For the fiscal first quarter ended June 30, 2009, THQ’s net sales climbed 77% to $243.5 million from $137.6 million in the prior year. On a non-GAAP basis, for the three months ended June 30, 2009, the company reported net sales of $233.9 million, up 93% from $121.1 million a year ago. Fiscal 2010 first quarter net sales were driven primarily by UFC 2009 Undisputed, the first game from THQ’s new UFC fighting franchise, and internally developed and owned intellectual property Red Faction: Guerrilla.
For the three months ended June 30, 2009, the company reported net income of $6.4 million, or $0.09 per share, compared with a net loss of $27.2 million, or $0.41 per share, in the prior year. On a non-GAAP basis, for the three months ended June 30, 2009, the company reported net income of $6.9 million, or $0.10 per diluted share, compared with a non-GAAP net loss of $25.4 million, or $0.38 per share, in the same quarter a year ago.
A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.
“We reported the highest June quarter net sales and net income in our history, driven primarily by the success of our hit title UFC 2009 Undisputed,” said Brian Farrell, THQ president and CEO. “Our first quarter results demonstrate the benefits of our more focused product strategy and aggressive cost management. These record results reflect the hard work and dedication of our employees around the globe.”
Farrell added, “Our three recently announced business units - Core Games; Kids, Family and Casual Games; and Online Games - are focused on delivering a strong fiscal 2010 line-up and building our pipeline of games to support THQ’s long-term profitability and growth.”
Fiscal 2010 First Quarter Highlights and Recent Developments
- THQ was the #3 independent publisher1,3 in the US and UK for the June quarter
- THQ extended its leadership in the fighting category with the addition ofnew multi-million unit title UFC 2009 Undisputed, which:
- has shipped more than 2.9 million units worldwide to date,
- was the #1 best-selling title1,2 in the US for the June quarter,
- was the #1 best-selling title2,3 from an independent publisher in the UK for the June quarter, and
- achieved an average Metacritic rating of 84.
- THQ established its popular Red Faction franchise on the Xbox 360 and PLAYSTATION 3, with an average Metacritic rating of 85 and more than one million units shipped to date
- THQ had three of the top ten best-selling titles1,2 in the US for the month of June: UFC 2009 Undisputed, Red Faction: Guerrilla and Up
- On June 24, 2009, THQ announced a reorganization of the company’s management team and business units in support of the company’s focused product strategy. THQ formed three new business units: 1) Core Games, 2) Kids, Family and Casual Games, and 3) Online Games; and promoted key executives to manage each of these units
- On June 30, 2009, THQ finalized the previously announced $35 million revolving credit facility with Bank of America, N.A.
On July 27, 2009, THQ announced that it prevailed in its binding arbitration with JAKKS Pacific, Inc. The arbitrator has established a new preferred return payment rate to JAKKS Pacific for WWE video games sold under a license granted by World Wrestling Entertainment, Inc. to THQ/JAKKS Pacific LLC. The new rate, which is 40% below the previous rate, is effective as of July 1, 2006 and applies through December 31, 2009.
As a result, the company expects to report a one-time benefit of approximately $23 million during the fiscal 2010 second quarter ending September 30, 2009, and to reduce its accrued venture partner expense on its balance sheet by the same amount.
Business Outlook
Fiscal Year Ending March 31, 2010
Given the strength of THQ’s first quarter results, the company now expects fiscal 2010 net sales to exceed those reported in fiscal 2009, on a non-GAAP basis, compared with its previous expectations of fiscal 2010 net sales that approximated fiscal 2009 net sales. The company also expects to achieve profitability for fiscal 2010, on a non-GAAP basis, compared with its previous goal of targeting profitability for the year. 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 payment of any amounts currently payable to JAKKS Pacific.
Fiscal Second Quarter Ending September 30, 2009
Because the company has no new titles scheduled for release during the fiscal 2010 second quarter, THQ expects to report net sales in the range of $85-$95 million, on a non-GAAP basis, compared with $151.6 million in the prior-year period. As a result of the company’s aggressive cost cutting efforts, THQ expects to report a smaller operating loss, on a non-GAAP basis, than reported in the same quarter last year. However, due to tax rate differences, the company expects to report a larger net loss for the fiscal 2010 second quarter, on a non-GAAP basis, than the $30.4 million net loss reported in the prior-year period.
The second quarter and full year non-GAAP outlooks exclude the expected one-time benefit of approximately $23 million from the JAKKS arbitration.
Pursuant to THQ’s product strategy, key releases scheduled for the remainder of fiscal 2010 include:
Core Games
Platforms
Darksiders
Xbox 360, PS3
MX vs. ATV Reflex
Xbox 360, PS3, NDS, PSP
Red Faction: Guerrilla
Windows PC
WWE SmackDown vs. Raw 2010
Xbox 360, PS3, Wii, NDS, PS2, PSP
Kids, Family and Casual Games
All Star Cheer Squad 2
Wii
Disney-Pixar’s Up (international markets)
Xbox 360, PS3, Wii, NDS, PS2, PSP, PC
Disney-Pixar’s Cars Race-O-Rama
Xbox 360, PS3, Wii, NDS, PS2, PSP
Drawn to Life: The Next Chapter
Wii, NDS
James Patterson’s Women’s Murder Club: Games of Passion
NDSi, DS
Marvel Super Hero Squad
Wii, NDS, PS2, PSP
SpongeBob Truth or Square
Xbox 360, Wii, NDS, PSP
The Biggest Loser
Wii, NDS
World of Zoo
Wii, NDS, PC
Online
Company of Heroes Online
PC
DragonicaOnline
PC
Beginning in fiscal 2010, for non-GAAP purposes, the company has adopted a fixed, five-year projected tax rate to evaluate its operating performance, as well as to forecast, plan and analyze future periods. Based on its current five-year projections, the company is applying a 15 percent tax rate to its fiscal 2010 non-GAAP operating results.
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 Auction Rate Securities,
- other material non-recurring charges and benefits, and
- 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 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 costs from its non-GAAP financial measures 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.