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THQ Reports Fiscal 2011 Second Quarter Results in Line with Guidance
-- Holiday Quarter Marks Beginning of Robust Multi-Year Product Pipeline --

AGOURA HILLS, Calif., Nov 03, 2010 (BUSINESS WIRE) -- THQ Inc. (NASDAQ: THQI) today reported financial results for the fiscal 2011 second quarter ended September 30, 2010, in line with the company's guidance.

For the fiscal second quarter ended September 30, 2010, THQ reported net sales of $77.1 million, compared with $101.3 million in the prior-year period. On a non-GAAP basis, for the three months ended September 30, 2010, the company reported net sales of $70.4 million, compared with $100.4 million a year ago.

For the three months ended September 30, 2010, the company reported a net loss of $47.0 million, or $0.69 per share, compared with a net loss of $5.6 million, or $0.08 per share, in the prior-year period. On a non-GAAP basis, for the three months ended September 30, 2010, the company reported a net loss of $40.6 million, or $0.60 per share, compared with a non-GAAP net loss of $25.2 million, or $0.37 per share, in the prior-year period.

A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.

THQ President and CEO Brian Farrell said, "This holiday begins the consistent flow of quality products that we've been investing in over the past two years. Our December quarter will be led by WWE(R) SmackDown(R) vs. Raw(R) 2011 and our new uDraw(TM)GameTablet(TM). Key releases for our March quarter include our new core game franchise Homefront(TM)as well as WWE(R) All Stars(TM), UFC(R) Personal Trainer(TM)and de Blob(R) 2."

Farrell added, "We continue to invest in our long-term product pipeline, with the recent eight-year extension of our UFC(R) relationship, and the planned addition of Patrice Désilets to our growing team of talented artists creating new intellectual properties for THQ. Our goal this fiscal year continues to be to position THQ for significant growth in fiscal 2012 and beyond, with high quality core games such as Red Faction(R) Armageddon(TM), Warhammer(R) 40,000(R): Space Marine(R), and the next installment of our Saints Row(R) franchise scheduled for release in fiscal 2012. We continue to execute on our strategy of integrating a digital component into all of our key franchises, including downloadable content and games on the iPhone, iPad, Facebook, Xbox LIVE Arcade and PlayStation(R) Network."

Fiscal 2011 Second Quarter Highlights and Recent Developments

  • On August 17, 2010, THQ unveiled its new uDraw GameTablet, a first-of-its-kind, innovative new gaming accessory developed by THQ for the Wii(TM). The uDraw GameTablet is scheduled to hit U.S. retail store shelves on November 14, 2010.
  • On October 19, 2010, THQ announced its plans for talented game developer Patrice Désilets, creative director on the Assassin's Creed franchise, to join the company next summer to form a new THQ-owned development studio in Montreal, Quebec, with the purpose of creating new intellectual properties.
  • On October 19, 2010, THQ announced that it extended its exclusive, worldwide agreement with Zuffa, LLC to publish video games and social and mobile applications based on the Ultimate Fighting Championship(R) brand through 2018.
  • On October 18, 2010, the company announced a new multi-year licensing agreement with Nickelodeon, granting THQ the worldwide rights to continue to develop and publish video games based on the highly popular SpongeBob(TM) SquarePants(TM) franchise.

Business Outlook

Fiscal Year Ending March 31, 2011

The company expects to report non-GAAP fiscal 2011 net sales in the range of $825 - $855 million and a non-GAAP loss per share in the range of $0.10 - $0.20 for the full year.

Fiscal Third Quarter Ending December 31, 2010

THQ expects to report non-GAAP fiscal 2011 third quarter net sales in the range of $300 - $315 million, and non-GAAP earnings per share in the range of $0.20 - $0.30, before applying the "if converted" method of calculating EPS, and $0.19 - $0.27 after applying the "if converted" method of calculating EPS.

Fiscal Fourth Quarter Ending March 31, 2011

THQ expects to report non-GAAP fiscal 2011 fourth quarter net sales in the range of $295 - $310 million, and non-GAAP earnings per share in the range of $0.35 - $0.45, before applying the "if converted" method of calculating EPS, and $0.31 - $0.40 after applying the "if converted" method of calculating EPS.

The "if converted" method of calculating EPS should be applied in any quarter with net income of at least $8 million and in any full year with net income of at least $32 million.

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 certain deferred revenue and related costs,
  • business realignment expense,
  • other-than-temporary impairment on investments and any subsequent realized gains on those investments, and mark-to-market adjustments on investments, and
  • material litigation settlements, charges and benefits.

For non-GAAP purposes, the company uses a fixed, long-term projected tax rate of 15% to evaluate its operating performance, as well as to forecast, plan and analyze future periods.

