Download TTWO -NASDAQ

June 14, 2007
Zacks Research Digest
Research Associate: Priti Dhanuka,M.Fin.,M.Com.
Editor: Jyoti Lakhotia, M.Fin.
Sr. Ed.: Ian Madsen, CFA; [email protected]; 1-800-767-3771 x 9417
111 N. Canal Street, Suite 1101  Chicago, IL 60606
www.zackspro.com
Take-Two Interactive Software Inc.
(TTWO -NASDAQ)
$20.98
Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q07 Results.
(Prev.: News Update, May 30)
Recent News-Summary
June 11: TTWO announced financial results for 2Q07.
May 22: TTWO announced Carnival Games will be launched this summer exclusively for Nintendo's
Wii.
April 10: TTWO announced The NASDAQ Stock Market has notified the company that it has regained
compliance with NASDAQ's listing requirements.
March 06: TTWO announced Grand Theft Auto: Vice City Stories for the PlayStation 2 is available in
North American retail stores.
February 28: TTWO announced the completion of its restatement of financial statements.
Overview
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Key Positive Arguments
The company has diversified its title portfolio
away from mega-franchise Grand Theft Auto,
with internal development of Max Payne and the
acquisition of popular Duke Nukem and
Civilization.
Third-party exclusive agreements with Major
League Baseball (MLB) and the National
Basketball Association (NBA), are high-cost
agreements, but may provide a recurring
revenue stream.
TTWO principally aims at developing highly
successful cutting edge proprietary intellectual
properties, establishing well-known product
brands with significant potential for sequels, and
focusing on delivering games that are attractive
to a broad customer base.
Restructuring activities will help in substantial
cost savings on an ongoing basis.
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Key Negative Arguments
The sale of video games is highly seasonal, and
is based on mega-hit titles.
Delay in the launch of new products may lead to
lower software sales.
Piracy is an issue in international markets.
The company is sensitive to changes in
consumer sentiment, GDP and disposable
income.
Major console transition cycle is about to begin,
which may increase the risk in the gamer sector.
Increased concern about management diligence
and visibility, is an area of concern for investors.
The criminal investigation will certainly draw
management focus away from game
development, and hence, analysts believe it will
increase execution risk.
© Copyright 2007, Zacks Investment Research. All Rights Reserved.
Headquartered in New York City, NY, Take-Two Interactive Software Inc. (TTWO) is an integrated
global developer, marketer, distributor, and publisher of interactive entertainment software games and
accessories for the PC console (mainly Sony PlayStation family of entertainment systems, Microsoft
Xbox video game and entertainment systems and Nintendo GameCube, and Game Boy Advance).
TTWO is best known for its record breaking Grand Theft Auto (GTA) franchise. Other popular
franchises include Max Payne, Duke Nukem, Mafia, Railroad Tycoon, and Midnight Club titles.
Through its JoyTech subsidiary, TTWO also manufactures and markets video game accessories in
Europe, North America and the Asia Pacific. For more information on the company, please visit its
website at www.take2games.com
Note: TTWO’s Fiscal Year ends on October 31.
Recent News-Details
On June 11, 2007, TTWO announced financial results for 2Q07. In 2Q07, revenue was $205.4 million,
and reported loss per share was $0.71. The results continued to be adversely impacted by the video
game industry's transition from current generation to next-generation platforms.
On May 22, 2007, TTWO announced Carnival Games will be launched this summer exclusively for
Nintendo's Wii. The title is being developed by Cat Daddy Games, the Take-Two studio that created the
popular "Deal or No Deal" PC game.
On April 10, 2007, TTWO announced The NASDAQ Stock Market has notified the company that it has
regained compliance with NASDAQ's listing requirements. As a result, Take-Two's common stock will
continue to be listed on The NASDAQ Global Select Market.
