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THQ Says Wait Until 2012 For Growth

By Perry Rod, Published: August 12th, 2010 11:34 PM CDT

Yeah, wait until the stock drops another couple dollars.  THQ (NASDAQ:THQI) now says that it will earn “roughly” .81 to .86 in its second half this fiscal year (ending in March, 2011).  That’s because the company just lost .21 in a quarter that featured its crucial UFC title and now forecasts .60 to .65 in adjusted losses for its second quarter.  How will they turn it around to breakeven for the year?  Mostly from two titles, they say: Red Faction and the CEO’s favorite bet, Homefront.

Homefront is by Kaos Studios, whose only credit is Frontlines: Fuel of War from 2006, which was met with poor ratings and low sales.  THQ emphasized on their call that Homefront received a great response at E3.  It did?  The new intellectual property was one of many similar titles in an overcrowded genre which includes heavy hitters like Call of Duty and Metal of Honor.  Yet, THQ’s Brian Farrell suggests investors should bet on it doing very well, despite the developers’ short and uninspiring track record.

Developer Volition, meanwhile, will try and hit the market with a sequel to Red Faction in only twenty months.  It’s questionable whether or not the last Red Faction even made a profit.  Volition is simultaneously working on Saints Row 3.  What’s their track record?  It’s mediocre, with titles rated in the 80’s (THQ management speaks of 80’s ratings as if it is something ground breaking).

Farrell stated that 2012 growth would come from Saints Row 3.  Should it be obvious that the title will succeed?  Since Saints Row 2, Take Two (TTWO) Interactive’s Rockstar has released GTA4 and Red Dead Redemption, two big budget titles in the same genre that rated in the mid 90’s.  Will buyers have an appetite for another lower rated lower budget Saints Row 3 after experiencing Rockstar’s offerings in the same genre?  Recent sequels to titles in the genre such as Crackdown and Just Cause have performed relatively poorly.  In fact, sequels in many genres have been performing surprisingly bad as of late.  It has become a hit or miss market for titles, with hits being few and far between.  Rockstar, meanwhile, is on deck with yet another massive budget title called L.A. Noire slated to be offered for $60.  Is a $60 title with an 80 million dollar development and marketing budget engaging in a fair fight with a $60, 40 million dollar development and marketing budget in the same genre?

Of course not.

But THQ management is trying to convince investors that they can compete with 80s rated offerings in an increasingly unforgiving market for new titles.  Now, in the recent quarter, the company burned 55 million in just three months and sits on 115 million net cash (and owes another 12 million to settle a dispute).  They will likely burn through a similar amount in the current quarter given their lack of releases.  The company furthermore does not own its most important developer of WWE and UFC titles, Yukes, making it relatively unattractive as a buyout target.

So what’s it worth?  Two years ago management made their decision.  They cut well over one third of their employees and went into a defensive mode where they would attempt to produce just enough where they wouldn’t risk jeopardizing executive salaries.  As a result, they would also have little chance of growth.  Now, they are relying on games such as Homefront, Red Faction, Saints Row, and Darksiders to help them breakeven this year and grow next year.  Will it work?

Of course not.

Related: THQI

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