TAKE-TWO INTERACTIVE SETTLES CLASS-ACTION LAWSUIT
Take-Two Interactive said it signed definitive agreement to settle class action lawsuit filed against it last year. As part of settlement, it agreed to pay $7.5 million in cash -- $6.1 million of which it said was covered by insurance. Suit had been filed by disgruntled investors after Take-Two revealed it was under SEC investigation for controversial accounting practices that forced it to restate results for 2000 and most of 2001 to delete certain sales it originally had labeled as revenue but that later were returned to or bought back by company (CED Dec 19 p4). Trading in company’s stock was halted temporarily earlier this year as company set out to restate results.
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In conference call with financial analysts late last week, CEO Kelly Sumner said although originally multiple class-action suits had been filed against company, they later were consolidated into one case. Take-Two said settlement was subject to final court approval that it said it was confident would be granted. Sumner told analysts: “We are pleased to have settled the litigation to be focusing our attention on providing the kind of solid financial and operational results you've seen in the last 6 months.” But Take-Two executives declined to comment on status of SEC investigation.
At same time as Take-Two announced settlement, it said sales in its 2nd quarter ended April 30 soared 93% to $170.3 million from $88.2 million in same quarter year ago. It also reported profit of $9.6 million (25? per diluted share), reversing $11.5 million loss (-35?) year ago. Sumner said company recorded $1.5 million pretax charge in quarter related to settlement. It achieved results in quarter largely through strong showing of games including State of Emergency for PlayStation 2 (PS2), released in quarter under its Rockstar Games label, and continued strong sales for its Grand Theft Auto III for PS2, also from Rockstar. In research note, SWS Securities analyst Arvind Bhatia said latter game represented 35% of company’s total revenue in quarter, while State for PS2 represented 22%.
Despite strong results in quarter, shares in Take-Two dropped after company provided earnings estimate for 3rd quarter lower than analysts had expected. Shares opened trading Fri. at only $21.15, down from $25.50 close day earlier. Shares hit low of $21 Fri. morning before increasing to $22.50. Sumner said he expected company in fiscal year would report $733 million in sales ($53 million more than expected) and earnings per share (EPS) of $1.68 (2? more than expected). EPS prediction included 2? from charge to settle suit, Sumner said. Otherwise, it expected it would have been able to post $1.70 EPS for year, he said. Sumner said company expected to report $100 million in sales and EPS of 7? for 3rd quarter. Take-Two indicated analyst estimates had been too optimistic before results were announced. SWS’s Bhatia said before company reported results, EPS estimate for quarter had been 12?. Although SWS continued to rate its stock as “strong buy,” Bhatia said he lowered 34d quarter revenue and EPS estimates to $100 million and 7?, respectively, from $116.5 million and 14?, based on Take-Two’s new forecast and switching of certain titles by company from 3rd quarter into 4th. But Bhatia said he increased 4th quarter revenue and EPS estimates to $180 million and 44? from $115.8 million and 35? and increased his fiscal year revenue and EPS estimates to $733.4 million and $1.70 from $685.6 million and $1.68. He said settlement of lawsuit was “a huge positive” and “removed a cloud over the stock.” Bhatia also said company had “healthy balance sheet with $70 million in cash [and] no debt.” But not every analyst was as easily swayed. For example, UBS Warburg analyst Michael Wallace told Reuters he still wasn’t recommending Take- Two stock to investors because of SEC investigation.
Breaking down 2nd quarter revenue by platform, company said 82% was from PS2 games and only 6% each were from PlayStation and Xbox, only 5% from PC, 1% from accessories. Company saw no revenue in quarter from products for Nintendo’s game systems. But Take-Two Pres. Paul Eibeler said in conference call that company planned to release its first GameCube title in 3rd quarter -- Smuggler’s Run Warzones -- July 23. Other major releases this year in which company said it had much faith included next installment in its popular Grand Theft line -- Vice City, which Eibeler said was to ship Oct. 22. He said company “has in excess of 60 [SKUs] under development currently.” While breakdown in near future still gears heavily on PS2 side, Sumner said company expected to release various titles for other next- generation consoles, as well as for Game Boy Advance and PC.
Take-Two also said that in first half of 2002 it was #2 publisher of PS2 software in U.S., according to NPDFunworld’s TRSTS data. It said data showed it had 17.7% dollar share of market in that period. In same period, Take-Two also said it was #2 publisher across all console software platforms, with 10.6% dollar share. Meanwhile, Grand Theft Auto III was top-selling videogame across all platforms in U.S. in both dollars and units for 2nd quarter and first 6 months of its fiscal year, NPDFunworld said. Take-Two said title had sold more than 6 million units globally to date. In past quarter it revealed it had signed deal with Sony Computer Entertainment to make all future Grand Theft Auto titles exclusive for PS2 through Oct. 2004 (CED May 22 p3).
In 2nd quarter, published products accounted for 79% of Take-Two’s total sales, while distribution sales via its Jack of All Games division accounted for 21%, compared with 55% and 45%, respectively, year ago. Eibeler said in conference call that Jack of All Games division “remains strong” and was focused on bottom line rather than top-of-line revenue. Sumner said division contributed to company’s profitability in quarter.
So far in 3rd quarter, company has shipped Grand Theft Auto III for PC and The Italian Job and Big Bass Fishing for PlayStation and has reissued Midnight Club and original Smuggler’s Run for Sony’s PS2 Greatest Hits program. Company also plans to ship Age of Wonders II and Tropico Gold for PC, as well as Austin Powers Pinball for PlayStation. In addition to Vice City, other upcoming games from company in fall include Serious Sam for Xbox. Company also plans to introduce Desert Storm across multiple platforms in Sept.
Sumner said: “We are very pleased with the further market share gains our products have achieved in the first 6 months of fiscal 2002, and the strong pipeline of titles we have planned for the balance of 2002 and continuing into 2003. Take-Two is strategically amassing an extensive portfolio of proprietary brands, which we will continue to leverage through the development of sequels and products for multiple platforms, as well as extensions of our successful brands to other forms of entertainment.”