For the three months ended December 31, 2008, THQ reported net sales of $357.3 million. On a non-GAAP basis, the company reported fiscal 2009 third quarter net sales of $385.6 million. A year ago, the company reported net sales of $509.6 million, for both GAAP and non-GAAP comparison purposes.
For the three months ended December 31, 2008, the company reported a net loss of $191.8 million, or $2.86 per share, which included a non-cash charge of $118.1 million related to goodwill impairment. In the same period a year ago, the company reported net income of $15.5 million, or $0.23 per share. On a non-GAAP basis, the company reported a fiscal 2009 third quarter net loss of $9.6 million, or $0.14 per share. In the same period a year ago, the company reported non-GAAP net income of $16.4 million, or $0.24 per share, which included a gain of $0.02 per share from discontinued operations. A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.
“We delivered high quality games to market this holiday season but fell short of our revenue and profit targets in this challenging environment,” said Brian Farrell, THQ president and CEO. “We are taking highly targeted actions with the objective of investing in games with the highest franchise potential and returning to profitability. We have executed on our previously announced plan to reduce our cost structure by $120 million. Given continued economic weakness, we plan to reduce costs by an additional $100 million.”
In November, the company announced a new strategic plan to focus on 1) developing a select number of high quality titles targeted at the core gamer, such as Saints Row 2 and the upcoming Red Faction: Guerrilla and Darksiders; 2) extending its leadership in the fighting category with such brands as WWE and Ultimate Fighting Championship; 3) reinvigorating the product portfolio and improving profitability in its kids’ business; 4) building strong casual game franchises like de Blob, Drawn to Life and Big Beach Sports; and 5) extending its brands into emerging online markets with games such as Company of Heroes Online and its Warhammer 40,000 MMO. The company also announced plans to align its organization and cost structure to support this strategy.
The company noted the following product highlights in fiscal 2009:
- Saints Row 2 achieved a Metacritic rating of 82 and shipped more than 2.6 million units to date
- WWE SmackDown vs. Raw 2009 achieved a Metacritic rating of 80 and shipped more than 4 million units to date
- de Blob achieved a Metacritic rating of 81 and shipped approximately 700,000 units to date
- Big Beach Sports shipped more than 1.2 million units to date
“Established franchises like Saints Row and WWE SmackDown vs. Raw, as well as new franchises such as de Blob and Big Beach Sports for the Nintendo Wii, give us confidence in our strategy going forward,” said Farrell. “We have several compelling games set to launch in the coming months, including Warhammer: Dawn of War II, WWE Legends of WrestleMania, our first games based on the popular Ultimate Fighting Championship, and Red Faction: Guerrilla.”
Farrell added, “In this environment, we are focused on what we can control: delivering high quality products, investing in a targeted product pipeline, and aggressively managing costs.”
During the fiscal third quarter, the company executed on its previously announced business realignment plan and reduced its fiscal 2010 forecasted annual spending by $120 million. As a result, the company recorded approximately $40.4 million in non-GAAP business realignment expenses in the third fiscal quarter, which included approximately $30.8 million in non-cash impairment charges related to the cancellation of titles and long-lived assets associated with studio closures, and $9.6 million in other costs, including severance and other employee-related costs, and lease and other contract termination costs.
In response to the continuing uncertainty in the market, the company today announced additional cost reduction actions consistent with its strategy discussed above. THQ will reduce costs in each functional area. The company plans to reduce product development spending by an additional $70 million through studio dispositions and other project and headcount reductions. THQ also intends to reduce sales, marketing and corporate expenses globally through headcount and other cost reductions, with targeted savings of an additional $30 million annually.
In the aggregate, the company expects to reduce planned fiscal 2010 spending by $220 million and headcount by approximately 600 people, or 24% of its workforce.
“Our focus for next fiscal year is to return to profitability and to generate cash. Our fiscal 2010 plan will reflect the benefits of our focused product strategy and strong actions on costs,” said Farrell.
The company expects to incur significant charges as part of the additional cost reduction actions, which will be excluded from the company’s non-GAAP results. Most of the charges will be recognized in the remainder of fiscal 2009.
During January 2009, consistent with SFAS No. 142, “Goodwill and Other Intangible Assets” and in connection with the preparation of THQ’s financial statements, THQ performed an interim goodwill impairment test as of December 31, 2008. In the latter half of the third quarter of fiscal 2009, the company’s stock price experienced a significant decline, resulting in a market capitalization below the carrying value of its net assets. As a result, the company impaired its entire goodwill balance of $118.1 million, as of December 31, 2008.
Due to economic uncertainty and limited visibility, the company is not providing revenue and EPS guidance for its fiscal 2009 fourth quarter. The company continues to experience a cautious retail and consumer environment. As a result, THQ expects fourth quarter results to be significantly below its previous expectations.
Key new releases during the quarter include Warhammer: Dawn of War II on PC, WWE Legends of WrestleMania on Xbox 360 and PS3, 50 Cent: Blood on the Sand on Xbox 360 and PS3, and Deadly Creatures on the Wii.