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THQ Results Highlight Strong Quarter, Higher Sales

Publisher THQ has reported a strong second quarter, with net sales up 68% at $240.2 million from the previous year's $142.7 million, driven by its first major original IP successes, Saints Row and Company of Heroes, alongside licensed stalwa
Publisher THQ has reported a strong second quarter in its latest preliminary earnings report, with revenue up 68% at $240.2 million from the previous year's $142.7 million, driven by its latest licensed and original IP including Saints Row, Company of Heroes and Cars. THQ reported a second quarter profit of $12.6 million, up from the previous year's net loss of $1.4 million. Its revenue for the 6 months ending September 30th saw a rise to $379 million, up from $300.7 million for the prior year. Its profit for the first half of fiscal 2007 was $518,000, a heavy turnaround from the prior year's $5.4 million net loss. The company's quarterly highlights include Saints Row achieving the top sales slot in September according to NPD sales data, with more than a million units shipped for the quarter. It also reported the number one slot in the UK for the quarter for its licensed property, Disney/Pixar's Cars, with more than four million units shipped. Similarly, its Company of Heroes achieved the top PC sales charts in September. As of now, THQ is the top third party publisher for Nintendo DS titles. The publisher is looking forward to a strong holiday sales season across all current and new next-gen platforms, with WWE SmackDown vs. Raw 2007, Cars, Bratz Forever Diamondz, Destroy All Humans! 2, The Sopranos, and Warhammer 40,000: Dawn of War: Dark Crusade being released variously on the Xbox 360 and the Wii, and expects sales of Saints Row and Company of Heroes to continue throughout the holiday season. THQ has also reported that it expects net sales for the fiscal 2007 year to reach a range of $925 million to $975 million. It has also reported that it anticipates third quarter sales between $400 and $425 million, and fourth quarter sales of $145 million to $170 million. In the company's conference call, it additionally reported that it plans to expand both its in-game advertising, and downloadable content initiatives looking forward into next year. THQ reported 50,000 users took advantage of its Saints Row downloadable content, a 10 percent attach rate, and plans to continue with more downloadables into the new year. "THQ's outstanding second quarter results demonstrate the power of our balanced mix of owned properties and games based on world-class brands," said Brian Farrell, THQ president and CEO. "During the quarter, THQ's Studio System delivered two ground-breaking original titles, Saints Row on Xbox 360 and Company of Heroes on PC. We have established two significant new franchises that we view as important pillars of our growth for many years to come." As reported in August, THQ is currently under an informal investigation by American Securities and Exchange Commission (SEC), who has requested documents and information from the company, relating to stock option grant practices from 1996 to the present. In its earnings report, THQ acknowledges the investigation and expects to not file its second quarter of fiscal 2007 report, but has said it will do so pending the completion of the investigation. [UPDATE: In the conference call following the results, THQ's Brian Farrell explained THQ's overall strategy: "What we've learned over the last couple of years.. is that you pick a strategic window with a very targeted property, and that's the way to be successful in the industry", referencing titles such as Destroy All Humans and Saints Row as being in the right place at the right time. Looking forward, execs particularly singled out key 2007 titles as including Stuntman, Juiced, and Frontlines: Fuel Of War, clarifying of THQ's philosophy for 2007: "There are titles that are unannounced... the way to think about growth next year is to think about growth in the core brands, extending the brands we already own, and a couple of new franchises that we think are pretty promising." Responding to an analyst question on the PlayStation 3 online service that suggested that "the download opportunities don't really kick in until the second half of 2007", THQ execs agreed: "We've been hearing similar things", continuing: "Sony is continuing to refine their online and download model." They continued of PS3 online download revenues: "I really don't think it'll be a meaningful opportunity until mid-next year anyhow", pointing out that Xbox 360 already has a significant and notable revenue opportunity in its online service. Interestingly, when asked whether PS3 online would match up to Xbox 360 online, execs demurred: "I'm sure that's Sony's goal", continuing: "It's clear that... customization is such a huge part of what's going on... [online downloads] are a natural on all platforms, including the Wii." Discussing THQ's competitiveness overall, it was noted: "Not only did we compete against Halo, GTA - you mentioned Spore, it looks nice, but I'm not sure it's an established franchise yet - we've competed and we've won. If you look at the trend in our GameRankings [score], they are staggeringly competitive... We believe that we are competing with the best and winning." On the significant THQ internal resources, it was commented: "We're always looking to build and acquire more studios - I'm not ruling that out", but overall, execs indicated that the company's internal resources "will be growing at a lesser rate", slowing down after the spurt in which the external development-heavy THQ brought a lot of its game development in-house. Regarding in-game advertising, it was noted by THQ in general that they "see some momentum there", but overall, the revenues were unproven: "We have no idea what those numbers are yet - they're a nascent part of the business." Talking Wii, THQ execs indicated that "there's a great opportunity for exclusive titles" on Wii, but noted that "it's just a matter of economics" about whether it's worth it to do games for just Wii. They indicated that they "are looking at some Wii exclusive properties", but there's nothing to announce at the time, beside 4 THQ Wii titles for launch which are adapted conversions from other SKUs. As for digital downloads, THQ explained that again, the market is very early, but the margins are high on the additional content, specifically suggesting: "With a hit like Saints Row, if you have get any kind of attach rate with that, you can start to drive some meaningful revenues." Discussing outsourcing on THQ's major titles, it was noted that "about 20% of Saints Row was outsourced overseas", through the XDG internal group at THQ, where a "library of assets that can be leveraged through the studio system" also exists.]

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