Grand Turnaround? Take-Two Trims Losses

Video game maker Take-Two Interactive managed to dramatically improve its financial performance in its fiscal third quarter, with net losses down significantly from a year ago even though revenue declined slightly.

Best known for the controversial “Grand Theft Auto” game series, New York-based Take-Two said it lost US$58.5 million, or 81 cents per share, in the quarter, compared with a loss of $91.4 million a year ago.

Revenue was $206.4 million, down from $241.2 million in the same period a year ago. The results from 2006 included sales tied to the release of the Liberty City version of “Grand Theft Auto” for the PlayStation 2 console.

Building Value

The improved data reflect a decrease in product costs, lower software development costs, fewer royalty payments to third-party developers and an overall reduction in operating expenses, Take-Two said.

The results and the company’s upbeat guidance reflect Take-Two’s new management team and structure, commented Chairman Strauss Zelnick.

“We are proud of what this company’s management team has accomplished in a short time, and confident that our efforts will build the value of Take-Two in the future,” Zelnick said.

The results may indicate Take-Two is poised to put behind it one of the more difficult times in its history as a public company.

Since the start of the year, both the former CEO and CFO of the company were forced to resign after hedge funds that owned significant stakes in the company began calling for dramatic change. In addition, the Securities and Exchange Commission has been investigating stock options backdating at the company.

Pipeline in Question

Take-Two has taken several recent steps to broaden its product line and enter new markets, it said, recently establishing 2K Play, a label that will focus on casual and family friendly gaming titles, including games based on Nickelodeon cartoons.

Take-Two may have also created a new franchise for itself with its recently released title for the Xbox 360, “BioShock,” which has been widely hailed by critics and may rank among the best-selling titles for August when NPD Group releases its monthly data later this week.

The company also sold its video game accessories business, known as Joytech, as part of a larger plan to focus on its coregame-development expertise.

Take-Two is “well-positioned to capitalize on the growth of the video game market” driven by the release of next-generation gaming consoles, said company CEO Ben Feder.

Still, the company suffered a significant setback when it said recently that “Grand Theft Auto IV,” originally slated for release earlier this year, would be delayed until next spring, missing the key fourth-quarter holiday selling season.

Still, Take-Two reiterated its previous guidance, which calls for revenue of $275 million to $300 million and 2008 revenue of $1.1 billion to $1.4 billion.

That forecast helped drive Take-Two shares higher by more than 6 percent in afternoon trading Tuesday to $16.72.

Taking Five

While the company has made sweeping changes and worked aggressively to settle overhanging legal matters, the turnaround may not be as dramatic as the outlook suggests, said Wedbush Morgan analyst Michael Pachter.

“There is some improvement, but it’s not clear yet that the company’s problems are all in its past,” Pachter told the E-Commerce Times. “There are still parts of the business that are far from profitable and will continue to weigh on earnings.”

The fact that Take-Two didn’t raise guidance even though “BioShock” has been an instant hit — the company said it has shipped 1.5 million copies since August — may suggest weakness in other areas, Pachter added.

Take-Two’s move toward the casual gaming market may help it boost sales significantly, said Yankee Group analyst Michael Goodman. Even though hard-core gamers remain the most voracious consumers of titles, the trend is toward a broader gaming landscape, with titles that appeal to women and older gamers. Nintendo helped accelerate that trend with its Wii console, which Take-Two has already begun to roll out games for through its 2K Play label.

“Game development remains an expensive and time-consuming process,” Goodman told the E-Commerce Times. “Being able to absorb misses as well as to ride the hits as long as possible is what makes for a successful gaming company.”