S H A R E

Investor Relations

News Release

Printer Friendly Version View printer-friendly version
<< Back
THQ Reports Fiscal 2009 Third Quarter Results
Company Announces Additional Business Realignment Actions Q3 GAAP Results Include $118.1 Million Non-Cash Goodwill Impairment Charge

AGOURA HILLS, Calif.--(BUSINESS WIRE)-- THQ Inc. (NASDAQ: THQI) today announced financial results for the fiscal third quarter ended December 31, 2008.

For the three months ended December 31, 2008, THQ reported net sales of $357.3 million. On a non-GAAP basis, the company reported fiscal 2009 third quarter net sales of $385.6 million. A year ago, the company reported net sales of $509.6 million, for both GAAP and non-GAAP comparison purposes.

For the three months ended December 31, 2008, the company reported a net loss of $191.8 million, or $2.86 per share, which included a non-cash charge of $118.1 million related to goodwill impairment. In the same period a year ago, the company reported net income of $15.5 million, or $0.23 per share. On a non-GAAP basis, the company reported a fiscal 2009 third quarter net loss of $9.6 million, or $0.14 per share. In the same period a year ago, the company reported non-GAAP net income of $16.4 million, or $0.24 per share, which included a gain of $0.02 per share from discontinued operations. A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.

“We delivered high quality games to market this holiday season but fell short of our revenue and profit targets in this challenging environment,” said Brian Farrell, THQ president and CEO. “We are taking highly targeted actions with the objective of investing in games with the highest franchise potential and returning to profitability. We have executed on our previously announced plan to reduce our cost structure by $120 million. Given continued economic weakness, we plan to reduce costs by an additional $100 million.”

Strategic Plan

In November, the company announced a new strategic plan to focus on 1) developing a select number of high quality titles targeted at the core gamer, such as Saints Row 2 and the upcoming Red Faction: Guerrilla and Darksiders; 2) extending its leadership in the fighting category with such brands as WWE and Ultimate Fighting Championship; 3) reinvigorating the product portfolio and improving profitability in its kids’ business; 4) building strong casual game franchises like de Blob, Drawn to Life and Big Beach Sports; and 5) extending its brands into emerging online markets with games such as Company of Heroes Online and its Warhammer 40,000 MMO. The company also announced plans to align its organization and cost structure to support this strategy.

The company noted the following product highlights in fiscal 2009:

  • Saints Row 2 achieved a Metacritic rating of 82 and shipped more than 2.6 million units to date
  • WWE SmackDown vs. Raw 2009 achieved a Metacritic rating of 80 and shipped more than 4 million units to date
  • de Blob achieved a Metacritic rating of 81 and shipped approximately 700,000 units to date
  • Big Beach Sports shipped more than 1.2 million units to date

“Established franchises like Saints Row and WWE SmackDown vs. Raw, as well as new franchises such as de Blob and Big Beach Sports for the Nintendo Wii, give us confidence in our strategy going forward,” said Farrell. “We have several compelling games set to launch in the coming months, including Warhammer: Dawn of War II, WWE Legends of WrestleMania, our first games based on the popular Ultimate Fighting Championship, and Red Faction: Guerrilla.”

Farrell added, “In this environment, we are focused on what we can control: delivering high quality products, investing in a targeted product pipeline, and aggressively managing costs.”

Business Realignment

During the fiscal third quarter, the company executed on its previously announced business realignment plan and reduced its fiscal 2010 forecasted annual spending by $120 million. As a result, the company recorded approximately $40.4 million in non-GAAP business realignment expenses in the third fiscal quarter, which included approximately $30.8 million in non-cash impairment charges related to the cancellation of titles and long-lived assets associated with studio closures, and $9.6 million in other costs, including severance and other employee-related costs, and lease and other contract termination costs.

In response to the continuing uncertainty in the market, the company today announced additional cost reduction actions consistent with its strategy discussed above. THQ will reduce costs in each functional area. The company plans to reduce product development spending by an additional $70 million through studio dispositions and other project and headcount reductions. THQ also intends to reduce sales, marketing and corporate expenses globally through headcount and other cost reductions, with targeted savings of an additional $30 million annually.

In the aggregate, the company expects to reduce planned fiscal 2010 spending by $220 million and headcount by approximately 600 people, or 24% of its workforce.

“Our focus for next fiscal year is to return to profitability and to generate cash. Our fiscal 2010 plan will reflect the benefits of our focused product strategy and strong actions on costs,” said Farrell.

The company expects to incur significant charges as part of the additional cost reduction actions, which will be excluded from the company’s non-GAAP results. Most of the charges will be recognized in the remainder of fiscal 2009.

