THQ Q3: Six new core games, partner sought for DMO

THQ has posted its financial results for the quarter ending December 31, 2011, revealing $9.2 million year-on-year decrease in sales but a healthy looking release schedule.

Sales of $305.4 million, down from $314.6 in Q3 FY2011, resulted in a loss of $55.9 million, up from a loss of $14.9 million in the same period 2010. Poor sales of uDraw and related software, kids, family and casual games were pinged as the cause for lower than predicted sales revenue.

Overall sales were $100 million below expectations, with uDraw in particular failing to match both internal predications and independent external studies. CFO Paul J Pucino said the tablet's limp reception on HD consoles had "the biggest single impact" on THQ's results.

"To give context, quarterly earnings would have more than doubled without uDraw," he said.

THQ had previously predicted a record-breaking quarter.

"Unfortunately we were wrong," president and CEO Brian Farrell said, but pointed to strong performance in the core as cause for hope.

"The success of Saints Row and WWE give us confidence in our future," he said.

THQ revealed the NPD placed it as the fifth most successful publisher in the US over calendar 2011 - fourth if you only count third-parties - and had 5.4% market share. The publisher's quarterly digital revenues almost doubled year-on-year, and digital revenues for the nine months ended December 31, 2011 were 81% higher year-on-year.

Saints Row: The Third shipped 3.6 million units in its launch quarter, with 3.8 million units shipped to date, making it the largest THQ-owned IP launch ever and the primary motivator for an increase in a year-on-year net core sales. Player shave created over 10 million characters using the game's creation suite and online Initiation Station, and the game produced "strong" DLC results. THQ expects it to be its highest-selling DLC title ever, and predicted lifetime shipments of 5-6 million units.

WWE '12 was the other major winner with over 2 million units shipped, and a sell-through increase of 29% on like-for-like platforms in the US.

"Saints Row: The Third and WWE '12 demonstrate the strengths of THQ's core gaming capabilities. These titles performed at or better than the expectations we shared during our last investor conference call, driven by favorable critical reviews, community engagement and outstanding marketing efforts," Farrell said.

Upcoming hits
THQ detailed a line-up of eight releases planned for fiscal year 2013, which runs from April 2012 to March 2013, including "two unannounced core titles" currently in development.

One other mysterious release - an "un-named original title" from Turtle Rock Studios - was listed for FY 2014, along with a further "four unannounced core titles for release in fiscal 2014 and beyond".

THQ notes that the "the majority of all unannounced titles are company-owned IP".

No details were given for the multiple unannounced titles on the schedule, but Farrell said THQ intends "to launch new franchises as new platforms are released", and that "all of our future games will be designed to excel in an always-on world". When pressed for details about next-gen hardware, Farrell said THQ would not announce games for new hardware before the proper time, to preserve relationships with first-parties.

"We will say that Volition is dedicated to the Saints Row franchise," Farrell added when asked about rumours.

Dark Millenium Online, rumoured to be shelved, was also listed for FY 2014 release, but in a conference call to investors, Farrell said THQ is being "realistic" about the project, and is "actively seeking a partner for this compelling MMO".

Guillermo del Toro's InSANE and a new IP from Assassin's Creed veteran Patrice Désilets were also pipped for FY 2014.

Farrell said THQ will throw more weight behind its core releases. Darksiders and Metro: 2033 were described as successful but under-marketed, and both sequels will be more aggressively marketed. A Crytek-developed Homefront sequel and South Park: The Game were noted as highlights of the coming year.

Metro: Last Light has been delayed, moving back to Q4 FY 2013 - that is, the first quarter of calendar 2013; it had been expected in time for the holidays this year. Farrell said the delay will give time to "enhance and polish the gameplay of this hidden gem" as well as secure a better launch window; the game's marketing budget has been doubled.

Strong Measures
Farrell touched briefly on THQ's restructuring in the accompanying press release.

"We are implementing a plan to bring costs in line with our lower anticipated level of revenue," he said.

"With our focused product plan, leaner cost structure, cash balance, and existing credit facility, we believe the company has adequate resources to execute on our plan and deliver on our strong multi-year pipeline of games."

THQ expects to reduce its general administrative costs by $60 million as a result of 240 redundancies, and save up to $100 million by exiting children's games. The publisher has already terminated two licensing contracts and is in negotiations to end two more; the uDraw tablet has been shelved entirely and THQ has no remaining financial commitments to it.

The overall cost of restructuring will reach $11.0 million, of which $8.5 million will be cash, and the great streamlining is expected to be mostly complete by the end of the 2012 fiscal year in March.

THQ has been threatened with NASDAQ delisting for failing to maintain a share price above $1 over the past year. In the wake of its financial results release, THQ's stock dropped by 24% to 58 cents, as results failed to meet even the low expectations of analysts.

The company declined to give detailed advice regarding its future, preferring to delay until end of year results.

"Directionally we believe net sales will be half [of earlier predictions]," Pucino said, estimating $800-$820 million for FY2012 as a whole.