From Sports To 'Civilization'

But Take-Two also has broadened its offering considerably, venturing successfully into sports with the NBA2K (basketball) and WWE2K (wrestling) series, and into a range of other popular adventure offerings such as XCOM and "Sid Meier's Civilization," among others.

The company's stock has climbed more than sevenfold over the past five years. Over the 12 months ended Feb. 28, shares of Take-Two soared more than 80%. Its market capitalization tops $11 billion.

For its fiscal 2018 third quarter ended Dec. 31, 2017, Take-Two posted net income of $25.1 million, or 21 cents per diluted share, on net revenue of $480.8 million.

Its outlook is bright. Take-Two and larger rivals Activision Blizzard (ATVI) and Electronic Arts (EA) are benefiting from a steady shift from packaged games to digital delivery, which includes full-game downloads and add-on content and services. Take-Two said its digitally delivered net revenue in the December quarter increased 8% from a year earlier to $258.4 million. It made up 54% of total net revenue.

Bright Outlook

Piper Jaffray analysts predicted in a report that, by 2023, 100% of console video games will be sold as digital downloads.

Digital delivery enables video game publishers to pass over retailers, sell directly to consumers and bolster profit margins in the process. The trend bodes well for the likes of Take-Two and helps explain why the company is upbeat on both revenue and earnings.

It projected net revenue in a range of $460 million to $510 million for its fiscal 2018 fourth quarter. Net income is forecast to come in between $87 million to $99 million.

The company recently raised full-year fiscal 2018 guidance, projecting adjusted earnings per share of $3.23 at the midpoint, up from $2.90 previously. Its fiscal 2018 revenue guidance of $2.02 billion was up from $1.98 billion.

For its fiscal 2019, it looks for revenue to top $2.5 billion.

"They have a lot of positives in their corner," analyst Neil Macker of Morningstar said in an interview.

He said the fall 2018 release of Red Dead Redemption 2 — think GTA in the 1800s Wild West — should prove an important indicator of how strong the tailwinds are. If Red Dead can enter the realm of GTA5's online sales performance, Take-Two's favorable outlooks are likely to prove prescient, Macker said.

Getting It Right

While some observers wish Zelnick would pick up the pace with launching new products, he prefers to give projects the time and attention they require.

While analysts such as Macker applaud the breadth of Take-Two's catalog today compared with a decade ago, some also wish Zelnick and company would expand deeper into potential growth areas such as sports and launch new versions of its existing games at a faster pace in order to gain ground on the notably larger Activision and Electronic Arts.

"Management gets high marks," Macker said. "They have a much more robust profile of franchises. But there is still room for more."

Zelnick understands. Investors do not like waiting long stretches for new catalysts. Development costs per new game tend to run high.

But Zelnick said Take-Two's success ultimately is premised on the splendor of its games — not just the visuals, but also the nuances of the stories and uncommon challenges within the games. Game developers cannot be rushed. Taking time to get it right may leave gamers waiting longer than they like, but when they are truly dazzled with the product once it does come out, they tend to form stronger attachments to it and pass along positive reviews that help fuel long-term sales.

Take-Two's average Metacritic ratings — an aggregation of game reviews — are consistently on the high end for the industry. The sales follow. And that validates one of the three pillars of leadership that Zelnick adheres to: Never compromise integrity. The others: Listen emphatically, and show up early and work hard.

The last one comes naturally for Zelnick. From his college days, through the course of his career, and in his personal time — he is famously devoted to physical fitness, working out daily with people half his age — Zelnick digs in full-bore. But he views it more as devoting himself to cherished pursuits than hard work.

"I'm not in the coal mines. I'm blessed," he said. "This is very cool place to work."

Zelnick's Keys

Executive posts span music, movie and video game giants.

Overcame: Steep losses to resurrect Take-Two into a video game power.

Lesson: Show up early and work hard. Listen emphatically. Never compromise integrity.

"I know what I'm not good at." Realize your strengths and capitalize on them.

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