Goodwill Impairment

During January 2009, consistent with SFAS No. 142, “Goodwill and Other Intangible Assets” and in connection with the preparation of THQ’s financial statements, THQ performed an interim goodwill impairment test as of December 31, 2008. In the latter half of the third quarter of fiscal 2009, the company’s stock price experienced a significant decline, resulting in a market capitalization below the carrying value of its net assets. As a result, the company impaired its entire goodwill balance of $118.1 million, as of December 31, 2008.

Fiscal Fourth Quarter Outlook

Due to economic uncertainty and limited visibility, the company is not providing revenue and EPS guidance for its fiscal 2009 fourth quarter. The company continues to experience a cautious retail and consumer environment. As a result, THQ expects fourth quarter results to be significantly below its previous expectations.

Key new releases during the quarter include Warhammer: Dawn of War II on PC, WWE Legends of WrestleMania on Xbox 360 and PS3, 50 Cent: Blood on the Sand on Xbox 360 and PS3, and Deadly Creatures on the Wii.

Non-GAAP Financial Measures

In addition to results determined in accordance with GAAP, the company discloses certain non-GAAP financial measures that exclude the following:

  • stock-based compensation expense,
  • the impact of deferred revenue and related costs,
  • business realignment expense,
  • goodwill impairment charges,
  • other-than-temporary impairment on investments and mark-to-market on Auction Rate Securities,
  • non-cash valuation allowance for deferred tax assets and
  • the related income tax effects for each of these items.

THQ may consider whether other significant non-recurring items that arise in the future should also be excluded in calculating the non-GAAP financial measures it uses.

The company excludes these expenses from its non-GAAP financial measures primarily because its management does not believe they are reflective of the company’s core business, ongoing operating results or future outlook. THQ’s management believes that the use of non-GAAP financial measures provides meaningful supplemental information regarding its financial condition and results of operations, and helps investors compare actual results to its long-term operating goals as well as to its performance in prior periods. The non-GAAP financial measures included in the earnings release have been reconciled to the comparable GAAP results and should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

In addition to the reasons stated above, which are generally applicable to each of the items THQ excludes from its non-GAAP financial measures, the company’s management uses certain of the non-GAAP financial measures for the following reasons:

Stock-Based Compensation. THQ does not consider stock-based compensation charges when evaluating the performance of its business or formulating its operating plans. Stock-based compensation charges are subject to significant fluctuation outside the control of management due to the variables used to estimate the fair value of a share-based payment, such as THQ’s stock price, interest rates and the volatility of the company’s stock price. Further, when considering the impact of equity award grants, THQ places a greater emphasis on the use of such grants as retention tools for long-term stockholder value creation, as well as overall shareholder dilution, rather than the accounting charges associated with such grants.

Deferred Revenue/Costs. Beginning in fiscal 2008, the company began recognizing the revenue and related costs from the sale of certain titles with significant online functionality over the estimated online service period. Although the company defers the recognition of its net revenue and costs with respect to these titles, there is no adverse impact to its operating cash flow. Internally, THQ’s management excludes the impact of deferred net revenue and costs related to packaged games when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. The company believes that excluding the impact of deferred net revenue and costs is important to facilitate comparisons to prior periods when the company did not delay the recognition of such amounts.

Business Realignment Expense. Although THQ has incurred business realignment expenses in the past, each charge has been a discrete, extraordinary event based on a unique set of business objectives. The company does not engage in business realignments on a regular basis or in the ordinary course of business. As such, the company believes it is appropriate to exclude these expenses from its non-GAAP financial measures.

In the financial tables below, THQ has provided a reconciliation of the most comparable GAAP financial measure to each of the non-GAAP financial measures used in this press release.

Investor Conference Call

THQ will host a conference call to discuss fiscal third quarter results today at 2:00 p.m. Pacific/5:00 p.m. Eastern. Please dial 877.356.8075 domestic or 706.902.0203 international, conference ID 82237979 to listen to the call or visit the THQ Inc. Investor Relations Home page at http://investor.thq.com. The online archive of the broadcast will be available approximately two hours after the live call ends. In addition, a telephonic replay of the conference call will be provided approximately two hours after the live call ends through February 6, 2009, by dialing 800.642.1687 or 706.645.9291, conference ID 82237979.

About THQ

THQ Inc. (NASDAQ: THQI) is a leading worldwide developer and publisher of interactive entertainment software. Headquartered in Los Angeles County, California, THQ sells product through its global network of offices located throughout North America, Europe and Asia Pacific. More information about THQ and its products may be found at www.thq.com and www.thqwireless.com. THQ, Big Beach Sports, Company of Heroes Online, Darksiders, de Blob, Deadly Creatures, Drawn to Life, Red Faction: Guerrilla, Saints Row 2 and their respective logos are trademarks and/or registered trademarks of THQ Inc.

