Analysts' double-take on Take-Two earnings

Industry watchers unveil expectations of BioShock sales, downloadable GTAIV content release date, and new installments of Max Payne and Red Dead Revolver.

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Yesterday after the end of the trading day, Take-Two Interactive released its quarterly financial report. The publisher touted the success of BioShock, lessened losses compared to the prior year, and expectations of a bright future that included its 2K Sports label turning a profit for the first time next year.

Investors seemed to like what they were hearing, as today the stock has been trading up about 6 percent from yesterday's closing price of $15.75. However, a handful of analysts expressed reservations about the numbers. Wedbush Morgan Securities' Michael Pachter questioned why the company left its sales guidance unchanged despite the performance of BioShock, Manhunt 2's arrival on the last day of the company's fiscal year (October 31), and other good news from management regarding its sports label and profitable distribution subsidiary Jack of All Games.

"We are hard pressed to explain how the company will manage to generate an expected $112 million in pro forma operating losses during fiscal year 2007," Pachter told investors in a note today. "The implication is that the rest of Take-Two's business is a black hole, with losses of $112 million on approximately $400 million in other revenue."

Nollenberger Capital Markets analyst Todd Greenwald was similarly dubious of Take-Two's math, but his note to investors suggest a different reason for the flat earnings guidance. "Despite the addition of Manhunt 2 and the encouraging release of Bioshock in August, management did not raise guidance for the October quarter, leaving it at $275 to $300 million," Greenwald wrote. "We continue to believe that Bioshock's financial success will be somewhat limited by the hardcore scope of the game."

Pachter also noted that Take-Two has reclassified revenue related to the release of its Xbox 360 Grand Theft Auto IV episodic content as "long term," which he said implies a release sometime in the fourth quarter (August through October) of Take-Two's fiscal 2008. In his own note, Pacific Crest Securities' Evan Wilson wrote that he expected the Grand Theft Auto IV episodic content to arrive in the company's third quarter (May through July) of fiscal 2008.

Wilson also delved a little deeper into BioShock, following up on Take-Two's acknowledgement that the game has shipped 1.5 million copies already.

"We forecast 3 million units in Q4 and 4 million through the January quarter," Wilson wrote, adding, "Given BioShock's enormous initial success, Take-Two will clearly release it on other platforms and create sequels if the market makes sense and if quality would not be compromised. Regardless, we expect a sequel to be released toward the end of fiscal 2009 at the earliest."

Wilson, Pachter, and UBS Investment Research analyst Ben Schachter all had a couple other expectations for fiscal 2009, with each predicting Take-Two to release new installments of Red Dead Revolver and Max Payne during the time frame. While Take-Two didn't announce those games during its conference call yesterday, it has brought the two franchises up regularly as examples of its stable of owned intellectual properties, and CEO Ben Feder said they would return sooner or later.

"In addition to Grand Theft Auto, our roster of $1 million plus wholly-owned brands includes BioShock, Civilization, Midnight Club, Max Payne, Red Dead Revolver, Manhunt and Bully," Feder said. "We fully intend to leverage these products, which are on development cycles that should complement and counterbalance each other."

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