Take-Two follows a profitable 2010 with stellar 2011 games lineup

Take-Two Interactive Software reported a strong profit for the fiscal year and quarter ended Oct. 31, the first time it has reported a sizable profit in a year when it didn’t ship a Grand Theft Auto Game. Much of that was due to the breakout hit from Take-Two’s RockStar Games label, Red Dead Redemption.

The results suggest that Take-Two has cracked the formula for consistently generating profits in an unpredictable, hit-driven business.

New York-based Take-Two has struggled for years with a unique problem in the industry. Grand Theft Auto sales generate huge profits during the years when RockStar launches a title in the series. But it usually lost money in the years when there was no GTA. For the first time in years, Take-Two has been able to report a profit in a non-GTA year, for the fiscal year ended Oct. 31, 2011. (Take-Two is changing its fiscal year to end March 31 going forward).

The company’s stock price is up 8.6 percent in after-hours trading, rising $1.03 a share to $12.97 a share.

The solid performance is due mostly to the emergence of a spectacular new franchise, Red Dead Redemption, which was my favorite game of the year. In fact, three of my favorite games this year were Take-Two titles; that was more than from any other company.

Red Dead Redemption, which is like a Clint Eastwood movie turned into a game, has sold more than 8 million copies since May. That means it has generated revenues of around $480 million at retail. In the most recent quarter ended Oct. 31, Take-Two also saw revenue from Mafia II, NBA 2K11, and Sid Meier’s Civilization V. The NBA 2K11 title sold more than 3 million units, partly because Electronic Arts canceled its own NBA Elite game. What’s remarkable is that Take-Two turned a profit even though it delayed a couple of major games, including Max Payne 3. Thanks to the strong basketball game sales, the 2K Sports division was profitable in the year. Of the big games that shipped this year, only Mafia II got less than stellar reviews.

“Candidly, I think we are the most creative company in the business,” said Strauss Zelnick, chairman of the company. “We don’t innovate by rolling the dice with our shareholders’ money. We do it with our brands and our teams.”

That’s not all bluster. Take-Two invested in Red Dead Redemption for five years before launching the game this spring. And its focus on quality shows in most of its major games. The trend toward quality is one that is being pursued by other big companies in games, but it’s not easy. Electronic Arts has stumbled financially in part because it takes a long time to get results from quality investments. Activision Blizzard and Ubisoft have also doubled down on quality with huge investments in marquee games. The result is that there isn’t much room on the shelves for mediocre games anymore.

For the fiscal year, revenue was $1.16 billion, up 65 percent from a year ago. GAAP net income was $49.7 million, compared with a loss of $130.4 million a year ago. Non-GAAP net income (from continuing operations) was $97.5 million, or $1.06 per share, compared with a loss of $90.4 million, or $1.18 a share, a year ago. Non-GAAP revenue includes revenues such as online game revenue. For the three months ended Oct. 31, revenue was $373.7 million, up 32 percent. GAAP net income was $54.2 million, compared with a loss of $7.9 million. Non-GAAP net income was $64.0 million, or 67 cents a share, compared with $7.9 million, or 10 cents a share a year ago. Analysts had expected net income of 31 cents a share.

Zelnick said that there was confusion about the state of the video game industry, given that market researcher NPD says that year-to-date sales are down 5 percent. But that’s mainly because of weakness in music and handheld games. Gamers have tired of the Guitar Hero games and handheld games are getting hammered by the iPhone. But games for the Xbox 360 and PlayStation 3 have seen double-digit revenue increases, Zelnick said, and the installed base of console hardware has grown substantially.

“This challenges the sentiment that core gaming has cooled off,” Zelnick said. “Gamers are as willing as ever to open their wallets to games with differentiated experiences.”

For the year ending March 31, 2011, Take-Two is forecasting revenue of $1.0 billion to $1.1 billion. It plans for a fiscal year profit of 50 cents a share to 65 cents a share on a non-GAAP basis. The big titles coming next year include L.A. Noire in the spring. That title is expected to be a big one in part because it is a fresh story; the game is based on a “film noir” style detective game with very realistic-looking animated human characters. Other titles coming include the long-awaited, politically incorrect shooting game, Duke Nukem Forever, set for release sometime during 2011. That game has been in the works for more than a dozen years, but it looks like it will finally happen. Other big titles are Spec Ops: The Line (fiscal year 2012), Xcom (fiscal year 2012), and BioShock Infinite (calendar year 2012). Take-Two will be hiring during the year, as it expects its research and development costs will go up 11 percent in the March 31 fiscal year.

The company said it plans to enter the Asian and Latin American markets. It plans to increase its digital business and is still working on a version of the Civilization game for Facebook.

For the quarter, about 46 percent of Take-Two’s business came from RockStar, 31 percent came from 2K Games, 18 percent from 2K Sports, and 5 percent from 2K Play. For the fiscal year ended Oct. 31, Take-Two reported $94 million in digital online revenue, mainly from sales of downloadable content on the consoles for Borderlands, Red Dead Redemption, Grand Theft Auto — as well as digital download sales of the PC game Civilization V.

As we noted in our story on a new video released today, Zelnick said that the technology for animating human faces in the L.A. Noire game (pictured right) is “extraordinary.” Ben Feder, who has been chief executive for five years, previously announced he is resigning from the company and plans to do extensive travel in Asia with his family. Interestingly, the employment contracts for the top three RockStar games executives expires in January, 2012. Take-Two has 2,000 employees, but those three include Dan and Sam Hauser, the duo behind Grand Theft Auto and other big RockStar games. No word yet on when Grand Theft Auto V will ship.