All other trademarks are trademarks or registered trademarks of their respective owners.

This press release contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, the company’s expectations for the fiscal fourth quarter ending March 31, 2009, statements about the expected impact of the business realignment initiatives on our future operations and financial condition, including the estimates relating to expense and headcount reductions in fiscal year 2010, and charges that we will incur in connection with our realignment, and for the company’s product releases in future periods. These forward-looking statements are based on current expectations, estimates and projections about the business of THQ Inc. and its subsidiaries (collectively referred to as “THQ”) and are based upon management’s beliefs and certain assumptions made by management. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive and technological factors affecting the operations, markets, products, services and pricing of THQ, and our ability to successfully implement our cost reduction plans. Unless otherwise required by law, THQ disclaims any obligation to update its view on any such risks or uncertainties or to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors and the information that could materially affect THQ’s financial results, described in other documents that THQ files from time to time with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q and its Annual Report on Form 10-K for the fiscal period ended March 31, 2008, and particularly the discussion of risk factors that may affect results of operations set forth therein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

   

THQ Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)

 
Three Months Ended Nine Months Ended
December 31, December 31,
2008   2007 2008   2007
 
Net sales $ 357,310 $ 509,609 $ 659,704 $ 843,443
 
Costs and expenses:
Cost of sales – product costs 133,768 175,568 269,814 306,732
Cost of sales – software amortization and royalties 131,587 126,270 198,099 177,179
Cost of sales – license amortization and royalties 35,840 50,420 68,771 86,250
Cost of sales – venture partner expense 13,393 19,207 15,747 21,241
Product development 27,235 41,311 84,015 94,504
Selling and marketing 69,551 65,499 141,726 135,495
General and administrative 22,639 15,528 59,213 52,269
Goodwill impairment 118,131 118,131
Restructuring 4,752 4,752
Total costs and expenses 556,896 493,803 960,268 873,670
Income (loss) from continuing operations before interest and other income, net, income taxes and minority interest (199,586 )

 

15,806

 

(300,564

)

 

(30,227)

Interest and other income, net 1,946 3,412 2,002 13,337
Income (loss) from continuing operations before income taxes and minority interest (197,640 ) 19,218

(298,562

)

(16,890

)

Income taxes (5,780 ) 5,224 37,860 (14,571 )
Income (loss) from continuing operations before minority interest (191,860 ) 13,994 (336,422 ) (2,319 )
Minority Interest 106 142
Income (loss) from continuing operations (191,754 ) 13,994 (336,280 ) (2,319 )
Gain on sale of discontinued operations, net of tax 1,513 2,042 1,513
Net income (loss) $ (191,754 ) $ 15,507 $ (334,238 ) $ (806 )
 
Income (Loss) per share – basic:
Continuing operations $ (2.86 ) $ 0.21 $ (5.04 ) $ (0.03 )
Discontinued operations     0.02   0.03   0.02
Income (loss) per share – basic $ (2.86 ) $ 0.23 $ (5.01 ) $ (0.01 )
 
Income (loss) per share – diluted:
Continuing operations $ (2.86 ) $ 0.21 $ (5.04 ) $ (0.03 )
Discontinued operations     0.02   0.03   0.02
Income (loss) per share – diluted $ (2.86 ) $ 0.23 $ (5.01 ) $ (0.01 )
 
Shares used in per share calculation – basic 66,997 66,118 66,769 66,502
Shares used in per share calculation – diluted 66,997 67,815 66,769 66,502
 

THQ Inc. and Subsidiaries  

Reconciliation of GAAP Net Income (Loss) to Non-GAAP Net Income (Loss) (a)

(In thousands, except per share data)

             
Three Months Ended
December 31,
Nine Months Ended
December 31,
2008 2007 2008 2007
Net sales $ 357,310 $ 509,609 $ 659,704 $ 843,443
Changes in deferred net revenue (b)   28,287   (1,409 )
Non-GAAP net sales $ 385,597 $ 509,609 $ 658,295 $ 843,443
 
 
Three Months Ended
December 31,
Nine Months Ended
December 31,
2008 2007 2008 2007
 
Income (loss) from continuing operations $ (191,754 ) $ 13,994 $ (336,280 ) $ (2,319 )
 
