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THQ Talks Up Darksiders and Red Faction 2, But Talk is Cheap For This Investor

By Perry Rod, Published: July 28th, 2009 7:15 PM CDT

THQ announced today that they made .09 non-GAAP earnings from what looked to be a spectacular quarter, which included UFC Undisputed, Red Faction and considerable cost reductions.  Now they are talking about making only around 90 million in revenues in the second quarter and somewhere in the ballpark of -.50 earnings.  That'll make it around -.41 first half, relying on their Darksiders game offering and a good holiday for the second half. 

Should anybody really hang their hat on Darksiders?  On today's conference call, CEO Brian Farrell suggested that they should, talking about it at great length.

As a part of their guidance, THQ also talked as they did in the previous quarter about having 50 million more cash than the end of the last fiscal year, or 190 million in cash.  Another simultaneous press release revealed that 90 million of that will be from senior convertible debt they are issuing.  Surprise.

That will result in around 100 million cash minus debt (considering a 33 million payment to JAKKS Pacific, Inc.), or around 15% future dilution - take your pick.  So you have a company gunning for 100 million cash minus debt next year with such hit titles as Darksiders and MX Racing and instead of 'targeting' profitability now they are guiding for it.  That's just great.

Now, assuming they meet expectations this year, where is future year growth coming from?  Farrell says they will try to release two new "core titles" every year.  One example of that will apparently be Red Faction 2 which was discussed on the call (while the current one is only two months into its release and likely not even profitable at this time).  They're also working on another UFC game for next year as if it is a perfect candidate to be an annual franchise (while EA and others limit similar fighting games to once every other year).  Is the next immediate installment of UFC going to match this year's demand, when there may have been years of pent up demand for the current offering?  We shall see.

The truth about this company as I see it is the CEO has decided to take limited risks, which means limited growth potential for the company.  Why?  Because he probably enjoys his job and wants to keep it.  THQ will therefore survive as a company but I do not believe there is hope of a major new hit right around the corner.  The true value of a video game publisher is their earnings, their management and their internal intellectual property. THQ has the most limited number of non licensed intellectual property of any major publisher and has a management that has just barely woken up to the idea of moving beyond licensed properties.

Analysts expect .11 profit this year and .29 profit next year.  Considering the company's limited amount of internal intellectual property and dependency on partners, the company should receive a lower earnings multiple from investors than its peers.  By any measure, that figure would be less than its current trading price above $8.

Disclosure: shorting THQI

Related: THQI

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