Unreal Tournament III can't turn Midway around

Publisher's fourth-quarter and full-year financial results show growing losses on shrinking sales.

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2007 may have been a record year for the gaming industry, but a rising tide doesn't necessarily lift all ships. Despite the long-awaited launches of Unreal Tournament III on the PC and PlayStation 3 and the John Woo-Chow Yun Fat vehicle Stranglehold, Midway Games saw declining sales and mounting losses for 2007.

The publisher reported its fourth-quarter and full-year 2007 financial results today, and its sales fell short of already-lowered expectations. Even with the PlayStation 3 version of Unreal Tournament III unexpectedly sneaking onto shelves by year's end, Midway reported fourth-quarter sales of $78 million, short of the projected $80 million and down from $97 million for the last quarter of 2006 (which saw the company release hits like Mortal Kombat: Armageddon and Happy Feet). For the full year, Midway reported revenues of $157 million, shy of both the $160 million forecast and the $166 million it brought in throughout 2006. As recently as August, the publisher had expected $225 million in full-year revenues.

In addition to sinking sales, Midway has to deal with growing losses. The company's net losses in 2007 surpassed $97 million, compared to $78 million the year before. The fourth quarter was especially rough, as Midway lost nearly $30 million over the holiday shopping season, compared to $2 million for the same period of 2006.

"2007 was a challenging year for Midway as we made the transition to the next-generation of consoles," said Midway president and CEO David Zucker in a postearnings conference call.

Despite the publisher's difficulties, there were some highlights for Zucker. Midway had three games reach the million-unit-shipped milestone in 2007. Those titles were Stranglehold, Unreal Tournament III, and the 2006 release Rampage: Total Destruction, which Zucker praised as "a perennial catalog seller."

The company's upcoming slate of titles including TNA iMPACT! and This Is Vegas also had Zucker optimistic, as he said, "For the first time in recent years, we believe we have a number of titles with the potential to break out and overachieve."

Zucker also said the company would continue to court the casual market with titles like Touchmaster for the DS and Game Party for the Wii, but Midway's still going to turn to titles like the 2008 installments of Mortal Kombat, Blitz, and the debut of The Wheelman to rack up sales.

"We're really focused on fewer, bigger, better... on creating those breakout games that can really move the dial on the revenue side," Zucker said.

For the current quarter, the first of Midway's 2008 fiscal year, the publisher expects revenues of $28 million for a net loss of $.30 per share. That's a big sales boost over the $11 million in revenues it posted for the same period last year, but a deeper loss than that quarter's $.22 per share shortfall.

The publisher today also announced that it has terminated a $30 million line of credit with Wells Fargo Foothill in favor of a $90 million credit line with National Amusements, Inc., an outfit headed up by Midway chair of the board Shari Redstone and controlling stockholder Sumner Redstone.

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