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Take Two: A One-Trick Pony Once Again?

Take Two Interactive Software has always fought against its reputation as a company with one bullet in its gun: the Grand Theft Auto series. In recent years, it seemed to be making some headway in those efforts, building a number of strong, if not super-powered, franchises that were far removed from its flagship title.

Grand Theft Auto IV
Source: Take Two Interactive Software
Grand Theft Auto IV

But with Thursday’s dire after-the-bell earnings warning, many investors and analysts are returning to their original thinking.

Take Two said results for the past quarter would fall far short of expectations due to weakness in its baseball games. The company also issued an initial outlook for fiscal 2010 that was well below analyst expectations, predicting it would lose 50 cents per share. (Analysts had expected a 65-cent profit.)

Shares are being hammered today, with Take Two stock down more than 30 percent.

The 2010 loss is what’s particularly worrying. The publisher has four of its biggest games – “BioShock,” “Mafia,” “Max Payne” and “Read Dead Revolver” - set to launch sequels next year, but will still be unable to make money.

Since fiscal 2005, the company has only achieved an annual profit one time – in 2008, when it released the last version of “GTA”.

“We once again question Take Two’s capability of generating positive earnings in a non-GTA release year,” writes Eric Handler, senior equity analyst for MKM Partners in a note to investors.

The next full-fledged GTA sequel is now expected in 2011. And while it may be enough to bring Take Two back into the black, at least one analyst is beginning to wonder if the legs of the long running hit are starting to get a bit shaky.

“GTA IV” set sales records when it was released last April. But expansions released for Microsoft’s Xbox 360 did not produce blockbuster sales. And portable versions of the game for the Nintendo DS and Sony PSP underwhelmed as well. All of the titles earned high review scores, were priced much lower than a traditional “GTA” game and had reasonably high marketing exposure.

“We must raise an even bigger question: has the Grand Theft Auto franchise peaked?,” says Ben Schachter of Broadpoint AmTech. “Given the strength of GTA IV in 2008, the question may seem misplaced, but our concern is that the very highly rated new GTA content for Xbox as well as PSP and DS did not perform up to expectations in 2009. Now, we very clearly understand that these do not represent ‘true’ new GTA titles ... but this does raise questions about the strength of [the company’s] crown jewel.”

Baseball, which was to blame for the current quarter’s losses, will continue to be a drain on Take Two as well. The publisher and Major League Baseball have a contract in place through the end of the 2012 season. Gamer interest in baseball titles, meanwhile, continues to fade.

The upside is 2011 is looking to be a boom year for the company. Beyond “GTA,” the company will launch another, unnamed AAA-title —which was originally planned for 2010.

While Take Two did not name the game, there are several contenders: work is underway on the next installment in the popular “Civilization” franchise and Rockstar Games, the studio behind “GTA” is working on two major titles: The long-awaited “L.A. Noire” and the PS3-exclusive “Agent” (which was teased by Sony earlier this year).

The potential of Take Two’s catalog is enough to keep at least one analyst still relatively optimistic about the company’s future earnings potential.

“With no profitability in sight, investors may again conclude that Take-Two is a ‘one-hit wonder’ with GTA and little else,” says Wedbush Securities’ Michael Pachter. “We disagree, and think that the company has at least eight bona fide franchises, with the potential for 10 or 12. We perceive the problem to be an overly ambitious development schedule, with high expectations and high quality standards leading to inevitable delays.”