With strong Darksiders launch, THQ shows January game sales are off to good start

THQ has struggled as a mid-tier company in the video game industry. But its third fiscal quarter earnings report today shows that there’s life in the middle of the pack.

The earnings report today shed light on a few trends of interest to everyone in video games. First, THQ is diversifying into digital content at a faster rate, much as other traditional game companies are doing. Second, while its sales in the fourth quarter were weak, sales in January look promising because of the launch of its long-awaited apocalyptic combat title, Darksiders. That could make people believe the core game industry will recover in 2010. And third, the mid-tier companies that keep an eye on their costs are able to turn a profit, as THQ did this quarter.

That should be encouraging to the whole game industry, which suffered losses and lower revenues in 2009 as the recession took a bite out of sales. And it should tell the upstarts of the iPhone, Facebook, and online multiplayer game markets that the bigger brands from the traditional game companies are going to make a run at the new markets. THQ shares rose 8 percent in after-market trading, after the earnings were announced.

For the quarter ended Dec. 31, THQ reported net income of  $542,000, or 1 cent a share, compared to a loss of  $191 million, or $2.86 a share, a year ago.  Revenues were $356.7 million for the quarter, flat compared to $357.3 million a year ago. THQ actually missed analysts target of non-GAAP earnings of 41 cents a share. The company reported, after one-time items, earnings per share of 35 cents. While Wall Street expected more, THQ said it met its own targets.

On the digital content side, THQ pledged it would invest more heavily in online-only titles. It has repositioned its Rainbow and Juice game studios to focus on digital content and is cutting 60 jobs in the process. Meanwhile, it is opening a game studio in Montreal that is expected to create hundreds of jobs and benefit from Canadian government subsidies.

Farrell said on a conference call that new games are taking shape. The company expects to launch its Company of Heroes online-only free-to-play game in South Korea as well as the U.S. And THQ is working on an online-only wrestling title based on its WWE license. Farrell said the company will attack the iPhone and Facebook game markets as well, though the revenues opportunities there are relatively small for now. And he said the company will talk about a massively multiplayer online game — based on its Warhammer 40K series — at the E3 trade show this summer.

All of these digital content games are investments for the future and aren’t expected to generate a huge amount of revenues this year.

Darksiders, which was released in early January, sold 1.2 million in its first four weeks. (Those sales will show up in THQ’s fourth fiscal quarter ending March 31). Farrell said he was very pleased with the results of Darksiders, even in a crowded market. Some feared that the big budget game, where you play one of the Four Horsemen of the Apocalypse who is wrongly blamed for a catastrophe, would miss its targets. But that number is pretty good for a brand new game and it is one example of a number of games across the industry — Mass Effect 2, Bayonetta, Star Trek  Online and Sony’s MAG — that have raised expectations for good January sales.

“Christmas came a little bit late this year,” said Brian Farrell, chief executive officer of Calabasas, Calif.-based THQ. “Januar is off to a great start, not just for us but the industry as a whole.”

THQ continues to invest in some big budget titles. Upcoming games include Homefront, a new title set in the Red Faction universe, an Ultimate Fighting Championship title, and another Saints Row open world game (the latter coming fiscal year 2012). Casual titles are also performing according to plan and those games are coming in at much lower costs than they were in the past, Farrell said.

The game console owners could help 2010 sales by cutting hardware prices again. But the market may also get a boost from upcoming hardware add-ons — Microsoft’s Project Natal and Sony’s new Motion Controller — that could generate new demand for games where players can control games with body gestures rather than controllers. (In an interesting preannouncement, Farrell referred to the Sony Motion Controller multiple times as “Arc”).

The overall performance is much better than a year ago, when THQ had disastrous results and had to lay off hundreds. The company continues to shift its investments into digital content, without losing its shirt in a big way. As I noted earlier, that should give the game industry’s middle tier some hope.

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