THQ Reports Fiscal Second Quarter Results
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-- Improved Operating Results Driven by Focused Product Strategy and Cost Cutting Measures --
AGOURA HILLS, Calif.--(BUSINESS WIRE)-- THQ Inc. (NASDAQ: THQI) today announced financial results for the three months ended September 30, 2009.
For the fiscal second quarter ended September 30, 2009, THQ reported net sales of $101.3 million, compared with $164.8 million in the prior-year period. On a non-GAAP basis, for the three months ended September 30, 2009, the company reported net sales of $100.4 million, compared with $151.6 million a year ago. The company had no major product releases in the fiscal 2010 second quarter, and as a result, net sales were driven primarily by continued sales of previously released games.
For the three months ended September 30, 2009, the company reported a net loss of $5.6 million, or $0.08 per share, compared with a net loss of $115.3 million, or $1.73 per share, in the prior-year period. On a non-GAAP basis, for the three months ended September 30, 2009, the company reported a net loss of $25.2 million, or $0.37 per share, compared with a net loss of $30.4 million, or $0.46 per share, in the same quarter a year ago.
A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.
"THQ is now operating as a more focused, more efficient company," said Brian Farrell, THQ's president and CEO. "We continue to deliver highly rated hit titles such as UFC 2009 Undisputed and WWE SmackDown vs. Raw 2010. We believe we are well positioned this holiday with our strong mass-market line-up led by the highly rated WWE SmackDown vs. Raw 2010, and the latest version of our multi-million unit franchise MX vs. ATV Reflex. In addition, we have positioned THQ to take a leading role in emerging online platforms in Asia and the US."
In July 2009, THQ prevailed in arbitration and in August 2009, THQ reached a settlement with JAKKS Pacific, which established a 40% lower preferred return payment rate owed to JAKKS Pacific for video games sold under the WWE license from July 1, 2006 through December 31, 2009. Pursuant to the terms of the settlement agreement, the company paid $32.8 million of accrued venture partner expense to JAKKS Pacific for the period of July 1, 2006 through March 31, 2009. Also related to the settlement, the company reported a one-time benefit of $24.2 million in its GAAP financial results for the fiscal 2010 second quarter ending September 30, 2009.
Fiscal 2010 Second Quarter Highlights and Recent Developments
-- THQ gained market share for the first nine months of calendar 2009,
ranking as the #3 independent publisher in the US1 with a 5.4% share and
the #4 independent publisher in Europe2 with a 4.5% share
-- UFC(R) 2009 Undisputed(TM) is a top-five best selling Xbox 360(R) and
PlayStation(R)3 game for the first nine months of calendar 2009,
according to NPD
-- THQ strengthened its balance sheet with the issuance of $100 million of
5.00% convertible senior notes maturing in August 2014
-- THQ advanced its online games strategy with the:
o launch of Dragonica(TM) Online in North America;
o launch of the public beta version of Company of Heroes(R) Online in
China with Shanda Games; and
o new partnership with Windysoft to bring Company of Heroes Online to
South Korea
-- THQ appointed Edward L. Kaufman as Executive Vice President of Business
and Legal Affairs, and Corporate Secretary
1Source: The NPD Group 2Source: Chart-Track and GfK
Business Outlook
Fiscal Year Ending March 31, 2010
The company reaffirmed its expectation to report fiscal 2010 net sales higher than those reported in fiscal 2009, and to achieve profitability for fiscal 2010, on a non-GAAP basis. The full year non-GAAP outlook excludes the one-time benefit of $24.2 million from the JAKKS settlement.
The company reaffirmed its expectation that its fiscal 2010 year-end cash balance will be at least $50 million higher than at the end of fiscal 2009, excluding the $32.8 million settlement payment to JAKKS Pacific and the net proceeds from the $100 million convertible senior note offering.
Fiscal 2010 Second Half Net Sales
The company expects to report fiscal 2010 second half net sales similar to last year's second half, with fiscal 2010 third quarter net sales that are approximately 5-10% below the same period last year, and a stronger fiscal 2010 fourth quarter than the prior-year quarter.
