Janco Wary Of THQ's Owned IP, Holiday License Outlook

Covering THQ's first quarter earnings, analyst group Janco has said it is skeptical of the publisher's plans to drive up margins with owned IP, and added that in a particularly competitive holiday season, "their software portfolio is weaker then some of their competitors’ offerings in several key areas." Janco's has cast doubt on many of THQ's operational plans, including its outlook for the coming quarter. "Management intends to spend additional marketing dollars to support the release of Stuntman and Juiced," noted the group, "which in our view will only have short term positive impact on sales." "New holiday releases from competitors and their concurrent marketing support of those releases, should 'cut the legs off' the additional Q2 marketing spend," they continued. "We believe ‘great’ games sustain a title’s momentum at retail, not an exaggeration in marketing spend, which in our view casts doubt over the current market buzz for the aforementioned game releases." THQ has claimed that 33% of its coming sales would be made up of owned IP, the "lion’s share" from Stuntman, Juiced, MX, and Frontlines. That figure is up from 20% last year but lower than earlier estimates of 40%. Referring to the numbers, Janco said, "Assuming $1,135 billion in sales, 33% of sales from owned IP would be $375 million. Assuming that 'lion’s share' is representative at 60% of their owned IP sales (seems conservative) and they ship with a $40 AWP (seems very conservative), they would need to ship nearly 6 million units of the aforementioned games (does not seem conservative)." "Considering the operating margin significance of owned IP, any slippage in actual units shipped relative to their forecast could result in missed fiscal ’08 financial guidance," Janco added. "We remain skeptical over their plans to release Frontlines and MX after the critical December retail holiday sales period, as we believe they will not receive the same retail ship or sales potential compared to releasing the games during the holiday season." Finally, with a large slate of kid-focused licensed properties hitting the market for the holiday season, including Spiderman, Shrek, Transformers, Harry Potter, Pirates of the Caribbean, as well as the "glut of casual content," Janco sees THQ's own licensed products struggling to make up for any owned IP losses through its Pixar and Nickelodeon titles. "Although management anticipates their increased marketing spend to have benefits lasting into their Q3 holiday sales period, we remain doubtful considering the anticipated content releases from competitors," said the group. The analysts concluded, "The current uncertainty circling the future of the Company’s license for WWE content and their heavy financial dependence from the licensing relationship with Pixar creates a pause in our potential enthusiasm for the Company’s shares. We expect the video game software market to be highly competitive this holiday, and believe their software portfolio is weaker then some of their competitors’ offerings in several key areas."