Updated from 10 a.m. EST
A five-year financial restatement and drastically reduced guidance couldn't keep
The video-game maker warned that the bookkeeping change -- combined with a handful of other problems affecting domestic and international operations -- would leave earnings for the current quarter and year well below analyst estimates. Even so, the stock shook off a weak open to surge 4% higher in midday trading, as many Wall Street analysts applauded what they saw as an increase in clarity.
"We view the restatements as necessary 'medicine' in order for the company to cure its SEC ills," Wedbush Morgan Securities analyst Michael Pachter wrote in a morning call note. "We think that satisfactory closure of the SEC matter is imminent, and believe the stock will offer a compelling entry point for investors this morning." Pachter has a buy rating, and the company is on his focus list; his firm hasn't done banking with Take-Two.
The accounting revisions come amid a
Securities and Exchange Commission
probe into Take-Two's revenue recognition policies that has turned the stock into one of the most bitterly contested long-short battlegrounds in the U.S. While the changes were detailed in a filing seeking an extra 15 days to file a year-end financial report with the SEC, some traders evidently saw the news as benign as it didn't require a more sweeping redesign.
Piper Jaffray analyst Anthony Gikas, another bull with an outperform rating, noted potential broader industry consequences of Take-Two's restatement, which involves the company's use of reserve accounts. "We view this as a positive catalyst for the group as it reduces the uncertainty of use of reserve accounts," Gikas wrote. "Historically, accounting for reserves have been perceived as a black hole with few details provided by publishers."
Take-Two is changing its revenue-recognition policies to move up the time at which it records reserves for discounts. The accounting change will affect the four fiscal years up to Oct. 31, 2002, and individual quarters of fiscal 2003, including the fourth quarter reported Dec. 18.
Per-share earnings in the year to October 2003 are expected to be lowered by 4 cents, while per-share earnings in the year to October 2002 should be raised by up to 3 cents a share. The company didn't detail the other revisions in the SEC filing announcing the changes.
The company also slashed guidance for coming periods. Take-Two expects to earn 70 cents a share in the first quarter on sales of $385 million. The company and Wall Street analysts had been calling for earnings of $1.10 a share on sales of $412 million, according to Thomson One Analytics.
Besides the accounting issues, Take-Two said the new guidance reflected the shift into the second quarter from the first of the majority of European shipments for a video game called
for Xbox; unanticipated weakness in its North American publishing business around Christmas and into January; continued disappointing sales of
Max Payne 2
; bad debt expense related to the bankruptcy of KB Toys; and expenses related to the cancellation of two products in development.
For the second quarter, Take-Two expects to earn 39 cents a share on sales of $220 million, compared to a previous forecast of 41 cents a share on sales of $218 million. For the year it expects to earn $2.45 a share on sales of $1.22 billion, compared to a previous forecast of $2.60 on $1.18 billion.
"We are disappointed that our fiscal 2004 results will not meet our prior expectations," the company said Monday. "However, we remain confident in the long-term performance of our business and, in particular, the release of the next installment of the
Grand Theft Auto
franchise in our fourth quarter."
After dipping as much as $2.10 early Monday, the shares rose steadily throughout the session and at midday were up $1.08 at $30.08. The news comes on the heels of a Friday evening SEC filing that seemed to indicate a five-year revenue restatement would be less painful than previously believed.
American Technology Research analyst P.J. McNealy offered perhaps the best explanation of the controversy with reserve accounting. In the past, Take-Two recognized revenue when a game was shipped to a retailer, with the full retail price of the game recognized and no reserve to account for a future price reduction. When a game price was later reduced, a company such as Take-Two would then rebate the retailer the amount of the discount, which meant taking the reserve in a later quarter.
Under its new program, Take-Two will take reserves for estimated price concessions at the time of sale, resulting in the shift of revenue and earnings changes. (McNealy has a buy rating on Take-Two and his firm has no banking relationship with the company.)
But Dougherty & Co. analyst Paul Kaump was less optimistic about the SEC investigation coming to a close soon and more critical of Take-Two's latest move. "We are somewhat mystified as to how the company, after performing an extensive audit and forensic accounting exercise, can once again restate its historic numbers -- in some cases for the third time," wrote Kaump, who reiterated his neutral rating and said he believes the stock's discount to peers is warranted. (His firm hasn't done banking with Take-Two.)
"We do not view this announcement as a sign that the SEC investigation is necessarily reaching a conclusion," he wrote.