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THQ stands over the abyss as stock nosedives nearly 50%

THQ stands over the abyss as stock nosedives nearly 50%

Tue 06 Nov 2012 5:09pm GMT / 12:09pm EST / 9:09am PST
BusinessPublishingFinancial

We analyze what may be the publisher's last earnings call

The message in THQ's earnings call for the quarter ended September 30 is clear, if not clearly stated: We are witnessing the slow-motion death of a once-major game company. It's not a pleasant prospect: Jobs will be lost in the short term, lives will be disrupted, potentially interesting and fun games may never be completed. The odds for THQ to continue in its current form are long, though, and getting longer. Let's examine the evidence from the earnings call.

Chairman and CEO Brian Farrell reported the basic economic facts of the last quarter: Non-GAAP net sales of $92 million and a net loss of $1.76 per share. That's not good, but Farrell did note the sales were a bit more than expected and the loss per share was less than expected. Then he said this: “Darksiders II was our only key release during the quarter. While we are pleased with the quality of the game, with a Metacritic of 83, sales of the title were below our expectations.”

Not unexpected, since analysts had warned of this, but devastating nonetheless. When you only have one release, and it performs poorly, you're in trouble.

I said last year that THQ was dancing on the edge of an abyss. Now, it seems like THQ is emulating Wile E. Coyote, standing in mid-air over an abyss wondering exactly what is holding him up. Farrell continued: “In the last year we have made significant strides to transform THQ into a producer of high-quality game titles targeted at the core gamer.” There's a telling quote. Clearly THQ was not a producer of high-quality game titles before, according to the company's own CEO. Isn't it a little late in the game to be figuring out that making high-quality games would be worthwhile?

"We have made significant strides to transform THQ into a producer of high-quality game titles"

Brian Farrell

Farrell again: “Perhaps more importantly, in the months ahead we face a number of challenges and opportunities. I want to assure you that we are working diligently to resolve those challenges and to maximize our opportunities.” Challenges like running out of money. THQ has only $36 million in cash, and analyst Michael Pachter estimates that THQ is burning through around $15 million per month. THQ has some credit available, but only about $22 million of easily available credit; and it has to pay back a $100 million note in March of 2014. The next quarter should be a good one for sales, though there is no new product release scheduled. Beyond the end of the year, things look bleak.

CFO Paul Pucino gave financial details of the company's quarter and current status, and ended with this: “We are no longer providing net sales and earnings guidance, and we are withdrawing our previous guidance for fiscal 2013 and our projected operating model.” Essentially, this statement means that either THQ has no ability to predict with any precision what its financial future is, or that the future is so bleak it would rather not say.

Newly minted president Jason Rubin discussed the company's products, and revealed the core of the problem. “Darksiders II did not perform to our expectations or live up to its generally favorable reception. Observing this and other recent industry releases, one is left with a firm understanding that in the current marketplace, only the absolute top tier of releases is making an impact on the game consumer. I now have an opportunity to start impacting our next slate of products, and positioning them to compete in this marketplace. Unfortunately, when I joined THQ I did not find the three titles that had been scheduled for the release in the fourth quarter of this year in the same strong state of production as Darksiders 2. Company of Heroes 2, Metro: Last Light and South Park: The Stick of Truth were all challenged, and were guaranteed to fall significantly short of their designs specs if they were forced to make their announced release schedules.”

Rubin continued: “Additionally, in light of the aforementioned marketplace changes, even if completed they would not have had the extra time dedicated to the polish needed to make them shine in this competitive environment. The resulting two-month delay on each title is almost de minimis by game industry standards. Unfortunately, this delay places South Park outside of our fiscal year. Additionally, the delay in revenue generated by the three titles has further risks for the company.”

There you see the problem emerging. Rubin is looking at the schedule realistically, and seeing that rushing the games out to meet fiscal deadlines won't save THQ, but would doom it. At this point a low-quality release would mean not only reduced revenue, but lower any pre-orders for other titles substantially.

Rubin went on: “None of the above should lead anyone to believe I have any less confidence in the slate. Given the appropriate resources, THQ is as strong as ever. The opportunity for South Park is massive. It is one of the most anticipated titles of calendar 2013, and it richly deserves the anticipation. I believe the sheer size of the game, which is comparable to multiple seasons of show, and the incredible dedication and high standards of the creators will make the title worth the wait. I can personally say that I have probably had more laugh-out-loud moments in the last four months than my entire game career to date.” Was that when Rubin was looking over the financials, or just the sales projections for next year?

