Exhibit 99.1

 

 

THQ REPORTS FISCAL 2009 SECOND QUARTER RESULTS, REDUCES FISCAL 2009 OUTLOOK AND ANNOUNCES SIGNIFICANT BUSINESS REALIGNMENT

 

·      Company Announces New Strategic Plan to Improve Profitability

 

·      Q2 GAAP Results Include $80.5 Million ($1.21 per share) Non-Cash Charge to Record Valuation Allowance and Related Tax Effects for Deferred Tax Assets

 

AGOURA HILLS, Calif. – November 5, 2008 - THQ Inc. (NASDAQ: THQI) today announced financial results for the fiscal second quarter ended September 30, 2008, reduced its financial outlook for the fiscal year ending March 31, 2009, and announced a significant business realignment.

 

Second Quarter Results

 

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

 

Strategic Plan and Business Realignment

 

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.”

 

Fiscal 2009 Guidance

 

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.

 

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, the other-than-temporary write-down on investments, the non-cash valuation allowance for deferred tax assets and the related income tax

 

 

effects for each of these items. The non-GAAP financial measures included in the earnings release have been reconciled to the comparable GAAP results 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. The company believes that these non-GAAP financial measures, when taken together with the corresponding GAAP financial measures, provide meaningful supplemental information to investors regarding the company’s performance by excluding certain items that may not be indicative of the company’s operating results. These non-GAAP financial measures also facilitate comparisons of the company’s performance to prior periods.

 

Stock-Based Compensation. When evaluating the performance of its business, THQ does not consider stock-based compensation charges. Likewise, the company excludes stock-based compensation expense from its short and long-term operating plans. In contrast, THQ’s management team is held accountable for cash-based compensation and such amounts are included in the company’s operating plans. In addition, the 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 overall shareholder dilution rather than the accounting charges associated with such grants.

 

Deferred Revenue/Costs. The company recognizes revenue and related costs from the sale of certain titles with significant online functionality over the estimated online service period. Although the company will defer the recognition of a significant portion of its net revenue and costs with respect to these titles, there will be no adverse impact to its operating cash flow. Internally, THQ excludes the impact of deferred net revenue and costs related to packaged games in its non-GAAP financial measures 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 and Other-Than-Temporary Write-Down on Investments.  From time to time, the company expects to incur certain expenses that are not part of normal ongoing operations. The company believes that excluding the impact of these expenses from its operating results is important to facilitate comparisons to prior periods.

 

Non-Cash Valuation Allowance for Deferred Tax Assets.  In accordance with FAS No. 109, “Accounting for Income Taxes” (FAS 109), the company evaluates its deferred tax assets, including net operating losses and tax credits, to determine if a valuation allowance is required. THQ has had three years of cumulative US tax losses. Therefore, during the second quarter of fiscal 2009, the company recorded a valuation allowance against its deferred tax assets. Internally, THQ excludes the impact of the valuation allowance for deferred tax assets in its non-GAAP financial measures when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.

 

 

In the financial tables below, THQ has provided a reconciliation of the most comparable GAAP financial measure to each of the non-GAAP financial measures used in this press release.

 

Investor Conference Call

 

THQ will host a conference call to discuss fiscal second quarter results today at 2:00 p.m. Pacific/5:00 p.m. Eastern. Please dial 877.356.8075 or 706.902.0203, conference ID 69135276 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 7, 2008, by dialing 800.642.1687 or 706.645.9291, conference ID 69135276.

 

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, Darksiders: Wrath of War, de Blob, Red Faction: Guerrilla, Saints Row 2 and their respective logos are trademarks and/or registered trademarks of THQ Inc.

 

All other trademarks are trademarks or registered trademarks 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 revenue and earnings per share for the quarter ending December 31, 2008, and the fiscal year ending March 31, 2009, statements about the expected impact of the business realignment on our future operations and for the company’s product releases and financial performance 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, 2008, 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.

 

###

(Tables Follow)

 

 

