THQ Earnings Analysis: This Asset is Still an Issue for Investors

THQ Inc (NASDAQ:THQI) Q4 results were in line with preannouncement. Pro forma revenue was $171 million, compared with our estimate of $170 million, consensus of $166 million, and the preannounced range of $160-170 million. Pro forma EPS was $(0.12) (excluding $0.66/share in net charges), compared with our estimate of $(0.10), consensus of $(0.14), and the preannounced range of $(0.20) – (0.10).

Management introduced specific FY:13 guidance for revenue of $410-430 million, approximately in line with prior guidance, and introduced FY:13 EPS guidance of $(0.40)-(0.25). Management introduced Q1:13 guidance for revenue of $25-30 million, and for EPS of $(0.45)-(0.40).

We are maintaining our FY:13 estimate for revenue of $418 million, and decreasing our EPS estimate to $(0.33) from $0.11 to reflect guidance.
Despite substantially lower operating expenses, the company expects a loss in FY:13. We thought that THQ (NASDAQ:THQI) could conceivably break even or achieve profitability in FY:13 with substantial cost-cutting efforts. However, earnings guidance calls for a loss, and is slightly above the Street’s more pessimistic/realistic expectations. Guidance may be conservative, but, given THQ’s recent string of disappointing results, we are not convinced that guidance includes the potential for any major misses. THQ has misjudged its portfolio in the past, and it is not assured of making the right decisions in FY:13. The company failed to achieve profitability in four of the last five years, even though it generated significantly more revenue than it has guided to in FY:13, and we are not yet convinced that streamlining its operations will result in a return to profitability.

Cash will continue to be an issue. We expect cash to remain tight for the next eight quarters, especially if losses are greater than expected, but we acknowledge that should THQ reduce its overhead sufficiently, it may be able to reach a cash flow positive year by FY:14. However, the company faces an uphill battle, as it must overcome yet another year of losses.

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

Michael Pachter is an analyst at Wedbush Morgan.