It was not long ago that Take-Two Interactive Software (TTWO) seemed to be on top of the world with one of the most successful video game launches in history for the fourth edition of its Grand Theft Auto franchise. The highly anticipated release of the game brought Electronic Arts (ERTS) knocking down their door for a $25.74 per share hostile takeover attempt, yet management pleaded with shareholders to just wait for the games release. They hoped a successful launch would demand an even greater premium from any suitor, and unfortunately the shareholders listened. As predicted, the game was a blockbuster selling 6 million copies in the first week, but it effectively made TTWO too expensive in the process.
Now, more than a year later, TTWO’s investors are wishing they had a reset button and could take the deal. The stock is down nearly 30% today to under $8 per share following a remarkably weak fiscal fourth quarter, as well as a worse than expected guidance for the year ahead. The company has not released full details on the quarter but said that EPS would come in around $.05-$.10 for the quarter on revenue of $325-$350 million. This is clearly a disappointment compared to analysts’ estimates of EPS of $.33 on $371 million in sales. Take-Two laid the blame on their Major League Baseball games which it says depleted EPS by 14 cents on its own. Management said that because of multi-year contracts with the MLB they will need to focus on improving these games over the coming years.
The picture did not get much brighter for the quarter ahead, as analysts were already anticipating the company to lose about $.26 per share in the first quarter. Take-Two believes that this is too rosy a prognosis and said that the loss will be no better than $.40 per share and could be as bad as $.60. Furthermore, the company is not anticipating being profitable in fiscal 2010, which will ratchet down analysts’ calls for EPS of $.64 in the year ahead. Considering Take-Two has four major releases next year of previously successful franchises like “BioShock”, “Mafia”, “Max Payne” and “Read Dead Revolver”, that is a great disappointment to the market. Apparently, the biggest problem is that the company is not releasing another version of Grand Theft Auto, which only adds to criticism that Take-Two is a one trick pony.
Clearly, there is no other way to term this release than a huge disappointment and it is being followed by a deluge of analyst downgrades. At Ockham, we downgraded TTWO to Overvalued in September as the fundamentals have continued to weaken since its last blockbuster game launch. Given the current decline in fundamentals we think that it is likely that TTWO will languish in the single digits for some time going forward. Management really whiffed on the bid from Electronic Arts last year, and has done little to inspire confidence since that point.