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,
		2008			2007			2008			2007
Net sales		$	164,816		$	229,349		$	302,394		$	333,834
Costs and expenses:
Cost of sales – product costs		76,038			87,449			136,046			131,164
Cost of sales – software amortization and royalties		39,512			38,311			66,512			50,909
Cost of sales – license amortization and royalties		20,007			22,159			32,931			35,830
Cost of sales – venture partner expense		899			1,137			2,354			2,034
Product development		23,231			28,561			56,780			53,193
Selling and marketing		43,124			47,193			72,175			69,996
General and administrative		16,971			17,638			36,574			36,741
Total costs and expenses		219,782			242,448			403,372			379,867
Loss from continuing operations before interest and other income, net, income taxes and minority interest		(54,966		)	(13,099		)	(100,978		)	(46,033		)
Interest and other income, net		(2,438		)	2,569			56			9,925
Loss from continuing operations before income taxes and minority interest		(57,404		)	(10,530		)	(100,922		)	(36,108		)
Income taxes (a)		57,892			(3,491		)	43,640			(19,795		)
Loss from continuing operations before minority interest		(115,296		)	(7,039		)	(144,562		)	(16,313		)
Minority Interest		36			—			36			—
Loss from continuing operations		(115,260		)	(7,039		)	(144,526		)	(16,313		)
Gain on sale of discontinued operations, net of tax		—			—			2,042			—
Net loss		$	(115,260	)	$	(7,039	)	$	(142,484	)	$	(16,313	)
Loss per share – basic:
Continuing operations		$	(1.73	)	$	(0.11	)	$	(2.17	)	$	(0.24	)
Discontinued operations		—			—			0.03			—
Loss per share – basic		$	(1.73	)	$	(0.11	)	$	(2.14	)	$	(0.24	)
Loss per share – diluted:
Continuing operations		$	(1.73	)	$	(0.11	)	$	(2.17	)	$	(0.24	)
Discontinued operations		—			—			0.03			—
Loss per share – diluted		$	(1.73	)	$	(0.11	)	$	(2.14	)	$	(0.24	)
Shares used in per share calculation – basic		66,757			66,462			66,655			66,695
Shares used in per share calculation – diluted		66,757			66,462			66,655			66,695

 

(a)   Income tax expense for the three and six month periods ended September 30, 2008 includes the deferred tax asset valuation allowance and related tax impact of $80,520 recorded in accordance with FAS No. 109, “Accounting for Income Taxes” (FAS 109).

 

 

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,
		2008			2007			2008			2007
Net sales		$	164,816		$	229,349		$	302,394		$	333,834
Changes in deferred net revenue (b)		(13,192		)	—			(29,696		)	—
Non-GAAP net sales		$	151,624		$	229,349		$	272,698		$	333,834
		Three Months Ended September 30,						Six Months Ended September 30,
		2008			2007			2008			2007
Loss from continuing operations		$	(115,260	)	$	(7,039	)	$	(144,526	)	$	(16,313	)
Non-GAAP adjustments:
Changes in deferred net revenue (b)		(13,192		)	—			(29,696		)	—
Change in deferred cost of sales:
Change in deferred product costs		3,366			—			7,268			—
Change in deferred software amortization and royalties		6,067			—			12,762			—
Total change in deferred cost of sales (b)		9,433			—			20,030			—
Business realignment expenses		669			—			4,196			—
Other than temporary impairment on investments		4,561			—			4,561			—
Stock-based compensation and related costs:
Cost of sales – software amortization and royalties		1,152			1,212			1,728			2,978
Product development		724			1,135			1,872			2,172
Selling and marketing		866			795			1,681			1,510
General and administrative		1,792			3,822			3,575			6,331
Total stock-based compensation and related costs (c)		4,534			6,964			8,856			12,991
Deferred tax asset valuation allowance and related tax impact (d)		80,520			—			80,520			—
Income tax adjustments (e)		(1,705		)	(2,119		)	(1,823		)	(5,040		)
Total non-GAAP adjustments		84,820			4,845			86,644			7,951
Non-GAAP loss from continuing operations		(30,440		)	(2,194		)	(57,882		)	(8,362		)
Gain on sale of discontinued operations, net of tax		—			—			2,042			—
Non-GAAP net loss		$	(30,440	)	$	(2,194	)	$	(55,840	)	$	(8,362	)
Non-GAAP loss per share – diluted:
Non-GAAP continuing operations		$	(0.46	)	$	(0.03	)	$	(0.87	)	$	(0.13	)
Discontinued operations		—			—			0.03			—
Non-GAAP loss per share – diluted		$	(0.46	)	$	(0.03	)	$	(0.84	)	$	(0.13	)

 

Notes:

(a) See explanation above regarding the Company’s practice on reporting non-GAAP financial measures.

(b) Prior to the third quarter of fiscal 2008, the Company did not defer net revenue or the related cost of sales.

(c) Stock-based compensation expense recorded under FAS 123(R) in fiscal 2009 and fiscal 2008.

(d) Deferred tax asset valuation allowance and related tax impact recorded in accordance with FAS 109.

(e) Income tax associated with other non-GAAP adjustments.

 

 

THQ Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands)

 

		September 30,			March 31,
		2008			2008
ASSETS
Cash, cash equivalents and short-term investments		$	162,627		$	317,504
Accounts receivable, net of allowances		63,303			112,843
Inventory		63,811			38,240
Licenses		42,651			47,182
Software development		203,990			155,821
Deferred income taxes		7,503			—
Prepaid expenses and other current assets		18,554			24,487
Total current assets		562,439			696,077
Property and equipment, net		45,711			50,465
Licenses, net of current portion		75,558			39,597
Software development, net of current portion		70,942			25,369
Income taxes receivable, net of current portion		8,381			16,116
Deferred income taxes		—			61,710
Goodwill		122,110			122,385
Long-term marketable securities		37,760			52,599
Other long-term assets, net		18,086			20,002
TOTAL ASSETS		$	940,987		$	1,084,320
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Accounts payable		$	79,772		$	61,700
Accrued and other current liabilities		203,306			202,102
Income taxes payable		12,020			6,504
Deferred income taxes		—			29,266
Total current liabilities		295,098			299,572
Other long-term liabilities		38,941			44,179
Total liabilities		334,039			343,751
Minority Interest		3,464			—
Total stockholders’ equity		603,484			740,569
TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY		$	940,987		$	1,084,320

