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Corporate Focus: THQ Stock Price Dives as Earnings Target Is Tweaked

THQ Stock Price Dives as Earnings Target Is Tweaked Corporate Focus By SHELLY GARCIA Senior Reporter You might think that a company reporting net income growth of 50 percent and revenue growth of 43 percent would be pretty bullish about the future. You’d be wrong, at least in the case of THQ Inc. After reporting an exceptionally strong third quarter on Oct. 21, the video game software maker tweaked fourth quarter 2002 guidance, and THQ revised full year 2003 guidance down to a fraction of the growth it experienced in the most recent quarter and in its 2001 fiscal year. Officials at Calabasas-based THQ insist the problem is not with the company, but rather with a weakening economy in which retailers are becoming increasingly wary over consumer demand in the all-important fourth-quarter holiday selling season and beyond. Some analysts wonder if there isn’t more behind THQ’s ho-hum prognostications. Shawn Milne, a research analyst with Soundview Technology Group, said, “You’ve got to peel back the onion and try to understand what they’re saying.” In particular, analysts wonder if the company put too much stock in software for Nintendo’s hand-held Game Boy Advance and GameCube and Microsoft Xbox, platforms that are proving to be far less popular than Sony PlayStation 2. “The company is too tied to Game Boy Advance,” said Milne, one of the few who dialed down their rating on THQ stock to neutral. “Second, the company is not leveraged enough to PlayStation 2. So when you’re misfiring on the best platform and you have a lot of exposure on the slowest platform, you’ve got a problem.” For its third quarter ended Sept. 30, THQ reported net income increased 50 percent to $4.8 million or 12 cents per diluted share on revenues of $97.3 million. That compares with earnings of $3.2 million or 9 cents per diluted share on sales of $68 million for the third quarter of 2001. But no sooner did the company release its financials than it warned that an industry slowdown on the horizon would likely affect its future growth. “Because of the higher level of uncertainty regarding the economy, consumer spending and the resulting growth in platform-installed base, we’re revising our projections of industry growth to 10 percent to 15 percent until we see greater visibility,” said THQ CEO Brian J. Farrell in a conference call. THQ did not change its earlier guidance for the fourth quarter or the full year, but said it would now expect the company’s results to come in at the lower end of the previous range of 95 cents to $1.00 per share on sales of $270 million to $275 million for the fourth quarter and $1.26 to $1.31 per share on revenues of $515 million to $525 million for the full year. However, for 2003, THQ officials said, they anticipate earnings per share of $1.40 on revenues of $585 million, a bump of just over 10 percent in earnings compared to 2002. “When we look at three of our competitors in the range of zero to 12-percent growth, we thought we were out of line at 20-percent growth,” said Farrell in response to a grilling by analysts over the company’s conservatism. One after the other, nearly every one of the analysts that participated in the earnings conference call questioned the rationale behind the meager growth projections, claiming they were out of line with the industry, with the company’s current performance or both. “To go so far away from where you were this close to what was a solid quarter doesn’t make sense to me,” said Heath P. Terry, an analyst with Credit Suisse First Boston. The company’s stock price has reflected that skepticism. On the day of the conference call, Oct. 21, THQ’s stock closed at $23.17. By the next day, the share price had plummeted more than 36 percent to $14.80, well below its previous 52-week low of $16.44. As of Friday, Oct. 25, the shares were trading at $14.35. Farrell insists that the projections are a response to industry trends, not any problems at THQ. “What we are seeing is two things,” he said. “Retailers are being very cautious with initial order quantities, and they’re having a tendency to chase products. What we’re hearing from retailers is the three platforms are not driving the market to the extent retailers had anticipated. Retailers don’t want all three platforms of any particular sku (unit).”

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