DEEP ANALYSIS: THQ Earnings Preview

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.                 

THQ (NASDAQ:THQI) will report its fiscal Q1 2013 (ending June) results after market close on Monday, August 6, with a conference call at 2:00pm PT (dial-in: 877-356-8075, conference ID: 12449281, or webcast: http://investor.thq.com).

Expecting Q1 results in line with our estimates, which reflect the recent reverse stock split.  We expect Q1:13 revenue of $28 million compared to consensus of $29 million and EPS of $(3.17) vs. consensus of $(3.97). Although THQ’s NPD US console software sales tracked above our expectations, its ability to meet our EPS expectations depends primarily on expense management.

Saints Row delay likely to negatively impact FY:13 results. On June 20, THQ announced that the Saints Row: The Third – Enter the Dominatrix will be a full sequel instead of an expansion pack, launching in 2013. As a result, THQ lowered FY:13 guidance, and we lowered our estimates. Future delays could impact cash flow and cause problems due to low cash balances and a thin lineup this year.

We expect THQ to provide updated FY:13 guidance reflecting the delay. At the time, THQ lowered guidance for revenue by $20 million and EPS by $0.03, resulting in implied guidance for revenue of $390 – 410 million and EPS of $(0.43)– (0.28). It is unlikely that FY:13 guidance will be lowered, but since THQ has not provided quarterly guidance, it can make up any near-term shortfalls later this year.

THQ had a solid E3 presentation centered on its FY:13 release slate. We were most impressed by the South Park game, which seems well-crafted to address its intended audience. However, the success of each THQ release is difficult to assess at this point as we have seen mainly live-action footage, not in-game footage.

Loss of UFC in line with THQ’s new business focus. THQ aims to surpass break-even on a title-by-title basis, and as the most recent UFC release fell short of its ≈ 2 million unit break-even point, THQ had sought to exit its UFC contract.

THQ completed a reverse 1-to-10 stock split on July 5.  As a result, THQ regained compliance with the NASDAQ Global Select Market’s minimum bid price rule ($1.00 or greater for ten consecutive business days) for continued listing.

Maintaining our NEUTRAL rating and suspended price target. Given THQ’s uneven financial performance historically, it is difficult to estimate if or when it will return to profitability, and difficult to determine a value for its equity. We advise investors to remain on the sidelines until it can show a clear path to profitability.

Michael Pachter is an analyst at Wedbush Securities.