On March 06, 2007, TTWO announced Grand Theft Auto: Vice City Stories for the PlayStation 2 is
available in North American retail stores. Developed by Rockstar Leeds in conjunction with series
creator Rockstar North, Grand Theft Auto: Vice City Stories is available for the suggested retail price of
$19.99, and is rated "M" for Mature.
On February 28, 2007, TTWO announced the completion of its restatement of financial statements to
reflect the recognition of stock-based compensation expense and tax effects resulting from the
previously announced investigation of past stock-based compensation awards. Take-Two's restated
financial statements are included in the company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2006, filed with the Securities and Exchange Commission.
Revenue
In 2Q07, the company reported net revenue of $205.4 million (in line with the Zacks Digest average),
versus $265.1 million in 2Q06. The company’s results surpassed the consensus estimate of $204.0
million.
According to management, the decrease in net revenue primarily reflected the significant sales
contributed by The Elder Scrolls IV: Oblivion in the year-ago period, partially offset in the reported
quarter by strong sales of Grand Theft Auto titles and Major League Baseball 2K7 in comparison to the
same franchises in the prior period. Both Grand Theft Auto: Vice City Stories and Major League
Baseball 2K7 sold over 1 million units each during the current quarter, according to analysts.
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Revenue - FY Oct 31
Publishing Revenue
2Q07A
q/q % chge
y/y % chge
2006A
2007E
2008E
Distributing Revenue
$154.1
-4.5%
-22.5%
$740.5
$935.4
$1,083.6
$51.4
-55.7%
-22.4%
$287.2
$292.3
$287.0
TOTAL REVENUE
$205.4
-25.9%
-22.5%
$1,037.8
$1,228.7
$1,402.5
Revenue by Segment
Publishing Revenue: In 2Q07, as compiled by the Zacks Digest, the segment (comprised of 75.0% of
the total revenue) contributed $154.1 million of revenue, down 4.5% sequentially and 22.5% y/y.
Distribution Revenue: In 2Q07, as compiled by the Zacks Digest, the segment (comprised of 25.0% of
the total revenue) contributed $51.4 million of revenue, down 55.7% sequentially and 22.4% y/y.
Outlook
Although GTA IV will be a major success, according to one analyst (AG Edwards), there are risks to the
upcoming release. These include tough comparisons versus previous title due to a lower addressable
installed base, a competitive holiday season, and potential for delay into FY08. Take-Two’s sales in the
past have also been heavily reliant on the Grand Theft Auto franchise. Additionally, Take-Two’s dollar
market share might fluctuate significantly from year to year depending on whether a new Grand Theft
Auto is released. If the upcoming Grand Theft Auto IV is delayed or fails to meet sufficient market
acceptance, revenue and overall profitability are likely to suffer in the forthcoming future.
With the ownership of the Grand Theft Auto franchise and significant investments in its 2K label in order
to expand revenue during the next platform cycle, analysts believe the company is in a good position to
post strong growth through the next platform cycle.
According to one analyst (BMO Capital), the 2K Sports category can show significant improvement and
leverage in FY07, as it believes the installed base of next-generation hardware will quickly ramp.
Please refer to the Zacks Research Digest spreadsheet on TTWO for detailed sales breakdowns and future estimates.
Margins
In 2Q07, the gross margin as compiled by the Zacks Digest, was 23.3%, down 300 basis points
sequentially, but up 1490 basis points y/y. According to one analyst (J.P. Morgan), the y/y increase was
driven by above average costs for Elder Scrolls and $18.0 million of impairment charges related to
studio closures in 2Q06. Gross margin also benefited from higher y/y sales of TTWO’s sports games
with comparable development and fixed costs.
According to management, as compared with the year-ago period, the 2007 second quarter results
reflected an improved gross margin due to lower external royalty costs, stronger margins on sports
products and reduced product impairment charges.
