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Perry Rod




09/02/09 at 11:55 AM CDT



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The Game of Burning 300 Million Cash: Take Two Interactive Software, Inc.

It was just one year ago that Take Two Interactive Software Inc. announced that it had accumulated 339 million dollars in cash from the success of Grand Theft Auto 4.  They had no debt.

Today, just twelve months later, they have managed to burn through almost all of that cash.  With a recent 5 million dollar cash settlement and 138 million in debt convertibles to go along with 175 million in cash, that leaves Take Two with 32 million in cash minus debt.

339 million cash, free of debt, has turned into 32 million cash minus debt in just one year - a decline of 307 million dollars.  How could that happen, and should investors be concerned that it will continue to happen?

In order to understand how it happened, one must dig deep into capitalized development costs and the details and trends of product development within Take Two.  It was about one year ago when competitors Electronic Arts and THQ started to rationalize their business by cutting development and trimming down operations.  But Take Two's management, perhaps high from a buyout offer and GTA4's success, were not cutting anything.

At the same time, Take Two was consistently delaying just about every title with an anounced release date, adding months of work and expense to capitalized development costs.  Midnight Club, which is Take Two's second highest selling franchise, released 6 months after GTA4 and was in development for at least 3 years.  For any other publisher, its sales numbers would be decent.  For Take Two, it was a disastrous quarter.

Today, upcoming titles such as Rockstar's Beaterator are being released 2 years after plan.  Upcoming title Borderlands, is at least one year over plan.  Upcoming title GTA: The Ballad of Gay Tony, like its predecessor, GTA: Lost and Damned, is one year over plan.  Next year's titles Mafia 2, Bioshock 2 and Red Dead Redemption are all at least 6-9 months over plan.  Meanwhile, games under development like L.A. Noire, have been in development for at least 5 years, obviously way beyond plan.

These delays show a consistent track record of going over budget when it comes to game development.  That means it takes a lot more sales just to break even on each title while Take Two continues to burn more cash.

In recent months, Take Two management suggested that the sequel to GTA4, which was reported to have cost around 100 million to develop, may not come out in the next fiscal year.  That would translate into another 3 year product development cycle.  And it is not known how long games like recently announced Agent, an exclusive title for Sony's console, have been under development or when they will actually hit the market.  There are also likely many other games that have not been announced.

Competitor Activision Inc., which can now claim to have the top selling mature franchise in the industry, Call of Duty, manages to put out that title once a year with internal 2 year product development cycles and no delays.  Take Two is a basketcase in comparison, with a track record of delaying and going over budget on not some, but most of their titles.

Could anybody have imagined one year ago that Take Two would have burned through 300 million plus in cash in just one year despite GTA4 catalog sales, Midnight Club's high reviews, and other GTA and other product offerings in 2009?

Take Two has high hopes for Bioshock 2 and other titles coming in 2010 that should ease the cash situation.  But high review scores have lately not translated into earnings success for other publishers, given extraordinary recent development costs in an effort to meet the market's quality expectations.  Analysts are expecting .70 profit in FY10 for Take Two.  Meanwhile, Take Two's management has provided no FY10 guidance and has suggested on more than one occassion that making any kind of profit in a non-GTA year will be a major accomplishment.  They are, after all, the highest paid management in the industry.  It pays for us to listen.

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