Analysts: Expect 'More Robust' THQ FY09 After 'Disappointing' FY08

Ahead of THQ's Q2 earnings call, expected November 1st, the company lowered its fiscal 2008 outlook, citing lower than expected shipments of recent releases, along with delays for its next-gen titles Destroy All Humans, Frontlines, and de Blob. Analysts from Lazard Capital, Wedbush Morgan and Cowen Group weighed in, calling the lowered guidance "disappointing." "We think investors largely expected a negative pre-announcement and that shares already reflect the disappointing news," said Cowen's Doug Creutz. Nonetheless, Creutz expressed expectations for a strong fiscal 2009, citing Saints Row 2, Red Faction 3 and the delayed key titles as likely strong performers. Added Creutz, "We are only reducing our fiscal 2009 and fiscal 2010 estimates slightly, reflecting lower revenues from the Stuntman and Juiced franchises." The Cowan Group lowered its expectations for fiscal year 2008 to $1.06 billion from $1.14 billion, in line with THQ's updated guidance. Though Lazard also lowered its revenue expectations for fiscal year 2008 from $1.135 billion to $1.06 billion, analyst Colin Sebastian joined Cowen in looking to THQ's fiscal 2009, which he agreed was "more robust," and "a significant improvement over this year," including the next Pixar title Wall-E and the first title based on the UFC license, along with the Saints Row and Red Faction sequels. "Management indicated that an updated development process including personnel changes and more rigorous product evaluations should help improve game quality longer-term," added Sebastian. Stating that THQ's balance sheet remains "solid," Sebastian noted, "We believe the biggest risks include the rising cost of game development, the future of the Pixar license, and ongoing WWE-related legal issues." Lazard expects THQ's revenue to reach $1.25 billion in fiscal year 2009. Saying that "the issues with Stuntman and Juiced are isolated, and are unlikely to recur in the future," Wedbush Morgan's Michael Pachter admitted that because "expectations for both games were set at unrealistic levels... We and other sell-side analysts should have recognized the potential for an earnings shortfall much sooner than today." Pachter lowered fiscal year 2008 revenue estimates to $1.06 billion from $1.09, but also raised estimates for fiscal year 2009 to $1.25 billion from $1.20 billion. "We remain confident about the company's long-term prospects," Pachter said. "THQ's lineup is quite strong next year, and the game shifts position it to grow in line with the industry in fiscal year 2009, after losing market share in fiscal year 2008." Specifically, as with the other analysts, Pachter called out Wall-E as comping favorably to the 'soft' selling Ratatouille, adding, "Stated simply, robots are cuter than rats, and make for better video game fodder." By contrast, Citi's Brent Thill was a bit more wary, stating, "While we believe THQI's miss was fairly anticipated by the Street, missing revenue targets two quarters in a row due largely to game quality issues leave us reticent to recommend the shares." He admitted that Wall-E has "big upside potential" in the pipeline, but as it doesn't ship until Summer 2008, Citi still favors Activision as a better performer into the holiday season.