"We are no longer providing net sales and earnings guidance, and we are withdrawing our previous guidance for fiscal 2013 and our projected operating model"

Paul Pucino

Rubin closed by saying “I'm excited and satisfied with the content size, positioning, and our slate going forward. The ten projects in production within THQ are as good a lineup as we could hope for.” Rubin is doing a good job with the position he was handed, honestly assessing the state of development for the titles and their prospects. He's bounded by THQ's financial condition, though, which has reached the point where it's severely constraining the development process.

Farrell took over again to deliver closing remarks. “Considering the video game market we operate in today, it is clear that the only viable path for THQ to succeed is to deliver to consumers high-quality, highly-rated truly exciting game experiences. As Jason discussed, we've decided to move Company of Heroes 2 and Metro: Last Light to March release dates, which is later than we had planned initially and to move South Park: The Stick of Truth from March to early fiscal 2014. The new release timing, and our limited financial resources have created a need for additional capital, and as you know, we also have $100 million of face value in convertible notes outstanding that are due in less than two years. In order to help us address these challenges, we have hired Centerview Partners to evaluate our strategic alternatives. We will discuss the results of that engagement at the appropriate time.”

Centerview Partners is a financial consultant that helps companies find ways to raise additional capital, and also advises on mergers, acquisitions, and sales of companies. THQ is finally, officially, hanging out the "For Sale" sign with this action.

Farrell shut down what would no doubt have been a raucous round of questions from analysts: “And because of this process, we have been advised not to conduct a Q&A session following our prepared remarks today. We acknowledge many of you will have questions, and we hope that you understand that we are not in a position to answer those questions until our work with Centerview has run its course. I would like to close today's call by thanking our dedicated employees for their tireless efforts in moving THQ forward. We appreciate your continued interest in THQ and for joining us on the call today.”

THQ would no doubt like to find some white knight investor who would be willing to float the company a hundred million dollars or so to get their newest games out and lead them back into profitability. At this point that is just wishful thinking. The company's financial position is dire, and the current management and board (with the exception of Jason Rubin) is responsible for that. No reasonable investor would want to put large sums of money into a company when the management that screwed up before is still in charge.

"The saddest day of your life isn't when you decide to sell out. The saddest day of your life is when you decide to sell out and nobody wants to buy"

Norman Spinrad

The current stock price of THQ is down almost 50 percent after yesterday's earnings call, and the market capitalization of the company is hovering around $11 million right now. In other words, the company is valued at far less than the development budget for even one title. Any interested buyer could have the company for a song, but no one wants it at that price. There are too many liabilities, and a management team that can't be relied upon to make the right decisions. The current trajectory of the stock means that THQ is getting cheaper by the hour, too. Anyone interested would be better off waiting to see how cheap it might get.

It seems most likely that THQ will get broken up and sold in pieces, either through a bankruptcy process or through a forced sale. Current investors in the stock are likely to be left with nothing, or nearly so, which is why the price is plummeting.

There's a quote from the classic science fiction novel Bug Jack Barron by Norman Spinrad that seems appropriate here: “The saddest day of your life isn't when you decide to sell out. The saddest day of your life is when you decide to sell out and nobody wants to buy.”

Update: It's worth noting that THQ officially closed down just over 50 percent at $1.50 on Tuesday.

23 Comments

Disney has the potential bags to be a white knight if they want.....

Posted:2 years ago

#1

James Brightman Editor in Chief, GamesIndustry.biz

263 466 1.8
Disney could go after much better companies. I think THQ's problem is that companies would rather wait for them to die and then pick at the corpse to get any good IP assets, like Saints Row or Darksiders.

