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Analysts:  Redemption  'Justifies'  Long Dev Cycles, For Now

Analysts: Redemption 'Justifies' Long Dev Cycles, For Now Exclusive

September 3, 2010 | By Leigh Alexander

September 3, 2010 | By Leigh Alexander
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The common analyst criticism of publisher Take-Two is that its long development cycles and frequent title delays challenge the company to demonstrate consistent profitability. In years wherein the company launches a numbered console Grand Theft Auto, financial results delight investors, but the intervening periods have historically been less stable.

But in the company's view, it's been investing over time in the development of new IP -- GTA may remain the company's crown jewel, but Take-Two's strategy has been to slowly and carefully cultivate other properties, like BioShock and Red Dead, that can act as pillars.

At E3 earlier this year, corporate communications VP Alan Lewis told Gamasutra that the company aims for one new IP a year, but asserted the company's position that generating high-quality properties takes a lot of time.

Analysts have been less patient than perhaps the company would prefer. But after two delays, Red Dead Redemption has led Take-Two to two straight profitable quarters -- and put the publisher on track to its first profitable non-GTA year in a decade.

"It is impossible to criticize the company’s success this year," says Wedbush analyst Michael Pachter. Pachter was critical of Take-Two ahead of its third quarter results, expecting to see soft performance of Mafia II (the company says the title will be profitable) and correctly anticipating the delay of yet another game, LA Noire.

For the time being, Pachter commends the company's painstakingly patient approach to title launches: "We think that long development cycles are most certainly justified by phenomenal results, and the performance of Red Dead [Redemption] absolutely justifies the development time taken," he concedes. Adds Kaufman Bros.' Todd Mitchell: "We believe that Mafia [II], released on Aug. 24, is also selling well."

But it'll be challenging to continue the positive trend, Pachter suggests. He sees strong profitability potential for next year's Spec Ops and X-Com and modest potential for LA Noire and Max Payne 3 (both of which have recently received a delay), but says the comparison next year versus Red Dead Redemption's performance this year will be hard.

Despite the positive results for its third quarter, analysts on yesterday's earnings call pressed Take-Two for more specificity on its release timelines, particularly as concerns the next GTA. Perhaps that's because they view it as crucial to a continuing growth trend, says Pachter: "In our view, it is unlikely that Take-Two can grow earnings in [fiscal 2011] without a new installment of GTA, and we believe that the company must allow the key Rockstar North team members to focus on getting that game out by the end of the fiscal year (in October [2011]) in order to ensure earnings growth."

"Should GTA launch in FY:11, we believe that earnings growth will be far easier to achieve in FY:12, with BioShock Infinite and The Agent each likely to be quite profitable," the analyst says.

But while Red Dead may have brought redemption for Take-Two over its past two quarters, "we remain skeptical about the sustainability of long development cycles, particularly if they impact the release of the company’s blockbuster GTA franchise," Pachter warns.

Kaufman Bros' Mitchell also retains reservations, especially should there be a delay for GTA -- he's not counting on seeing the next installment launch next year. "Developer Rockstar has established a solid reputation as a video game hit maker," Mitchell says. "However, we remain concerned about the consistency and sustainability of the company's lineup in fiscal 2011, particularly as we do not think estimates should include GTA V."

It's true Red Dead Redemption is a "sleeper hit," he continues, but that's to be expected given five years and "significant" cost. "LA Noire looks interesting as well, but it is really the last game which got greenlit before the current management arrived and it received an unfettered development budget."

"Take-Two needs to corral its portfolio of valuable franchises to showcase an ability to string together a series of hits and consistent results," Mitchell concludes.


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