THQ Posts Loss

The maker of <I>SpongeBob SquarePants</I> also warns that its next quarter won't meet Street expectations.
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Updated from 4:50 p.m. EDT

THQ

(THQI)

on Wednesday posted a fiscal first-quarter loss about even with that of the year-ago period despite a nearly 80% jump in revenue.

That result bested analysts' estimates, but the video-game software publisher warned that it would fall shy of Wall Street's expectations in its coming quarter. More troubling, perhaps, is that the company declined to adjust upward its full-year guidance, despite the bottom-line beat.

Still, after an initial selloff, investors seemed to weather the news, sending the company's stock down less than 1% in recent after-hours exchanges.

The flat loss was the result of increased marketing to support two new titles, company CFO Ed Zinser said on a conference call. THQ also saw a jump in product development expenses attributable to the company's preparation of games for the next generation of consoles that are set to debut over the next 18 months, he said.

Meanwhile, THQ's decision to maintain guidance reflects the delayed launch of one of its key titles and the fact that this is a transition year in the console cycle, Zinser said.

"There's a lot of variables out there for the next three quarters," Zinser said in an interview with

TheStreet.com

.

In the quarter ended June 30, THQ lost $3.96 million, or 10 cents a share, on $157.97 million in sales. In the same period a year earlier, the company lost $3.9 million, or 10 cents a share, on sales of $88.19 million.

On average, analysts polled by Thomson First Call had projected that the company would lose 15 cents a share on sales of $137.4 million. THQ

forecast in May that it would lose 15 cents a share on sales ranging from $135 million to $140 million.

Despite beating the bottom line in the quarter expectations, THQ reiterated its full-year guidance of $1 a share on about $750 million in revenue, implying that it expects the next quarters to come in worse than previously expected. For its second quarter, the company predicted it would lose 10 cents a share on sales of about $125 million.

In May, the company had predicted that second-quarter results would be "substantially better" than those in the first quarter. Analysts have predicted that the company would lose 5 cents a share in the second quarter on sales of about $127.19 million.

In the same quarter a year ago, THQ lost 16 cents a share on $96.3 million in sales.

In after-hours trading, THQ's shares were off 24 cents, or 0.7%, to $35.43. Earlier in the after-hours session, shares traded off as much as 2%. The company's stock closed regular trading off 28 cents, or 0.8%, to $35.67.

The company's revenue in the first quarter was boosted by sales of two new titles,

Destroy All Humans

and

Juiced

, the company said. Those two titles, plus

WWE Wrestlemania 21

, accounted for about half of the company's sales in the quarter, Zinser said on the conference call.

THQ also saw strong gains in its wireless division, which offers games and other entertainment for cell phone users. Sales at THQ Wireless more than tripled from those posted a year ago to $10.2 million.

Zinser attributed a good deal of that growth to its Star Wars offerings, which included a game based on the recent movie

Star Wars: Revenge of the Sith.

Star Wars products alone accounted for 1 million of the wireless division's revenue, he said.

In addition to the burgeoning sales, the company gross margin swelled in the quarter, jumping to 65.6% of sales from 61.7% of sales in the year-ago period. Higher average prices for its titles and a greater percentage of sales from its higher-margin wireless business helped boost the company's overall margin, Zinser said.

But those gains were evened out by increased costs.

The increase in THQ's license and royalty costs outpaced its sales growth, nearly doubling to $13.7 million. However, Zinser said the numbers didn't render an accurate picture of the company's licensing costs in the quarter.

In the year-ago period, the company saw a one-time gain that lowered its licensing costs in the quarter. Setting aside that gain, the company's licensing costs would have actually declined as a portion of sales this past quarter, he said.

The rise in other costs was much less murky. Product development costs, for instance, rose 91% to $19.1 million as the company bulked up on its employee numbers.

The company now has a staff of roughly 1,000 in software development, up from about 600 a year ago, Zinser said. Much of that development effort is focused on next-generation products, he said, for soon-to-be released consoles.

Microsoft

(MSFT) - Get Report

plans to release its Xbox 360 console later this year, while

Sony

(SNE) - Get Report

and

Nintendo

plan to launch their next-generation machines next year.

Noting that the cost of developing next-generation games is about 50% greater than those for current-generation systems, Zinser said THQ expects product development expenses to continue to rise this year. Those costs won't start to tail off as a percentage of sales until next fiscal year, he said.

But the payoff will be in increased sales, Zinser said. THQ expects to hit $1 billion in sales in 2007.

In addition to product development costs, THQ also saw a jump in marketing expenses, which more than doubled to $36.96 million. Most of that increase was due to promotional support for

Juiced

and

Destroy All Humans

, Zinser said.

Because both were new titles, the company needed to "overinvest" in marketing to establish them, he said. Marketing costs should decrease, at least as a portion of sales, in coming quarters as the company launches sequels to some of its tried-and-true franchises, he said.