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Weak Lineup, Slow Sales Strain Take Two Software

Investors are predictably slamming shares of Take Two Interactive Software after Monday’s downwardly revised revenue guidance, with the focus primarily on the financial impact. But the announcement (and a subsequent conference call by company executives) revealed a lot about what’s going on under the surface at Take Two.

Take Two Interactive
Take Two Interactive

The publisher said it expects to lose between 80 cents and 95 cents per share in fiscal year 2009 (ending October 31). Previously, it had forecast a break-even to 20 cents a share profit. The revision was blamed on the delay of “Bioshock 2” — one of Take Two’s expected tentpole games this holiday season — and continuing weakness in retail.

Neither reason is a good sign. Retailers aren’t placing heavy orders for new or catalog games as we approach the holiday season. This is partially the fault of the economy, but also indicates shaky confidence in consumer interest surrounding Take Two’s games.

The holiday season in 2008 faced similarly rough economic conditions. Retailers quickly adjusted their philosophy, throwing their support behind proven winners and titles that were highly anticipated.

Industry observers expect that will prove true this year — meaning Microsoft, Activision and Ubisoft could see the biggest boost, given the surge of interest in “Halo 3: ODST,” “Modern Warfare 2” and “Splinter Cell: Conviction.” Take Two’s titles, though, haven’t created a lot of buzz.

“We believe the company’s weak lineup of games is one of the key reasons for the cautionary stance being taken among retail buyers,” wrote MKM Partners analyst Evan Handler in a note to investors.

“Bioshock 2,” meanwhile, had a disappointing debut at E3 last month — and currently has four development studios working on different aspects of the game, which many industry observers fear doesn’t bode well.

Take Two’s comments didn’t do much to assuage those fears.

“The decision to shift a release date is never an easy one, especially with a product as highly anticipated as ‘BioShock 2’,” said Ben Feder, CEO of Take-Two in a statement. “We felt that it was essential to invest the additional time to ensure that this title will deliver what its fans expect and deserve.”

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With the move, Take Two has positioned itself for a strong fiscal 2010, though. In addition to “Bioshock 2,” the company will release “Mafia II,” “Max Payne 3” and “Red Dead Redemption.”

Noticeably absent from that list of 2010 games is the next installment in the “Grand Theft Auto” franchise (not counting portable games or downloadable content for existing GTA games). While some analysts had speculated that “GTA V” would make its debut next year, Take Two effectively shot down the rumors in its conference call.

“Our goal for fiscal year 2010 is to operate the company profitably … without a new multi-platform ‘Grand Theft Auto’ release,” said Feder.

Not bringing out a new “GTA” might disappoint some investors, but it could be the wisest move Take Two makes all year.

While publishers typically worry about games being lost in the crowd during the holiday season, 2010 is going to be just as crowded, with potential blockbusters due throughout the year. Among the titles due are Sony’s (SNE) “God of War III,” Microsoft’s “Alan Wake” and “Halo: Reach” and Nintendo’s “Super Mario Galaxy 2”.

A “GTA” would still perform well in that crowd, but would likely do better when consumers are presented with fewer choices.

Analysts who cover the company adjusted their earnings model after the guidance change, but did not change their recommendations. While some noted that the resulting stock dip might be viewed as a buying opportunity, they suggested investors think carefully before acting on that impulse.

“The company continues to own a powerful portfolio of wholly owned brands,” wrote Edward Williams, an analyst for BMO Capital Markets. “However, we believe execution is paramount and Take-Two's current performance remains underwhelming. We remain cautious at this time.”

With the weak guidance, don’t be surprised if takeover whispers begin to get louder in the months to come. Analysts say that while the company certainly remains a target, it’s far from certain that anything will come of the gossip.

“We continue to believe that TTWO may be an interesting potential take-out target, but we are reluctant to recommend it as an investment solely on that basis,” said Ben Schachter of Broadpoint AmTech. “In our years covering the industry, speculation of potential M&A activity is frequent, yet deal flow remains quite rare.”