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Analysis: THQ's financial troubles may get worse before they get better
Analysis: THQ's financial troubles may get worse before they get better Exclusive
January 17, 2012 | By Chris Morris

January 17, 2012 | By Chris Morris
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    7 comments
More: Console/PC, Exclusive, Business/Marketing



THQ just can't catch a break these days.

While whispers of the company canceling its entire 2014 lineup were quickly discounted by the company, it can't deny the dire state of its stock.

As of Tuesday morning, shares of the industry's fourth largest third-party publisher were trading at just 66 cents. They've hovered under $1 since Dec. 8, two days after the company lowered its revenue guidance. That's 26 trading days below the buck mark.

Once that number hits 30 trading days, things are going to get messy. Assuming the NASDAQ market follows its usual protocols, it will send a deficiency notice to the company after hitting the 30 day milestone – the first step in a possible delisting of the stock.

That notice (which will be followed by an 8K filing with the SEC by THQ) could further rattle already nervous investors. But does it mean a delisting is a certain thing? Hardly.

Assuming the stock doesn't rebound sharply in the coming days and that deficiency notice is, in fact, served, here's what you can expect:

THQ will have 180 days – roughly six months – from the point it receives the notice to turn things around and regain compliance, which means keeping its stock above the $1 mark for a minimum of 10 consecutive business days.

At the same time, the company will put together a plan to remedy the situation, in case the stock doesn't turn around naturally. Most commonly, this is done via a reverse stock split. It's expensive, time consuming and embarrassing, but it's also fairly effective – most of the time.

If, after that period, the stock's still not trading above the $1 mark, there's an opportunity for a hearing that could extend the probationary period.

NASDAQ, as a rule, prefers not to delist companies. When possible, they give them the benefit of the doubt. And if THQ can point to a strong lineup of games in development, that could be enough to convince NASDAQ to give it some extra time.

Of course, a delisting threat is far from the only trouble at THQ these days. Analysts have questioned the company's cash flow, which could have helped lead to the rumors of the past few days.

Michael Pachter of Wedbush Securities, in December, wrote he believed "THQ is at risk of running out of cash by the June 2012 quarter" after the company's reduced guidance.

"With another unprofitable year expected in FY:12 (its fourth unprofitable year in the last five years), we expect the company’s cash balance to become an issue if it is unable to turn a profit in the first half of FY:13," said Pachter. "Given its declining licensed and core properties (apart from Saints Row), and an uncertain release schedule next year, we remain unconvinced that FY:13 will be profitable."

Not all the forecasts are quite as dire. Sterne Agee analyst Arvind Bhatia expects THQ to have between $75 million and $100 million in cash on its balance sheet at the end of the fiscal year – less than he had predicted earlier in the year, but not quite as fatalistic as Pachter.

We'll get company commentary on the cash situation next month, most likely – but unless the news is surprisingly optimistic, that's unlikely to affect the stock price.

Investors are looking for a hit –and they're getting desperate. Saints Row 3 and this year's WWE installment were tracking ahead of expectations in December, but as we all saw with last week's NPD numbers, things fell off the cliff industry-wide as the month went on. And even if those titles avoided that fate, neither will qualify as a real blockbuster.

What's worrisome is there's nothing in THQ's announced lineup that has the earmarks of a mega-hit. The closest thing it has is Crytek's work on a Homefront sequel, but that franchise burned a lot of goodwill with its debut offering.

Either way, that title is still a long ways away - and there are a lot of hurdles to clear before then. Until THQ shows it's capable of clearing them, it's going to have trouble getting its stock into healthy territory without utilizing methods, like reducing its number of available shares, that it would rather avoid.


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Comments


Rob Wright
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I liked Metro 2033 quite a bit, but beyond that THQ hasn't published a game that's knocked me over since the days of Company of Heroes and Supreme Commander. Too many UFC, WWE, 50 Cent, and [pick your license]. Homefront was a huge disappointment, but it's hardly to blame for what's happened to THQ. Oh, and they probably should have kept Big Huge Games -- the way Kingdoms of Alamur is shaping up, that looks like a great investment by 38 Studios.

E Zachary Knight
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Hmmm... Is it time for a stock purchase in anticipation of a buy out later?

Rodolfo Rosini
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Looks like the market already discounted it to the point it's expecting to file for bankruptcy. They are in a cash- and time-intensive business of making "hit" games in a market that is shrinking due to digital, mobile and social.



Basically they're all kinds of fucked.

Eric Geer
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Sad to hear that they may be in rough times--they have some games that I am looking forward or intrigued about in 2012/2013-



Metro: Last Light

Darksiders II

South Park: The Game

inSANE

Devil's Third

Warhammer 40,000: Dark Millennium Online

thay thay
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I wouldn't be surprised if the MMO gets canned or delayed. MMOs are costly and the genre is too crowded. THQ should stick with multiplatform games instead of PC only MMO as they still need a breakthrough franchise, unlike EA and Act.

Steven Ulakovich
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THQ seems to be the home of quality titles that are always just on the outside looking in.

thay thay
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I have to disagree. If anything THQ over hypes but under delivers. For example homefront, this game had such potential. But they rushed it fearing BF3. Since it was rushed, it was a buggy mess online. When you compare HF to BF3, BF3 is superior. I think having crytek to make the sequel is a step in the right direction as their CE3 may be be better tech than the all purpose UE3.



I hope THQ survives as the game industry needs more competition in the publishing sector, as EA and Act already have too much power. THQ's CEO has to set more rational expectations on sale projections and focus on game quality. He talks like all is rosy when clearly that is not the case.


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