THQ Treading On Thin Ice As Funds Run Out

As we stated yesterday here, THQ’s stock nosedived an enormous 50% after its second quarter earnings were revealed.

Chairman and CEO Brian Farrell had this to say regarding the publishers current state of woeful affairs; “Darksiders II was our only key release during the quarter. While we are pleased with the quality of the game, with a Metacritic of 83, sales of the title were below our expectations. In the last year we have made significant strides to transform THQ into a producer of high-quality game titles targeted at the core gamer. Perhaps more importantly, in the months ahead we face a number of challenges and opportunities. I want to assure you that we are working diligently to resolve those challenges and to maximize our opportunities.”

CFO Paul Pucino then stepped in to give further insight into the financial details of the company’s quarter; “We are no longer providing net sales and earnings guidance, and we are withdrawing our previous guidance for fiscal 2013 and our projected operating model”.

President Jason Rubin moved to discuss the company’s products, and reveal the true core of the issue; “Darksiders II did not perform to our expectations or live up to its generally favorable reception. Observing this and other recent industry releases, one is left with a firm understanding that in the current marketplace, only the absolute top tier of releases is making an impact on the game consumer. I now have an opportunity to start impacting our next slate of products, and positioning them to compete in this marketplace. Unfortunately, when I joined THQ I did not find the three titles that had been scheduled for the release in the fourth quarter of this year in the same strong state of production as Darksiders 2. Company of Heroes 2, Metro: Last Light and South Park: The Stick of Truth were all challenged, and were guaranteed to fall significantly short of their designs specs if they were forced to make their announced release schedules.”

Rubin continued: “Additionally, in light of the aforementioned marketplace changes, even if completed they would not have had the extra time dedicated to the polish needed to make them shine in this competitive environment. The resulting two-month delay on each title is almost de minimis by game industry standards. Unfortunately, this delay places South Park outside of our fiscal year. Additionally, the delay in revenue generated by the three titles has further risks for the company.”

Rubin went on by saying: “None of the above should lead anyone to believe I have any less confidence in the slate. Given the appropriate resources, THQ is as strong as ever. The opportunity for South Park is massive. It is one of the most anticipated titles of calendar 2013, and it richly deserves the anticipation. I believe the sheer size of the game, which is comparable to multiple seasons of show, and the incredible dedication and high standards of the creators will make the title worth the wait. I can personally say that I have probably had more laugh-out-loud moments in the last four months than my entire game career to date. I’m excited and satisfied with the content size, positioning, and our slate going forward. The ten projects in production within THQ are as good a lineup as we could hope for.”

The reigns were than handed back to Farrell for a closing statement; “Considering the video game market we operate in today, it is clear that the only viable path for THQ to succeed is to deliver to consumers high-quality, highly-rated truly exciting game experiences. As Jason discussed, we’ve decided to move Company of Heroes 2 and Metro: Last Light to March release dates, which is later than we had planned initially and to move South Park: The Stick of Truth from March to early fiscal 2014. The new release timing, and our limited financial resources have created a need for additional capital, and as you know, we also have $100 million of face value in convertible notes outstanding that are due in less than two years. In order to help us address these challenges, we have hired Centerview Partners to evaluate our strategic alternatives. We will discuss the results of that engagement at the appropriate time.”

The market capitalization of the company is hovering around $11 million currently, In other words, the company is valued at far less than the development budget for even just one of their titles. To add insult to injury, THQ has only $36 million in cash, and analysts estimate that THQ is burning through around $15 million per month – that gives them about 2 more months before they start going the way of the Dodo. THQ does have some credit available, but only about $22 million of it is realistically accessible; and it has to pay back a $100 million note by March of 2014. The three products they have in development currently, Company of Heroes 2, Metro: Last Light and South Park: The Stick of Truth – all of which have been delayed till at least Spring 2013 – are not going to make anywhere near the amount that THQ need to bail them out. With the announcement that they are now using Centerview Partners, which is financial consultant that helps companies find ways to raise additional capital, the ‘For Sale’ sign has now firmly been placed on the front lawn. Question is, who in their right mind would want to buy such a poisoned chalice?

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David Delve


3 Comments

  1. charles
    November 7, 2012, 1:25 PM

    Brian Farrel is incompetent. Is he not accountable for anything?

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  2. CJ W
    November 7, 2012, 3:24 PM

    I disagree with “Charles.” Perhaps he has not been around the industry to recall the state of “Toy HeadQuarters (SIC)” before Mr. Farrel came aboardand turned it around.

    Back then every title from THQ was considered the absolute measuring stick for everything bad about videogames. It was amazing that Brian’s team actually turned that around and had a series of hit titles over the past decade or so.

    The whole industry as it was in the past is certainly under strain from te cost of development for the current generation of consoles. It is also no secret that even EA and other top tier publishers did not anticipate the shift from consoles to smart phones and Pads in time. Frankly, if I were Jason, I’d “revive” the best of THQ’s earlier titles for the these newer devices and scoop up some operating cash ASAP via those short turn development opportunities.

    Brian has done a great job duringhis tenure and I’d say THQ would have been long gone without his team and his individual guidance. I wish the current crew all the best and hope for a new resurection for THQ in the New Year.

    Best,

    CJ

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  3. David Delve
    November 8, 2012, 4:47 AM

    CJ has a point but I still think there is an element of Farrell just closing his eyes and hoping all THQ’s troubles go away. By going public, it’s clear that they are hoping for a buyer – I just don’t think they will get one.

    It’s extremely hard these days for any developer or publisher to make a profit considering the high costs of attempting to make AAA games. The only exceptions are franchises like Call of Duty, GTA, FIFA etc (which are phenomenons in themselves) that have allowed the likes of Activision, Rockstar and EA to pump tens of millions of dollars, sometimes over a hundred, in developing AAA titles and still make a large profit out of it. For companies such as THQ, it’s just impossible to compete, hence I agree with CJ when he said they should focus on social or mobile gaming, bringing some of their previous classics back to life.

    Unfortunately though, I think that time has come and gone.

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