THQ Earnings Call - State of the Industry

Why do I own stock in THQ?  I bought it at exactly the wrong time a few years ago, and it hasn't recovered with the market at large.  And I've never been very impressed by the company's games.  But if I look at it rationally, it turns out that I actually own quite a few THQ titles on various platforms -- retro classics, remakes, and misbegotten sequels, primarily.  And the company has managed to survive through a couple of hardware generations now, which is more than a lot of videogame publishers can say.

Anyway, my handful of THQI shares entitled me to listen in on the company's earnings conference call meeting this week -- actually, anyone can do that, it's a public event, but I feel obligated to do so now and then.  It's been a few years -- I still had to dial in on the phone last time around, but now the event is Webcast-based and it can be listened to in real-time or after the fact. 

From this year's meeting, I learned that:

• There's a lot of risk in any forward-looking statements, and they don't have to be updated if the company later knows better.  Caveat investor.  This is standard stuff.
• For the previous fiscal year, the company saw net sales of $160.3 million in software and a net loss of 21 cents per share, or $14.4 million, down from a net gain of 10 cents per share last year.  Sequel UFC Undisputed 2010 was the big sales leader, with 2.7 million units shipped for the year, but sales were disappointing compared to the previous game in the series (Ed: maybe because people felt burned by the first game?).
• Significant growth is planned for next year.  At E3, THQ's new titles received the most critical acclaim the company has ever received (Ed: That's not saying much).  The company is focusing on XBox 360 and PS3 on the console front, and has developers working on the 3DS, with sequels Saint's Row III and de Blob II coming to the new handheld.
• A term with which I was unfamiliar, "technological feasibility," as used by the company appears to mean "release readiness."
• The company still has operating cash on hand.   $182 million was invested in software development last year.  No new titles are expected in the second quarter.
• Upcoming games... THQ is trying to manage its own IP in addition to licensed games, and build long-term franchises (Ed: Like every other software company.)  Red Faction: Armageddon will be promoted with a two-hour Red Faction: Origins movie on the Syfy network.  THQ's military shooter Homefront features a script by John Milius (Apocalypse Now and Red Dawn.)  WWE and UFC licensed wrestling and fighting titles remain important, including a UFC fitness game coming for Kinect, PS3 Move and Wii (Ed: Ooooookay.)  Company of Heroes: Online is THQ's attempt at a mobile online game, hoping to build a revenue stream and reduce the market impact of used games.  THQ is also involved in Facebook, XBLA and PSN platforms.
• THQ's big fiscal 2013 games are already being bandied about -- Ninja Gaiden creator Tomonobu Itagaki's Devil's Third, and a Warhammer 40,000 MMO.

Questions from shareholders and analysts addressed current weakness in the market -- core titles sell well, casual and catalogue titles are slow -- and the company's structure, marketing and titles.  In response, THQ indicated that:

• The Wii is in a mature, holiday-driven cycle -- it sells strongly at the end of the year; the 360 and PS3 are more robust year-round.  
• THQ's new Montreal studio is focused primarily on art asset creation, at a lower cost than the company's existing facilities.  
• The company is looking at lengthening its development cycle for the UFC titles, maybe to 18 months, so as not to saturate its market and to tie-in better with franchise events.  
• Downloadable add-on metrics are becoming clearer as the market matures -- THQ is looking at online play and DLC as different types of "hooks" appropriate to different kinds of titles.
• The 3DS is perceived as more of a "core gamer" platform than the original, but THQ will be releasing both core and casual titles for the platform.
• THQ expects to burn through a good chunk of its available cash this year, investing in new titles and getting through a rough period.
• Industry growth is becoming even more difficult to predict for packaged and downloadable titles, there's no good hard data that can be used to project numbers.  Sales are expected to be down further this year, both in North America and in Europe.  And currency exchange rates have been volatile as well.
• Retailers will continue to get behind big titles and be cautious with shelf space for new and smaller titles.  Pricing at $60 for premium new titles remains stable for now.
• Inventory is up a tad due to UFC 2010 falling below sales expectations.
• THQ's marketing is shifting focus away from traditional TV ads to "transmedia plays" like the Red Faction TV movie and online communities.
• Q2's absence of new titles is largely traceable to cutbacks THQ had to make a couple of years ago.  It will be a difficult quarter, especially because UFC reorders are not expected to be significant.

My take?  I remember when an individual programmer could throw something together on the kitchen table and generate enough sales to turn a profit with relatively little risk.  Those days are long gone -- even a middle-of-the-road mainstream publisher needs quite a bit of cash to stay afloat.  THQ isn't burning up the sales charts or the Metacritic ratings, and it's spreading its investments out and avoiding any truly interesting risks.  But the company is still in there fighting.  I have to give them credit for that.