THQ may consider whether other significant 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 reflect the company's primary 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 this earnings release have been reconciled to the comparable GAAP results in the accompanying tables, 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 of 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 stockholder dilution, rather than the accounting charges associated with such grants.

Deferred Revenue/Costs. The company recognizes the revenue and related costs from the sale of certain titles for which the online service is determined to be a deliverable over the estimated online service period. Although the company defers the recognition of all or a portion of its net revenue and costs with respect to these titles, there is no impact to its operating cash flow. THQ's management excludes the impact of deferred net revenue and costs when evaluating the company's operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.

Business Realignment Expense. Although THQ has incurred business realignment expenses in the past, each charge relates to a discrete event based on a unique set of business objectives. Management does not believe these charges reflect the company's primary business, ongoing operating results or future outlook. As such, the company believes it is appropriate to exclude these expenses from its non-GAAP financial measures.

Fiscal Periods

Our fiscal year ends on the Saturday nearest March 31st. For simplicity, we present all fiscal periods as ending on a calendar month end. Our fiscal 2011 second quarter ended on October 2, 2010. Our fiscal 2010 second quarter ended on September 26, 2009. The fiscal three month periods ended September 30, 2010 and 2009 consisted of 13 weeks.

Investor Conference Call

THQ will host a conference call to discuss fiscal 2011 second 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 17900312 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 November 5, 2010, by dialing 800-642-1687, domestic, or 706-645-9291, international, conference ID 17900312.

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 http://www.thq.com. THQ, de Blob, Homefront, Red Faction Armageddon, Saints Row, uDraw, uDraw GameTablet and their respective logos are trademarks and/or registered trademarks of THQ Inc.

Microsoft, Xbox, Xbox 360, Xbox LIVE, the Xbox logos, and the Xbox LIVE Arcade logo are either registered trademarks or trademarks of Microsoft Corporation in the U.S. and/or other countries.

"PlayStation" is a registered trademark of Sony Computer Entertainment Inc.

Wii, Nintendo DS and Nintendo DSi are trademarks of Nintendo.

All other trademarks are property 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 third and fourth quarters and full fiscal year ending March 31, 2011, 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. 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, 2010, 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 Six Months Ended
September 30, September 30,
2010 2009 2010 2009
Net sales $ 77,053 $ 101,290 $ 226,432 $ 344,791
Cost of sales:
Product costs 35,003 38,975 95,706 118,904
Software amortization and royalties 21,162 24,191 54,515 69,227
License amortization and royalties 9,583 (9,049 ) 30,473 23,490
Total cost of sales 65,748 54,117 180,694 211,621
Gross profit 11,305 47,173 45,738 133,170
Operating expenses:
Product development 17,900 19,304 34,375 41,462
Selling and marketing 24,023 19,028 57,649 57,471
General and administrative 11,878 14,055 23,722 30,633
Restructuring (161 ) 870 7 2,522
Total operating expenses 53,640 53,257 115,753 132,088
Operating income (loss) (42,335 ) (6,084 ) (70,015 ) 1,082
Interest and other income (expense), net (3,991 ) 290 (5,581 ) 349
Income (loss) before income taxes (46,326 ) (5,794 ) (75,596 ) 1,431
Income taxes 659 154 1,499 1,154

Net income (loss) prior to allocation of noncontrolling interest

(46,985 ) (5,948 ) (77,095 ) 277
Loss attributable to noncontrolling interest -- 378 -- 562
Net income (loss) attributable to THQ Inc. $ (46,985 ) $ (5,570 ) $ (77,095 ) $ 839
Earnings (loss) per share attributable to THQ Inc. - basic $ (0.69 ) $ (0.08 ) $ (1.14 ) $ 0.01
Earnings (loss) per share attributable to THQ Inc. - diluted $ (0.69 ) $ (0.08 ) $ (1.14 ) $ 0.01
Shares used in per share calculation - basic 67,813 67,462 67,779 67,466
Shares used in per share calculation - diluted 67,813 67,462 67,779 67,745

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
September 30,

Six Months Ended
September 30,

2010 2009 2010 2009
Net sales $ 77,053 $ 101,290 $ 226,432 $ 344,791
Changes in deferred net revenue (6,658 ) (909 ) 4,232 (10,511 )
Non-GAAP net sales $ 70,395 $ 100,381 $ 230,664 $ 334,280

