THQ Q1 - Net loss of $38.4M, Red Faction shelved

THQ has released its financials for Q1 of FY12, and it finds the firm with net sales of $195.2 million, compared with $149.4 million in the prior-year period, and a net loss of $38.4 million.

THQ "disappointed" in Q1 results

For the three months ended June 30, 2011, the company reported a net loss of $38.4 million, compared with a net loss of $30.1 million in the prior-year period.

"We are disappointed in our first quarter financial performance. Sales of Red Faction: Armageddon and our licensed kids titles were below our expectations, and the late release of UFC Personal Trainer also adversely impacted the quarter," said Brian Farrell, THQ president and CFO.

"Despite a light first half, we are looking forward to a strong and profitable second half, including what we expect to be the biggest third quarter, both in revenue and earnings per share, in our company's history, with proven franchises Saints Row, WWE and the uDraw GameTablet, all launching in November."

Planned Q2 releases are Warhammer 40,000: Space Marine, Penguins of Madagascar, and Barbie Jet, Set and Style.

Farrell said Red Faction did not resonate with "a sufficiently broad console" audience, which he said proves that even core titles must meet higher quality standards to do so.

He also said better marketing for quality franchises will be a goal going forward.

"In today's hit driven core gaming business, even highly polished titles with a reasonable following like Red Faction face a bar which continues to move higher," he said.

"Our core game titles moving forward must meet a very high quality bar with strong creativity and differentiation, appeal to a broader audience, and be aggressively marketed."

Farrell said in the investors call that followed the figures release that future business will be based less on kids games, with THQ's HD uDraw Tablet and family Kinect titles ramping up casual support for browser, mobile and Facebook titles.

Only profitable games, no matter if they're AAA or indie, will be considered in the future.

"We expect strong revenue and profit with Saint's Row: The Third, uDraw, WWE 12, and UFC Undisputed 3," he said.

"In fact, we expect Q3 to be biggest in revenue and profit in THQ history. We will focus on better quality with a broader appeal to core audiences and push to drive our digital revenues.

"Our last three launches, we have been disappointed in quality. The entire core team knows it. We're making sure our next big titles meet the quality bar, and we're making sure the time and resources are there."

THQ doesn't "intend to carry forward" with the Red Faction series, "in any meaningful way," according to Farrell.

Saints Row: The Third was used as an example of THQ working with the developer to make sure a high quality bar is set, using former Metacritic ratings for the series as something to mirror. Pre-orders for the title have surpassed the previous Saints Row entry, and there are still 15 weeks to go before it's released.

The previous game has sold 4 million life-to-date, and the upcoming title will have "a year's worth" of DLC.

Farrell also said THQ doesn't "intend to carry forward" with the Red Faction series "in any meaningful way," considering that the "two successive versions just found a niche."

Volition will instead be focusing on the Saint's Row franchise and Guillermo del Toro's Insane.

Farrell said the firm has made "tremendous progress" in "reshaping" THQ, but it has "more to do," and strong releases in the second half of the year will prove it remains "committed to evolving".

Q1 FY12 highlights and developments

THQ said in its release it will continue to focus on its "four-pillar digital strategy":

1. Create a digital ecosystem around key title console launches such as the November 15 release of Saints Row: The Third, with a "robust DLC schedule, online Season Pass, and in-game store for consumables".
2. Create a critical mass of users on social media platforms such as Facebook and mobile platforms including iOS and Android, using THQ-owned or branded content, such as the upcoming fall release of MargaritavilleOnline.
3. Create an ongoing digital revenue stream with the launch of the company's MMO, Warhammer 40,000: Dark Millennium Online.
4. Continue to drive digital end user sales through existing channels as well as the re-launch of THQ.com.

Titles slated for the second half of the year include: Saints Row: The Third, uDraw HD GameTablet, WWE '12, and UFC Undisputed 3.

UFC Undisputed titles have moved 7 million units life-to-date.

Q4 will be anchored by UFC: Undisputed 3 - enhanced with new features like the pride fighting league - and THQ plans to market it for both the causal and core. The series has moved 7 million units life-to-date.

Darksiders 2 is still on the slate for the first half of 2013, as is Metro: Last Light: Farrell said the firm plans to provide better marketing for the title than it did with its predecessor, Metro 2033.

FY13 will include the MMO WH40K: Dark Millennium Online, Devil's Third, and an unannounced core title.

Insane is still slated for calendar 2013 along with THQ's unannounced Turtle Rock title, and while there isn't a schedule for Patrice Désilets' original core game as yet, Brian Farrell said the developer is currently running ideas by the firm as it is still in the planning phase.

Farrell said it will be "very" creative and unique.

"We have already assembled a team in Montreal," said Farrell. "I have not personally discussed the IP that he has in mind. I know he has several ideas that we want to run through our greenlight process. The idea is to create a AAA, core gaming experience using the best of his creative abilities."

Farrell said the firm is always revamping the greenlighting process, and any changes made to it hitherto will not be based on the less-than stellar launches of the firm's last three games. Speaking bluntly, Farrell said that Homefront 2 would at least have an install base when it releases.

Digital and Dark Millennium Online

Farrell said that online and digital is a strategic area for THQ, and it's targeting double-digit digital year-on-year growth for 2012 and FY13.

He plans to build a "robust digital ecosystem" around its console games, with 20 percent of sales derived from post launch digital offerings. This will be achieved either through DLC, microtransactions, season passes, add-ons and or through consumables.

"Success with [WH40K:DMO] depends on what we can do to break it out beyond the core Warhammer consumer."

THQ plans to use triple-A MMO Warhammer 40,000: Dark Millennium Online to help it achieve this goal. The Warhammer franchise has moved 6.5 million units for the firm, and with the MMO's release, THQ believes it will offer new play incentives and excitement for the broader MMO fan, as well as fans of the IP.

Success would mean a robust multi-year digital revenue stream for the firm, and it plans to market the game to more than just the core Warhammer fan in order to attain this success.

"The universe is rich and deep with a strong following, and our goal is to appeal to the core fans and then break out beyond them," said Farrell. "Our success with it depends on this - the key is to see what we can do to break it out beyond the core Warhammer consumer."

Farrell also touched upon how the firm did with MX vs ATV: Alive, which released at market with a lower price point of $39.99, build a large install base in a quick manner, and rely on digital content to make up the difference. Farrell said the experiment was "noble" but not a success due to the fixed cost of offerings on the market, but he believes the game will have a long shelf life.

"The $39.99 price point, while good just wasn't enough to drive the install base to where we wanted it to be," he told investors. "Obviously the correlary to that, is that on a lower install base, the amount of DLC sales are not what we anticipated."