THQ Earnings Preview: Unconvinced!

THQ (NASDAQ:THQI) will report its fiscal Q4 2012 (ending March) results after market close on Tuesday, May 15, with a conference call at 2:00pm PT (dial-in: 877-356-8075, conference ID: 72879879, webcast:
Expecting Q4 results in line with our estimates, which reflect April’s preannouncement. We expect Q4:12 revenue of $170 million, versus consensus of $157 million and guidance of $160 – 170 million. We expect Q4:12 EPS of $(0.10), versus consensus of $(0.23) and guidance of $(0.20) – (0.10).

On April 18, THQ preannounced positive Q4 results. The company expects Q4 net sales of $160 – 170 million, above earlier guidance of $130 – 150 million. Stronger-than-expected sales were driven by Saints Row: The Third, UFC Undisputed 3, and digital. THQ also announced non-GAAP EPS of $(0.20) – (0.10), above earlier guidance of $(0.50) – (0.35).

THQ also announced that it expects to end FY:12 with $76 million of cash, above its earlier estimate of $25 million. It expects to utilize a substantial portion of cash and its credit facility as it launches FY:13 releases. We believe a reduction in expenses and selective asset sales will generate sufficient cash to fund operations through FY:13.

We do not expect specific financial guidance for FY:13. On its Q3:12 results call, THQ guided to FY:13 revenue of roughly half of FY:12 revenue, without providing EPS guidance. Given THQ’s ongoing restructuring, we do not expect any more specific guidance than what has already been provided.

We remain unconvinced that THQ will be profitable in FY:13. In order to “rightsize” its overhead to fit its sharply reduced revenue expectations, THQ will have to lower expenses substantially by reducing payroll. THQ has misjudged its portfolio in the past, and it is not assured of making the right decisions in FY:13. In the past, THQ has been unprofitable in years with much higher revenue.

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.