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PC gamer, WorthPlaying EIC, globe-trotting couch potato, patriot, '80s headbanger, movie watcher, music lover, foodie and man in black -- squirrel!

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THQ Financial Result Reveals Layoffs, Delays And Cancellations

by Rainier on Nov. 5, 2008 @ 2:34 p.m. PST

THQs Q2 2009 financial result reveals less sales ($164.8 million, compared to 2007's $229.3 million) and higher loss ($115.3 million compared to 2007's 7 million). THQ confirmed the five studios closures and specified that it would lay off 17% of its studio staff (250 employees). To further push the realignment various, yet unannounced titles, have been canceled, while Faction: Guerrilla and Darksiders: Wrath of War are being pushed from their early 2009 dates to further down the year. THQ will release fewer, but more high budget, titles, and bring some of its franchises online (Company of Heroes, WWE).

For the three months ended September 30, 2008, THQ reported net sales of $164.8 million, compared with $229.3 million in the prior year. On a non-GAAP basis, the company reported fiscal 2009 second quarter net sales of $151.6 million. Fiscal 2009 second quarter sales reflect a lighter new release schedule than the prior-year period, and included the international roll-out of games based on Disney/Pixar’s WALL-E and initial global shipments of new original Wii™ title de Blob™.

For the three months ended September 30, 2008, the company reported a net loss of $115.3 million, or $1.73 per share, which included a non-cash charge of $1.21 per share related to a valuation allowance and the related tax effects for its deferred tax assets. In the same period a year ago, the company reported a net loss of $7.0 million, or $0.11 per share. On a non-GAAP basis, the company reported a fiscal 2009 second quarter net loss of $30.4 million, or $0.46 per share. This was below the company’s previous guidance of a loss of $0.35 to $0.39 per share, primarily due to lower-than-anticipated international sales of WALL-E and higher-than-expected sales returns and allowances. In the same quarter a year ago, the company reported a non-GAAP net loss of $2.2 million, or $0.03 per share.

The company’s income tax expense for the quarter included a non-cash charge of $80.5 million, or $1.21 per share, on a GAAP basis, related to a valuation allowance and the related tax effects for its deferred tax assets, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Although this non-cash valuation allowance reduces the value of the net deferred tax assets on the balance sheet, the company expects to be able to utilize these assets to reduce tax expense in future profitable periods.

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

Fiscal 2009 Second Quarter Highlights and Recent Developments

  • The company continued to build the Saints Row® franchise, shipping more than two million units of Saints Row® 2 globally in its first two weeks and achieving a Metacritic rating above 80
  • THQ established a new, internally developed Wii franchise with de Blob, which achieved a Metacritic rating above 80
  • The company strengthened its portfolio of online games and enhanced its online business with the following announcements:
    • A new agreement to launch WWE Online (working title) in Asia in 2010
    • The formation of a joint venture with ICE Entertainment ("ICE"), an operator of online games located in Shanghai, China, to launch Dragonica, a free-to-play, micro-transaction-based massively multiplayer online ("MMO") casual game scheduled for release in North America in 2009
    • The opening of a new office in Shanghai, China, from which THQ will pursue new development opportunities and expand publishing partnerships in the growing Chinese market

The company has prepared a new strategic plan, which will be discussed on its conference call today. As part of the new plan, the company today announced that it is undertaking a significant business realignment to position THQ for future profitability and growth. As part of this realignment, THQ plans to focus on fewer, higher quality titles, and to align its organization and cost structure accordingly. The company is in the process of implementing its plan with the cancellation of several titles that were in development but had not been publicly announced, the closure of five studios and a reduction in product development personnel of approximately 250 people, or 17 percent of its studio staff, and the streamlining of its corporate organization to support the new product strategy.

The company has reduced its fiscal 2010 forecasted annual product development spending by approximately $100 million, a reduction of about $30 million below its estimated product development spending in fiscal 2009. The company will further reduce costs and streamline operations, and expects to reduce selling, marketing and general and administrative expenses on an annual basis by approximately $20 million. The company expects to incur significant charges as part of its business realignment, which will be excluded from the company’s non-GAAP results. Most of the charges will be recognized in the remainder of fiscal 2009.

“We have made substantial progress in improving product quality and innovation, as evidenced by recent shipments of several well-reviewed games including de Blob and Saints Row 2,” said Brian Farrell, THQ president and CEO. “We are aligning our business to be more competitive in key consumer segments and address the current business environment. We expect the combination of a much more focused and competitive product line with a more efficient cost structure to put THQ back on the path to growth and profitability in fiscal year 2010.”

THQ issued initial guidance for the fiscal third quarter ending December 31, 2008, and updated its guidance for the fiscal year ending March 31, 2009. The primary drivers of the updated fiscal 2009 guidance are:

  • The company’s decision to release original titles Red Faction®: Guerrilla™ and Darksiders™: Wrath of War™ in the fiscal year ending March 31, 2010, instead of the previously scheduled fourth quarter of fiscal 2009 accounted for approximately $125 million in lower forecasted net sales
  • The significant appreciation of the US dollar accounted for approximately $80 million in lower forecasted net sales
  • The company’s expectations for a more cautious retail environment and continued softness in sales of kids games accounted for approximately $70 million in lower forecasted net sales

As a result of these factors, THQ’s new non-GAAP guidance is as follows:

  • For the fiscal year ending March 31, 2009, THQ expects net sales in the range of $875 million to $900 million. The company expects earnings to be approximately breakeven in the second half of the fiscal year.
  • For the fiscal third quarter ending December 31, 2008, THQ expects to report net sales in the range of $400 million to $420 million. The company expects to report net income per diluted share in the range of $0.05 to $0.15.
  • The company also expects to record severance and other expenses related to the business realignment announced today but has not yet quantified these amounts, which will be excluded from non-GAAP results.

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