Deal With ‘GTA’ Team Brightens Take-Two’s Gloomy Outlook

Shares of video game publisher Take-Two Interactive Software fell 26 percent to US$8.91 in late-day trading Thursday after the company announced a disappointing financial forecast for the holiday shopping period.

Take-Two shares were down 68.2 percent from their 52-week high of $27.91.

Dismal forecasts aside, Take-Two also announced it has inked a deal with its Rockstar Games unit that will keep the Rockstar creative team at the company for another three years. Rockstar Games is the creator of the massively popular “Grand Theft Auto” series.

Fiscal Q4 Results

Take-Two reported a $15 million loss on $323.4 million in revenue in the fiscal quarter ended Oct. 31, compared to a $7.1 million loss on $292.6 million in revenue during the same period in 2007.

However, the company reported $97.1 million in earnings on $1.5 billion in revenue for the fiscal year ended Oct. 31, 2008, compared to a $138.4 million loss on $981.8 million in revenue during the same period in 2007.

Still, Take-Two’s guidance for the fiscal quarter that ends Jan. 31, 2009, has wreaked havoc on the company’s stock. Take-Two predicts revenue of $175 million to $225 million next quarter, well below Wall Street expectations of $326.2 million in revenue.

“The stock is trading less on what they’re performance during the quarter was and more on the guidance they gave,” Mike Hickey, an equity analyst at Janco Partners, told the E-Commerce Times. “It was the magnitude of the pullback that drove the stock lower.”

Like most consumer-driven businesses, Take-Two is suffering from a sharp downturn in consumer spending as the U.S. economy stumbles through a year-long recession.

“They’ve said that they’ve dramatically lowered their shipment expectations due to lower consumer spending,” Hickey said.

Rife with Controversy

The poor economy cannot be blamed for Take-Two’s image problems.

In 2007, the company was investigated by the Securities and Exchange Commission over concerns about the way it granted stock options.

In early 2006, Take-Two became embroiled in what became known as the “hot coffee” mod — “mod” being short for “modification.” The mod in question unlocked sexually explicit content in the “Grand Theft Auto: San Andreas” game — content that exceeded the standards for the game’s “M,” or mature, rating.

The Los Angeles City Attorney’s office lawsuit sued Take-Two in Los Angeles Superior Court, alleging unfair business practices, among other charges. Eventually, Take-Two released a version of the game sans “hot coffee.”

“Take-Two has historically suffered from credibility expectations,” Janco’s Hickey said. “They’ve been investigated by the SEC in the past, and it’s a company rife with controversy.”

Take-Two’s management team, which promised to clean up the company’s business practices, was trying to regain its credibility by giving such dismal financial guidance for the next fiscal quarter, Hickey suggested.

“They don’t want to put out anything that will disappoint the Street,” he said. “Clearly, they didn’t take the easy road here. They did the right thing by giving the Street a number it could act on. They’re setting the bar low, so they’re in a position where they don’t have to walk into negative earnings revisions.”

Rockstar Games Deal

The good news for Take-Two is that its relationship with the creative team at Rockstar Games has been cemented for another three years. The contract ends in January 2012.

“It’s a fantastic deal for the company and for Rockstar,” Hickey said.

Though exact terms of the deal were not released, Take-Two said Rockstar would get a new incentive compensation program, based primarily on profit-sharing.

“Under the new deal, as we understand it, Rockstar gets paid on a sales basis after taking out the costs of marketing, distribution, manufacturing, royalties and licensing,” explained Hickey. “[Take-Two] also kept the creative minds and geniuses that have created some of the biggest video game hits of all time.”

The “Grand Theft Auto” series isn’t Rockstar’s only blockbuster — the studio has also created such hits as “Midnight Club,” “Red Dead Revolver,” “Max Payne” and “Manhunt.”