Kaufman Bros. analyst Todd Mitchell sent a note to clients previewing the earnings report of THQ Inc. (THQI) - excerpt:
• THQ Inc. (THQI) will report fiscal 3Q07 results Friday, February 2. Management will host a conference call at 11:00 a.m. EST.
• THQ preannounced revenue of $475 million and GAAP EPS of $0.91. This was well ahead of its guidance of $400 million to $425 million and GAAP EPS of $0.65 to $0.70. THQ credited upside to sales of WWE Smackdown vs. Raw 2007!, Cars, and Avatar: The Last Airbender. We also believe THQ benefited from a weaker dollar as WWE and Cars were strong sellers in the U.K. and Europe.
• We expect fiscal 2007 revenue of $1 billion and GAAP EPS of $1.01. We believe THQ sold about 3.5 million copies of WWE in fiscal 3Q07 for about $130 million and franchise sales should total $170 million in fiscal 2007. Cars also continued to sell well during the holidays. We estimate 2.9 million copies were sold in fiscal 3Q07 for $95 million for a total of 8.75 million copies and $269 million in sales in fiscal 2007.
• For fiscal 4Q07 we look for $152 million and GAAP EPS of $0.09. Our estimates compare to guidance of $146 million, down from prior guidance of $145 million to $170 million, and GAAP EPS of $0.09, down from previous guidance of $0.17 to $0.22. The key titles for fiscal 4Q07 are all PC titles (Supreme Commander, Titan Quest: Immortal Throne, and S.T.A.L.K.E.R.: Shadow of Chernobyl).
• We believe THQ can generate 18% revenue growth in fiscal 2008. We project $1.18 billion and GAAP EPS of $1.28, up from $1 billion and GAAP EPS of $1.01 in fiscal 2007. Our estimate is based on 18% higher software sales and 10% growth in THQ's mobile business. We assume Disney/Pixar is flat. We see some growth in WWE and the Nickelodeon franchises, but note that much of the upside implicit in fiscal 2008 comes from new and unproven IP.
• We estimate the video game market will grow 16% in fiscal 2008. We project worldwide software sales growing 16% during THQ's fiscal 2008 to over $23 billion. Our estimates foresee a 70% increase in next-gen software sales to $10.9 billion from $6.4 billion during fiscal 2007, with handheld sales growing 11% to $6.5 billion from $5.9 billion, and current-gen sales contracting by 24% to $5.9 billion from $7.7 billion.
• We think that shares of THQI are likely to tread water for a while. After hitting it out of the ball park with Cars in fiscal 2007 and taking advantage of a short window of opportunity with Saints Row, we that believe investors are skeptical about what THQ can do for a follow-on in fiscal 2008. At this point, we believe it is hard to say. Our bottom-up analysis would seem to indicate that it can grow with its current release slate if it can execute.
• We reiterate our $34 price target and HOLD rating on shares of THQI. Our price target is based on 25.0x calendar 2009E FCF $100 million discounted to the present at 11.0%. We consider investment in THQI moderately risky.
• Technical Analysis: Key technical ranges that investors should note are: $38.40 to $38.60, $34.50 to $34.75, $33.00 to $33.25, $32.00 to $32.50, 31.40 to $31.60, $29.85 to $30.10, $28.25 to $28.50, and $27.00 to $27.25.
THQI 1-yr chart