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Analysts Cautiously Optimistic On THQ, Weigh Potential Risks

Following THQ's announcement of its financial results for the second quarter of fiscal 2008, reporting slightly reduced revenue of $229.3 million and a loss of $7.0 million on disappointing performance of titles such as Stuntman and Juiced 2
Following THQ's recent announcement of its financial results for the second quarter of fiscal 2008, reporting slightly reduced revenue of $229.3 million and a loss of $7.0 million on disappointing performance of titles such as Stuntman and Juiced 2, industry analysts were quick to weigh in. Although CEO Brian Farrell expressed confidence in a $49.99 price point for the PS2 version of WWE Smackdown during THQ's call to analysts, Colin Sebastian of Lazard Capital Markets was skeptical, calling it a "risk" for THQ, "since other publishers are encountering some resistance from consumers at that price point." Sebastian also believes that the fact THQ slightly raised its expectations for 2007 unit sales of Wii and PS3 hardware, while leaving unchanged its assumptions for Xbox 360 units, "is consistent with our belief that the platform may be in shorter supply for the holidays." The analyst added that THQ's product lineup for fiscal 2009 is a "significant improvement" over the current year, including the next Pixar title, Wall-E, sequels to the Red Faction and Saints Row franchises, and the first title based on the UFC license. However, Sebastian cited rising game development costs, the future of the Pixar license and ongoing WWE-related legal issues as the "biggest risks" for THQ. Wedbush Morgan analyst Michael Pachter also agreed that THQ's fiscal 2009 prospects look better, estimating the company would grow revenues by 18 percent, compared to the industry estimate of 17 percent. Said Pachter, "As we said in our note following the preannouncement, we think that the company’s lineup next year compares quite favorably to this year’s, and believe that THQ is highly likely to grow at least in line with the industry. The shift of five SKUs from the March quarter into FY 2009 strengthens our belief that the company will do so," he added, noting that this may even be a conservative estimate based on the margins of companies like Activision, EA and Ubisoft. Citi analyst Brent Thill, however, was a bit more cautious on THQ's prospects for THQ. Although he said Wall-E "could be a blockbuster," the UFC franchise could offer WWE-like revenues and that popular franchises (Red Faction, Saints Row) have sequels pending, he said, "However, FY08 should have been a good year as well, with the industry clearly recovering, but game quality issues have turned a promising year into a disappointing one... The question remains whether THQ can generate successful owned IP, which is key to their margin expansion story."

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