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Updated from June 8

Grand Theft Auto


Take-Two Interactive

(TTWO) - Get Take-Two Interactive Software Inc. Report

got mugged in Friday's market after reporting a quarter that gushed red ink.

Before the session, Wall Street analysts reacted to companies' earnings report Thursday night with a couple of downgrades. Even those analysts that remain bullish on Take-Two's shares lowered their price targets for the company's stock.

"We think investors should be selling shares of Take-Two this morning," said Citigroup analyst Elizabeth Osur in a note issued Friday morning in which she downgraded the company's stock to a sell from a buy. "A

second-quarter disappointment, product delays and product cancellations translate to our view that TTWO deserves a lower multiple," added Osur, whose firm has not done recent investment banking business for Take-Two.

Investors appeared to follow the advice or Osur and her fellow sell-siders. In recent trading, Take-Two shares were off $2.48, or 14.8%, to $14.29. Earlier in the session they were off as much as 16%.

Take-Two disappointed investors and analysts by not only posting a much wider than expected loss -- excluding a one-time charge, the company lost about 36 cents a share more than analysts had predicted -- but also by declining for the second quarter in a row to give a specific financial forecast for coming quarters.

On a conference call Thursday night, company executives explained that they were having a difficult time determining a forecast due to a tough market environment. Amid the introduction of new video game hardware, software publishers have been seeing soft sales of games for older consoles in recent quarters at the same time that they've seen rising development costs.

"We do share your frustration" that the company isn't providing an outlook for coming quarters, Take-Two CEO Paul Eibeler told American Technology Research analyst P.J. McNealy on a conference call Thursday following the earnings announcement. "But there's a lot of uncertainty in the marketplace right now."

In the quarter ended April 30, the video-game-software publisher lost $50.4 million, or 71 cents a share. In contrast, the company lost just $8.2 million, or 12 cents a share, in the year-earlier quarter.

The loss grew in spite of the fact that sales jumped 19% year over year to $265.1 million.

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The company's red ink included a $26.3 million pretax charge -- equivalent to about 24 cents a share after taxes -- for restructuring. The charge was for expenses related to the closure of two of Take-Two's development studios and the company's decision to cease development on some six unnamed titles.

The company plans to record an additional $6 million in restructuring charges in its third quarter related to the closure of a third studio and the relocation of its international publishing headquarters to Geneva from the United Kingdom. The restructuring should result in annual savings of about $28 million, Eibeler said on the call.

Even without the second-quarter charges, Take-Two still would have lost about 47 cents a share, which was far more than Wall Street was expecting. Analysts polled by Thomson First Call had predicted the company would lose 11 cents a share in the quarter on sales of $258.8 million.

As with the current quarter, the company had not given any guidance for the just-completed period's results.

Prior to the call, analysts had forecast that the company would lose 11 cents a share on $244.4 million in sales in its current, third, quarter. In the same period last year, Take-Two lost $28.8 million, or 41 cents a share, on sales of $169.9 million. That quarter's results were severely affected by the "hot coffee" scandal that forced Take-Two to pull its flagship

Grand Theft Auto: San Andreas

game from store shelves.

Although he didn't give any specific guidance, CFO Karl Winters said Take-Two expects to "return to profitability" in the fourth quarter this year and expects to post a full-year profit next year.

Analysts had predicted that the company would earn 58 cents a share in the fourth quarter on $430.2 million in sales and 78 cents a share next year on sales of $1.4 billion.

Take-Two's swelling loss was caused in part by a switch in mix in this year's results. Last year's sales were driven by internally developed titles, which tend to carry higher gross-profit margins. In contrast, sales in the second quarter this year had much lower margins since they were driven largely by

The Elder Scrolls IV: Oblivion

, which Bethesda Software developed and co-published with Take-Two, and

Major League Baseball 2K6

, which carries a high royalty fee, Winters said.

Indeed, due to the write-off and sales of lower-margin products, Take-Two's gross-profit margin shrank to $17.8 million, or 6.7% of sales, in the quarter from $71.8 million, or 32.4% of sales, in the year-ago period.