Some video game publishers' recent results might make you forget that we should be in the sweet spot of the video game console upgrade cycle. THQ Inc. (Nasdaq: THQI ) is in this camp.
THQ's third-quarter net income dropped a whopping 75% to $15.5 million, or $0.23 per share. However, revenues increased 7% to $509.6 million. Stock compensation expense helped drag down the quarter. On a non-GAAP basis, THQ would have reported earnings of $0.24 per share.
Hold on, though. The quarter also included $27 million in charges related to some project cancellations and write-downs related to certain intellectual properties, as well as $20 million in accelerated amortization expense. Got all that?
Of course, THQ's tough times are old news. Last October, it reduced its fiscal 2008 guidance by a long shot because of product delays and flagging sales. And in January, we got a preview of the quarter, and the stock got hammered on word it was closing down a small studio, canceling some titles, and lowering its third-quarter guidance to $0.22 per share (which, as you can see, it beat just barely).
Maybe it's tough not to be Electronic Arts (Nasdaq: ERTS ) or Activision (Nasdaq: ATVI ) (and judging by Electronic Arts' most recent quarter, it's not exactly a cake walk for leaders, either). THQ may have some high-profile partners providing characters for its games -- like World Wrestling Entertainment (NYSE: WWE ) , Disney (NYSE: DIS ) , and Viacom's (NYSE: VIA ) Nickelodeon -- but apparently, it's just not enough. Nor does the popularity of consoles like the Wii, PlayStation 3, or Xbox seem to be helping THQ much.
I believe in the lasting trend of video games as entertainment for rapidly expanding demographics -- it's a hot sector that should show impressive growth. However, I'd prefer to focus on the companies that seem to have the leadership positions. THQ's recent struggles tell me this is a stock to pause on for now.