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THQ turnaround shows it can cut, but can it grow?

February 3, 2010 |  5:08 pm
UFC Undisputed 2 
A screen shot from UFC 2009 Undisputed, THQ's top selling game in 2009. Credit: THQ.

THQ, the publisher of UFC Undisputed and WWE video games, this afternoon reported it had eked a $542,000 profit, a penny a share, on sales of $357 million for its third quarter ended Dec. 31.

Just a year ago, the Agoura Hills game company looked like it might have been down for the count. It lost $192 million, also on $357 million in sales. THQ marshaled its resources, or perhaps pared them down, and launched a turnaround plan. The idea: cut costs, focus on just a couple of hard-core games and build on its strength in wrestling games and games for smaller kids.

So how's it going?

So far, so good. The company slimmed to 1,800 employees, down from 2,400 just 14 months ago. Once the No. 3 publisher, THQ is now No. 4 after Activision, Electronic Arts and Ubisoft Entertainment. But it seems to be finding a better groove in the lighter weight category, where it can pick its battles more selectively. Those cuts paid dividends; THQ turned a profit last quarter on the same revenue it took in a year ago, when it posted a massive loss.

"They've turned it around," said Michael Pachter, an analyst with Wedbush Morgan Securities. "The question is whether they can grow revenue."

Brian Farrell, THQ's longtime boss, insists the answer is yes.

"We've gained market share, and we're ramping up our digital games initiatives," Farrell told Wall Street analysts during a conference call, saying the company is "positioned for growth."

Key to THQ's plan is to test out new games online first where development costs are lower, via Facebook or downloads on Xbox Live or PlayStation Network. If the titles get traction, the game gets moved up the food chain as a bigger-budget disc-based console franchise.

It's a smart strategy, Pachter said. Though the digital download and online games business is still small, it's growing fast. Any upside, however minor, could move the needle for THQ, where "every little bit means a lot," Pachter said.

-- Alex Pham