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THQ's Earnings Slump Despite Increased Sales

The game publisher's profit falls 25% from a year earlier on higher licensing costs and a product that flopped.

October 21, 2003|Alex Pham | Times Staff Writer

Despite a 30% jump in sales of its video games, THQ Inc. posted lower profit Monday as a result of higher-than-usual marketing and licensing costs, as well as a game that sold poorly, during its fiscal second quarter.

The Calabasas game publisher reported net income of $3.6 million, or 9 cents a share, down 25% from $4.8 million, or 12 cents, a year earlier. Revenue, however, grew to $127 million in the quarter ended Sept. 30.

The results included a one-time net gain of $2.5 million from settling an insurance claim related to shareholder lawsuits filed against the firm last year.

Excluding the insurance settlement, THQ earned 3 cents a share. Analysts surveyed by Thomson First Call had expected the company's per-share earnings to be a penny.

THQ shares, which rose 30 cents to $18.08 in regular Nasdaq trading, fell to $17.77 in after-hours trading following the earnings announcement.

The company is known for publishing games based on the movie "Finding Nemo," the television show "SpongeBob SquarePants" and the WWE wrestling league.

In recent years, THQ has tried to cultivate its own franchises rather than rely on -- and pay steep licensing fees for -- outside brands. The strategy has yielded mixed results. Its two "Red Faction" action games have sold more than 1 million copies, but others haven't fared as well.

"When you're trying to create new products, some of it will work, some not," said Stewart A. Halpern, analyst with RBC Capital Markets.

THQ's latest original game, "Alter Echo," sold so few copies that executives wrote off the entire cost of the game in the second quarter rather than over several quarters.

"They're trying to put it behind them so they can have a clean balance sheet in the future," said Michael Pachter, analyst at Wedbush Morgan Securities.

At the same time, increased sales from outside franchises meant the firm had to pay more in licensing fees. Those payments came to 12% of THQ's sales in the quarter, higher than the company's historical average of 8%, Chief Executive Brian Farrell said.

"We expect those costs to return to the 8% range in the back half of the year," Farrell said.

THQ's earnings also were depressed by marketing costs for games that won't debut until at least Christmas, Farrell said.

Analysts have high expectations for the holiday quarter, which could account for nearly 70% of THQ's sales this year.

THQ also announced that Chief Financial Officer Fred Gysi would step down once a replacement was found.

At the same time, it appointed Eric Doctorow as chief operating officer. The former president of Paramount Pictures' home entertainment division, Doctorow will replace Jeff Lapin, who left this year.

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