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Analyst: Ratatouille Game Weakness, Internal IP Could Hurt THQ

Ahead of THQ's Q1 financial results on August 1st, Mike Hickey of analyst firm Janco Partners shared his predictions, saying that the publisher's '08 objectives "could prove aggressive", and that Ratatouille game sales may not be enough to offset p
In a new analyst note to investors, Mike Hickey of analyst firm Janco Partners has been commenting on his revenue predictions for major publisher THQ, ahead of its Q108 financial results to be held on August 1st, 2007. Janco expects THQ management will report fiscal Q108 performance within their previously announced guidance range, but Hickey believes THQ's objectives for fiscal year '08 "could prove aggressive." "We think their reliance on internal developed owned IP for operating margin growth is risky considering some of their anticipated games have unproven market demand, are older franchises, have less than exceptional release dates, and will enter a highly competitive video game market this holiday," Hickey said. "We are not confident sales of licensed mass market games like Ratatouille and Cars will be sufficient to offset aforementioned anticipated weakness from internally developed games, which will likely lead to less than guided financial performance." Hickey said his predictions for THQ are "consistent with our thoughts on Electronic Arts," expecting that THQ's thinner slate of releases in the quarter, along with Ratatouille's late release "provided management with minimal amount with a good sense of achievable operating guidance for the period." "Therefore," he continued, "we would not expect them to miss their appropriately conservative financial performance expectations." Hickey does not expect THQ management to lower their projections for fiscal 2008, but says he believes investors "will continue to question the achievability of their guidance, which will likely pressure shares lower over the next several months." Hickey also noticed that the Amazon.com online sales rankings for the Ratatouille game-- out of the top 100 for Xbox, at #42 for Wii, #47 for PS2 and #31 and #71 for Nintendo DS and PSP respectively-- "appear very weak." "However," Hickey added, "we believe online sales are generally tilted toward an older demographic and therefore are slightly discounted versus a ranking which would include [traditional] retail outlets like GameStop and Walmart. We think the game is more of a ‘pick up and go’ title versus a highly anticipated game where game reservations could be a more meaningful indication of potential sell-thru." That said, Hickey does not expect that sales of Ratatouille can approach the success of the previous year's Cars game, owing to what he calls its less "video game-friendly" category and this year's surplus of AAA content in the market which he believes is "fragmenting potential sales." Hickey predicts THQ's fiscal '08 will be "exceedingly competitive" in both mass-market and core gamer categories, expecting heightened competition in the market to erode some of its retail opportunity-- "especially new IP releases with unproven market demand." He also cited the cancellation of Saints Row for the PS3, calling it "mysterious," as a reason for an anticipated "particularly weak" Q1 period for THQ. [THQ previously announced that Saints Row for PS3 could be better served by a "simultaneous shipment into a larger install base next year" with Saints Row 2.] "We expect the game’s development was tracking behind schedule, and a later release date would have positioned the game within the GTA IV buzz halo, which could have significantly weakened the franchise’s future potential", Janco's analyst added. He continued: "In addition, their new IP Frontlines was strangely delayed into their Q408 period, a seasonally less favorable release period that could dampen the game’s unit ship potential and another example of development execution issues creeping into their release schedule." Hickey concluded, "We would avoid shares at this time, waiting for more opportunistic entry price points below $30 per share. We do not believe the Company has any unannounced titles that can be materially accretive for margin expansion in ’08. We would not be surprised to see continued delays in title releases, especially in their new IP portfolio which could continue to pressure their margin opportunity."

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