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THQ sales "even worse than feared"

Analysts raise doubts over FY12 and FY13 profitability

Sales of THQ's uDraw tablet appear to have been worse than anticipated by some analysts, despite a warning that the controller would miss targets even before the publisher adjusted its own revenue expectations.

On Tuesday Cowan & Company downgraded the publisher due to expected weak sales, with THQ yesterday confirming that sales for the third quarter will be down around 25 per cent.

It blamed the performance of uDraw on Xbox 360 and the PlayStation 3, but the financial community is suggesting that the company has a bigger problem than just the sales of one game.

"Our downgrade of THQ shares on Tuesday was motivated by precisely this issue, though the revenue downside was even worse than we had feared," wrote Cowan & Company.

"Management blamed poor sales of uDraw on the Xbox 360 and PlayStation 3 for the miss. However, the $130 million revenue downside suggests that there was likely some incremental weakness elsewhere.

The company may face a cash crunch before mid-year 2012, unless it is able to generate solid profits early in its fiscal 2013

Michael Pachter, Wedbush Morgan

"At a roughly $50 for uDraw across all platforms, including the Wii, it would take a 2.6 million unit shortfall to account for the full revenue miss; THQ's planning implied less than 2.6 million units of total uDraw sell-in."

Wedbush Morgan's Michael Pachter suggested that THQ may not achieve guidance for the full 2012 financial year, making it the fourth year out of the last five that the publisher would post a loss.

"Yesterday's revised revenue guidance strengthens our conviction that THQ will be unable to achieve its FY:12 guidance. We believe there are other factors besides the disappointing uDraw shipments driving the lower guidance.

"In our view, the company's remaining release schedule for the quarter apart from Saints Row: The Third and WWE '12 featured many games that failed to generate significant buzz at retail. Therefore, we believe sales were lower-than expected for many titles in addition to uDraw, due in large part to a pattern of mediocre reviews and a very crowded release slate for the video game industry. Reorders were also likely below expectations as the company's release slate over the first half of the year was pretty thin apart from Warhammer 40,000 Space Marine."

Pachter also suggested that THQ's cash balance could "become an issue" in the next financial year.

"Given its declining licensed and core properties (apart from Saints Row), and an uncertain release schedule next year, we remain unconvinced that FY:13 will be profitable," he wrote.

"In our view, THQ's breakeven revenue run rate is $900 million. We have modelled sales of $925 million next year, with positive earnings for the year, but note that the company has not yet announced a line-up of games that is deep enough to generate revenues at this level."

THQ secured a new credit facility with Wells Fargo in September, but Pachter noted that deal has a number of restrictive covenants that may be triggered should the publisher's earnings fall below required levels.

"Given that the company did not provide earnings or EBITDA guidance, we are unable to speculate that it will violate these covenants, but our revised EPS estimates lead us to conclude that THQ will likely have to pay down its credit line in order to avoid being in default on the Wells Fargo line.

"If that is, indeed, the case, the company may face a cash crunch before mid-year 2012, unless it is able to generate solid profits early in its fiscal 2013."

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Latest comments (16)

Graham Simpson Tea boy, Collins Stewart5 years ago
Look at the share price chart from Monday and how it mysteriously falls continually with particularly higher volume on Wednesday. [link url=http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1323378000000&chddm=1955&chls=IntervalBasedLine&q=NASDAQ:THQI&ntsp=0
]http://www.google.com/finance?chdnp=1&ch...[/link]

That's called insider trading folks.
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James Prendergast Research Chemist 5 years ago
Isn't uDraw closer to $90 than $50? Amazon has it at around $80-90... Seems like that would mess with their numbers.
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John Donnelly Quality Assurance 5 years ago
I would not go so far to call it insider trading.
The price graph can hide whats actually going on in the markets but you can find people short selling the stock and will then rebuy it at the low price only to cash out again as it rises.
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Show all comments (16)
John Bye Lead Designer, Future Games of London5 years ago
James - they'll be using the trade price (what THQ sell it to retailers for) rather than the shelf price (what the retailer charges you for it).
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Darren Stewart Videogame investor 5 years ago
@Graham, I thought that but then somebody mentioned (in this thread http://www.bougafer.com/comment/585#comm... that THQ cancelled their appearance at the UBS conference that day and also removed all mention of it from their PR so that tipped them off that something may be up.

