Updated from 4:46 p.m. EDTScalded by "hot coffee," Take-Two Interactive ( TTWO) poured some cold water on investors on Tuesday: missing analysts' earnings estimates, lowering its full-year guidance and offering a disappointing outlook for 2006. While the fiasco involving explicit sex scenes in its latest Grand Theft Auto game tarnished the just-completed quarter, increased costs and delayed products are expected to weigh on coming periods. Despite the bad news, Take-Two officials touted the company and its future on a conference call. "We are confident about our position in the industry and in the marketplace," said company CEO Paul Eibeler on the call. "We believe Take-Two's prospects have never been better." Investors seemed to have a different opinion though. In after-hours trading following Take-Two's earnings release, the company's stock was trading off $1.52, or 6.3%, to $22.64. And in terms of Take-Two's financial results, things certainly have been better. In its fiscal third quarter ended July 31, the video-game software company lost $28.8 million, or 41 cents a share. In the same period a year earlier, in contrast, the company lost $14.4 million, or 21 cents a share. Sales rose 5.6% to $169.9 million. Analysts polled by Thomson First Call were expecting Take-Two to lose 38 cents a share in the quarter on sales of $175.6 million. Warning that it would not meet previous financial expectations for the quarter, the company in July
Given the company's year-to-date results, that guidance implies that the company expects to earn 59 cents to 64 cents a share in its fourth quarter on sales ranging from roughly $326 million to $376 million. Analysts had projected that the company would earn 84 cents a share in the current quarter on sales of $408.79 million. Take-Two attributed the slashed outlook to the postponement of two upcoming releases: Grand Theft Auto: San Andreas in Japan and Bully, a new title. The company no longer expects to release either title this year. The company postponed the Japanese version of San Andreas because of "cultural issues" related to how best distribute the game there, company CFO Karl Winters said on the call. Meanwhile, the company delayed Bully to give the company's Rockstar studio, the development house behind the Grand Theft Auto series, more time to develop a top-flight title, Eibeler said. "It was absolutely the right decision to make sure
Bully meets the standards we've come to expect from our Rockstar titles," he said. And Take-Two further disappointed analysts with its outlook for the first quarter and all of next fiscal year. Take-Two expects to earn 10 to 15 cents a share -- 14 to 20 cents a share excluding the cost of stock options -- on sales ranging from $350 million to $400 million in the first quarter. For the full year, the company expects to post a profit ranging from $1.05 a share to $1.30 a share -- $1.25 to $1.55 a share before options costs -- on sales of $1.4 billion to $1.5 billion. The midpoint of the company's ranges then, excluding options costs, are about 17 cents a share in earnings on some $375 million in sales in the first quarter and $1.40 a share in profits on $1.45 billion in sales for the full year.
In contrast, analysts were predicting that the company would earn 44 cents a share in the first quarter on $437.9 million in sales. For the full year next year, Wall Street had predicted a profit of $1.45 a share on $1.4 billion in sales. Thanks to the upcoming launch of two new game consoles, the coming fiscal year is difficult to predict, Winters said. The supply of consoles into the market, consumer adoption of those new platforms and broader pricing of current and next generation titles could all weigh on Take-Two's results, he said. "The market dynamics create uncertainty across many fronts," Winters said. The bad news on earnings and outlook followed Take-Two's move in July to pull its top-selling title, Grand Theft Auto: San Andreas from store shelves. The move, which prompted the company to take a $33 million reserve in the third quarter against potential returns, followed the decision by a ratings board to slap an "Adults Only" rating on San Andreas. The ratings board's decision followed revelations that the game included hidden explicit sexual content that could be unlocked with a program downloaded from the Internet. Take-Two had originally denied that the sexually explicit "hot coffee" scenes were included in the software, implying that they were added by a hacker. The Federal Trade Commission has launched an inquiry into the matter. Despite the mess, Eibeler praised the company's response to it. "While this was a challenging situation, never seen before in our industry, we addressed it with professionalism and integrity," he said. Eibeler declined to comment on the FTC inquiry.