THQ stock slides 17% as analysts pile on

Publisher's share price takes substantial hit following dismal holiday earnings announcement; Pachter, Schachter, Greenwald offer mixed reactions.


THQ has been in transition for quite some time. After struggling through much of 2008, the publisher took drastic action to realign its costs in November, announcing the closure of five internal studios and substantial layoffs and unveiling its new shift in focus from quantity to quality.

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The pains of that transition were brought into the spotlight yesterday, when THQ reported a dismal October-November quarter marked by a $192 million loss and expanded restructuring that extended its headcount reduction to 24 percent of its staff, or 600 employees. The effect of yesterday's earnings announcement was immediate. THQ's stock price suffered a precipitous drop today, falling 17.87 percent by market close to $3.40 per share, having recovered from a day low of $2.45.

What this means for THQ going forward is a matter of dispute among industry analysts. Through the eyes of Signal Hill Capital Group's Todd Greenwald, THQ isn't likely to make up any ground during its next fiscal year thanks to what he believes to be a weak upcoming lineup.

"The loss of Saints Row 2 (2.6m units) will be hard to compensate for--we don't think Red Faction or Darksiders will come anywhere close," said Greenwald. "Furthermore, WWE appears to be a franchise in decline, especially as the PS2 platform dies off, and Pixar's Up should underperform WALL-E (which underperformed Ratatouille, which underperformed Cars...). While UFC will help, it is licensed, externally developed, and will have to be heavily marketed for it to succeed, so profitability may be limited."

Greenwald also sees a flaw in THQ's efforts to better align itself under Nintendo's best-selling console and portable. "Furthermore, THQ's large lineup of kids/family-fare/mass-market titles will be hard-pressed to stand out in a crowded Wii/DS market, and are very susceptible to price cuts," he said.

UBS Securities analyst Ben Schachter also believes that THQ's restructuring efforts will mean nothing unless the company can create more attractive games. "While the steps to right-size the business for a lower revenue base continue to move the company in the right direction, none of it will matter unless the company can get things right with its games," said Schachter. "This has been THQ's primary problem for the last two years."

Schachter was far more optimistic on THQ's 2009-2010 release slate, noting that success will hinge on Nintendo's systems. "We're somewhat encouraged by what we've seen thus far of the FY'10 line-up (particularly UFC) and expect success on the Wii/DS may be the ultimate determinant into whether FY'10 is a successful year for THQI or another disappointing one," he said.

Wedbush Morgan Securities' Michael Pachter also believes that it is too early to give up completely on THQ, thanks to the publisher's promising restructuring efforts. "While THQ has repeatedly disappointed investors by generating losses in six of the last seven quarters (with another loss expected in the fourth quarter), we think that the company is about to turn the tide," said Pachter. "Its restructuring is deep, and...we note that the elimination of marginal SKUs should help THQ to improve margins sufficiently to drive results back into profitable territory."

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