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THQ: Is this the beginning of the end?

THQ: Is this the beginning of the end?

November 5, 2012 | By Chris Morris

It's starting to look like THQ is entering the end game.

The company beat the forecasts of financial analysts Monday, but tempered that good news with a lot of bad. Earnings guidance was suspended. The guidance for the rest of this fiscal year? Just forget about that, said the company. Big games? Delayed - with the biggest being pushed into the next fiscal year. And the money? Running short.

On the company's quarterly conference call, it added to the misery by refusing to take questions from analysts - citing its efforts to evaluate "strategic and financing alternatives intended to improve THQ's overall liquidity." Basically, it told the financial world, it doesn't have any answers for the litany of questions investors currently have.

It's sobering news - and while THQ did its best to give it an upbeat spin, even the most hopeful of observers now have to start wondering if what we're seeing is the beginning of a death rattle for what was once the industry's third largest publisher.

Investors have certainly lost faith. After THQ's 10 for 1 reverse stock split on July 9, the company's stock has continued to slide - falling nearly 60 percent at one point. (Shares closed Monday slightly higher at $3.02 per share - and were suspended in after hours trading - but they're likely to fall hard in trading Tuesday.)

As I read the earnings and listened to the truncated earnings call, I thought back to a conversation I had with THQ chairman and CEO Brian Farrell at E3 this year.

"We don't have a lot of room to run, so we've got to execute flawlessly," he said at the time. Obviously, the company hasn't.

Interestingly, Farrell largely stuck to the background in Monday's earnings announcement. He had a quick paragraph stuck to the bottom of the earnings announcement - and bookended the quick call with analysts. But the spotlight was clearly on new president Jason Rubin.

That might have been to start putting a new public face on the company, as investor faith in Farrell has seemingly wavered. But if that was the plan, Rubin's comments were not the sort of thing you'd expect an executive to say in order to build confidence.

In the earnings call, he essentially painted Company of Heroes 2, Metro: Last Light and South Park: The Stick of Truth as being games that weren't shaping up well when he came on board. None, he said, were as good as Darksiders II, the commercially disappointing title that earned a respectable, but not awe-inspiring Metcritic score of 84.

Delaying Company of Heroes 2 and Metro: Last Light by a month or two, though, isn't something that implies substantial changes are being made. If it wasn't obvious before, it's now crystal clear that THQ appears to be putting all of its collective eggs into the South Park basket.

On the upside, the game looked great at E3 in June. On the downside... South Park has a mixed track record in the videogame space. And the TV series is now 16 years old. While its humor is still sharp, it's less cutting-edge than it used to be.

Of course, it's better to delay games when their quality levels aren't up to standards. I'm not arguing otherwise. But THQ's back is certainly against the wall here. And if it's using Rubin as a new frontman to shape a different story to tell investors, he's going to need more.

Again, Farrell said it best in June: "I've been doing this long enough to know that the end of the day, the product will drive the stock price," he said.

Overshadowing all of this is the lingering threat that THQ might not have the money to ride out those delays. The company has already drawn $21 million from its line of credit - and its cash reserves are down to $36 million.

It has tapped Centerview Partners to help it raise capital and address the August 2014 due date of its $100 million 5% convertible senior notes. (But as the company acknowledged in its earnings, "there can be no assurance that the evaluation of strategic and financing alternatives will result in a transaction or financing, or that, if completed, said transaction and/or financing will be on attractive terms.")

"Strategic alternatives" is one of those business phrases that usually means the company is shopping itself around for a buyer. So, while it's hoping things will get better, they could get a lot worse - a lot quicker.

Once more, let's harken back to that June conversation:

"We want to show the shareholders that the heavy lifting is done," said Farrell at the time. "The last six months have been an exercise in great pain and suffering. We feel like we're getting there. We've taken a lot of negative things in the press - and frankly a lot of that was deserved. This company has changed. We have strong, new leadership. ... It's starting to come together."

We can debate whether that was true at the time. But with today's announcements, it's starting to look like whatever was coming together is starting to fall apart now.

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