Game Publisher THQ Cuts Outlook on Slower Sales

Calabasas video game publisher THQ Inc. slashed its fourth-quarter and 2003 revenue and earnings forecasts Monday, another sign that holiday sales of games are failing to live up to expectations.

The news surprised both industry observers and investors, given that the fourth quarter traditionally is the company’s most vital, last year having accounted for nearly half of annual sales and 75% of profit. THQ shares traded as low as $9.50 on Nasdaq before recovering to end the day at $12.22, off 9 cents.

Michael Pachter, an analyst with Wedbush Morgan Securities, was taken aback by the magnitude of the revision, as THQ lowered its sales projections by as much as 22%.

The company and other, smaller rivals to industry giant Electronics Arts Inc. are failing to get the unit sales they expected because they are making too many games and retailers aren’t ordering the second-tier names, Pachter said.

“The strategy of putting out more games isn’t working,” he said, noting that THQ makes the same number of games as EA but is one-fifth its size in terms of revenue.

Still, Pachter reiterated his “buy” rating on THQ stock, up to $18, because he expects earnings and revenue to improve and because the company has ample cash. Pachter said he does not own any THQ shares.

A THQ spokesman said the company would not comment beyond a news release disclosing the revision.

In revising its forecast, THQ blamed lower-than-expected sales of games for Nintendo Co.’s GameCube consoles and the “Red Faction II” game made for Sony Corp.’s PlayStation 2, as well as retailers’ changing inventory strategies.

Game industry analysts and executives have said retailers are keeping initial orders of new games low to focus on the most popular titles.

THQ said sales in the three months ending Dec. 31 should come in at $215 million to $220 million, or as much as 22% below previous guidance of $270 million to $275 million. The company cut its profit guidance by as much as 60%, to 40 cents to 43 cents a share, from the previous range of 95 cents to $1.

Analysts polled by Thomson First Call had projected, on average, profit of 93 cents a share on revenue of $263.4 million.

The company also announced fourth-quarter charges totaling $6.7 million, including $2 million for settling a 2-year-old shareholder lawsuit. THQ said it tentatively agreed to pay $10.2 million to settle the class-action suit, which claimed the company misled investors. THQ said its insurance might not cover $5 million of the settlement.

Excluding the charges, earnings will be 30 cents to 33 cents a share for the quarter, THQ said.

For all of 2002, THQ said it expected revenue of $478 million to $483 million and earnings of 68 cents to 71 cents a share, excluding charges. Analysts expected earnings of $1.06 a share on revenue of $581 million.

Looking to 2003, THQ said it expected a first-quarter loss of about 15 cents a share on revenue of $50 million.

That compares with a profit of 7 cents a share, on sales of $79.7 million in the first quarter this year.

For all of 2003, THQ said it expected earnings of about 90 cents a share on revenue of about $540 million.

Analysts were forecasting a loss of 11 cents on revenue of $54.6 million for the first quarter, and a full-year profit of $1.38 a share on revenue of $581 million.