THQ reports a widening loss but continues to invest in digital games

THQ, a mid-sized publicly traded game company, reported an unexpectedly high loss today as sales of its Red Faction: Armageddon game and children’s games sold below expectations.

THQ is one of the stalwart console makers of the game industry, but it’s sales are smaller than those of the industry titans and its results can suffer if one big budget game turns out to be a disappointment. It’s one more reminder that games are a hit-or-miss entertainment business. And even though the company is losing money, it continues to invest heavily in digital games.

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“Clearly a disappointing quarter,” said Brian Farrell (pictured), chief executive of THQ, in a conference call with analysts.

The challenge for THQ is to continue to invest heavily in high-quality games while trying not to be one of the also-rans in comparison to bigger rivals such as Electronic Arts, Activision Blizzard, Ubisoft and Take-Two Interactive. The Agoura Hills, Calif.-based company reported that sales for the first fiscal quarter ended June 30 were $195.2 million, compared with $149.4 million a year earlier. The net loss was $38.4 million, or 56 cents a share, compared with a loss of $30.1 million, or 44 cents a share a year earlier. Analysts expected a loss of 52 cents on revenue of $172.3 million.

Non-GAAP revenues were $141.2 million, compared with $160.3 million a year ago. The non-GAAP loss was $64.4 million, or 94 cents a share, compared with a loss of $14.4 million, or 21 cents a share a year earlier.

Farrell, who spoke at our recent GamesBeat 2011 event, said sales of Red Faction: Armageddon and licensed kids titles were below expectations. The late release of UFC Personal Trainer also hurt the results. Farrell said that Red Faction has a passionate niche following, but the title did not resonate with a sufficiently broad console audience. The bar on such titles is moving higher and higher.

Farrell said the licensed kid game market is on the decline and the company is putting less emphasis on such titles.

Farrell said the company is looking forward to a strong and profitable second half, with big titles coming such as Saints Row the Third, WWE 12, and the uDraw Game Tablet, all launching in November. He said that THQ’s third fiscal quarter could be the biggest int he company’s history in terms of revenues and profits.

Other big titles in the works are Darksiders II, Metro: Last Light, UFC Undisputed 3, Warhammer 40,000: Space Marine; Devil’s Third, and Insane. The company said it will work with Turtle Rock Studios on a game that will be released in 2013. Meanwhile, game developer Patrice Désilets joined THQ’s Montreal studio to work on a new game.

On the digital front, THQ is launching digital titles related to big console games such as Saints Row the Third; it is working on social and mobile games such as the upcoming fall title Margaritaville Online; the massively multiplayer online game Warhammer 40,000: Dark Millennium Online; and it plans to drive users to its games via online ads and the relaunch of THQ.com. Farrell said the company will emphasize Facebook, smartphone, and tablet games.

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In the current second fiscal quarter, THQ is launching Warhammer 40,000: Space Marine, the Penguins of Madagascar, uDraw GameTablet, and Barbie Jet Set and Style.