Analysts: Take-Two restructuring a start

Industry watchers weigh in on publisher's plans to trim the fat; say it won't be a solution to problems by itself.


Grand Theft Auto IV

Earlier this year, Take-Two shareholders--upset over years of headaches from Hot Coffee to SEC investigations--joined together to sweep out the company's executive ranks and install their own board of directors. Yesterday the new management released its first post-takeover quarterly earnings report and detailed a plan to return the publisher to profitability, which would involve laying off "a significant percentage" of its workforce. The job cuts were set primarily to come from sales, marketing, and administrative positions.

Today analysts reacted to the move as a good first step on the way to recovery for the company. Wedbush Morgan Securities' Michael Pachter, whose speculation about a Grand Theft Auto IV delay was bluntly denied by Take-Two executives yesterday, applauded the restructuring plan but said it wouldn't be enough on its own. According to Take-Two's estimates, the restructuring will save it about $25 million annually. While significant, that amount would not be enough to offset even the losses from its most recent quarter, which surpassed $51 million.

"At this level, $25 million in cost savings will only make a dent in the company’s losses," Pachter told investors. "Without better decisions about games, we are not optimistic that Take-Two can generate the earnings power necessary to justify its current share price."

While Evan Wilson of Pacific Crest Securities was similarly reserved in his assessment of the move, his primary area of concern was not the company's choosiness in which games to make, but its reliance on a single golden goose.

"Ultimately, investors are still working on faith in new management and counting on the continued success of the Grand Theft Auto franchise," Wilson said, "which is not a foregone conclusion, in our view. However, we believe the road to profitability is incrementally more clear."

Nollenberger Capital Partners analyst Todd Greenwald also issued a note approving of the restructuring plan, but saw different flies in the Take-Two ointment. Greenwald said the firm was maintaining its cautious stance on Take-Two due to ongoing issues with the Securities and Exchange Commission, high cost structure, and emphasis on PlayStation 3 and Xbox 360 development.

"While other publishers seem to have recognized and reacted to the slow ramp of the PS3, and enormous success of the Wii/DS, Take-Two seems much slower to switch gears," Greenwald said, adding, "At this point, we believe Take-Two has the most to lose if the PS3 and Xbox 360 hardware bases do not accelerate significantly."

A day after the restructuring plan was announced, Take-Two's share price ended the trading day at $19.33, up a little more than 2 percent from its closing price yesterday.

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