The operating margin as compiled by the Zacks Digest, was (20.4%), down 1330 basis points
sequentially, but up 720 basis points y/y. According to management, the reported quarter's operating
results were benefited from a decrease in selling and marketing expense, along with a realization of
cost benefits from the prior year development studio closings and the absence of costs related to these
closings. This was offset by business reorganization and related expenses, and increased general and
administrative expenses related to professional fees associated with the investigation of stock option
grants and responses to the New York County District Attorney's subpoenas, expenses related to other
legal matters, and the relocation of the company's international headquarters.
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Outlook
The company’s fundamentals remain unchanged. Despite the release of GTA IV in October and strong
profits expected from major rivals, Take-Two has guided for only breakeven results for FY07. The new
management indicated the focus of the new Board is to improve margins. A potential way to accomplish
this would be to sell the company’s distribution arm - Jack Of All Games (JOAG).
Contrary to the company’s view of non-profitable Sports division, one analyst (B. of America) believes
2KSports’s profitability could be improved by focusing on core titles, and reducing developer headcount
and licensing costs. Sales of Take-Two’s distribution business have declined in each of the past three
years, and represented 27.0% of fiscal 2006 revenue versus 29.0% and 31.0% in fiscal years 2005 and
2004, respectively. It believes the best opportunity for Take- Two to improve its profitability lies with a
refocusing on its publishing program. Specifically, Take-Two could reduce its fiscal year 2007 operating
costs by cutting its non-Rockstar development staff headcount, which currently totals ~800 developers.
While potentially difficult in the short-run, the analyst views these cuts are necessary due to the
underlying lack of profitability of many 2K Sports and 2KGames titles.
Jack Of All Games division (JOAG) software sales have especially suffered during the current console
transition due to declining current generation software sales. Take-Two’s management noted the
revenue decline in its distribution business was reflective of both declining unit sales, as well as pricing
due to underperforming PS2 software. Further, while analysts believe the industry sales of next
generation hardware and software will increase significantly during 2007 on a y/y basis, it remains
uncertain whether JOAG will see the benefit of these higher price point sales due to continued
weakness in value and legacy software during the year. As a result, JOAG’s profitability will likely to
continue to suffer and remain a drag on margins in the near term.
MARGINS - FY Oct 31
Gross
Operating
Pretax
Net
2Q07A
23.3%
-20.4%
-13.7%
-14.5%
q/q chge
y/y chge
-3.0%
-13.3%
-9.4%
-9.2%
14.9%
7.2%
6.7%
-1.9%
2006A
20.9%
-17.6%
-12.4%
-9.6%
2007E
31.3%
0.2%
2.2%
1.1%
2008E
32.9%
4.2%
3.1%
3.4%
Please refer to the Zacks Research Digest spreadsheet on TTWO for more details on margin estimates.
Earnings per Share
In 2Q07, the company reported non-GAAP net loss of $29.7 million or $0.41 per share (in line with the
Zacks Digest average) versus $37.0 million or $0.52 per share in the second quarter of 2006. The EPS
results were above the consensus estimate of ($0.58) because of improved gross margins y/y due to
lower external royalty costs and stronger margins on sports game sales.
The company reported net loss of $51.2 million or $0.71 per share versus GAAP net loss of $50.4
million or ($0.71) per share in 2Q06. The GAAP net loss includes pre-tax expenses of $21.6 million for
business reorganization and related costs due to the company's recent management and board
changes, legal expenses and other professional fees associated with the investigation of stock option
grants, responses to the New York County District Attorney's subpoenas, and other legal matters, as
well as stock-based compensation expenses.
Outlook
Analysts believe the retail environment for current generation will remain difficult as PS2 software
begins to experience more meaningful declines. However, they expect the installed base of nextgeneration hardware to quickly ramp up to critical mass in 2007, providing the springboard for TakeZacks Investment Research
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Two to offset the challenging 2006 year. They believe the company has a solid release schedule for the
year, with a good blend of wholly owned IP, licensed games, and sports. In addition, Take-Two has a
robust internal development capability that over the course of the next-generation cycle, can improve
margins and subsequently, the bottom-line. They also expect alternative revenue streams, including
micro-transactions and in-game advertising, to become meaningful contributors to earnings. This is a
potentially significant catalyst as it is highly profitable, and can extend the life of Take-Two’s products.
