Analyst sees weakness from Take-Two

Take-Two Interactive, the beleaguered publisher of Rockstar Games' Grand Theft Auto series, will report earnings for the August-October '05 quarter this week. In anticipation of that report, one analyst is predicting the company will report earnings at the low end of its adjusted guidance.

Take-Two currently estimates that revenue for the quarter ending October 31, 2005, will be between $286 and $291 million. In a brief memo to investors today, Michael Pachter of Wedbush Morgan said he expects the publisher to report revenues of no more than $286 million. That quarter closes out the company's full 2005 fiscal year.

The news can hardly be called surprising. In late October, officials reduced their estimates of full-year earnings for fiscal year 2005, from $1.22–$1.27 billion to $1.18–$1.185 billion.

At the same time, the company adjusted its Q1 '06 earnings forecast as well, lopping $50 million off its estimates. Before the October 31 warning, the company was anticipating revenues of $350-$400 million for the quarter ending January 31, 2006. Based on a number of factors, including continued losses associated with pulling Grand Theft Auto: San Andreas from shelves, it adjusted earnings down to the $300-$350 million range.

Pachter also sees some sluggishness lasting into the current fiscal year (November 1, 2005, through October 31, 2006). "As industry sales continue to be challenging, we expect Take-Two to lower fiscal year '06 and Q1 '06 guidance," he said today.

Pachter offered some consolation to Take-Two, adding that whatever downturn the company is experiencing, it is being similarly felt by other publishers. "Given weak November NPD sales and Electronic Arts' and Activision's recent earnings warnings, we believe that Take-Two [also] experienced weak sales during the holiday period."

Contributing to the weak sales are consumers who, according to Pachter, "continue to shun current generation games while waiting for next generation consoles."

Currently, Take-Two is predicting current fiscal year revenues of $1.35–$1.45 billion. Pachter's estimates for the current year are less optimistic. Today he lowered fiscal year 2006 estimates for revenue from $1.35 billion to $1.30 billion--and for the current quarter that ends January 31, 2006, Pachter is lowering his revenue estimates from $325 million to $285 million.

If Pachter is right, investors can expect to see Take-Two's revenue figures adjusted down when CEO Paul Eibeler chairs his company's conference call with analysts this Thursday.

Pachter maintains a cautious Hold rating on the stock (with a $20 target price), suggesting investors "stay on the sidelines" for at least the next few months--"until Take-Two can demonstrate that it can deliver on its guidance."

Take-Two (TTWO) shares closed at $18.05 today, up $0.35 from the morning open.