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THQ Optimistic as Outlook Brighter for Holiday Season

THQ Optimistic as Outlook Brighter for Holiday Season CORPORATE FOCUS By JACQUELINE FOX, Staff Reporter Economic forecasts for a brighter holiday retail season this year have officials at video game software manufacturing firm THQ Inc. treading into their busiest time of year cautious, but optimistic. Net income for the Calabasas-based company’s second quarter ending Sept. 30 was $3.6 million or 9 cents a share on revenues of $127 million, compared to net income of $4.8 million or 12 cents per share on revenues of $97.3 million for the same quarter a year ago. THQ did earn 6 cents per share from a $4 million settlement with its insurer National Union, which put actual profits at $1.1 million, or 3 cents a share. Nonetheless, THQ positioning is much more solid than it was a year ago, when the company was forced to downgrade its earnings forecast for fiscal year 2003, even after posting a 50 percent growth in net income. The company blamed the weakened economy and unpredictability in the retail sector for the revisions. This year, however, is a new game. Analysts surveyed by Reuters Research, a unit of Reuters Group PLC, were initially expecting THQ to report earnings of a penny a share on revenues of $105.2 million for this year’s second quarter after the company cut its earnings forecast to 1 cent from 8 cents due to the delayed release in September of two new franchise products. But the second quarter also included the release of several other titles that helped offset the cost of the delays, including “SplashDown: Rides Gone Wild” from THQ’s Rainbow Studios in August. New versions THQ is now in the middle of a rollout of several new versions of existing products including a new installment of its popular SpongeBob Square Pants franchise with “SpongeBob Square Pants: Battle For Bikini Bottom” for multiple platforms, as well as the two new products, “Tak and the Power of JuJu” and “Sphinx and the Cursed Mummy.” Net income for the quarter, however, reflected heavy investments in licensing and marketing costs affiliated with the new franchise agreements, according to THQ’s CEO Brian J. Farrell. “You really have to look at the video game business over a lot of quarters, not any one quarter,” said Farrell. “It was a mix issue, and we had a much higher mix (of new products) in September and we’ve also been ramping up on new brands, so we are investing in the future. The fact that we came in higher in revenue shares is fantastic.” Retail holiday sales in 2002 rose only 2.2 percent from the previous year, the worst showing in more than a decade and barely in line with inflation figures. The National Retail Federation (NRF), however, is projecting sales of general merchandise, will climb by 5.7 percent in November and December over last year’s level. Good news for the industry, which earns more than 50 percent of its revenues between November and February, according to analysts’ reports. THQ has also signed agreements with Warner Bros. to publish titles to coincide with a 2004 theatrical release of “The Polar Express,” a co-publishing agreement with Sega Europe to produce three titles based on the “Sonic the Hedgehog” franchise and an agreement with Sony computer Entertainment America to publish Rainbow Studios’ “ATV Offroad Fury 2” in Europe. Discontinuing titles THQ’s decision to discontinue a few poor-performing titles in the last two quarters, coupled with key new licensing agreements, were, according to one analyst, solid moves. “They made the decision to focus on product quality, and killed a bunch of products that did not meet with new standards,” said John Taylor with Arcadia Investment Corp. “That’s certainly helped pull their earnings up. Last year consumers were just not responding to what the industry was selling. THQ has upgraded its overall quality, so they have a better chance of getting their numbers because they are better titles. The wild cards are Tak and Sphinx; we gotta wait to see how the consumer responds to this new list.”

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