Posted:2 years ago

#2

Hugo Dubs Interactive Designer

163 24 0.1
Why disney would buy such studios when they already got one out their deal with Lucas.
Just sad we probably won't see the next Metro title

Posted:2 years ago

#3
Its one thing to pick at the corpses to own IP, but sometimes it requires the purchase of a studio and its culture. eg Relic - with its homeworld premise

Posted:2 years ago

#4

Benjamin Kratsch Deputy Editor-in-Chief, Games Network

22 4 0.2
They have one last shot: The next "Saints Row", which will probably come out in april 2013.
They sold 5 mio. copies of "Saints Row: The Third", so that could probably rescue THQ. I really hope so, because they put a lot of passion into games like Darksiders 2. But the problem will be: Where to get the marketing money for it? You need a good 20 mio to market such a game to get this 5 mio sales. All the best THQ

Posted:2 years ago

#5

Nicholas Pantazis Senior Editor, VGChartz Ltd

1,021 1,470 1.4
@ Dr. Wong The problem is partly with the ineffeciency and cost of such studios. Most Pubs would rather buy the IPs and stick their own teams on them.

@ Benjamin There's a solid chance THQ will not live long enough to release that game.

Posted:2 years ago

#6

Benjamin Kratsch Deputy Editor-in-Chief, Games Network

22 4 0.2
@Nicholas: That`s a bit weird, because when I attended a preview event of Metro: Last Light it looked really good. Like outstanding in terms of visuals, I haven`t seen enough to judge story, gameplay variety etc.

Rubin is a clever man, he was the founder of Naughty Dog so he knows how much time a good game needs. But in march they have to compete against Crysis 3 and I bet EA will put a lot of marketing money in this title because they have three games in this quarter: FUSE, Army of Two: The Third Cartell and Crysis 3. Crysis is the biggest brand, so THQ is making it even tougher for them.

Do you have any idea why basically everything thq is doing failed (just Saints Row was a big win with 5 mio sold copies). I mean seriously: Darksiders 2 - 250.000 sales in the us? That`s not so much more than Syndicate, where EA did basically no marketing.

Posted:2 years ago

#7

Stephan Schwabe Multichannelmanagement, Telefonica

74 34 0.5
Relic will change that for THQ. When CoH hits it will be a huge. Darkstiders2 will allso be big on WiiU. Its a hard time for THQ but thy get over it.

Posted:2 years ago

#8

Daniel Hughes Studying PhD Literary Modernism, Bangor University

436 497 1.1
It'd be interesting to see a longer-term look at THQ's problems. Are they the last victim of the jump to HD development, which massively increased development costs and eliminated middle-tier development? Or are they victims of their own standards and practises, which have finally caught up with them in the last few years? Does the truth lie somewhere in the middle?

Any chance GI will investigate and compile a long-term analysis?

Posted:2 years ago

#9
@ Tom - I like the idea of Sega grabbing hold of Relic. It is a good addition to complement Sega's stable of studios.
The reason why I was thinking Disney was - they do have the marvel IP (which is being handled carefully) but as you say they also paradoxically do not have a core game strategy (in house). However, there is probably a chance of Disney closing and gutting down the studios so perhaps, your solution is a more feasible, realistic option for all concerned.

Optionally, THQ coudl tough it out and see if their line up of 10 games has sufficient nuance/time to playout vs cash in hand

Posted:2 years ago

#10

Charlie Andre-Barrett European Digital Sales Manager, Bethesda Softworks

19 1 0.1
Spot on Tom , wise words indeed ! also I can see Capcom as a front runner here at the right price !

Posted:2 years ago

#11

Matthew Hill Head of Recruitment, Specialmove

75 26 0.3
Does anyone else share THQ's level of faith in South Park ?

Posted:2 years ago

#12

Steve Peterson West Coast Editor, GamesIndustry.biz

111 73 0.7
A story on the life and death of THQ would be interesting, though as yet the final chapter would remain unwritten. Will they get bought, go bankrupt, or find an investor and recover? One of those three things is likely to happen before the end of 2013.

Posted:2 years ago

#13

James Brightman Editor in Chief, GamesIndustry.biz

263 466 1.8
@ Matthew, no. I think the game could turn out to be good, but it's still a licensed game, and when you're banking on a licensed game to be your big hit to save a company, that's a problem.

Posted:2 years ago

#14

Greg Wilcox Creator, Destroy All Fanboys!

2,196 1,176 0.5
This is turning into the 3DO story all over again, as there are enough properties that can be sold off should THQ go under to make some other studios something of a profit if they can keep those franchises going afterward.

