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.

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

Source: THQ Inc.

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