Retailers More Optimistic, Take-Two CEO Says

Third-party publishers and retailers were left in the dark by Sony Computer Entertainment about 2006’s PS3 console launch and any plans to discount its PS2 and PSP game systems (CED March 2 p5). But Eibeler said retailers told Take-Two “they were seeing some real excitement” after a tough holiday season that saw sales sag for current-generation game systems and demand for Microsoft’s Xbox 360 console far outrun supply. “Some of it is just about managing expectations,” Eibeler said, adding that retailers sound optimistic about upcoming Take-Two games, including Elder Scrolls: Oblivion for Xbox 360 (later this month at $59.99). The firm is “very pleased with the appetite” of consumers for next-generation games, he said.

The comments came as Take-Two Interactive reported weaker results for its Q1 ended Jan. 31. Sales fell to $265 million from $502.5 million a year ago when it saw strong sales from its controversial game Grand Theft Auto: San Andreas for PS2, the firm said. Take-Two posted a $29.1 million loss (41 cents a share) for the quarter, reversing last year’s $55.2 million profit (79 cents). CFO Karl Winters said the company again was “negatively impacted by the lighter than expected consumer purchases of videogames and lower average selling prices as the industry transitions to next-gen hardware.”

Take-Two declined to provide specific result estimates on its coming quarters this year -- largely because it remains “uncertain about hardware numbers,” Eibeler said. The company sidestepped questions about when it expects Sony’s PS3 to ship after weeks of rumors that launch might be delayed. Sony has said it expects to launch PS3 in the spring but hasn’t been more specific. Analysts, publishers and retailers took that to mean a spring launch in Japan, followed by a fall launch in N. America. But comments by component suppliers in recent weeks suggest the Japanese launch won’t happen until at least midsummer or fall, which could affect the N. American launch.

Despite what Take-Two heard at Destination PlayStation, Winters said his firm is “assuming the continued cautious retail environment due to the ongoing console transition.” Although Xbox 360 hardware availability is a little better -- and Microsoft CFO Chris Liddell said last week that will only improve the next 2-3 months (CED March 8 p3, March 1 p6) -- Winters said “we also assume that 360 hardware availabilities will remain constrained and that the pricing pressure we are seeing now on current-gen software will continue through 2006.”

But Take-Two shares were up 10.84% at $16.46 in late Wed. afternoon trading -- probably helped by company executives’ statements to analysts that they expect a return to profitability in Q4. Winters said Take-Two’s Q1 revenues slightly beat the range projected in Jan. -- “primarily due to the higher than expected distribution volume” from its Jack of All Games business. About 60% of Take-Two revenue came from publishing vs. about 40% from distribution -- a shift from a year ago when publishing accounted for 71% of sales, he said. More distribution revenue came from hardware than a year ago, he said, noting that side of the business has lower gross margins.

Winters said about 20% of Take-Two Q1 revenue came from its #1-selling title in the quarter, Grand Theft Auto: Liberty City Stories for PSP. San Andreas for PS2 brought about 6% of sales, while Civilization IV for PC accounted for about 5% of sales, he said. Close to 13% of revenue came from its growing sports game business, while Xbox 360 games brought 6% of revenue, Winters said. The firm said 72% of its revenue came from N. America, up from 66% a year ago. PSP revenue was 33% of sales vs. 30% for PS2 (down from 90%), 12% PC (up from 2%), 10% Xbox 360, 7% Xbox (up from 5%), 2% Game Boy Advance (up from 1%), 1% GameCube (up from 0%) and 5% for other platforms and accessories (up from 2%).

Take-Two has more than 120 game SKUs in development, with about 70 SKUs planned for release in fiscal 2006. These include titles that have shipped, such as College Hoops 2K6 from its 2K Sports label, Winters told analysts. Of the 120 SKUs, he said about 70 are for PSP and other next-generation systems. Coming games include Table Tennis for Xbox 360, expected to ship May 22 in the U.S. at $39.99 -- $20 below most 3rd-party publishers’ 360 titles, in keeping with the publisher’s assertive strategy to increase market share in the sports game category at the expense of leader Electronic Arts and others. Take-Two said it plans to ship a game for current-generation consoles based on animated TV show The Family Guy this fall in an exclusive licensing deal with 20th Century Fox. Winters said upcoming games this year will feature 2 PSP titles, including another one based on its hit Grand Theft Auto franchise.

It is “crucial that we manage through the [console] transition as effectively as possible while ensuring that Take-Two is in a strong competitive position for the upturn that we believe begins in ‘07” as the installed base ramps up significantly on the new game systems, Eibeler said. To reach those goals, Take-Two has 3 strategies: (1) Keep supporting its “high-quality” game lineup in 2006. (2) “Improve the efficiency” of its operations. To that end, Eibeler said, “we are streamlining our business and controlling costs while at the same time continuing to support the creative talent that will produce our next wave of hit products.” (3) “Maintain our investment in diverse development resources.” He later said the company recently decided to consolidate its Poptop Software and Firaxis Games development studios -- a move he said “will allow us to combine the strong creative talents of these studios into a single entity” headed by industry veteran Sid Meier. Eibeler said the company also is “evaluating plans to reduce overhead in several key areas [and is] working to bring costs down to the greatest extent possible while recognizing that we need to be well-positioned for ‘07.”

The CEO said Liberty City Stories had been the #1 PSP game in the U.S. each month since it shipped in Oct., according to NPD Group sales data. “We anticipate strong sales throughout ‘06 as the hardware base continues to build” for PSP, he said.

Take-Two has about 1,300 employees in development work, Winters said. Asked if that will increase this year, he said only that Take-Two has made no game studio acquisitions in “several months” but isn’t ruling out future deals. “We always have a watchful eye on the marketplace [and if] something extraordinary comes along we're not going to just pass it by,” he said.

The company moved to reassure investors by noting again that key employees at its Rockstar Games studio, source of its Grand Theft Auto titles, recently signed long-term contracts. Asked if the company might come out with separate new Grand Theft Auto games for PS3 and Xbox 360, Eibeler said only that “anything is possible.” The company has not provided details on its next entries in that series for the new consoles.

Exec. Vp Cindi Buckwalter told analysts the firm expects to boost its mobile game offerings over the next year, probably through 3rd parties. Suits recently filed against Take-Two by L.A. City Atty. Rocky Delgadillo (CED Jan 30 p9) and by law firms seeking class action status for their cases “don’t have any merit and we'll continue to defend ourselves against them,” she said.

Again telling analysts Take-Two remains “optimistic” on its future, Eibeler said “we think we are working through this” current console transition.