Non-GAAP adjustments:
Changes in deferred net revenue (b) 28,287 (1,409 )
Change in deferred cost of sales (b) (17,061 ) 2,969
Business realignment expenses (c) 40,375 44,571
Other than temporary impairment on investments 4,561
Mark-to-market on trading Auction Rate Securities (d) 276 276
Goodwill impairment 118,131 118,131
Stock-based compensation and related costs (e) 4,674 4,730 13,530 17,721
Deferred tax asset valuation allowance (f) 36,501 117,021

Income tax adjustments (f)

  (29,018 )   (3,804 )   (30,841 )   (8,844 )
 
Total non-GAAP adjustments   182,165   926   268,809   8,877
 
Non-GAAP income (loss) from continuing operations (9,589 ) 14,920 (67,471 ) 6,558
Gain on sale of discontinued operations, net of tax   1,513   2,042   1,513
Non-GAAP net income (loss) $ (9,589 ) $ 16,433 $ (65,429 ) $ 8,071
 
Non-GAAP loss per share – diluted:
Non-GAAP continuing operations $ (0.14 ) $ 0.22 $ (1.01 ) $ 0.10
Discontinued operations   0.02   0.03   0.02
Non-GAAP loss per share – diluted $ (0.14 ) $ 0.24 $ (0.98 ) $ 0.12
 
Notes:
 
(a) See explanation above regarding the Company’s practice on reporting non-GAAP financial measures.
(b) Prior to the fourth quarter of fiscal 2008, the Company did not defer net revenue or the related cost of sales. See table below for further detail related to income statement classifications.
(c) Business realignment expenses for the three months ended December 31, 2008 consist of $29.8 million in non-cash software development impairment charges related to the cancellation of future titles; $5.9 million related to severance and other employee related costs; $3.7 million in lease and other contract termination costs; and $1.0 million of asset impairments related to closed facilities. Business realignment expenses for the nine months ended December 31, 2008 include an additional $4.2 million in employee related and facility related charges recorded in the first half of fiscal 2009. See table below for further detail related to income statement classifications.
(d) Net mark-to-market impact related to an unrealized gain on a put option received for Auction Rate Securities (ARS) offset by the unrealized loss on the underlying ARS. This amount is recorded in “Other income (expense), net”.
(e) See table below for further detail related to income statement classification of stock-based compensation costs.
(f)

Income tax associated with other non-GAAP adjustments.

 

 

The following table provides further detail on the income statement classification of certain non-GAAP adjustments that impact cost and expenses:

       
Three Months Ended
December 31,
Nine Months Ended
December 31,
2008 2007 2008 2007
Change in deferred cost of sales:
Change in deferred product costs (9,305 ) (2,037 )
Change in deferred software amortization and royalties (7,756 ) 5,006
Total change in deferred cost of sales (17,061 ) 2,969
 
Stock-based compensation and related costs:
Cost of sales – software amortization and royalties 2,629 2,413 4,357 5,391
Product development (181 ) 1,262 1,691 3,434
Selling and marketing 345 573 2,026 2,083
General and administrative 1,881 482 5,456 6,813
Total stock-based compensation and related costs 4,674 4,730 13,530 17,721
 
Business realignment expenses:
Cost of sales – software amortization and royalties 29,760 29,760
Product development 3,651 7,847
Selling and marketing 1,620 1,620
General and administrative 592 592
Restructuring 4,752 4,752
Total business realignment expenses 40,375 44,571
 

THQ Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands)

 
December 31,   March 31,
2008 2008
 
ASSETS
Cash, cash equivalents and short-term investments $ 144,288 $ 317,504
Accounts receivable, net of allowances 145,507 112,843
Inventory 39,528 38,240
Licenses 49,873 47,182
Software development 154,623 155,821
Deferred income taxes 6,499
Prepaid expenses and other current assets 37,222 24,487
Total current assets 577,540 696,077
Property and equipment, net 39,530 50,465
Licenses, net of current portion 54,022 39,597
Software development, net of current portion 49,179 25,369
Income taxes receivable, net of current portion 8,337 16,116
Deferred income taxes 61,710
Goodwill 122,385
Long-term investments 5,892 52,599
Long-term investments, pledged 30,500
Other long-term assets, net 17,953 20,002
TOTAL ASSETS $ 782,953 $ 1,084,320
 
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Accounts payable $ 62,388 $ 61,700
Accrued and other current liabilities 254,977 202,102
Secured credit line 25,965
Income taxes payable 886 6,504
Deferred income taxes 29,266
Total current liabilities 344,216 299,572
Other long-term liabilities 32,282 44,179
Total liabilities 376,498 343,751
Minority Interest 3,358
Total stockholders’ equity 403,097 740,569
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY $ 782,953 $ 1,084,320
 

