Pachter questions long-term Take-Two profitability

Wedbush Morgan's Michael Pachter has released an investor's note on Take-Two, recommending a Hold rating and raising questions over the company's long-term profitability.

He cited the company's own fiscal guidance, released earlier this week, as well as the employment agreement with key Rockstar employees.

"Take-Two extended its employment agreement with key Rockstar employees through January 2012," he wrote. "The terms were not disclosed, but the company stated that bonuses will be a percentage of profits, rather than revenues. In addition, key Rockstar employees will have a controlling stake in a new company that owns any new IP they create, with games funded and published by Take-Two.

"We think that the dramatic year-over-year decline in earnings reflects the difficulty Take-Two faces in sustaining consistent profitability. With the new Rockstar deal, we question whether the company will be able to replicate its past profitability.

"It is possible that as old brands fade and new brands are created within the new Rockstar-controlled entity, shareholder value will shift to Rockstar employees. Until we have greater visibility, we advise investors to remain on the sidelines."

Additionally he noted that Wedbush Morgan was lowering its fiscal year estimates for the company.

"We expect Take-Two to generate FY09 revenues from GTA that are less than half the level in FY08. The year-over-year decline will trigger a substantial decline in earnings," he said.

"We are lowering our FY09 estimates for revenue to USD 1.2 billion from USD 1.35 billion, and for non-GAAP EPS to USD 0.10 from USD 1.10.

"We are initiating FY10 estimates for revenue of USD 1.55 billion, and non-GAAP EPS of USD 2.10. Our FY10 estimate presumes another instalment of Grand Theft Auto in 2010."