Three Months Ended
September 30,

Six Months Ended
September 30,

2010 2009 2010 2009
Operating income (loss) $ (42,335 ) $ (6,084 ) $ (70,015 ) $ 1,082
Non-GAAP adjustments affecting operating income (loss):
JAKKS preferred return rate reduction (b) -- (24,221 ) -- (24,221 )
Change in deferred net revenue (6,658 ) (909 ) 4,232 (10,511 )
Change in deferred cost of sales (c) 1,075 102 (179 ) 5,281
Business realignment expenses (c) (161 ) 352 7 2,828
Stock-based compensation and related costs (c) 1,829 768 4,357 3,702
Total non-GAAP adjustments affecting operating income (loss) (3,915 ) (23,908 ) 8,417 (22,921 )
Non-GAAP operating loss $ (46,250 ) $ (29,992 ) $ (61,598 ) $ (21,839 )

Three Months Ended
September 30,

Six Months Ended
September 30,

2010 2009 2010 2009
Net income (loss) attributable to THQ Inc. $ (46,985 ) $ (5,570 ) $ (77,095 ) $ 839
Non-GAAP adjustments:
Non-GAAP adjustments affecting operating income (loss) (3,915 ) (23,908 ) 8,417 (22,921 )
Gain on sale of investments (d) -- (152 ) -- (640 )
Mark-to-market adjustments on investments (e) 2,524 (234 ) 2,524 (95 )
Interest and other income, net -- (63 ) -- (63 )
Income tax adjustments (f) 7,817 4,678 11,197 4,498
Non-GAAP net loss $ (40,559 ) $ (25,249 ) $ (54,957 ) $ (18,382 )

Non-GAAP loss per share - diluted (g)

$ (0.60 ) $ (0.37 ) $ (0.81 ) $ (0.27 )
Notes:
(a) See explanation above regarding the Company's practice on reporting non-GAAP financial measures.
(b) Represents the one-time reduction in accrued joint venture partner expense resulting from the settlement of the preferred return rate with JAKKS Pacific.
(c) See table below for further detail related to income statement classification of these adjustments.
(d) Realized gains on sales of investments to the extent we had previously excluded a related other-than-temporary impairment from non-GAAP amounts.
(e) Mark-to-market adjustments, including the impact of changes in foreign currency rates, related to certain of our available-for-sale investment securities; these amounts are recorded in "Accumulated other comprehensive income," a component of stockholders' equity, on our balance sheet until realized. Adjustment also may include unrealized gains on trading Auction Rate Securities (ARS), partially offset by related unrealized losses on a put option received in connection with the ARS; this amount is recorded in "Interest and other income, net."
(f) For non-GAAP purposes, the Company uses a fixed, long-term projected tax rate of 15% to evaluate its operating performance, as well as to forecast, plan and analyze future periods.
(g) Non-GAAP loss per share - diluted has not been calculated using the "if-converted" method relative to the Convertible Senior Notes (Notes) issued in August 2009 as their inclusion would have been anti-dilutive.

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

Three Months Ended
September 30,

Six Months Ended
September 30,

2010 2009 2010 2009
Change in deferred cost of sales:
Change in deferred product costs $ 119 $ (51 ) $ 467 $ 2,693
Change in deferred software amortization and royalties -- 153 -- 2,588
Change in deferred license amortization and royalties 956 -- (646 ) --
Total change in deferred cost of sales $ 1,075 $ 102 $ (179 ) $ 5,281
Business realignment expenses:
Product development $ -- $ (508 ) $ -- $ (253 )
Selling and marketing -- 4 -- 497
General and administrative -- (14 ) -- 62
Restructuring (161 ) 870 7 2,522
Total business realignment expenses $ (161 ) $ 352 $ 7 $ 2,828
Stock-based compensation and related costs:
Cost of sales - software amortization and royalties (a) $ 548 $ 830 $ 819 $ 1,367
Product development (a) (118 ) (265 ) 623 322
Selling and marketing (a) 318 (33 ) 676 64
General and administrative (a) 1,081 236 2,239 1,949
Total stock-based compensation and related costs $ 1,829 $ 768 $ 4,357 $ 3,702
Notes:
(a) Stock-based compensation expense for the three and six months ended September 30, 2009 is net of the impact of the reversal of a portion of payroll tax accruals established in fiscal 2007 during our historical stock option grant investigation.

