A year ago, video game publisher THQ Inc. was teetering on the financial abyss.
It had lost more than $330 million, burned through half its cash and the company’s stock had tumbled from more than $21 in 2008 to about $3. THQ appeared to be a ripe acquisition target for a larger competitor. One analyst even told the Business Journal that the company had a 50-50 chance of going bankrupt.
But Agoura Hills-based THQ seems to have successfully rebooted. Its stock now trades at more than $7.50 and some analysts are bullish on it again. The company has stabilized revenue and slashed expenses. Perhaps most importantly, THQ has started to turn a profit, albeit a small one: Last quarter it had a net income of over $500,000 compared with a $191 million loss for the same period last year.
Analysts credited in part an aggressive turnaround plan pushed by Chief Executive Brian Farrell that included cutting $220 million in expenses and laying off almost 600 employees.
THQ has also revamped its portfolio of games, focusing on making fewer titles that are of higher quality. Before this year, the company’s games typically earned mediocre reviews. Now, five of its six games targeted at hardcore players in 2010 have a rating of at least 80 out of 100 on Metacritic.com, a Web site that compiles reviews of games, movies and TV shows.
“This is a company whose enterprise value last year was essentially zero,” said Mike Hickey, an analyst with Janco Partners in Greenwood Village, Colo., who had given the odds on THQ going bankrupt. “But you have to give credit to management. They were exceedingly aggressive in reducing cost and focusing on strong games, and it looks like the market is coming back.”
A spokeswoman for THQ declined to comment because the company is in the quiet period that precedes an earnings call. But in a recent conference call with analysts, Farrell said he was “pleased with our progress to date and we intend to carry this momentum forward.”
At the heart of THQ’s turnaround is a change in the kind of games it produces. Before, the company relied heavily on licensed properties from films and TV shows, such as games based on Disney-Pixar movie titles. Such games carry instant name recognition and might sell well, but THQ’s share of the profits is diminished because part of the revenue goes to the license holder.
Now, THQ is focusing more on developing its original franchises, including sequels to its “Red Faction,” “Darksiders” and “Saints Row.” In the past, it could take the company two years or more to release sequels to its original franchises. But it now appears to be trying to publish new games in less than 24 months, Doug Creutz, an analyst with New York-based Cowen and Co., wrote in a recent note to investors. Creutz recently upgraded THQ’s stock from “neutral” to “outperform.”
THQ has also kept its stranglehold on video games featuring wrestling and fighting matches, which have traditionally sold well. The company recently inked a deal with World Wrestling Entertainment to develop WWE games for the next eight years. Last year, THQ released its first game based on Ultimate Fighting Championship that analysts said will likely sell a total of 2.2 million copies – a solid performance for a first-year franchise.
Finally, the company is trying to turn some of its original games into other media properties, such as TV shows. In February, THQ announced an agreement with the NBC Universal Inc.-owned SyFy channel to make Web and television content based on “de Blob.” While it could be years before such efforts begin to pay off, they open doors to new sources of revenue.
But the company’s turnaround is far from guaranteed. Even well-reviewed games can sell poorly. And THQ is still searching for an original franchise that turns into a consistent blockbuster, similar to the way “Call of Duty” has become a perennial best-seller for local rival Activision Blizzard Inc. in Santa Monica.
One game that could potentially become that big hit is “Homefront,” in which the player takes on the role of a U.S. soldier fighting off an invasion by North Koreans. THQ unveiled a glimpse of the game at last year’s Electronic Entertainment Expo in Los Angeles, and it generated positive buzz. Analysts expect THQ to release the game some time in 2011.
Speed Money
EdgeCast Networks Inc., a Santa Monica company that helps Web sites deliver content at high speeds, raised $10 million from investors, the company announced last week.
EdgeCast sells its services to businesses and Internet companies that typically have thousands of multimedia files, such as video and music, on their Web sites. EdgeCast links these businesses with special servers that allow the files to be streamed and downloaded at faster-than-usual speeds.
The lead investor in the recent fundraising round was Menlo Ventures, a Silicon Valley firm. Steamboat Ventures, the investment arm of Walt Disney Co. and a previous investor in EdgeCast, also participated.
EdgeCast will use the money to develop new services, increase its sales and marketing campaigns, and expand its network of servers. The company has raised $20 million to date and has been profitable since the end of 2009.
Staff reporter Charles Proctor can be reached at [email protected] or at (323) 549-5225, ext. 230.
