INSIGHTFUL ANALYSIS: THQ’s Shocking Delay

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Before market open on Wednesday, THQ (NASDAQ: THQI) announced that the  Saints Row: The Third – Enter the Dominatrix expansion scheduled for release in September 2012, will be delayed, and instead incorporated into a full CY:13 sequel.

THQ has lowered FY:13 guidance for revenue by $20 million and for EPS by $0.03 to reflect the change. Implied FY:13 guidance is now for revenue of $390- 410 million, down from $410-430 million, and implied EPS guidance is $(0.43)- (0.28), down from $(0.40)-(0.25). We estimate that the negative cash flow impact for FY:13 is ≈ $20 million (lower revenue, with higher R&D, offset by lower marketing). In FY:14, we expect sales of 1 million units of the sequel (at an MSRP of $59.99), as opposed to sales of 0.8 million units for the expansion (at $29.99), resulting in ≈ $20 million of positive net incremental cash flow through FY:14.

Lowering our FY:13 estimates for revenue to $398 million from $418 million, and for EPS to $(0.36) from $(0.33) to reflect guidance. In our view, if THQ can get the sequel out by Q1:14, today’s decision makes sense. If the game takes more than 6-9 months more to complete, R&D costs will continue to mount, and the company’s cash balance could become perilously low.

Today’s slip follows last week’s revised results disclosure and recent game delays. Last week, the company disclosed that a $2.6 million increase to Q4:12 selling and marketing expense had been discovered, resulting in non-GAAP EPS dropping to $(0.15) from $(0.12). Also, THQ recently delayed the release of Darksiders II by two months, and  South Park: The Stick of Truth by a quarter. Continuing game delays exacerbate THQ’s difficult cash position.

We thought THQ had a solid E3 presentation. The company’s Investor Breakfast focused on the FY:13 release slate, now down to five games. A significant portion of the presentation was live-action footage, as opposed to in-game footage, so we will reserve judgment until we know more about game quality and reviews.

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.

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