Given all these, they expect the second half of FY07 to be challenging for the company.
One analyst (Pacific Crest) seemed disappointed with the outlook for FY07, since , despite Take-Two’s
expectation of a profitable sport business ahead, management guided to only break-even profitability,
with heavy losses in first three quarters.
Another analyst (Janco) believes management’s 100 day turnaround plan will position them for
significant EPS acceleration and an eventual sale in next 12 months.
Pro Forma EPS - FY Oct 31
Zacks Consensus
Company Guidance
Digest High
Digest Low
Digest Average.
2Q07A
($0.41)
($0.41)
($0.41)
3Q07E
($0.57)
($0.52)
($0.58)
($0.56)
4Q07E
$1.44
2006A
2007E
$0.15
2008E
$0.69
$1.44
$1.20
$1.34
($0.87)
($2.60)
($1.87)
$0.30
$0.10
$0.19
$1.14
$0.49
$0.78
*Zacks Consensus is GAAP- all other estimates are proforma.
Zacks consensus EPS is $0.15 for 2007, and $0.69 for 2008.
2007 EPS forecast (5 brokers) ranges from a low of $0.10 to a high of $0.30, with an average of $0.19.
2008 EPS forecast (4 brokers) ranges from a low of $0.49 to a high of $1.14, with an average of $0.78.
Please refer to the Zacks Research Digest spreadsheet on TTWO for more extensive EPS figures.
Guidance
For 3Q07: Take-Two is providing initial guidance of net revenue in the range of $195.0 million to
$215.0 million, with a GAAP net loss per share in the range of $0.60 to $0.65, including stock-based
compensation expense of $0.06 per share, but excluding any charges related to the company's
reorganization expenses and restructuring initiatives. Additionally, third quarter estimates reflect no tax
benefit.
For 4Q07: Take-Two is providing initial guidance of net revenue in the range of $520.0 million to
$550.0 million, with diluted net earnings per share in the range of $1.35 to $1.40, including stock-based
compensation expense of $0.06 per share, but excluding any charges related to the company's
reorganization expenses and restructuring initiatives. The company's reorganization expenses include
additional stock-based compensation expense of $0.03 per share. Additionally, fourth quarter estimates
only reflect tax expense for the company's international operations.
For FY07: Take-Two is reiterating its guidance for fiscal 2007 of revenue in the range of $1.20 billion to
$1.25 billion and break even results on a GAAP basis, including stock-based compensation expense of
$0.22 per share, but excluding any charges related to the company's reorganization expenses and
restructuring initiatives. The company's reorganization expenses include additional stock-based
compensation expense of $0.03 per share. Additionally, fiscal 2007 estimates only reflect tax expense
for the company's international operations.
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Target Price/Valuation
Of 15 brokerage firms covering TTWO, 3 gave positive ratings, 9 gave neutral ratings and 3 gave
negative ratings.
The Zacks Digest target price for TTWO ranges from $12.00 (Sterne, Agee & Leach and Wedbush) to
$28.00 (Janco), with an average target price of $18.40 ( by $0.62 from the previous Zacks Digest
target price). Most brokerage firms used P/E multiple methodology to arrive at the target price.
Most analysts believe the current valuation is compelling enough for patient investors, but concerns
with regard to operational issues, coupled with a continuous weak performance, prompt them to take a
back seat in the near term.
Rating Distribution
Positive
Neutral
Negative
Avg. Target Price
Analysts with Targets/Total
20.0%
60.0%
20.0%
$18.40
10/15
Please refer to the Zacks Research Digest spreadsheet on TTWO for further details on valuation.