THQ Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands)

September 30,
2010
March 31,
2010
ASSETS
Cash, cash equivalents and short-term investments $ 122,763 $ 271,319
Short-term investments, pledged -- 22,774
Accounts receivable, net of allowances 10,511 41,318
Inventory 21,234 13,970
Licenses 74,998 56,555
Software development 170,271 132,223
Deferred income taxes 7,297 5,590
Income taxes receivable 1,067 4,914
Prepaid expenses and other current assets 40,347 13,864
Total current assets 448,488 562,527
Property and equipment, net 31,038 28,374
Licenses, net of current portion 95,436 83,752
Software development, net of current portion 53,802 26,792
Deferred income taxes 433 433
Long-term investments 1,892 1,851
Other long-term assets, net 12,271 10,600
TOTAL ASSETS $ 643,360 $ 714,329
LIABILITIES AND EQUITY
Accounts payable $ 59,167 $ 40,305
Accrued and other current liabilities 141,677 137,332
Secured credit line -- 13,249
Total current liabilities 200,844 190,886
Other long-term liabilities 82,856 98,825
Convertible senior notes 100,000 100,000
Total liabilities 383,700 389,711
Total THQ Inc. stockholders' equity 259,660 324,355
Noncontrolling interest -- 263
Total equity 259,660 324,618
TOTAL LIABILITIES AND EQUITY $ 643,360 $ 714,329

THQ Inc. and Subsidiaries

Unaudited Supplemental Financial Information

(In thousands)

Three Months Ended GAAP Six Months Ended GAAP
Platform Revenue Mix

September 30,
2010

September 30,
2009

September 30,
2010

September 30,
2009

Consoles
Microsoft Xbox 360 $ 14,260 18.5 % $ 21,698 21.4 % $ 58,773 26.0 % $ 119,152 34.5 %
Nintendo Wii 13,011 16.9 9,359 9.2 32,171 14.2 22,652 6.6
Sony PlayStation 3 12,279 15.9 17,467 17.3 59,733 26.4 95,734 27.8
Sony PlayStation 2 1,903 2.5 8,189 8.1 6,606 2.9 14,890 4.3
Other -- -- -- -- -- -- 5 --
41,453 53.8 56,713 56.0 157,283 69.5 252,433 73.2
Handheld
Nintendo Dual Screen 17,246 22.4 19,842 19.6 36,912 16.3 39,862 11.6
Sony PlayStation Portable 6,862 8.9 7,585 7.5 11,203 4.9 12,618 3.7
Wireless 1,499 1.9 2,779 2.7 3,088 1.4 6,974 2.0
25,607 33.2 30,206 29.8 51,203 22.6 59,454 17.3
PC 9,993 13.0 14,371 14.2 17,946 7.9 32,904 9.5
Total net sales $ 77,053 100.0 % $ 101,290 100.0 % $ 226,432 100.0 % $ 344,791 100.0 %
Geographic Revenue Mix
Domestic $ 45,253 58.7 % $ 56,471 55.8 % $ 146,388 64.6 % $ 218,785 63.5 %
Foreign 31,800 41.3 44,819 44.2 80,044 35.4 126,006 36.5
Total Net Sales $ 77,053 100.0 % $ 101,290 100.0 % $ 226,432 100.0 % $ 344,791 100.0 %
Three Months Ended Non-GAAP Six Months Ended Non-GAAP
Platform Revenue Mix

September 30,
2010

September 30,
2009

September 30,
2010

September 30,
2009

Consoles
Microsoft Xbox 360 $ 10,996 15.6 % $ 21,634 21.5 % $ 61,211 26.5 % $ 119,104 35.6 %
Nintendo Wii 13,011 18.5 9,359 9.3 32,171 13.9 22,652 6.8
Sony PlayStation 3 8,953 12.7 17,364 17.3 61,747 26.8 87,520 26.2
Sony PlayStation 2 1,903 2.7 8,190 8.2 6,606 2.9 14,891 4.4
Other -- -- -- -- -- -- 5 --
34,863 49.5 56,547 56.3 161,735 70.1 244,172 73.0
Handheld
Nintendo Dual Screen 17,246 24.5 19,842 19.8 36,912 16.0 39,862 11.9
Sony PlayStation Portable 6,862 9.8 7,585 7.5 11,203 4.9 12,618 3.8
Wireless 1,499 2.1 2,779 2.8 3,088 1.3 6,974 2.1
25,607 36.4 30,206 30.1 51,203 22.2 59,454 17.8
PC 9,925 14.1 13,628 13.6 17,726 7.7 30,654 9.2
Total net sales $ 70,395 100.0 % $ 100,381 100.0 % $ 230,664 100.0 % $ 334,280 100.0 %
Geographic Revenue Mix
Domestic $ 41,111 58.4 % $ 55,455 55.2 % $ 149,137 64.7 % $ 214,262 64.1 %
Foreign 29,284 41.6 44,926 44.8 81,527 35.3 120,018 35.9
Total Net Sales $ 70,395 100.0 % $ 100,381 100.0 % $ 230,664 100.0 % $ 334,280 100.0 %

SOURCE: THQ Inc.

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


 
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