Publisher THQ Hopes for Happier Holiday Season

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As this year’s crucial holiday season nears, the game publisher with the most at stake could be THQ Inc.

The gift-giving season a year ago was a rough time for the Agoura Hills-based company. THQ saw revenues and its stock price fall after pinning its hopes on “Juiced 2: Hot Import Nights” and “Stuntman: Ignition,” titles that debuted to lukewarm reviews and lackluster sales.

In response, the company canceled several games it had in the pipeline and shuttered Concrete Games, a Carlsbad-based studio. The message: It was trying to ignite a turnaround.

Meanwhile, THQ’s closest local rival, Activision Publishing, was thriving. In December 2007 it merged with Vivendi Games to form Activision Blizzard Inc., one of the largest video game publishers in North America, and it has since ridden the success a series of hit franchises, including its “Guitar Hero” and “Call of Duty” games.

Now, with the holiday season looming once again, THQ is about to find out whether its efforts have borne fruit.

“I think this holiday will be better than last holiday for THQ, but will it be enough to get the stock price moving higher again?” said Doug Creutz, a senior research analyst at Cowen and Co. LLC in San Francisco.

Executives declined to comment in advance of the company’s earnings, which will be released Nov. 5.

But in a statement issued shortly after the company announced its comeback effort earlier this year, Chief Executive Brian Farrell said THQ had “taken actions to strengthen our pipeline and position ourselves to compete aggressively with compelling, high-quality games.”

THQ is entering this holiday season with a stronger slate. It has already released “Saints Row 2” and “de Blob,” two games that debuted to positive reviews. Next month, it plans to release “WWE SmackDown vs.Raw 2009,” the next installment in what has been one of THQ’s few perennial hit franchises.

Those three games form a trifecta that could make or break the company’s turnaround.

THQ’s disappointing performance during the holidays last year was surprising because the company’s expenses were almost $100 million higher than the previous year’s, partly because of development costs and marketing for “Juiced 2” and “Stuntman,” according to THQ’s quarterly filings.

But the increased costs didn’t lead to higher profits. In the quarter that ended Dec. 31, 2007, the company’s net income was $15.5 million, down from $62.1 million the previous year.

The decline partly stemmed from charges THQ took when it pulled the plug on several titles in development, according to company filings. But it was also because some games that were released never connected with

consumers.

“They kind of messed up pretty badly,” said Michael Pachter, a research analyst at Wedbush Morgan Securities Inc. in Los Angeles. “They selected games that really weren’t all that interesting to consumers and they put too much behind them.”

The missteps are reflected in the company’s stock price. THQ’s shares were just shy of $30 in late December 2007. Now, they’re trading at less than $10.


Bigger success

THQ’s recent problems put it in contrast with the other large video game publisher in Los Angeles County, Activision Blizzard.

Not long ago, THQ and Activision were often mentioned in the same breath. But then Activision merged with Vivendi in an $18.9 billion deal, giving Activision the muscle to maximize sales of existing franchises “Call of Duty” and “Guitar Hero,” and access to the “World of Warcraft” online game. All three rank high on gamers’ “must-have” lists.

Meanwhile, THQ had to shut down the “Stuntman” and “Juiced” franchises when sales flopped.

THQ also owns the rights to kid-friendly games from the Nickelodeon and Disney-Pixar brands, but sales for those titles have weakened. For instance, despite sales of more than 1 million units, THQ’s “Wall-E” video game fell far below expectations, partly contributing to a 30 percent tumble in the company’s share price in the first quarter of this year.

“They’ve just been kind of stuck with these license properties, and I think those properties have kept them from and limited their profitability,” said Pachter of Wedbush Morgan.

Despite the economic downturn, video game sales are projected to fare well this holiday season as consumers invest more in home entertainment, said Creutz of Cowan and Co.

But buyers will likely go for the must-have titles first and THQ’s lack of such games could hurt the company’s outlook, analysts said.

“If there is pressure on video game spending, I’d expect it to be on the non-must-have titles first, the I’d-like-to-have-that titles,” Creutz said.

THQ, he added, has “a lot of I’d-like-to-have-that titles.”

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