Capital Structure/Solvency/Cash Flow/Governance/Other
Balance Sheet
At the end of the reported quarter, the company’s balance sheet was in good shape. Take-Two has
cash and cash equivalents of $109.0 million or $1.51 per share, and no debt. DSOs were 31 days, less
than the prior year quarter’s 44 days, and were within a reasonable range. Reserve at the end of 2Q07
as a percentage of gross A/R, increased from 40.2% to 42.9%. According to analysts, current reserve
levels are adequate to fully protect the company from the risk of future product returns or price
protection. Inventory at the end of the reported quarter, was $80.0 million versus $92.0 million in 2Q06,
down 13.0% y/y, primarily due to TTWO’s continued focus on managing Jack’s inventory levels.
Accounts receivables were $70.0 million at the end of April quarter.
Change in Corporate Governance
As expected by the Street, a group of investors owning 46.0% of TTWO’s shares outstanding,
successfully ousted the company’s Board of Directors on March 29, 2007. The slate of directors
consists of Strauss Zelnick, Ben Feder, Jon J. Moses, Michael Dornemann, Michael James Sheresky
and John Levy, who is an incumbent independent director of TTWO. Grover C Brown, an independent
director, was also elected as a director by the new Board. Strauss Zelnick is the new Chairman of
TTWO. Additionally, Bed Feder, a partner of ZelnickMedia since 2001, has been named as the new
acting CEO. The Board stated it is working with Paul Eibeler, former CEO and President of TTWO, to
ensure a smooth transition.
On June 11, 2007, after a comprehensive business review, Take-Two's new management team
announced the first of a series of initiatives to revitalize the company. These initiatives are designed to
enhance the efficiency of the organizational structure, support a highly creative and financially
disciplined product development process, increase operating margins and improve the company's
productivity and cost-effectiveness, according to analysts. Management commented the company’s
evaluation process is continuing, and expects to report on progress in additional areas in the future.
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Take-Two's restructuring plan to date consists primarily of the following key elements:

Restructure Take-Two's international operations to consolidate and align the marketing, sales
and operational functions according to business discipline rather than geography, to create a
more efficient and responsive international organization.

Realign label and studio administrative functions to report to the respective departments at the
corporate level, thereby ensuring increased control and accountability.

Consolidate the management, marketing and business development operations of the 2K and
2K Sports labels on the West Coast to improve access to resources, work more closely with the
sports development teams, and provide a centralized organization to increase efficiency and
better support the growth of these labels.

Consolidate third-party PC distribution into North American sales.
Take-Two expects to reduce fixed overhead from these actions by approximately $25.0 million, which
should be realized by the end of fiscal 2008 on an annualized run-rate basis. The company anticipates
approximately $15.0 million of charges related to the restructuring, excluding any asset impairments,
through fiscal 2008, with approximately half of the charges expected in fiscal 2007.
Amended incentive stock plan and new auditor approved
A proposal to amend TTWO's incentive stock plan to increase the number of shares of common stock
reserved for issuance under the plan by 2 million shares, was approved. Additionally, a proposal to
ratify the appointment of Ernst & Young LLP as the company's auditor for FY07, was also approved. A
shareholder proposal requesting that the Board of Directors's Compensation Committee should include
social responsibility, as well as corporate governance and financial criteria in setting executive
compensation, was, however, defeated.
New Appointments
On June 11, 2007, Take-Two also announced Lainie Goldstein, interim Chief Financial Officer, has
been named for the CFO position.
On April 18, 2007, TTWO announced the appointment of Robert A. Bowman to the company's Board
of Directors. The company also appointed current director J Moses to serve on Take-Two's Audit
Committee.
The news followed the resignation of TTWO’s Chief Financial Officer, Karl Winters, on April 09, 2007.
Potentially Severe Problems
None other than those discussed in other sections of this report.
Long-Term Growth
The average long-term growth rate for TTWO is 16.1%.
