Analysis: What's next for THQ?

The cloud hovering over THQ's corporate head got a lot darker Wednesday – and the long-term forecast is pretty uncertain. While there's certainly nothing happy about 240 employees losing their jobs and it's never a good sign when a CEO slashes his own salary, the actions could be the start of what THQ needs to do to ensure its long-term survival. But they may not be the end. For most people, the troubles at the battered publisher became obvious when rumors it had cancelled its entire 2014 lineup began to circulate. The company quickly shot those down, but it was enough to raise eyebrows. It soon became obvious that a stock delisting notice was looming and the company hadn't yet hit bottom. Whether yesterday's cuts reflect that bottom is hard to say, but it seems unlikely. THQ's hoping that its renewed focus on core games can bring it back into compliance with Nasdaq and launch a turnaround to return it to its glory days. Problem is: Investors and analysts remain skeptical. "We believe THQ continues to lack a critical mass of high quality games with multi-million unit sales status and has yet to show any ability to execute this console cycle," says Eric Handler of MKM Partners. "While we recognize the need to get smaller before growing again, we lack conviction in when (or if) that upturn may come." Dumping licensed kids games from its portfolio shed a lot of unprofitable titles, but completely walking away from the genre could have been throwing the baby out with the bathwater, since the company hasn't fully explored the mobile and freemium markets. (You don't have to look any further than Capcom's success with its Smurfs and Snoopy iOS games to know there's still money to be made with licensed products.) Additionally, THQ's vow that it is through with licensed kids games sounds an awful lot like an alcoholic swearing off of booze. Sometimes returning to old habits is just too hard to resist. Think back to 2009, when the company first sounded the alarm about those sorts of games. CEO Brian Farrell admitted "the kids' pie is getting sliced in smaller pieces, which makes it less profitable," yet announced a deal with Dreamworks just a few months later. And while news of a reorganization may boost the confidence of some investors, anyone who scratches the surface is going to find that the company announced another restructuring just five months ago, when it laid off 200 employees and closed its Australian Studio. (Since 2008, THQ has laid off nearly 700 people.) At the time, the publisher said it planned to concentrate on core games, iOS/Facebook, MMOs and digital sales. We'll hopefully learn in today's earnings call what the new focus is, but if the focus is once again split, it's not likely to give investors warm fuzzies. It may well be that the company will have to consider selling off some IPs if this restructuring doesn't pan out. And that's where things get really worrisome. Saints Row could find a buyer pretty easily, given its success. Warhammer has been mismanaged, but still has an audience hungry for a game worthy of the brand. And EA or Take-Two would likely swoop in to grab the WWE and/or UFC license at a reduced price. But then things get murky. Homefront failed to build an audience and seems too derivative of other shooters to attract much interest. Darksiders isn't a bad game, but this year's sequel is only expected to ship 1-1.5 million units, which doesn't exactly put it in blockbuster territory. A privately held publisher like Bethesda might be able to do something with it, but again, the sales price would be low. Whatever Patrice Desilets is creating will certainly be sniffed at. And assuming the Guillermo del Toro game is still underway, it could find a new home as well. But both are unknowns, which lowers their potential asking price. It is, of course, much too soon to begin carving up THQ. Analysts aren't cutting their ratings at this point and we're just at the beginning of the turnaround process. Before there's a fire sale, there will be management shuffles and a few other steps to try first. And there actually is some good news for the company these days: That delisting warning from Nasdaq is likely to be a flash in the pan. The company survived in 2006 when it failed to file a 10Q quarterly report with the SEC. (It, like Activision and Take-Two, was in the midst of an investigation into alleged irregularities in stock option grant practices.) This is a bit different, but if the company can get the stock above $1 for 10 consecutive days, that warning will go away. It will first attempt that by outlining its turnaround plan. Failing that, expect a reverse stock split. And while neither is a guaranteed solution, the odds are fairly good it can escape that particular noose. The company faces an extremely difficult road – and if it plays its cards right, it's in a survivable situation. But THQ hasn't shown itself to be particularly adept at that in recent years. And that's what has the market so worried.