Wow, he really down on Take-Two.
GTA IV is No 'Panacea' for Take-Two, says Analyst
While Take-Two just posted improved fiscal results for its fourth quarter, thanks largely to the success of BioShock, everyone knows that the company's bread and butter is Grand Theft Auto. Wedbush Morgan Securities analyst Michael Pachter, however, is "not convinced that GTA IV will be the panacea that investors anticipate."
He explained, "In the three quarters following the launch of GTA Vice City (Q4:02, Q1:03 and Q2:03), Take-Two generated $590 million in publishing revenues, incurred operating expenses of $171 million, and generated operating income of $150 million. In the same period following the launch of GTA San Andreas, the company generated revenues of $854 million, incurred operating expenses of $269 million, and generated operating income of $157 million. In FY:08, management guidance reflects publishing revenues of around $975 million in Q2 – Q4, with operating expense of $310 million and operating profit of $114 million. For purposes of comparison, during the comparable Q2 – Q4 period for FY:07, Take-Two generated an operating LOSS (excluding restructuring expense) of $(85.8) million on publishing revenues of $530 million and operating expenses of $278 million.
"We find it remarkable that Take-Two management believes that operating income for the last three quarters of FY:08 can grow by $200 million on publishing revenue growth of only $445 million, especially given the marketing support and R&D amortization that will be required when GTA IV launches. While we expect the game to perform quite well, we think that the implied profit forecast is barely credible, and we note that our estimates reflect full-year revenues of $1.35 billion (near the top of the guidance range)."
Pachter, who reiterated a "Sell" rating on Take-Two's stock (TTWO), also cast some doubt on Take-Two new management – specifically their ability to make tough decisions quickly enough to turn the company around..
"Management stated repeatedly that the company intends to participate in the robust growth cycle that the games industry is experiencing. However, that growth cycle began in 2006, around the same time that Take-Two's losses began to multiply," he said. "Take-Two expects a year-over-year DECLINE in publishing revenues in its first quarter (we estimate a decline of around 20%), notwithstanding expected industry software sales GROWTH of around 20% for the same three-month period. This follows similar performance in Q1:07, when Take-Two delivered flat year-over-year publishing revenue growth while the industry grew by 14%."
Pachter continued, "New management appears to us to be sincere, but we think it is important to state the obvious: they are new. They have not managed a business like this one in an environment like this, and we don't see them making tough decisions fast enough to deliver upside to the low end of company guidance. The company intends to grow its staff to facilitate growth of the business, but we don't see its revenues growing fast enough to offset the considerable losses it continues to generate from its core business. We are somewhat surprised that there were not staff reductions following the abysmal performance of All-Pro Football, especially after keeping the development team occupied with that game a full two years after competitor Electronic Arts signed an NFL exclusive."
Ultimately, Pachter believes that investor confidence in Take-Two and GTA has gone too far. "We hasten to remind investors that over the 12-quarter period from February 2005 through January 2008, Take-Two is expected to generate a cumulative operating loss of over $450 million. Although we believe that management is sincere in its desire and resolve to complete a turnaround of the company, these losses are significant, and are difficult to treat without taking some bitter medicine," he said. "We think that the company's intent to cut expenses by $25 million per year is a good start, but think that investors give management way too much credit for completing the full turnaround based upon overconfidence in the performance of GTA IV."