 

 

THQ Inc. and Subsidiaries

Unaudited Supplemental Financial Information

 

		Three Months Ended September 30, 2008										Three Months Ended September 30, 2007
		GAAP					Non-GAAP(a)					GAAP					Non-GAAP(b)
Platform Revenue Mix
Consoles
Microsoft Xbox 360		$	19,978		12.1	%	$	10,016		6.6	%	$	44,418		19.4	%	$	44,418		19.4	%
Microsoft Xbox		—			—		—			—		357			0.1		357			0.1
Nintendo Wii		30,504			18.5		30,504			20.1		8,914			3.9		8,914			3.9
Nintendo GameCube		62			—		62			0.1		1,801			0.8		1,801			0.8
Sony PlayStation 3		11,622			7.1		11,622			7.7		13,282			5.8		13,282			5.8
Sony PlayStation 2		13,836			8.4		13,836			9.1		62,667			27.3		62,667			27.3
		76,002			46.1		66,040			43.6		131,439			57.3		131,439			57.3
Handheld
Nintendo Dual Screen		48,585			29.5		48,585			32.0		51,559			22.5		51,559			22.5
Nintendo Game Boy Advance		1,511			0.9		1,511			1.0		9,013			3.9		9,013			3.9
Sony PlayStation Portable		11,233			6.8		11,233			7.4		16,888			7.4		16,888			7.4
Wireless		6,231			3.8		6,231			4.1		4,874			2.1		4,874			2.1
		67,560			41.0		67,560			44.5		82,334			35.9		82,334			35.9
PC		21,254			12.9		18,024			11.9		15,576			6.8		15,576			6.8
Other		—			—		—			—		—			—		—			—
Total Net Sales		$	164,816		100.0	%	$	151,624		100.0	%	$	229,349		100.0	%	$	229,349		100.0	%
Geographic Revenue Mix
Domestic		$	76,502		46.4	%	$	69,272		45.7	%	$	77,803		33.9	%	$	77,803		33.9	%
Foreign		88,314			53.6		82,352			54.3		151,546			66.1		151,546			66.1
Total Net Sales		$	164,816		100.0	%	$	151,624		100.0	%	$	229,349		100.0	%	$	229,349		100.0	%

 

		Six Months Ended September 30, 2008										Six Months Ended September 30, 2007
		GAAP					Non-GAAP(a)					GAAP					Non-GAAP(b)
Platform Revenue Mix
Consoles
Microsoft Xbox 360		$	40,107		13.3	%	$	17,537		6.4	%	$	54,765		16.4	%	$	54,765		16.4	%
Microsoft Xbox		—			—		—			—		1,752			0.5		1,752			0.5
Nintendo Wii		53,808			17.8		53,808			19.7		15,238			4.6		15,238			4.6
Nintendo GameCube		115			—		115			0.1		5,974			1.8		5,974			1.8
Sony PlayStation 3		18,275			6.1		18,275			6.7		13,282			4.0		13,282			4.0
Sony PlayStation 2		33,688			11.1		33,688			12.4		88,255			26.4		88,255			26.4
		145,993			48.3		123,423			45.3		179,266			53.7		179,266			53.7
Handheld
Nintendo Dual Screen		75,875			25.1		75,875			27.8		69,183			20.7		69,183			20.7
Nintendo Game Boy Advance		3,130			1.0		3,130			1.1		17,331			5.2		17,331			5.2
Sony PlayStation Portable		21,613			7.1		21,613			7.9		24,768			7.4		24,768			7.4
Wireless		11,378			3.8		11,378			4.2		9,248			2.8		9,248			2.8
		111,996			37.0		111,996			41.0		120,530			36.1		120,530			36.1
PC		44,405			14.7		37,279			13.7		33,640			10.1		33,640			10.1
Other		—			—		—			—		398			0.1		398			0.1
Total Net Sales		$	302,394		100.0	%	$	272,698		100.0	%	$	333,834		100.0	%	$	333,834		100.0	%
Geographic Revenue Mix
Domestic		$	151,352		50.1	%	$	136,379		50.0	%	$	143,896		43.1	%	$	143,896		43.1	%
Foreign		151,042			49.9		136,319			50.0		189,938			56.9		189,938			56.9
Total Net Sales		$	302,394		100.0	%	$	272,698		100.0	%	$	333,834		100.0	%	$	333,834		100.0	%

 

Notes:

(a) See explanation above regarding the Company’s practice on reporting non-GAAP financial measures.

(b) Prior to the third quarter of fiscal 2008, the Company did not defer net revenue.