THQ (NASDAQ:THQI) may not have the most striking brand in the industry, but it has a strategy that is working.
The No. 2 independent video game publisher, THQ saw fourth-quarter sales jump 84% to $123 million, primarily on the strength of its new motocross game MX Unleashed. As a result, the company was able to turn last year's $0.20 per-share loss into a $5.4 million, or $0.14 per share, profit. And though both sales and EPS came in ahead of a forecast already raised back on March 26, it is management's outlook for fiscal 2005 that has the stock up more than 10% in afternoon trading.
Over the next four quarters, THQ expects to earn between $1.05 and $1.10 per share on $680 million in sales, vs. $0.94 per share on sales of $655 million. Because the gains will come towards the back end of the year, however, the company expects to record a $0.10 per-share loss on $85 million in first-quarter sales, rather than a profit.
But there's more good news: Gross margins for fiscal 2004 climbed from 61.9% to 64.2%, and operating margins almost tripled to 7.6%.
What's especially interesting is that THQ has been successful without hitting the core demographic for gamers. It doesn't have Activision's (NASDAQ:ATVI) Tony Hawk, Microsoft's (NASDAQ:MSFT) Halo, Sony's (NYSE:SNE) Gran Turismo, Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto, or anything like Electronic Arts' (NASDAQ:ERTS) devastating lineup.
But THQ has hit the younger audience hard. In fiscal 2004, the company sold more than 5 million copies of a game based on Disney (NYSE:DIS) and Pixar's (NASDAQ:PIXR) Finding Nemo, 1 million units of Tak and the Power of Juju, and 3.3 million units of SpongeBob SquarePants.
It's also notable that roughly a quarter of THQ's sales come from Nintendo's Game Boy Advance, which also targets a younger audience.
Successful as this strategy has been, THQ hopes to hit the core demo with the release of such titles as Full Spectrum Warrior, S.T.A.L.K.E.R, and Warhammer. The names should be dead giveaways that these aren't intended for SpongeBob Square Pants fans. On the conference call (transcript provided by CCBN), CEO Brian Farrell indicated that "there is one fairly significant title that has not yet been announced."
When it comes to software, the bulk of our discussions thus far have been about Electronic Arts and Activision and their mega blockbusters. But it's clear that THQ is worth a look as another solid player in this rapidly growing industry.
Give us your take on the THQ and Video & PC Games discussion boards.
Fool contributor Jeff Hwang owns shares of Electronic Arts.
