Looking at the recently announced Take Two earnings reports, Wedbush Morgan and Stern Agee analysts have called the company's losses "troubling" and "disappointing," with only mild hopes for the company to rise above breaking even in 2007, despite a new Grand Theft Auto
"Take-Two’s FY07 revenue guidance is disappointing at $1.2–$1.25 billion with break-even EPS (earnings per share)," wrote Stern Agee's Arvind Bhatia, adding that "Assuming 6.5 million units (50% of the estimated 13 million units) of GTA IV
will be shipped in FY07, we estimate the franchise will contribute $0.50 to EPS in FY07."
"Break-even guidance therefore implies the rest of the company will lose about $0.50 per share," though, he added, "Clearly not an encouraging sign."
Wedbush Morgan's Michael Pachter agreed with the forecast, saying "We think that Take-Two’s flagship franchise, Grand Theft Auto
, will continue to generate significant profits, but it is clear that the profit potential from its sports business and from “everything else” will not be realized in FY:07. If the company achieves merely “breakeven” results, profits from GTA
will be fully offset by losses from everything else."
"The company reported very messy Q3 and Q4 results," said Patchter. "While Q3 revenue was as expected, Q4 revenue was below our and consensus expectations. We believe that while Bully
did well, the company’s biggest release, GTA: Vice City Stories
performed more poorly than expected," also noting Take-Two's claims that the next-gen console transition and rising costs of development, as well as a lower-than-expected installed base for new consoles, were the reasons behind its results.
Pachter continued that he is "no longer convinced" that Take-Two can achieve sustainable profits given the $75 million losses in fiscal 2006 and breakeven projection for fiscal 2007, without growing sales to $190 million. That might be possible with GTA IV
says Pachter, but "we are left wondering what to expect in FY:09 and beyond."
Pachter also looked at Take-Two's claims for its sports business, with executives saying if the company could sell 8 million units of sports games in calendar 2007, the group could be "marginally profitable."
"We are not optimistic that Take-Two can achieve sports game sales at this level in 2007," said Patchter, "While it is true that the company intends to release a greater number of SKUs this year, we believe that the same is true of competitors Electronic Arts and Sony. Any market share gains by Take-Two would come at the expense of these competitors, and we do not believe that either would be complacent in yielding market share to Take-Two."
Looking beyond the above, Pachter adds, "We think that in addition to GTA
, games like Manhunt 2, Bioshock
and The Darkness
will perform well. However, we are less optimistic about Ghost Rider
(currently in release), The Bigs and All-Pro Football. The latter two games are likely to garner good reviews, but we do not sense that the market has sufficient appetite for “over the top” baseball and football games to make either a commercial success."
"We think that Take-Two makes great games," concluded Pachter, "and believe that several of its franchises will be solid sellers for years to come. We think that the company has embarked on the wrong strategy in its attempts to diversify away from its Grand Theft Auto revenue base. It has consistently gambled on money-losing games in its effort to diversify, and made a huge bet when it embarked on its sports strategy. This bet was lost, in our view, when Electronic Arts escalated the sports battle by offering the NFL a lot of money for an exclusive license. Take-Two responded by doing the same with Major League Baseball, all but ensuring limited or no profits for many years."
"In conclusion, we think that yesterday’s earnings release supports our prior view that Take-Two has lost its way. We do not think that its obstacles are insurmountable, but in order to turn things around, we believe that the company must abandon its Quixotic pursuit of sports dominance, limit its offering of movie-based titles, and significantly cut its overhead," he said, before advising investors to sell until Take-Two can "demonstrate greater than expected progress in its cost control efforts, in its game selection, or in delivering profits from its sports business."