Take-Two Saga Takes a Nasty Turn

Updated from 9:46 a.m. EDT

Take-Two Interactive ( TTWO) forecast an unexpected loss in its second quarter and announced the resignation of its chief executive Wednesday morning. The news comes one month after the video-game maker's chairman quit and the Securities and Exchange Commission said it was considering civil charges against the company and several officers.

New York-based Take Two expects to lose 15 cents a share on revenue of $170 million in the quarter ending April 30, citing a delay in the release of its Red Dead Revolver title. Analysts surveyed by Thomson First Call had been forecasting earnings of 33 cents a share on revenue of $219.7 million in the quarter.

The company said Jeffrey Lapin resigned as chief executive, to be replaced on an interim basis by its current executive chairman, Richard Roedel. Roedel was appointed chairman last month following the resignation of its founder, Ryan Brant. Take-Two also reappointed Paul Eibeler president, a post he held between 2000 and 2003, and named Gary Lewis chief operating officer. Lewis had been managing director of its international division.

Investors, who bid the stock up when Brant stepped down March 15, were less generous about Wednesday's news: The stock was recently down $3.79, or 10.8%, to $31.41.

Take-Two now expects to release Red Dead Revolver for PlayStation2 and Xbox in the first weekend in May. It also cited lower-than-expected sales of older products, a trend that occurred despite more spending on sales support and discounts. The company also moved back the launch date of its Warriors game for PlayStation2 to the first quarter of 2005 from the third quarter of 2004. The move will allow it to devote additional resources to the next release of its flagship Grand Theft Auto game, which is scheduled to be in North American stores Oct. 19.

The company reiterated third-quarter guidance for earnings of 12 cents to 17 cents a share on revenue of $180 million to $200 million, and lowered full-year guidance to earnings of $2 a share on revenue of $1.17 billion. Analysts surveyed by Thomson First Call were forecasting earnings of 15 cents a share on revenue of $191.7 million for the third quarter and earnings of $2.44 a share on revenue of $1.20 billion for the full year.

Take-Two said in March that Brant and another unidentified employee were among those who were notified by the SEC that the agency was considering civil charges, following a two-year-old review of the company's accounting.

Take-Two's disappointment comes in contrast to two other video-game makers -- THQ ( THQI) and Activision ( ATVI) -- that reported stronger-than-expected results in the just-completed quarter.

Despite the selloff Wednesday, Banc of America Securities analyst Gary Cooper noted that most investors hold Take-Two for one reason -- the next installment of Grand Theft Auto, called San Andreas.

" San Andreas is widely anticipated to be the largest game of the year, with the potential to sell over 10 million units worldwide," Cooper wrote in a note. As a result, he expects weakness Wednesday will be temporary, followed by a rebound as the E3 video-game conference in May approaches and then the debut of San Andreas.

Cooper recently raised his rating to a buy from neutral after Brant stepped down. Banc of America hasn't done any banking with Take-Two.

Wedbush Morgan Securities analyst Michael Pachter also stood by his buy rating, citing the company's valuation, a healthy balance sheet and the upcoming Grand Theft Auto release. He noted that Take-Two's problems with game releases, increased marketing costs and earnings warnings began after the departure of Eibeler, whose return Pachter expects to help restore the company's credibility with investors. Wedbush hasn't done any banking with Take-Two.

But in a note last week -- before Take-Two's shake-up -- First Albany analyst Paul Tryon took a more tempered view of the company. Tryon, who has a neutral rating on Take-Two, called expectations for GTA: San Andreas "sky high." (His firm hasn't done banking with the company.)

Speculation about Lapin leaving the company was already swirling before Wednesday's announcement, sparked after Take-Two updated Lapin's employment agreement late last year with a provision that entitled him to his salary, bonus and health benefits for 18 months if he leaves for any reason after March 30. Take-Two will incur severance charges during the quarter due to Lapin's resignation.

Lapin came to Take-Two in January 2003 from competitor THQ, where he was vice chairman and chief operating officer.

Lapin and a Take-Two spokesman were not immediately reachable for comment.

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