The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
THQ (NASDAQ:THQI) quarterly beat driven by better-than-expected revenue and improved cost control. Revenue was $92 million, compared with our estimate of $75 million, the consensus estimate of $84 million, and guidance of $75 – 85 million. The top-line beat was driven by Darksiders II, which performed below expectations, catalog (37% of sales, led by Saint’s Row: The Third, WWE ’12, and UFC Undisputed 3), and digital (roughly 21% of sales). EPS was $(1.76), compared with our estimate of $(4.00), the consensus estimate of $(3.47), and guidance of $(4.50) – (3.50).
Guidance no longer provided. Management stated that it will no longer provide net sales or earnings guidance. THQ withdrew prior FY:13 guidance for revenue of $390 – 410 million and for EPS of $(4.30) – (2.80). We are decreasing our FY:13 estimate for revenue to $355 million from $409 million to reflect game delays, but are maintaining our EPS estimate to reflect cost control. The reticence to provideguidance suggests to us that the remainder of the release slate timing is at risk. We expect investors to be more concerned about management’s ability to successfully execute the turnaround.
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You cannot save your way to prosperity. Although THQ has been able to lower its cost structure through layoffs and a streamlined release slate in order to temporarily improve profitability, it is unlikely to return to profitability unless its revenues once again begin to grow. Fewer releases in the near-term will likely lead to sustained revenue declines and constrained development budgets for the upcoming games, negatively impacting game quality and quantity.
In response to its precarious financial position, THQ has hired Centerview Partners to evaluate strategic alternatives. Should its financial position continueto deteriorate, we expect THQ to raise financing through an equity sale that could lead to dilution of existing shareholders. We expect creditors to be asked to renegotiate terms at a discount; if they are unwilling, bankruptcy is possible.
Maintaining our NEUTRAL rating and suspended price target. Management has a track record of over-promising and under-delivering, and the company has been in turnaround mode for the last five years. The additional game delays, hiring of a financial advisor and refusal to take questions increase our skepticism that a turnaround plan can be executed before the company runs out of cash. We do not believe THQ is investable for most institutions.
Michael Pachter is an analyst at Wedbush Securities.
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