Pursuant to THQ's product strategy, key releases scheduled for the third and fourth quarters of fiscal 2010 include:
Fiscal Third Quarter
Core Games Platforms
WWE(R) SmackDown(R) vs. Raw(R) 2010 Xbox 360, PlayStation 3, Wii(TM),
Nintendo DS(TM),
PlayStation(R)2, PSP(R)
MX vs. ATV(TM) Reflex Xbox 360, PlayStation 3, Nintendo DS,
PSP
Kids, Family and Casual Games
All Star Cheer Squad(TM) 2 Wii
Disney Pixar's Cars Race-O-Rama Xbox 360, PlayStation 3, Wii, Nintendo
DS, PlayStation 2, PSP
Drawn to Life(R): The Next Chapter(TM) Wii, Nintendo DS
Marvel(R) Super Hero Squad(TM) Wii, Nintendo DS, PlayStation 2, PSP
SpongeBob Truth or Square Xbox 360, Wii, Nintendo DS, PSP
The Biggest Loser Wii, Nintendo DS
World of Zoo(TM) Wii, Nintendo DS, Windows PC
Online
Company of Heroes Online Online
Dragonica Online Online
Fiscal Fourth Quarter
Core Games Platforms
Darksiders(TM) Xbox 360, PlayStation 3
Metro 2033(TM) Xbox 360, Windows PC
Warhammer(R) 40,000(TM): Dawn of War Windows PC
(TM) II -
Chaos Rising(TM)
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,
-- other-than-temporary impairment on investments and any subsequent
realized gains on those investments, and mark-to-market adjustments on
trading Auction Rate Securities,
-- other material non-recurring charges and benefits, and
-- related income tax effects for each of these items.
Beginning in fiscal 2010, for non-GAAP purposes, the company has adopted 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 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 reflect 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 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 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. Beginning in fiscal 2008, the company began recognizing 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 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 related costs from its non-GAAP financial measures is important to facilitate comparisons to prior periods when the company did not defer 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.
Investor Conference Call
THQ will host a conference call to discuss fiscal 2010 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 36220855 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 6, 2009, by dialing 800.642.1687, domestic, or 706.645.9291, international, conference ID 36220855.
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, All Star Cheer Squad 2, Company of Heroes, Darksiders, Drawn to Life: The Next Chapter, MX vs. ATV Reflex, World of Zoo 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 logo are either registered trademarks or trademarks of Microsoft Corporation in the U.S. and/or other countries.
"PlayStation", "PS" Family logo and "PSP" are registered trademarks of Sony Computer Entertainment Inc.
Wii and Nintendo DS 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 fiscal third quarter ending December 31, 2009, and the fiscal fourth quarter and year ending March 31, 2010, 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, 2009, 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,
2009 2008 2009 2008
Net sales $ 101,290 $ 164,816 $ 344,791 $ 302,394
Cost of sales:
Product costs 38,975 76,038 118,904 136,046
Software amortization and 24,191 39,512 69,227 66,512
royalties
License amortization and 14,619 20,007 45,915 32,931
royalties
Venture partner expense (23,668 ) 899 (22,425 ) 2,354
Total cost of sales 54,117 136,456 211,621 237,843
Gross profit 47,173 28,360 133,170 64,551
Operating expenses:
Product development 19,304 23,231 41,462 56,780
Selling and marketing 19,028 43,124 57,471 72,175
General and administrative 14,055 16,971 30,633 36,574
Restructuring 870 -- 2,522 --
Total operating expenses 53,257 83,326 132,088 165,529
Operating income (loss) (6,084 ) (54,966 ) 1,082 (100,978 )
Interest and other income, 290 (2,438 ) 349 56
net
Income (loss) from
continuing operations before (5,794 ) (57,404 ) 1,431 (100,922 )
income taxes
Income taxes 154 57,892 1,154 43,640
Income (loss) from (5,948 ) (115,296 ) 277 (144,562 )
continuing operations
Gain on sale of discontinued -- -- -- 2,042
operations, net of tax
Net income (loss) prior to
allocation of noncontrolling (5,948 ) (115,296 ) 277 (142,520 )
interest
Loss attributable to 378 36 562 36
noncontrolling interest
Net income (loss) $ (5,570 ) $ (115,260 ) $ 839 $ (142,484 )
attributable to THQ Inc.
Earnings (loss) per share
attributable to THQ Inc. -
basic:
Continuing operations (1) $ (0.08 ) $ (1.73 ) $ 0.01 $ (2.17 )
Discontinued operations -- -- -- 0.03
Earnings (loss) per share - $ (0.08 ) $ (1.73 ) $ 0.01 $ (2.14 )
basic
Earnings (loss) per share
attributable to THQ Inc. -
diluted:
Continuing operations (1) $ (0.08 ) $ (1.73 ) $ 0.01 $ (2.17 )
Discontinued operations -- -- -- 0.03
Earnings (loss) per share - $ (0.08 ) $ (1.73 ) $ 0.01 $ (2.14 )
diluted
Shares used in per share 67,462 66,757 67,466 66,655
calculation - basic
Shares used in per share 67,462 66,757 67,745 66,655
calculation - diluted
(1) Based on amounts attributable to THQ Inc. (i.e., subsequent to the allocation of noncontrolling interest).
