THQ sales "even worse than feared"

Sales of THQ's uDraw tablet appear to have been worse than anticipated by some analysts, despite a warning that the controller would miss targets even before the publisher adjusted its own revenue expectations.

On Tuesday Cowan & Company downgraded the publisher due to expected weak sales, with THQ yesterday confirming that sales for the third quarter will be down around 25 per cent.

It blamed the performance of uDraw on Xbox 360 and the PlayStation 3, but the financial community is suggesting that the company has a bigger problem than just the sales of one game.

"Our downgrade of THQ shares on Tuesday was motivated by precisely this issue, though the revenue downside was even worse than we had feared," wrote Cowan & Company.

"Management blamed poor sales of uDraw on the Xbox 360 and PlayStation 3 for the miss. However, the $130 million revenue downside suggests that there was likely some incremental weakness elsewhere.

The company may face a cash crunch before mid-year 2012, unless it is able to generate solid profits early in its fiscal 2013

Michael Pachter, Wedbush Morgan

"At a roughly $50 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."

Wedbush Morgan's Michael Pachter suggested that THQ may not achieve guidance for the full 2012 financial year, making it the fourth year out of the last five that the publisher would post a loss.

"Yesterday's revised revenue guidance strengthens our conviction that THQ will be unable to achieve its FY:12 guidance. We believe there are other factors besides the disappointing uDraw shipments driving the lower guidance.

"In our view, the company's remaining release schedule for the quarter apart from Saints Row: The Third and WWE '12 featured many games that failed to generate significant buzz at retail. Therefore, we believe sales were lower-than expected for many titles in addition to uDraw, due in large part to a pattern of mediocre reviews and a very crowded release slate for the video game industry. Reorders were also likely below expectations as the company's release slate over the first half of the year was pretty thin apart from Warhammer 40,000 Space Marine."

Pachter also suggested that THQ's cash balance could "become an issue" in the next financial year.

"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," he wrote.

"In our view, THQ's breakeven revenue run rate is $900 million. We have modelled sales of $925 million next year, with positive earnings for the year, but note that the company has not yet announced a line-up of games that is deep enough to generate revenues at this level."

THQ secured a new credit facility with Wells Fargo in September, but Pachter noted that deal has a number of restrictive covenants that may be triggered should the publisher's earnings fall below required levels.

"Given that the company did not provide earnings or EBITDA guidance, we are unable to speculate that it will violate these covenants, but our revised EPS estimates lead us to conclude that THQ will likely have to pay down its credit line in order to avoid being in default on the Wells Fargo line.

"If that is, indeed, the case, the company may face a cash crunch before mid-year 2012, unless it is able to generate solid profits early in its fiscal 2013."