THQ Shares Positioned Well To Return To Profitability In Fiscal 2014

| About: THQ, Inc. (THQIQ)

Video game maker THQ (THQI) saw shares shoot up yesterday after it reported first quarter earnings and guidance for the rest of the year. The company that was previously trading for under $1 a share, recently completed a reverse stock split giving shareholders 1 share for every 10 that they owned.

THQ saw net sales of $39 million in the first quarter, with no new released games. The company relied on strong catalog sales of titles like Saints Row: The Third and WWE '12. The company reported a net loss of $3.41 per share. Digital revenue was $13 million for the quarter. In last year's first quarter the company saw sales of $141 million with new releases including Red Faction: Armageddon, and MX vs. ATV Alive.

One of the biggest surprises during the call was THQ's announcement that it has cancelled the inSane game series that was created by Guillermo del Toro. Del Toro, the famous movie director of Hellboy and Pan's Labyrinth, was in charge of the game series that was shaping up to be a trilogy. The gaming rights will now be returned to del Toro.

The move follows a similar path THQ took with its UFC license recently. In an attempt to focus on core games and cut down on licensing fees, THQ sold its rights to the Ultimate Fighting Championship to rival Electronic Arts (NASDAQ:EA). THQ received a cash payment and will lose the rights in 2013. I praised this move for both parties, but thought it set up better for EA as they continue their sports video game market leading position.

THQ did update on its eight month transformation to turn the company profitable during its earnings call.

· Exit nonperforming games

· Shed licenses to cut down on licensing annual fees

· Reduce headcount

· Named new president Jason Rubin, who has taken an active position and visited many of the studios making games for THQ

· No casual Facebook games

· No casual mobile games

The biggest current event for THQ is the launch of the Darksiders II video game. The highly anticipated game is creeping up bestseller lists already with strong presales. The game, set to be released in two weeks, will have a dramatic impact on THQ's second quarter earnings. Here is a look at some preorders from VG Chartz:

· #11 Darksiders II (XBOX 360) 109,141 copies, added 10,118 last week

· #13 Darksiders II (Playstation 3) 91,441 copies, added 5,108 last week

The game also appears on Amazon's bestselling video game list:

· #34 Darksiders II (XBOX 360), in Top 100 for 10 days

· #39 Darksiders II (Playstation 3), in Top 100 for 8 days

Here is a look at future game releases:

· Quarter Two: Darksiders II

· Quarter Three: WWE '13 (October 30)

· Quarter Four: Company of Heroes 2, Metro: Last Light, South Park: The Stick of Truth

As you can see, the company's fourth quarter looks like it has the potential to send shares higher with three possible catalysts with new game releases. One of THQ's future games was even named to a list of highly anticipated games, which I discussed here. South Park: The Stick of Truth made the list as it has a built in fan base and is the first south park game released in awhile. THQ also announced it had begun four new titles during the first quarter, but is not providing details on this.

Another announcement concerning the company's release came from THQ's hit Saint's Row gaming franchise. A previously announced expansion pack to Saint's Row: The Third is moving out of the fiscal 2013 lineup. The expansion is being adapted into a full scale game release, tentatively referred to as Saint's Row 4. The move is likely to knock $0.30 off of earnings per share for THQ.

The company had cash of $21 million at the end of June. THQ also has a $50 million credit facility that should help the company get through this unprofitable time. Analysts on Yahoo Finance see the company squeaking out a profit of $0.36 in fiscal 2014.

THQ issued revenue guidance of $75-$85 million in the second quarter. The company sees a loss of $3.50 to $4.50 in the second quarter. Analysts on Yahoo Finance see THQ posting a loss of $2.04 on revenue of $97.95 in the second quarter. For the full fiscal year, THQ is seeking revenue of $390-$410 million. The company is expecting to post a loss of $2.80 to $4.30 in the fiscal year. Analysts see the company posting a loss of $3.05 with revenue of $432.9 million.

I bought in to THQ when shares were trading below $0.75. I think the company represents a good short term play, on the success of Darksiders II. The company remains a good long term bet on the possibility of a profit next fiscal year. THQ also is an attractive buyout candidate (discussed here) with good assets like Saint's Row, Company of Heroes, WWE, Metro, and Darksiders.

Disclosure: I am long THQI.

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