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THQ CEO admits confidence was “misplaced” on children’s video games

THQ chief executive Brian Farrell ate some major crow on his company’s analyst conference call today.

“We anticipated our third fiscal quarter would be the largest in our company’s history,” Farrell said. “Unfortunately, we were wrong.”

The weakness in the third fiscal quarter was due to poor sales of the uDraw tablet, a kid-oriented drawing tablet that was a hit last year on the Wii. But poor sales of uDraw dragged down the quarterly performance, even though the company had big hits with WWE ’12 (2 million units sold) and Saints Row the Third (3.6 million units sold).

In the call, the company detailed the disastrous uDraw tablet sales on high-definition platforms. The company shipped 1 million tablets into the market and sell-through was poor. Sales of the tablet turned out to be $100 million less than expected, while other casual/kids titles were $25 million below the target. One of the reasons is that the iPad and iPod Touch have taken the kids market by storm in the past year, since kids can get thousands of apps for free or at lost costs.

The company was confident from last year’s sales that the uDraw title would be a big seller, but Farrell said, “Our confidence was misplaced.” The failure prompted THQ to analyze its business from “top to bottom,” Farrell said.

Farrell’s straight talk is admirable, but it doesn’t seem to have pleased investors. In after-hours trading, THQ’s stock is down 26 percent to 56 cents a share. That gives the company a valuation of $51.9 million, barely above the $47 million in cash that the company has.

“We were looking at uDraw as a bridge to a digital revenue market,” Farrell said. “But that bridge turned out to be a plank we walked off of.”

THQ has had to heavily discount the uDraw tablets, resulting it $33 million in losses. Further production of uDraw hardware has been halted. A charge of $11 million against earnings will be taken in the fiscal fourth quarter ending March 31. About $8.5 million of that charge will be cash.

Farrell said THQ has canceled the Adidas My Coach game and it now expects to sell 1.5 million units (below a previous estimate) of UFC Undisputed in the fourth fiscal quarter ending March 31. THQ will now focus on its hardcore game properties. The various cutbacks, including layoffs of 240 employees, will result in $160 million in lower annual spending this year.

“Over the past two months we reviewed all aspects of our business,” Farrell said. “Our plan is to transform THQ into a smaller, more agile entertainment company.”

The company has been encouraged by feedback on the Darksiders II game and is doubling its expected marketing spending on the game, which will come out in June.

Last week, THQ launched its Margaritaville Online social game on Facebook. Regarding that, Farrell said the rate of monetization and engagement is higher than usual for such a game.

John Taylor, an analyst at Arcadia, noted on the call that THQ has been trying to restructure itself for a few years now and it hasn’t had success yet. He asked if there was a contingency plan if the current restructuring doesn’t work. Farrell said the company is confident it has adequate resources to execute on its current plan.

THQ’s five remaining studios include Volition (maker of Saints Row the Third), THQ Montreal (headed by Patrice Desilets, a former Ubisoft star developer), Vigil (maker of Darksiders II and Dark Milllennium Online), Relic, and a studio in San Diego. THQ is also working with outside studios such as Turtle Rock.

Obsidian is working on a South Park game for THQ. Metro: Last Light has been pushed back to the first quarter of 2013 so that it can be refined.

Farrell said the company would invest in hardcore games for the next-generation consoles coming in the next year or so.

THQ expects Saints Row the Third to ship more than 5 million or 6 million units over its life. Farrell said that the Saints Row the Third character creator has been used to create 10 million avatars in the game. The WWE ’12 title is up 29 percent over sales of the previous wrestling game. THQ believes it will end the fiscal year with $25 million in cash.

Farrell said the company is “being realistic about our resources” and is looking for a partner for the launch of Dark Millennium Online, a massively multiplayer online game now scheduled for fiscal 2014 and beyond.


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