Analysts are praising Take-Two's long-overdue sale of its distribution arm
, Jack of All Games -- but until the company can demonstrate shorter and more reliable development cycles, the absence of distribution revenue will only highlight its volatility, they say.
"While the disposition of the distribution business will provide much-needed cash (we had previously estimated that Take-Two would require a capital raise in mid-2011 if no GTA games were released by then), we think that the transformation of Take-Two into a pure-play publisher exposes the company’s stock to volatility (and its management to criticism) in the case of further game delays," says Wedbush analyst Michael Pachter.
The company recently announced
a $137.9 million loss at the close of its fiscal 2009, and has expressed its intention to help repair its performance by focusing squarely on AAA, core-market video games. The Jack of All Games sale is a step in the streamlining strategy -- but the company's volatility still needs addressing, the analysts stress.
The lack of Jack of All Games' revenue going forward will "highlight the impact of any prospective revenue shortfalls from its publishing business," adds Pachter.
Cowen Group analyst Doug Creutz also approves of the sale, but says it's not "particularly material to management's eventual goal of sustainable profitability." Both analysts point out that until Take-Two can deliver its AAA games more consistently, it will still face the same difficulties.
Alongside the average development time of two to three years for most AAA titles, Take-Two's dev cycles are unacceptably long, and that's the core of their revenue difficulties now, says Pachter.
"For example, this year’s lineup contains sequels to Max Payne 2
(last released in December 2003), Mafia
(last released in March 2004) and Red Dead Revolver
(last released in May 2004)," he says.
Even factoring in the time required to update or rebuild game engines, says Pachter, six years between major franchise installments "suggests a lack of discipline within Take-Two’s development organization."