Take-Two Interactive Tests Loyalties

Even long-term bulls have started to question the company's prospects.
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Shares of

Take-Two Interactive

(TTWO) - Get Report

plunged Friday after the company gave a disappointing outlook for coming quarters and said that it had received another grand jury subpoena.

Take-Two's report -- just the latest in a litany of bad news in recent months -- made even long-term bulls question the company's management and prospects. Perhaps more importantly for the company's stock price on Friday, analysts responded by slashing their earnings estimates and cutting their price targets for the stock.

Janco Partners analyst Mike Hickey, for instance, who has long recommended Take-Two shares, titled his report on the company on Friday "Pain, Disgust and Agony," and took aim at the company's lack of specific guidance for coming quarters and its "spiraling chaos of continued bad news."

"We have dramatically lowered our earnings expectations based on management's indication the Street was too high and our 'expect the very worst' conditioned response to operational performance. We believe management's continued inability to provide guidance is either from inadequate internal financial controls and/or guidance too undesirable to report, neither of which leaves of with much confidence," Hickey wrote.

Still, while Hickey brought down his price target from $22 to $18 -- he had a target of $24 as recently as April -- he reiterated his buy rating on Take-Two shares, citing the company's "potential earnings power and relative valuation."

Those factors weren't enough to convince Wedbush Morgan's Michael Pachter, who, while reiterating his hold rating, dropped his price target on Take-Two shares. Formerly he had a target price of $12.

"We remain cautious on Take-Two shares," Pachter said in his own note on Friday. "As Take-Two has generated operating losses of an estimated $190 million over the last six quarters (representing net losses of approximately $1.39 per share), it is not clear that the company can return to sustainable profitability until it releases the next installment in the

Grand Theft Auto

console game series. Accordingly, we advise investors to stay on the sidelines until the government investigations are closer to resolution."

Investors seemed to be taking that advice. In recent trading, Take-Two shares were off 84 cents, or 6.9%, to $11.36. Earlier in the session, they traded as low as $10.88.

After the bell on Thursday, Take-Two warned that its bottom line for its fiscal third and fourth quarters will likely fall short of analysts' targets. Because of its ongoing probe into its past stock-options grants, Take-Two gave scant details on its performance in its third quarter, which ended July 31.

Not only did the company forecast disappointing earnings, but it also slightly missed analysts' revenue targets for the third quarter and is again delaying a title from its Rockstar studio, which will affect fourth-quarter sales.

What's more, the company warned that it has been hit with grand jury subpoenas related to its past options practices, and that it doesn't expect to file its quarterly report in time to meet regulatory requirements.

"While the Company is addressing various regulatory matters, we continue to focus on creating content to well position ourselves for the improved industry conditions we anticipate in 2007," Take-Two CEO Paul Eibeler said in a statement.

In the third quarter, Take-Two posted about $240 million in sales, up 41% from the same period last year. But

sales last year were held down in part by the company's

recall of its flagship title

Grand Theft Auto: San Andreas

, after the discovery of explicit sex scenes within the game that could be accessed with a downloadable program.

The company did not give any precise numbers on its expenses or its bottom line, saying only that " independent of any potential financial impact that may result from the company's internal investigation of option grants, the current analyst consensus EPS estimates for its third quarter, and revenue and EPS estimates for its fourth quarter, are too high."

On average, analysts polled by Thomson First Call were expecting the company to lose 21 cents a share in the just-completed quarter on $241.6 million in sales. In the company's

previous quarterly report in June, Take-Two officials declined to provide an outlook for this quarter, citing a tough market environment.

Other than its warning about fourth-quarter sales and earnings, Take-Two did not give any specific guidance. The Street had predicted that the company would earn 38 cents a share on sales of $394.1 million in the quarter.

Take-Two did not specify what title it was postponing, only that it was a Rockstar title for

Sony's

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PlayStation Portable "based on a premier brand."

Take-Two did say that it still plans to release the

Grand Theft Auto: Vice City Stories

for the PSP in late October, toward the end of its fiscal year.

On the regulatory front, Take-Two said that the district attorney for the County of New York has subpoenaed the company for documents related to its options grants from November 2001 to the present, as well as other internal and regulatory documents.

Late in June, the district attorney's office had

subpoenaed Take-Two for documents related to the explicit

Grand Theft Auto

sex scenes.

Additionally, the company is the target of a probe by the

Securities and Exchange Commission

over various matters, including its options grants.

Take-Two has been in and out of trouble with regulatory authorities for years. Two weeks prior to the district attorney's June subpoena, the company

settled a complaint by the Federal Trade Commission over the

Grand Theft Auto

sex scene.

Last year, the company

settled a prior complaint by the SEC that charged the company with boosting its reported sales by flooding its distribution network with products that were later returned.