Perhaps others also came to the same conclusion which led to the sell off on Wednesday ahead of their warnings.

http://www.bougafer.com - investing in the video game industry.

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Things look tough for Thq now, and blaming a lack of success of the uDraw for overall earnings is insufficient or indicates a severe underlying deficiency of games lineup
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Bruce Everiss Marketing Consultant 5 years ago
The business model for boxed console games seems to have evolved to be quite perilous.
The market appears to have resolved itself into a relatively small number of blockbuster franchises that each make a lot of money at every iteration. Anything and everything else seems to have trouble.
Current generation console platform titles have very high costs of development followed by very high costs of global marketing. Yet they only have a very small window in which to make an income before the pirates (on 360) and secondhand sales pull the rug from under legitimate retail sales.

The net result is that the publishers who have mismanaged their IP and who thus don't have blockbusters are doomed to failure. We all know who they are.
Meanwhile the small number of publishers with blockbuster titles will either buy out the failing competition or just let them go bust. This is a process that has been with us for decades, but the current commercial reality accelerates the process. We could end up like recorded music with just 3 global publishers and then lots of niche players.

The good news is that boxed console games are taking an ever decreasing percentage of total gaming revenue. We have platform proliferation. And currently the fastest growing gaming market is for smartphones. This has very low barriers to entry and in many ways resembles the 8 bit home computer game market of the 1980s. You could easily set up and run 10 smartphone game companies for the cost of making one middle ranking current generation boxed console title.
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@ Bruce - I forsee many overseas smartphone devs/publishers entering/penetrating the Europe and Uk markets over the next 2 years.
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James Prendergast Research Chemist 5 years ago
@John,
Ah, good point. Though i did some checking and saw that the SKU i was looking at was an exception for some reason (no idea why) and the normal price was around 30/$50. Of course, i couldn't edit my post due to the silly bug that's been plaguing Gamesindustry comments for a while now and i didn't want to clutter up the thread with unnecessary posts.
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Nick Parker Consultant 5 years ago
THQ is not the only publisher who is leaving it late to transition to digital. The traditional publisher mindset is not comfortable with a new value chain, is in denial of gamers experience change and is keeping its fingers crossed that the next PS4/Xbox 720 cycle will return historic performance for the bricks and mortar/warehouses and trucks value chain; it won't.
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James Ingrams Writer 5 years ago
People aren't buying hardware for consoles or PC because the current consoles are getting on for 8 years old! I think the future is indie and European individualistic $20 million game projects and not North American $50-60 million bland multi-format game projects.
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Steven Pick Lead Graphic Designer, Atomhawk Design5 years ago
THQ reminds me of Midway in its darkest hours. Hope it doesn't come to the end result for them.
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Josh Jonsson Studying Bcomm/CompSc, University of Calgary5 years ago
MIDWAY WAS GLORIOUS! THOU SHALT NOT DEFAME IT VILE CRETIN!!!!
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Michael Vandendriessche Studying Computer Science, K.U. Leuven5 years ago
For me personally, THQ are on a much higher note than they were before.
With games like Saints Row 3, Darksiders, Homefront, Warhammer, etc... they get in my home more often than before.
I didn't even know about UDraw. heard of it before, then forgot about it and now i hear it didn't sell.
For me personally they're doing well. Maybe they should stop giving out crap and focus on the good games.
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I really believe that THQ needs to get a better marketing. I just see WWE ads, and its common to find great games that this company published, but I never 'heard' about in the media.
Other example: Never heard about UDraw. Even in games websites.
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Craig Page El Presidente, Awesome Enterprises4 years ago
Try this THQ, make a sequel to Conan!!!!!!!!

I enjoyed that game more than God of War 1,2, or 3.
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