TTWO has pursued a growth strategy of capitalizing on the widespread market acceptance of video
game consoles, as well as the growing popularity of innovative action games that appeal to mature
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audiences. TTWO has established a portfolio of successful proprietary software content for the major
hardware platforms. The company expects to continue to be the leader in the mature, action product
category by leveraging its existing franchises, and developing new brands.
TTWO has diversified its product offerings by capitalizing on significant growth opportunities in the
market for sports, and other licensed action and strategy titles. 2K Games has made strategic
acquisitions of leading sports development studios, and entered into license agreements with major
sports leagues to develop sports titles. According to analysts, however, diversification strategies like
sports, have not yet proven profitable. TTWO has also entered into license agreements for several
popular entertainment properties, acquired well-known intellectual property rights, and entered into
distribution and publishing arrangements for major action and strategy PC titles.
One firm (BMO Capital) believes the long-term outlook remains bright, despite lingering near-term
challenges.
Upcoming Events
Products Pipeline
In the second half of fiscal 2007, 2K and 2K Sports are expected to release a variety of titles across
multiple platforms, including BioShock for Xbox 360 and Games for Windows; The BIGS, an arcade
style Major League Baseball title on multiple current and next-generation platforms including Wii;
College Hoops 2K7 for PLAYSTATION 3; The Darkness; Fantastic 4: Rise of the Silver Surfer including
Wii; The Elder Scrolls IV; All Pro Football 2K8 for next-generation consoles; as well as NHL 2K8 and
NBA 2K8 across multiple current and next-generation platforms.
Global Star Software is expected to publish a PC extension of its popular Deal or No Deal game, and
will continue its focus on video games, incorporating popular licensed and children's entertainment
properties, with several titles planned for Wii later in 2007.
In 2008, Rockstar will introduce exclusive episodic content downloads for Grand Theft Auto IV.
Rockstar will also release new titles based on its proprietary brands, including L.A. Noire developed by
Team Bondi. In addition to the licensed 2K Sports lineup, starting in 2008, 2K will also have new
content based on its Civilization franchise and other products, including both original intellectual
property and third-party titles. The upcoming 2K titles under multiple platforms include Major League
Baseball 2KB, NBA 2K9 and NHL 2K9.
On September 11, 2007, the company is expected to announce its 3Q07 results.
Individual Analyst Opinions
POSITIVE RATINGS
Wall Street Strategies – Buy ($23.00 target price) - 06/12/07: The firm upgraded the rating from Hold
to Buy, and increased the target price from $21.00 to $23.00 based on positive outlook.
J.P. Morgan – Overweight (no target price) - 06/12/07. INVESTMENT SUMMARY: The firm
continues to view the stock as attractive, attributed to the launch of Grand Theft Auto IV in October.
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NEUTRAL RATINGS
BMO Capital – Market perform ($20.00 target price) – 06/12/07. INVESTMENT SUMMARY:
Although Take-Two’s business should improve in the next 12-18 months as key investments made in
games for the new consoles come to the market, the firm believes investors should remain on the
sidelines. It opines significant catalysts for the company are led by the upcoming launch of Grand Theft
Auto IV, with other catalysts including a solid release schedule for the balance of the year and an
improving performance from the company’s sports category. However, countering these positive
catalysts is uncertainty surrounding the ongoing litigation and how management endeavors affect the
release slate, quality of games, and key employees. Until better clarity on the new management’s plans
for the company and its assets is visible, the shares of TTWO are likely to remain range bound between
the high teens and the low 20s.
Kaufman Bros. – Hold ($18.00 target price) – 06/12/07: The firm upgraded the rating from Sell to
Hold based on the company’s stabilized fundamentals. INVESTMENT SUMMARY: The firm expects
positive momentum over the next few months in terms of new product introductions, and believes
current valuations reflect an aggressive outlook and the potential for operating leverage in 2008 and
2009 that will be difficult to achieve.
