Analyst Todd Mitchell sent a note to clients regarding THQ, Inc.'s (THQI) 3Q07 earnings results and fiscal 2008 guidance. Key excerpts follow:
THQ reported preannounced fiscal 3Q07 results – Fiscal 3Q07 revenue grew 33% to $476 million, and GAAP EPS rose to $0.91 from $0.71 a year ago. Results were better than guidance at the beginning of the quarter for revenue of $425 million to $450 million and GAAP EPS of $0.50 to $0.60. Upside versus our forecast was due primarily to higher-than-expected WWE sales, and higher volumes for Nickelodeon and other young-oriented titles.
Initial guidance calls for 12% to 15% growth in fiscal 2008 – THQ expects revenue of $1.12 billion to $1.15 billion and GAAP EPS of $1.11 to $1.21 in fiscal 2008. THQ expects about 50% of revenue to come from next-gen content, 20%-25% to come from handhelds, and 15%-20% to come from PS2. Title count will be flat with fiscal 2007, but THQ expects 80 SKUs versus 66 SKUs in fiscal 2007. Top-line growth is slower than most expectations for industry growth, and likely conservative.
Core Pixar and WWE franchises are expected to be flat – We think Cars will do about $250 million in fiscal 2007 and WWE will do about $200 million. We believe THQ will have a tough Pixar comp in fiscal 2008 with Rataouille and Cars 2. WWE performed better than our expectations this holiday as well. We just don't see how this franchise gets any bigger. With Pixar and WWE expected to trend flat to down, growth will need to come for new IP.
Growth in fiscal 2008 will come from new properties – THQ has added the Stuntman franchise to its line up for fiscal 2008, which we believe has the potential to be a successful 1.5 million to 2 million copy franchise. Otherwise new properties for fiscal 2008 are either unproven, or updated next-gen versions of titles, that where certainly successful, but in most cases were hardly blockbuster hits in their previous iteration.
Fiscal 2008 guidance is conservative if THQ can execute on game quality – We are projecting a 15% increase in fiscal 2008 revenue to $1.16 billion. We are projecting GAAP EPS of $1.26, also slightly ahead of guidance. The success of THQ's fiscal 2008 line-up will be borne out in execution. There are about six of seven titles, that if THQI executes well on, would result in upside. At the same time, if any two or three are unsuccessful, then there is likely some downside risk to guidance.
We would not be chasing THQI at these levels at this time – We think that shares of THQI offer potential upside from current levels, but we would not be buyers at this time. We feel that shares of THQ have had a nice run on strong fiscal 2007 execution and a recovery of cyclical demand. THQ is planning a much broader line-up for fiscal 2008, which points to upside, but before this can happen we expect to see tough comps versus Cars.
We reiterate our HOLD rating and $34 price target – Our price target is based on 25.0x calendar 2009 FCF of $98 million discounted to present at 11%. There are many risk inherent in our forecast for THQ as we are projecting revenues based on the success of video games, which are not completed. We consider shares of THQI moderately risky.