Take-Two Interactive Software (Nasdaq: TTWO) just beat every reasonable expectation for the second quarter, delivered a profit despite seasonal sloth far away from the holidays, and raised guidance for upcoming periods. Western game Red Dead: Redemption is a qualified hit, and there seems to be more of the same coming up when Mafia II hits store shelves.
So if everything is so great, how come I'm thinking about selling my Take-Two stock on the news?
First, let's run through the numbers. Sales grew 54% year over year to $268 million, thanks to a nice catalog of action games and sporting franchises. GAAP earnings landed at $0.20 per share, up from a $0.13 loss per share a year ago. So far, so good; nobody expects video game publishers to make much money in the spring and summer months.
What leaves me hollow is not the numbers, but the desperation I sense behind Take-Two's communications. Sure, Red Dead: Redemption is a great game by all accounts and will sell like hotcakes. But that title was published in the current quarter, yet management kept talking about it as if last quarter's results depended on it.
They could have focused on Mafia II and the marketing blitz that's planned for it, including national TV and print ads, unique package deals when you pre-order the game from Wal-Mart or GameStop (NYSE: GME), and strong pre-launch press buzz. But the crosshairs of conversation centered squarely on Red Dead.
Take-Two is known mostly for its Grand Theft Auto franchise, which inspired Electronic Arts (Nasdaq: ERTS) to launch a half-hearted hostile takeover attempt two years ago. The Mafia and Red Dead franchises could supply tentpoles when GTA is in the shop for some body work. See, I still love what Take-Two is doing -- from a gamer's perspective.
It's just a management mess, though. Besides focusing on the wrong talking points, the steady stream of hit releases fails to make any money. Both EA and Activision Blizzard (Nasdaq: ATVI) carry gross margins nearly twice as wide as Take-Two's, and Activision even makes a profit on a regular basis.
I bought Take-Two after that failed takeover attempt, thinking that the company would straighten out its sloppy operations and prove that EA should have paid more when it had the chance. Now, I'm not so sure of that thesis anymore. Why would one of the big boys want to buy an inefficient cash-burner, no matter how tasty the game portfolio?
I've canceled my "outperform" rating on Take-Two in CAPS at a loss. Unless management screws its collective heads on the right way and start showing some derring-do and panache, I might sell my real shares, too. Stay tuned.
Is Anders jumping to conclusions, or should he have seen the problems two years ago? Discuss in the comments below.
