UPDATE 3-THQ shares fall on lukewarm outlook, notes sale

* Q1 EPS ex-items 10 cts vs Street view 6 cts loss

* Sees Q2 non-GAAP rev $85 mln-$95 mln

* To offer $90 mln of convertible notes

* Shares down 8 pct after hours (Adds details, CEO quote, fresh share price)

By Gabriel Madway

SAN FRANCISCO, July 28 (Reuters) - THQ Inc (THQI.O) posted a stronger-than-expected quarterly profit on a 77 percent jump in sales, but the shares of the video game developer fell 8 percent after it issued a disappointing forecast and announced a $90 million convertible notes offering.

Although the company's June quarter results got a big boost from best-seller "UFC 2009 Undisputed," analysts said the company's outlook was cause for concern amid an industry-wide slump in video game sales.

On an adjusted basis for the current quarter, THQ forecast revenue of $85 million to $95 million and a larger loss than the year-ago period due to tax-rate differences. The company does not plan to release new titles in the September quarter.

Signal Hill Group analyst Todd Greenwald called the guidance "really weak."

"Even if they're not releasing any titles, there's catalog business to be done and the fact that sales are going to be down 40 percent year over year suggests that their catalog business is really weak," he said.

Company executives said on Tuesday that proceeds from the private placement of convertible notes would help THQ's financial flexibility and fund future growth. THQ has $154.7 million in cash and short-term investments.

THQ's shares have risen around 90 percent this year. The Agoura Hills, California-based company's stock closed up 9 cents at $8.41 on Nasdaq, but fell to $7.70 in extended trading.

NO HOLDS BARRED

On an adjusted basis for fiscal 2010, THQ expects sales to be higher than in 2009 and expects to be profitable.

Wedbush Morgan analyst Michael Pachter said THQ's shares fell due to the expected dilution from the planned convertible issue. The offering is equivalent to more than 15 percent of THQ's market capitalization of around $560 million.

But Pachter said the results proved THQ can still sell games.

"THQ has shown they can be profitable when they do something right," he said. "They're doing something right now."

"UFC 2009 Undisputed" -- based on the popular Ultimate Fighting Championship tournament featuring no-holds-barred sparring -- was the top-selling game in the United States in the June quarter, according to industry estimates, and has shipped more than 2.9 million units worldwide.

In the middle of an economic downturn that is pinching consumer spending, THQ has been cutting costs and has focused on developing a smaller number of big hits, rather than pour resources into a larger number of games with lukewarm sales.

THQ, which also publishes the "Saints Row" and "Red Faction" franchises, said revenue rose 77 percent to $243.5 million, and adjusted revenue came to $233.9 million. Wall Street had been forecasting sales of $208 million, according to Reuters Estimates.

The company reported a net profit of $6.4 million, or 9 cents a share, in the fiscal first quarter ended June 30, compared with a year-ago net loss of $27.2 million, or 41 cents a share.

Excluding items, profit was 10 cents a share, beating the average analyst estimate for a loss of 6 cents a share, according to Reuters Estimates.

The video game industry as a whole has been showing serious signs of weakness of late. U.S. sales of video game equipment and software fell 31 percent to $1.17 billion in June, according to NPD, the largest decline since 2000.

Chief Executive Brian Farrell said on the conference call the results show "a vast improvement from a year ago and evidence of a dramatic turnaround here at THQ." (Editing by Bernard Orr and Andre Grenon)