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Analysts Downgrade THQ, Doubt Management Cred

Although industry analysts used to be optimistic regarding THQ, the company's dramatic $115.3 million loss and 250 layoffs seemed to surprise them -- and many responded by downgradi
Although video game industry analysts have up until now kept optimistic regarding THQ, several prominent firms are lowering their ratings of the publisher's shares following a dramatic second quarter loss hallmarked by studio closings, layoffs and a business restructuring. In its latest quarter, THQ revealed its losses widened to $115.3 million on $164.8 million in revenues. In the same quarter last year, the company had $7 million in losses against $229 million in revenue. The firm confirmed "the closure of five studios" with 250 job losses in its results announcement, a list that apparently includes Helixe, Sandblast Games, Locomotive, Mass Media and Paradigm, with reduced staffing at Juice Games and Rainbow Studios -- reducing THQ's development studios from 16 to 11. "We genuinely believed that THQ was making progress with its new greenlighting process, and relatively high review scores for new property De Blob, and for the sequel to THQ’s original IP Saints Row gave us modest confidence that the company’s strategy was working," says Michael Pacher of Wedbush Morgan, which lowered its estimates for the company and softened its recommendation to buy shares. "The company’s Pixar license, Wall-E, is performing even more poorly than last year’s Ratatouille (shocking, but apparently true)," says Pachter, who like many other analysts had expected Wall-E would be a shoe-in to outdo a game about a rat. Adds Pachter, "[THQ's] catalog titles are suffering, and its new IP is off to a slow start. While results for Saints Row 2 are solid, they are not spectacular." "We are hopeful that we won’t be fooled again," says the analyst, who nonetheless says the company's cash reserves are in good shape and that THQ has the opportunity to gain better positioning next year. "As the company shifts games, its prospects for next year are improved, and it should be in a good position to deliver the operating leverage investors have largely tired of waiting for," he says. But Janco Partners' Mike Hickey suggests investors should tap out, lowering his rating on THQ to Market Perform and calling the company's future earnings potential "unpromising." Hickey also believes THQ's management "continues to be in a state of flux and lacks considerable credibility, in our view." Both Lazard Capital Markets and Cowen Group also maintain neutrality on the shares, holding out for the results of the restructuring, while skeptical that the publisher can maintain its position in the children's game market amid weakening brand strength for Pixar. Speaking to Gamasutra about the potential for an acquisition of THQ by a media company, Pachter notes the publisher is now "awfully cheap if a media company merely wants to acquire the know-how to make, package, market and distribute games." "An acquirer would likely keep the WWE and UFC licenses, and depending upon whom, may keep some of the other licenses (Disney, for example, would pretty clearly keep Pixar)," the analyst adds. However, Pachter suggests that any acquisition would be unlikely in the current economic climate. "Companies are trying to keep costs in check and prepare for the worst, and it's hard to imagine anyone taking a risk on integrating an acquisition in this environment," he said. Kaufman Bros. and Citigroup also downgraded THQ today, and the company's shares slipped almost 27 percent to a full year low of $4.80 per share as of press time. At the beginning of the year, THQ generally traded in the $28 range.

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