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 Six Months Ended
September 30, September 30,
2009 2008 2009 2008
Net sales $ 101,290 $ 164,816 $ 344,791 $ 302,394
Changes in deferred net (909 ) (13,192 ) (10,511 ) (29,696 )
revenue
Non-GAAP net sales $ 100,381 $ 151,624 $ 334,280 $ 272,698
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 2009 2008
Operating income (loss) $ (6,084 ) $ (54,966 ) $ 1,082 $ (100,978 )
Non-GAAP adjustments
affecting operating income
(loss)
JAKKS preferred return rate (24,221 ) -- (24,221 ) --
reduction (b)
Changes in deferred net (909 ) (13,192 ) (10,511 ) (29,696 )
revenue
Change in deferred cost of 102 9,433 5,281 20,030
sales (c)
Business realignment 352 669 2,828 4,196
expenses (c)
Stock-based compensation 768 4,534 3,702 8,856
and related costs (c)
Total non-GAAP adjustments
affecting operating income (23,908 ) 1,444 (22,921 ) 3,386
(loss)
Non-GAAP operating loss $ (29,992 ) $ (53,522 ) $ (21,839 ) $ (97,592 )
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 2009 2008
Net income (loss) $ (5,570 ) $ (115,260 ) $ 839 $ (142,484 )
attributable to THQ Inc.
Non-GAAP adjustments:
Non-GAAP adjustments
affecting operating income (23,908 ) 1,444 (22,921 ) 3,386
(loss)
Gain on sale of investments (152 ) -- (640 ) --
(d)
Other-than-temporary -- 4,561 -- 4,561
impairment on investments
Mark-to-market on trading (234 ) -- (95 ) --
Auction Rate Securities (e)
Interest and other income, (63 ) -- (63 ) --
net
Deferred tax asset
valuation allowance and -- 80,520 -- 80,520
related tax
Income tax adjustments (f) 4,678 (1,705 ) 4,498 (1,823 )
Non-GAAP net loss $ (25,249 ) $ (30,440 ) $ (18,382 ) $ (55,840 )
Non-GAAP net loss per share $ (0.37 ) $ (0.46 ) $ (0.27 ) $ (0.84 )
- diluted
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 adjustment related to 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) On April 1, 2009, the Company adopted a fixed, long-term projected tax rate of 15% for the purposes of evaluating its operating performance, and to forecast, plan and analyze future periods.
The following table provides further detail on the income statement classification of certain non-GAAP adjustments that impact cost and expenses:
Three Months Ended Six Months Ended
September 30, September 30,
2009 2008 2009 2008
Change in deferred cost of sales:
Change in deferred product costs $ (51 ) $ 3,366 $ 2,693 $ 7,268
Change in deferred software 153 6,067 2,588 12,762
amortization and royalties
Total change in deferred cost of sales $ 102 $ 9,433 $ 5,281 $ 20,030
Stock-based compensation and related
costs:
Cost of sales - software amortization $ 830 $ 1,152 $ 1,367 $ 1,728
and royalties (a)
Product development (a) (265 ) 724 322 1,872
Selling and marketing (a) (33 ) 866 64 1,681
General and administrative (a) 236 1,792 1,949 3,575
Total stock-based compensation and $ 768 $ 4,534 $ 3,702 $ 8,856
related costs
Business realignment expenses:
Product development $ (508 ) $ 669 $ (253 ) $ 4,196
Selling and marketing 4 -- 497 --
General and administrative (14 ) -- 62 --
Restructuring 870 -- 2,522 --
Total realignment expenses $ 352 $ 669 $ 2,828 $ 4,196
Notes:
(a) Stock-based compensation expense 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, March 31,
2009 2009
ASSETS
Cash, cash equivalents and short-term investments $ 208,920 $ 140,662
Short-term investments, pledged 27,786 --
Accounts receivable, net of allowances 7,321 60,444
Inventory 40,443 25,785
Licenses 25,816 45,025