Needham – Hold (No target price): 06/12/07. INVESTMENT SUMMARY: The firm believes new
management will likely change the corporate strategy, and recommends the investors to hold the
shares until the core strategy is clear. It foresees the outperformance of the shares as an unlikely event
until new management sets forth their plan, which is expected to take 3-6 months.
Pacific Crest – Sector Perform (No target price): 06/12/07. INVESTMENT SUMMARY: The
company’s dependence on the Grand Theft Auto franchise, mixed success in new-title development
and spotty financial execution led the firm to give a Sector Perform rating. Despite being attractively
valued relative to its peers, Take-Two continues to struggle with poor execution and product delays,
which prevent the firm from being positive on its shares.
AG Edwards – Hold (No target price): 06/12/07. INVESTMENT SUMMARY: The firm remains
cautious on Take-Two’s prospect considering the reliance on the Grand Theft Auto franchise and the
company has been unable to leverage diversification efforts into increased profitability. The company’s
continual missteps, including several investigations and class-action lawsuits, also provided overhang
to the stock.
B. of America – Neutral ($19.00 target price) – 06/12/07. INVESTMENT SUMMARY: The firm
remains cautious on Take-Two shares due to questions surrounding its management and outstanding
regulatory issues. Additionally, it prefers to remain on the sidelines until there is greater visibility into its
FY08 line-up of non-GTA titles. According to the firm, shares of TTWO reflect expected overhead cost
reductions, and the expected announced release of Grand Theft Auto IV in October 2007. The firm
believes these will drive top-line growth of 17.5%, and allow the company to return to profitability with
fiscal year 2008 EPS of $0.70.
CIBC – Sector Perform (no target price) – 06/11/07. INVESTMENT SUMMARY: Based on visibility
issues of TTWO and disappointing FY07 guidance, the firm prefers to remain on the sidelines, and
maintains its Sector Perform rating.
Piper Jaffray – Market Perform ($18.00 target price): 06/12/07: The firm reiterated a Market Perform
rating, but decreased the target price from $20.00 to $18.00 based on reduced earnings expectations.
INVESTMENT SUMMARY: Though a new management change was a welcome change in the
organizational mode of the company, the firm believes Take-Two has deep-rooted structural issues that
will make any turnaround a difficult and lengthy project. Areas that need to be addressed include
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alignment of product development groups, realignment of compensation plans that can benefit
employees-stockholders-earnings, cultural change; reduction of off-balance sheet financing and
development of new IP. In its view, significant realignment of the company could take more than two
years and long-term earnings growth remains uncertain.
NEGATIVE RATINGS
Sterne, Agee & Leach – Sell ($12.00 target price): 06/12/07. INVESTMENT SUMARY: The firm
maintained a Sell rating. According to the firm, expensive contracts, lack of managerial expertise and
an uphill battle on gaining credibility with the Street are some of the issues that new management will
have to immediately deal with.
Wedbush – Sell ($12.00 target price) – 06/12/07: The firm maintained a Sell rating and the target
price of $12.00. INVESTMENT SUMMARY: The firm believes the company’s fundamentals are
overvalued, and therefore, recommends investors to sell the stock.
Bear Stearns – Under perform ($13.00 target price) – 06/12/07 – The firm reiterated an Under
perform rating and a target price of $13.00. INVESTMENT SUMMARY: The firm remains optimistic
about the revenue growth, but believes profitability will be constrained by rising costs. It further believes
obstacles to improve the economics of key franchises still remain.
DROPPED COVERAGE
American Technology – 03/26/07. The firm has terminated the research coverage of the stock based
on analyst departure.
Citigroup – 03/15/07. The firm ceased the coverage.
Prudential – 06/11/07. The firm dropped the coverage on TTWO due to the departure of the analyst
from the firm.
Research Associate: Priti Dhanuka
Reviewed by:
Copy Editor: Oindrila Banerjee
Content Ed.: Jyoti Lakhotia
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