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| [November 04, 2009] |
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THQ Reports Fiscal Second Quarter Results
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® 2009 Undisputed™ is a top-five best selling Xbox 360® and PlayStation®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:
launch of Dragonica™ Online in North America;
launch of the public beta version of Company of Heroes® Online in China with Shanda Games; and
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 (News - Alert)
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® SmackDown® vs. Raw® 2010
Xbox 360, PlayStation 3, Wii™, Nintendo DS™,
PlayStation®2, PSP®
MX vs. ATV™ Reflex
Xbox 360, PlayStation 3, Nintendo DS, PSP
Kids, Family and Casual Games
All Star Cheer Squad™ 2
Wii
Disney?Pixar's Cars Race-O-Rama
Xbox 360, PlayStation 3, Wii, Nintendo DS, PlayStation 2, PSP
Drawn to Life®: The Next Chapter™
Wii, Nintendo DS
Marvel® Super Hero Squad™
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™
Wii, Nintendo DS, Windows PC
Online
Company of Heroes Online
Online
Dragonica Online
Online
Fiscal Fourth Quarter
Core Games
Platforms
Darksiders™
Xbox 360, PlayStation 3
Metro 2033™
Xbox 360, Windows PC
Warhammer® 40,000™: Dawn of War™ II -
Windows PC
Chaos Rising™
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 (News - Alert), 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 royalties
24,191
39,512
69,227
66,512
License amortization and royalties
14,619
20,007
45,915
32,931
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, net
290
(2,438
)
349
56
Income (loss) from continuing operations before income taxes
(5,794
)
(57,404
)
1,431
(100,922
)
Income taxes
154
57,892
1,154
43,640
Income (loss) from continuing operations
(5,948
)
(115,296
)
277
(144,562
)
Gain on sale of discontinued operations, net of tax
2,042
Net income (loss) prior to allocation of noncontrolling interest
(5,948
)
(115,296
)
277
(142,520
)
Loss attributable to noncontrolling interest
378
36
562
36
Net income (loss) attributable to THQ Inc.
$
(5,570
)
$
(115,260
)
$
839
$
(142,484
)
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 - basic
$
(0.08
)
$
(1.73
)
$
0.01
$
(2.14
)
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 - diluted
$
(0.08
)
$
(1.73
)
$
0.01
$
(2.14
)
Shares used in per share calculation - basic
67,462
66,757
67,466
66,655
Shares used in per share calculation - diluted
67,462
66,757
67,745
66,655
(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 EndedSeptember 30,
Six Months EndedSeptember 30,
2009
2008
2009
2008
Net sales
$
101,290
$
164,816
$
344,791
$
302,394
Changes in deferred net revenue
(909
)
(13,192
)
(10,511
)
(29,696
)
Non-GAAP net sales
$
100,381
$
151,624
$
334,280
$
272,698
Three Months EndedSeptember 30,
Six Months EndedSeptember 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 reduction (b)
(24,221
)
(24,221
)
Changes in deferred net revenue
(909
)
(13,192
)
(10,511
)
(29,696
)
Change in deferred cost of sales (c)
102
9,433
5,281
20,030
Business realignment expenses (c)
352
669
2,828
4,196
Stock-based compensation and related costs (c)
768
4,534
3,702
8,856
Total non-GAAP adjustments affecting operating income (loss)
(23,908
)
1,444
(22,921
)
3,386
Non-GAAP operating loss
$
(29,992
)
$
(53,522
)
$
(21,839
)
$
(97,592
)
Three Months EndedSeptember 30,
Six Months EndedSeptember 30,
2009
2008
2009
2008
Net income (loss) attributable to THQ Inc.
$
(5,570
)
$
(115,260
)
$
839
$
(142,484
)
Non-GAAP adjustments:
Non-GAAP adjustments affecting operating income (loss)
(23,908
)
1,444
(22,921
)
3,386
Gain on sale of investments (d)
(152
)
(640
)
Other-than-temporary impairment on investments
4,561
4,561
Mark-to-market on trading Auction Rate Securities (e)
(234
)
(95
)
Interest and other income, net
(63
)
(63
)
Deferred tax asset valuation allowance and related tax
80,520
80,520
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 - diluted
$
(0.37
)
$
(0.46
)
$
(0.27
)
$
(0.84
)
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 EndedSeptember 30,
Six Months EndedSeptember 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 amortization and royalties
153
6,067
2,588
12,762
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 and royalties (a)
$
830
$
1,152
$
1,367
$
1,728
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 related costs
$
768
$
4,534
$
3,702
$
8,856
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 Xbox 360
$
21,698
21.4
%
$
19,978
12.1
%
$
119,152
34.5
%
$
40,107
13.3
%
Nintendo Wii
9,359
9.2
30,504
18.5
22,652
6.6
53,808
17.8
Sony PlayStation 3
17,467
17.3
11,622
7.1
95,734
27.8
18,275
6.1
Sony PlayStation 2
8,189
8.1
13,836
8.4
14,890
4.3
33,688
11.1
Other
62
-
5
-
115
-
56,713
56.0
76,002
46.1
252,433
73.2
145,993
48.3
Handheld
Nintendo Dual Screen
19,842
19.6
48,585
29.5
39,862
11.6
75,875
25.1
Sony PlayStation Portable
7,585
7.5
11,233
6.8
12,618
3.7
21,613
7.1
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 Sales
$
101,290
100.0
%
$
164,816
100.0
%
$
344,791
100.0
%
$
302,394
100.0
%
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 Sales
$
101,290
100.0
%
$
164,816
100.0
%
$
344,791
100.0
%
$
302,394
100.0
%
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 Xbox 360
$
21,634
21.5
%
$
10,016
6.6
%
$
119,104
35.6
%
$
17,537
6.4
%
Nintendo Wii
9,359
9.3
30,504
20.1
22,652
6.8
53,808
19.7
Sony PlayStation 3
17,364
17.3
11,622
7.7
87,520
26.2
18,275
6.7
Sony PlayStation 2
8,190
8.2
13,836
9.1
14,891
4.4
33,688
12.4
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 Dual Screen
19,842
19.8
48,585
32.0
39,862
11.9
75,875
27.8
Sony PlayStation Portable
7,585
7.5
11,233
7.4
12,618
3.8
21,613
7.9
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 Sales
$
100,381
100.0
%
$
151,624
100.0
%
$
334,280
100.0
%
$
272,698
100.0
%
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 Sales
$
100,381
100.0
%
$
151,624
100.0
%
$
334,280
100.0
%
$
272,698
100.0
%
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