Software development 142,930 137,820
Deferred income tax 7,234 6,112
Income taxes receivable 5,315 903
Prepaid expenses and other current assets 46,703 27,441
Total current assets 512,468 444,192
Property and equipment, net 30,071 33,511
Licenses, net of current portion 36,748 47,875
Software development, net of current portion 48,313 24,647
Deferred income taxes 1,982 1,982
Long-term investments 1,852 5,025
Long-term investments, pledged -- 30,618
Other long-term assets, net 14,317 10,479
TOTAL ASSETS $ 645,751 $ 598,329
LIABILITIES AND EQUITY
Accounts payable $ 44,355 $ 40,088
Accrued and other current liabilities 126,577 190,140
Secured credit lines 18,419 24,360
Total current liabilities 189,351 254,588
Convertible senior notes 100,000 --
Other long-term liabilities 21,852 33,503
Total liabilities 311,203 288,091
Total THQ Inc. stockholders' equity 331,912 307,040
Noncontrolling interest 2,636 3,198
Total equity 334,548 310,238
TOTAL LIABILITIES AND EQUITY $ 645,751 $ 598,329
THQ Inc. and Subsidiaries
Unaudited Supplemental Financial Information
(in thousands)
Three Months Ended GAAP Six Months Ended GAAP
September 30, 2009 September 30, 2008 September 30, 2009 September 30, 2008
Platform
Revenue Mix
Consoles
Microsoft $ 21,698 21.4 % $ 19,978 12.1 % $ 119,152 34.5 % $ 40,107 13.3 %
Xbox 360
Nintendo 9,359 9.2 30,504 18.5 22,652 6.6 53,808 17.8
Wii
Sony
PlayStation 17,467 17.3 11,622 7.1 95,734 27.8 18,275 6.1
3
Sony
PlayStation 8,189 8.1 13,836 8.4 14,890 4.3 33,688 11.1
2
Other -- -- 62 5 115
56,713 56.0 76,002 46.1 252,433 73.2 145,993 48.3
Handheld
Nintendo 19,842 19.6 48,585 29.5 39,862 11.6 75,875 25.1
Dual Screen
Sony
PlayStation 7,585 7.5 11,233 6.8 12,618 3.7 21,613 7.1
Portable
Wireless 2,779 2.7 6,231 3.8 6,974 2.0 11,378 3.8
Other -- -- 1,511 0.9 -- 3,130 1.0
30,206 29.8 67,560 41.0 59,454 17.3 111,996 37.0
PC 14,371 14.2 21,254 12.9 32,904 9.5 44,405 14.7
Total Net $ 101,290 100.0 % $ 164,816 100.0 % $ 344,791 100.0 % $ 302,394 100.0 %
Sales
Geographic
Revenue Mix
Domestic $ 56,471 55.8 % $ 76,502 46.4 % $ 218,785 63.5 % $ 151,352 50.1 %
Foreign 44,819 44.2 88,314 53.6 126,006 36.5 151,042 49.9
Total Net $ 101,290 100.0 % $ 164,816 100.0 % $ 344,791 100.0 % $ 302,394 100.0 %
Sales
Three Months Ended Non-GAAP Six Months Ended Non-GAAP
September 30, 2009 September 30, 2008 September 30, 2009 September 30, 2008
Platform
Revenue Mix
Consoles
Microsoft $ 21,634 21.5 % $ 10,016 6.6 % $ 119,104 35.6 % $ 17,537 6.4 %
Xbox 360
Nintendo 9,359 9.3 30,504 20.1 22,652 6.8 53,808 19.7
Wii
Sony
PlayStation 17,364 17.3 11,622 7.7 87,520 26.2 18,275 6.7
3
Sony
PlayStation 8,190 8.2 13,836 9.1 14,891 4.4 33,688 12.4
2
Other -- -- 62 0.1 5 -- 115 0.1
56,547 56.3 66,040 43.6 244,172 73.0 123,423 45.3
Handheld
Nintendo 19,842 19.8 48,585 32.0 39,862 11.9 75,875 27.8
Dual Screen
Sony
PlayStation 7,585 7.5 11,233 7.4 12,618 3.8 21,613 7.9
Portable
Wireless 2,779 2.8 6,231 4.1 6,974 2.1 11,378 4.2
Other -- -- 1,511 1.0 -- -- 3,130 1.1
30,206 30.1 67,560 44.5 59,454 17.8 111,996 41.0
PC 13,628 13.6 18,024 11.9 30,654 9.2 37,279 13.7
Total Net $ 100,381 100.0 % $ 151,624 100.0 % $ 334,280 100.0 % $ 272,698 100.0 %
Sales
Geographic
Revenue Mix
Domestic $ 55,455 55.2 % $ 69,272 45.7 % $ 214,262 64.1 % $ 136,379 50.0 %
Foreign 44,926 44.8 82,352 54.3 120,018 35.9 136,319 50.0
Total Net $ 100,381 100.0 % $ 151,624 100.0 % $ 334,280 100.0 % $ 272,698 100.0 %
Sales
Source: THQ Inc.
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