Analyst: THQ Could Run Out Of Cash By Q1 2013

Reacting to THQ's lowered revenue guidance for its third quarter, Wedbush's Michael Pachter warns that a substantial loss for FY12 could have dire consequences in FY13.
Reacting to THQ's lowered revenue guidance for the third quarter, Wedbush Securities analyst Michael Pachter predicted the publisher will suffer a "substantial loss" for the current fiscal year and may run out of cash by the first quarter of the next. THQ reported lower than expected sales for its uDraw GameTablet line on Tuesday and lowered its third quarter (October through December) guidance of $510 to $550 million by around 25 percent, bringing it down to $383 to $413 million. Though the publisher did not update its $925 million to $1 billion guidance for the full 2012 fiscal year (ending March), Wedbush forecasted that "the magnitude of the Q3 miss suggests a large downward revision." Pachter pointed out that if this becomes another unprofitable year for THQ, it would be the company's fourth in the last five years. He added that its cash balance would "become an issue if it is unable to turn a profit in the first half of FY:13." "Given its declining licensed and core properties (apart from Saints Row), and an uncertain release schedule next year, we remain unconvinced that FY:13 will be profitable," said Pachter. "We think its cash position may be compromised. The company's debt covenants suggest to us that its line of credit must be repaid to avoid default, and we think that THQ is at risk of running out of cash by the June 2012 quarter." Cowen & Company analyst Doug Creutz also weighed in, reducing THQ's full-year revenue estimate to $844 million. Despite the Q3 miss and Pachter's concerns, he did not believe the publisher is in any imminent balance sheet danger. The investment firm, however, did express that THQ's "revenue downside was even worse than [it] had feared", and that there could be more problems around the uDraw GameTablet than the publisher is letting on. "Management blamed poor sales of uDraw on the Xbox 360 and PlayStation 3 for the miss," said Creutz. "However, the $130 million-ish revenue downside suggests that there was likely some incremental weakness elsewhere." Creutz continued, "At a roughly $50 ASP for uDraw across all platforms (including the Wii), it would take a 2.6 million unit shortfall to account for the full revenue miss; THQ's planning implied less than 2.6 million units of total uDraw sell-in." Pachter concurred on that matter, "We note that the Q3 miss reflects a shortfall of almost all of the 2.3 million uDraw units we modeled, suggesting that either guidance is overly conservative, or that there is a bigger as yet undisclosed problem."

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