THQ, on their earnings call with analysts, did their best to explain why their Q3 fell apart so badly, and what they're going to do about it. The news is stark: THQ lost $56 million on sales of $305.4 million, and in their SEC filing yesterday revealed they are laying off 240 more staff. What do you say to analysts, when your stock is in danger of being delisted on NASDAQ, and speculation is growing about whether the company can survive?
President and CEO Brian Farrell started with an admission of fact: “On our last call we told you we anticipated that our third quarter would be the largest in our company's history. Unfortunately, we were wrong.” He went on to say why: “The disappointing performance of uDraw this holiday, and continued weakness in the kid's license category overshadowed the very successful releases of Saints Row The Third and WWE 12. uDraw hardware and software sales were approximately $100 million below our plan, and our other casual titles were approximately $25 million below plan, substantially reducing our revenue and profits for the quarter. We were confident that uDraw would resonate again this holiday, given last year's robust sell-through and 2 independent studies indicating we were addressing a sizable market on the HD platforms. Our confidence was misplaced. What we had viewed to be a product that would generate revenues and profits while we continued to build our portfolio of core gaming franchises has instead created a catalyst for us to evaluate our business from top to bottom.”
Farrell proceeded to outline how the company was downsizing, and later in the call specific numbers were produced: THQ is cutting $160 million from its expenses from the year, with $100 million of that coming from reduced development and $60 from reduction in SGA... which is where the layoffs are counted. Strangely, not once during the earnings call did Farrell or anyone else mention the layoffs.
"We were looking at uDraw as a bridge to the digital future, and it turned out to be a plank that we walked off of."
CFO Paul Pucino reviewed the financials, and the basis of it was clear that uDraw was the main reason for the bad quarter. Pucino noted that the quarterly earnings would have more than doubled over last year's quarter if not for the uDraw disaster. THQ drew against its credit line during the quarter, but repaid it all by the end, and finished Q3 with $25 million in cash. Accounts receivable stand at $140 million, but of course reserves are high due to the uDraws still out in the channel. The next quarter will be a transitional quarter, in Pucino's words, with a loss of about 35 to 50 cents per share. This compares to a gain of 15 cents per share in the same quarter last year. For the full fiscal year, Pucino told analysts to expect revenue on the range of $800 to $820 million, with a loss of $1.60 to $1.80 per share. While he declined to provide precise guidance for FY 2013, Pucino said he expects THQ to have net sales of roughly half of FY 2012.
Farrell, in discussing what THQ was doing to rectify its problems, said they had been reviewing all aspects of their business over the past two months. Farrell said the “highest priority is to better execute on our fundamentals.” As an example, he said the first Darksiders game was not marketed aggressively, so “we are elevating that with at least double the marketing spend.” THQ plans to move forward with most of the core game projects such as South Park with Obsidian Entertainment as the developer, and Crytek's new version of Homefront. THQ's biggest project, the MMO Dark Millennium Online (based on the Warhammer: 40,000 miniatures game) is just too big for THQ to tackle in their current state. “We are being realistic about our resources and are actively seeking a partner,” said Farrell. Which means THQ is open to offers; we'll see if any buyers appear. Overall, Farrell sees them as being “in the process of transforming THQ into a very different company. The road ahead isn't easy and it won't happen overnight.”
Analyst questions met with few details, though the most candid moment in the call occurred when John Taylor of Arcadia questioned Farrell on what THQ's plan B was in case this effort didn't work. Brian Farrell didn't really have a good answer for him, but he summed up the earnings call in one bleak statement when he said: “We were looking at uDraw as a bridge to the digital future, and it turned out to be a plank that we walked off of.”
Now we'll have to see if THQ can swim to shore through the dangerous waters ahead.
