Take-Two takes $50 million Q2 loss

Just hours after the Federal Trade Commission announced it had closed an investigation into Take-Two Interactive, the game publisher issued its earnings report for the three months that ended April 30, 2006. The quarter, the second of the New York-based company's fiscal year, saw a net loss of $50.4 million, or $0.71 per share. During the same period in 2005, the company suffered an $8.2 million net loss, or $0.12 per share.

The shortfall must've been a bitter pill for Take-Two executives to swallow, since net revenue for the quarter was $43 million higher than during the same period in 2005, going from $222.1 million to $265.1 million. "Total revenue in the second quarter was up about 19 percent compared to Q2 last year due to a 36 percent increase in our publishing business," said Take-Two CEO Karl Winters in a postannouncement conference call.

The reason for the uptick? "Publishing revenue was led by the sales of The Elder Scrolls IV for Xbox 360 and PC, which together represented 40 percent of publishing revenue," said Winters, indicating the Bethesda Softworks-developed title generated $106 million of net revenue all on its own. The CEO said the next-best-selling game was the multiplatform Major League Baseball 2K6, which was "approximately 14 percent of publishing revenue in the quarter," or around $37 million. Winters also singled out Top Spin 2, Grand Theft Auto: Liberty City Stories, and the now-bargain-priced Grand Theft Auto: San Andreas as other top sellers.

Unfortunately for Take-Two, brisk sales couldn't overcome a $26.3 million charge the company took "related to the write-off of several titles in development...and other costs from the closure of two development studios." The company recently revealed the cancellation of Snow, a drug-dealer sim that would've assuredly generated controversy. It also disclosed the closures of Rockstar Vienna (Xbox ports of Max Payne and Grand Theft Auto: Vice City) and Indie Built (Amped 3, Top Spin 2) in early May, the start of its third quarter.

Winters also cited other, more pervasive reasons for Take-Two's quarterly shortfall. One was that the company has a smaller-than-normal profit margin on Oblivion, which it copublishes with Bethesda. "As we've said in prior calls, co-publishing gross margins can range anywhere from 20 to 40 percent, and, in this case, tip toward the lower end of that range," he said. Winters also blamed the "fairly high royalty costs" of Major League Baseball 2K6 as a big factor for lessened profits. Take-Two currently holds the exclusive license to publish third-party MLB games.

"Our internally owned internally developed titles, which typically provide much higher margins, represented less than 20 percent of our publishing revenue in the quarter," said Winters, "[Our] sports business contributed over 30 percent of the quarter's publishing revenue, and our licensed external products were 50 percent."

For the six months ending April 30, 2006, Take-Two suffered a net loss of $79.5 million, versus a net income of $47.1 million in the same period in 2005. A big factor in that downfall was the game industry's current bogeyman--the current-to-next-generation console transition. "Second-quarter revenue declined year-over-year due...to reduced sales of current generation hardware and software and a decrease in average selling prices as the industry transitions to next-gen platforms," said Winters.