Is Take-Two Making Promises It Can't Keep?


Take-Two Interactive (NAS: TTWO) is making promises that it may be hoping it won't have to keep.

The cutting-edge video game publisher behind the Grand Theft Auto and Red Dead Redemption franchises came through with softer-than-expected fiscal first quarter results last night. Its outlook for the current quarter is abysmally short of where the pros were perched. However, Take-Two is still putting out surprisingly rosy projections for all of fiscal 2012 and promising a blowout fiscal 2013.

Does Take-Two really see the light at the end of the tunnel, or is painting on a faraway smile a ploy to lure Electronic Arts (NAS: ERTS) or Activision Blizzard (NAS: ATVI) into a buyout?

Let's get into the ugly numbers first.

Revenue fell 11% to $334.4 million, as the poorly received Duke Nukem Forever weighed down its critically acclaimed L.A. Noire release. Margins got slaughtered, with last year's adjusted profit of $0.43 a share being whittled down to a mere $0.02 a share. Analysts were banking on a tweaked profit of $0.10 a share on $352.9 million in revenue.

If you think that's bad, the current quarter is going to be even worse. Take-Two is targeting an adjusted loss of $0.55 to $0.65 a share on $70 million to $85 million in revenue. Wall Street's estimates are calling for a loss of $0.05 a share on $203 million in revenue.

These things happen in the video game industry. Revenue recognition practices and juggled release dates lead to lumpy performances from quarter to quarter. However, it seems odd that Take-Two is sticking to the guidance it initiated for all of fiscal 2012 three months ago. Take-Two still sees itself earning between $0.10 a share and $0.35 a share on $1 billion to $1.1 billion this fiscal year ending next March. It also feels it will earn more than $2 a share next fiscal year.

In an ideal world, Take-Two is telling the truth. Outside of releasing L.A. Noire for the PC and cranking out a licensed baseball game using Viacom's (NYS: VIA) Nickelodeon characters, its release slate for the current quarter is relying largely on low-profile digital releases. NBA 2K12 and other potential needle movers won't be out until the second half of the fiscal year. Investors should already be looking forward to new installments in the BioShock and Borderlands franchises slated for fiscal 2013.

However, plans can get hairy if the NBA lockout continues or if its sequels fall flat the way Duke Nukem Forever did this summer.

If Take-Two was ever looking for an exit strategy, now would be the ideal time to approach rival gamers -- or any media company looking for some skin in gaming -- to field offers. The projections just don't seem realistic, and it may be time for Take-Two to wave its potent franchises as intellectual capital while that's still worth something.

Take-Two is now three years removed from rebuffing EA's buyout offer. In retrospect, holding out for more was an ill-advised move. Let's see if it can get it right this time, hopefully before it has to answer to its unbelievably cheery forecasts a year or two out.

Is a buyout Take-Two's best shot for serious capital appreciation? Share your thoughts in the comment box below.

At the time thisarticle was published The Motley Fool owns shares of Take-Two Interactive Software and Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Take-Two Interactive Software and Activision Blizzard, as well as creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Longtime Fool contributor Rick Munarriz will admit to still playing video games, though finding time is the rub. He does not own shares in any of the companies in this story. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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