THQ Earnings Preview: Video Game Sales Should be In-Line
THQ (NASDAQ:THQI) will report its fiscal Q1 2012 (ending June) results after market close on Wednesday, July 27. We expect results in-line with our estimates for revenue of $174 million and EPS of $(0.59), vs consensus for revenue of $172 million and EPS of $(0.52), and guidance for revenue of $165 – 180 million and EPS of $(0.50) – (0.60).
THQ’s U.S. retail sales tracked up only 2% in the June quarter according to NPD. A pair of new releases — Red Faction: Armageddon and MX vs ATV Alive) and a stronger catalog (Homefront, uDraw, and WWE (WWE) All-Stars — kept sales roughly flat with Q2:10, when UFC 2010: Undisputed accounted for roughly half of THQ’s retail sales. We note that THQ has an easy revenue comp of down 31%.
We expect THQ to lower its FY:12 guidance (for revenue of $925 million to $1 billion and EPS of $0.25 – 0.40), which we view as aggressive. Although 1H:12 guidance for revenue of roughly $300 – 325 million ($70 – 100 million above 1H:11) may be achievable if Warhammer 40,000: Space Marine performs well, implied 2H:12 guidance for revenue of $625 – 700 million ($50 – 125 million above 2H:11) seems unlikely. We are skeptical Saint’s Row: The Third, uDraw and UFC can generate the growth THQ’s guidance implies, particularly if uDraw sales are down.
Although THQ (NASDAQ:THQI) management once again talked about an improving product portfolio at E3, we remain unconvinced. We note that many of THQ’s recent core titles, including Homefront and Red Faction: Armageddon, suffered from lackluster reviews. While Homefront performed well early in its release, Red Faction: Armageddon was already out of many top-seller lists upon its release. In our view, THQ’s best hope appears to be Q3:12’s Saints Row: The Third.
THQ’s (NASDAQ:THQI) valuation may have hit a low point after multiple missteps in the last few quarters. If the quality of upcoming games improves significantly, THQ should begin to show earnings improvement with revenue growth and operating leverage.
Michael Pachter is a video game analyst at Wedbush Morgan.