Still, THQ has better properties than it does investors and analysts. Who wants to play with a bunch of jerks who want all the toys and keep demanding you buy and have the best ones each time they come over? Granted, new management would help as well, but that's like changing captains on the Titanic or those Kilgons beaming aboard the Enterprise in Star Trek III just before it blows up.

Unless that South park game is reinventing the wheel, I'd say it's going to tank because the show is neither new nor that relevant. Yeah, it's funny as hell, but it's been so absorbed and passed through the culture that I'd say betting the farm on it doing gangbusters and saving THQ for a few more months would be a bad idea.

Posted:2 years ago

#15

Jason Sartor Copy editor/Videographer, Florida Today

104 33 0.3
@ Mathew, James,

It would be unwise to underestimate South Park because it is a licensed game. Obsidian's track record is pretty good, they are a long-established RPG developer and Batman Arkham City sold more than 4 million in its first week and has eclipsed 7 million total unit sales to date.

If South Park gets the 85 metacritic or about and gets great reviews the way Batman Arkham Asylum and City both got to go along with the South Park IP, it could sell really well. Four million units would cover the loss of Darksiders 2 (assuming it fails to reach 2 million break even), and still post a nice profit and carry THQ until Company of Heroes 2 releases, and will most likely also turn a big profit. That gets THQ back on track with the next WWE sure to make money and the next Saint's Row sure to make money. No more UDraw to write down, no more iffy titles to write off, no more excess studio overhead. Each studio would be carrying their own weight on solid IPs.

Posted:2 years ago

#16

Nicholas Pantazis Senior Editor, VGChartz Ltd

1,021 1,470 1.4
@ Benjamin I have seen nothing to suggest that Saints Row 4 is even close to ready for March. I expect November, if that, and again I don't think THQ will be around in November.

Posted:2 years ago

#17

Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.

2,287 2,507 1.1
Jason, Rocksteady developed the Batman: Arkham titles. Not Obsidian.

However, Obsidian did do well with Fallout: New Vegas selling just over 3 million units.

Posted:2 years ago

#18

Private VIdeo Games

103 14 0.1
Goo THQ, hang in there fellas!!!

Posted:2 years ago

#19

Benjamin Kratsch Deputy Editor-in-Chief, Games Network

22 4 0.2
The South Park game is just about marketing. If you get Trey Parker to write a story about the game happening in the south park tv show, it could get really big. And since those guys are really open and also did a show with Blizzard and WoW, it could work.

Posted:2 years ago

#20

Jason Sartor Copy editor/Videographer, Florida Today

104 33 0.3
@Jim. I know Rocksteady developed Batman. I was just referencing Obsidian's track record as a developer, and that not all licensed games are automatically garbage (as the Batman Arkham games are very good) and that they can be very successful if well executed (hence, my reference to the metacritic score and if it gets reviews like the Arkham games).

Apologizes to anybody I may have confused by not making more clear that Obsidian was not the developer of the Arkham game.

Edited 1 times. Last edit by Jason Sartor on 8th November 2012 3:51am

Posted:2 years ago

#21

Matthew Hill Head of Recruitment, Specialmove

75 26 0.3
South Park - If it's of a similar calibre to the Batman Arkham or Lego Star Wars titles I can see it being a breakout hit giving THQ a major shot in the arm. Clearly its got a cracking developer in Obsidian and potentially could be a great game. My concerns are a) Licence costs b) Strength of South Park licence c) IP Ownership - Can the South Park people quickly take the Games elsewhere. As a comparison Eidos/SCi launched Lego Star Wars but soon lost control. Lots of investment upfront but Warners reaped the long term rewards

Anyway this is just one part of a much bigger picture. Fingers crossed THQ deliver

Posted:2 years ago

#22

Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.

2,287 2,507 1.1
Fair point, Jason.
My other other rebuttal is that those Batman games came at a time when Batman was at peak popularity. Both titles launched after Christopher Nolan's Batman Begins and The Dark Knight which propelled the Batman franchise to levels that Tim Burton and Joel Schumacher could only dream of.

The South Park IP has lost relevancy and even at its peak in the late 90's never saw the level of popularity that Batman has over the last few years.

I don't doubt the game will be good. I do expect that. But it's an IP that's seen better days and an RPG (when was the last RPG [not action RPG] to sell well that didn't have the Final Fantasy name in it?).

Posted:2 years ago

#23

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