Strong Quarter for THQ

Strong Quarter for THQ

[Update] Publisher THQ today announced its preliminary Q2 2007 financial results, reflecting a 68 percent increase in sales and strong profit gains; company to file final results late, due to inquiry by regulators.

Net sales for the fiscal quarter ended September 30 were $240.2 million compared to $142.7 million a year prior. Main drivers for the sales increase were the Xbox 360 action game Saints Row, the PC real-time strategy game Company of Heroes and Disney Pixar’s Cars.

THQ’s net income improved greatly compared to the comparable quarter a year ago. Earnings were $12.6 million compared to a loss last year of $1.4 million.

For the most recent six-month period, THQ reported net sales of $379 million from $300.7 million, an increase of 26 percent. Net income rose to $518,000 compared to a net loss of $5.4 million for the same period in fiscal 2006.

THQ CEO Brian Farrell said that the successes of its second quarter reflect the company’s “balanced mix of owned properties and games based on world-class brands.” The company publishes licensed games including Nickelodeon properties, Disney Pixar’s Cars, WWE, Bratz and The Sopranos, but it has been making efforts to create original IP for a more even portfolio.

Farrell also hinted that Saints Row and Company of Heroes would see sequels. “We have established two significant new franchises that we view as important pillars of our growth for many years to come,” he said. One million copies of Saints Row sold during the quarter.

THQ added that it’s the number one publisher on the Nintendo DS.

For the future, THQ raised its guidance for the full fiscal year, expecting sales between $925 and $975 million.

For the third quarter, the publisher anticipates sales between $400 and $425 million. Fourth quarter revenues are pegged in the range of $145 million to $170 million.

THQ reiterated that the results were subject to a review of its stock-based compensation practices. The firm is currently under an informal inquiry by the U.S. Securities and Exchange Commission regarding its stock option grant practices, as are many other companies both inside and outside of the games industry.

A statement read, “To date, this investigation has determined that the actual measurement dates for financial accounting purposes of certain stock option grants issued in the past are likely to differ from the recorded grant dates.” The company added that it is “likely to need to adjust” its preliminary results. The final Form 10-Q quarterly results will be filed “as soon as practicable following completion of the special committee investigation.”

[Update]

On rising development costs

During the company’s quarterly conference call, Farrell said that in some ways, as far as spend is concerned, the next generation of game development won’t differ from the current generation. "I’m not sure that this generation is going to be any different than prior generations, where all of us make significant investments in our engines and technologies and tools early on, and then we leverage those throughout the cycle. That’s going to happen."

Farrell acknowledged that development costs will rise, as developers continue to push the quality bar to higher, more expensive levels. However, he said that these overall rises in industry development costs actually put THQ in "a bit of a competitive advantage."

He said that less expensive titles make up for the greater spend for high-end games like Saints Row. "When we look at another part of our portfolio, things like WWE… are very, very solid performers, but are not necessarily based on ground-breaking technology. [Those titles require] a [lesser] level of spending.

He said that games such as SpongeBob and Disney Pixar titles are even less expensive to create. "Our mass-market brands certainly don’t command the level of spending of something like Saints Row. When we look at our portfolio, we’re glad that we don’t have to make the huge investment in all our titles that maybe some of our competitors may have to make."

PS3 online opportunities

Although more details have been recently revealed regarding Sony’s online plans, the service is likely to remain at least partially shrouded in mystery right up until the launch of the PS3. Farrell said that THQ is keeping a close watch on Sony’s network in the meantime, as it plans for downloadable content.

"Sony is continuing to refine its online and download model. … I really don’t think [Sony's online service] is going to be a meaningful opportunity til mid-year of next year anyway. I think Sony has time to really put the finishing touches on that whole download model. If you look at the opportunity on Xbox Live, I think everyone is realizing there is truly an opportunity there."

When asked during if Sony’s network would be as robust as Xbox Live, Farrell responded, "I’m sure that’s Sony’s goal, and it would certainly be our hope as well. It’s clear from Xbox Live that players want to play online. Customization is such a huge part of what’s going on both culturally and in gaming, so given that trend, [online content is] a natural on all platforms, including the Wii. I would presume that all platform holders would do everything possible to take maximum advantage of [online]."

"Competing and winning" against competitors

Huge titles such as Microsoft’s Halo 3 and EA’s Spore indicate that THQ has its work cut out for it as far as future competition is concerned. The games industry has been and will remain a highly-competitive sector, but Farrell said that THQ has held its own, and then some.

"If we look back in the prior year’s cycle, not only did we compete against Halo and GTA–…Spore looks nice, but I’m not sure that it’s an established franchise yet–we’ve competed and we’ve won," Farrell said.

"If you look at our trend in our game rankings, they are staggeringly competitive. Not only do we intend to [compete], but we believe we are competing with the best and winning. So, I respect all of our competition, but I think they’re respecting THQ and our abilities to compete more and more.

"…We’re not that cocky, but we’re highly confident."