THQ Inc. and Subsidiaries

Unaudited Supplemental Financial Information

       
Three Months Ended December 31, 2008 Three Months Ended December 31, 2007
GAAP   Non-GAAP(a) GAAP   Non-GAAP(b)
Platform Revenue Mix                
Consoles
Microsoft Xbox 360 $ 91,631 25.6 % $ 91,028 23.6 % $ 62,846 12.3 % $ 62,846 12.3 %
Microsoft Xbox 349 0.1 349 0.1
Nintendo Wii 63,433 17.8 63,433 16.5 52,952 10.4 52,952 10.4
Nintendo GameCube 6 6 767 0.2 767 0.2
Sony PlayStation 3 47,964 13.4 76,785 19.9 59,949 11.8 59,949 11.8
Sony PlayStation 2   49,009 13.7     49,009 12.7     130,590 25.6     130,590 25.6  
  252,043 70.5     280,261 72.7     307,453 60.4     307,453 60.4  
Handheld
Nintendo Dual Screen 63,474 17.8 63,474 16.5 103,030 20.2 103,030 20.2
Nintendo Game Boy Advance 132 132 15,027 2.9 15,027 2.9
Sony PlayStation Portable 21,753 6.1 21,753 5.7 43,150 8.5 43,150 8.5
Wireless   5,942 1.7     5,942 1.5     5,286 1.0     5,286 1.0  
  91,301 25.6     91,301 23.7     166,493 32.6     166,493 32.6  
 
PC 13,966 3.9 14,035 3.6 35,663 7.0 35,663 7.0
Other                
Total Net Sales $ 357,310 100 % $ 385,597 100 % $ 509,609 100 % $ 509,609 100 %
 
Geographic Revenue Mix
Domestic $ 212,220 59.4 % $ 222,581 57.7 % $ 278,294 54.6 % $ 278,294 54.6 %
Foreign   145,090 40.6     163,016 42.3     231,315 45.4     231,315 45.4  
Total Net Sales $ 357,310 100 % $ 385,597 100 % $ 509,609 100 % $ 509,609 100 %
 
  Nine Months Ended December 31, 2008       Nine Months Ended December 31, 2007
GAAP   Non-GAAP(a) GAAP     Non-GAAP(b)
Platform Revenue Mix              
Consoles
Microsoft Xbox 360 $ 131,738 20.0 % $ 108,565 16.5 % $ 117,611 13.9 % $ 117,611 13.9 %
Microsoft Xbox 2,101

0.3

2,101

0.3

Nintendo Wii 117,241 17.8 117,241 17.8 68,190 8.1 68,190 8.1
Nintendo GameCube 121 121 6,741 0.8 6,741 0.8
Sony PlayStation 3 66,239 10.0 95,060 14.4 73,231 8.7 73,231 8.7
Sony PlayStation 2   82,697 12.5     82,697 12.6     218,845 25.9     218,845 25.9  
  398,036 60.3     403,684 61.3     486,719

57.7

    486,719

57.7

 
Handheld
Nintendo Dual Screen 139,349 21.1 139,349 21.2 172,213 20.4 172,213 20.4
Nintendo Game Boy Advance 3,262 0.5 3,262 0.5 32,358 3.8 32,358 3.8
Sony PlayStation Portable 43,366 6.6 43,366 6.6 67,918 8.1 67,918 8.1
Wireless   17,320 2.6     17,320 2.6     14,534 1.7     14,534 1.7  
  203,297 30.8     203,297 30.9     287,023 34.0     287,023 34.0  
 
PC 58,371 8.9 51,314 7.8 69,303 8.2 69,303 8.2
Other           398

0.1

    398

0.1

 
Total Net Sales $ 659,704 100 % $ 658,295 100 % $ 843,443 100 % $ 843,443 100 %
 
Geographic Revenue Mix
Domestic $ 363,572 55.1 % $ 358,960 54.5 % $ 422,190 50.1 % $ 422,190 50.1 %
Foreign   296,132 44.9     299,335 45.5     421,253 49.9     421,253 49.9  
Total Net Sales $ 659,704 100 % $ 658,295 100 % $ 843,443 100 % $ 843,443 100 %
 
Notes:
 
(a)   See explanation above regarding the Company’s practice on reporting non-GAAP financial measures.
(b) Prior to the fourth quarter of fiscal 2008, the Company did not defer net revenue.

Source: THQ Inc.

THQ/Investor & Media Relations
Julie MacMedan, 818/871-5125


 
thq.com | Join | Legal | Be Safe| Help | Report User | Report Content