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THQ Financial Result Reveals Cancellation & Delay

by Rainier on May 11, 2007 @ 5:39 a.m. PDT

THQ reported its net sales increased 27% to a record $1billion, driven by titles like STALKER, Cars, Supreme Commander, and WWE SmackDown vs. RAW 2007. In the subsequent conference call, THQ executives revealed that the previously announced Saints Row PS3 port was canceled in favor of launching a full-on sequel on X360 and PS3 simultaneously, while Kaos Studios' Frontlines: Fuel of War was pushed back from holiday season 2007, to January 2008.

For the twelve months ended March 31, 2007, THQ reported its 12th consecutive year of revenue growth as net sales increased 27% to a record $1,026.9 million from $806.6 million for fiscal 2006. Net income for fiscal 2007 was $68.0 million, or $1.01 per diluted share, which included stock-based compensation expense of $0.23 per diluted share. This compares with prior-year net income of $32.1 million, or $0.49 per diluted share, which included stock-based compensation expense of $0.05 per diluted share. A reconciliation of GAAP to non-GAAP results is provided in the accompanying financial tables.

THQ reported fiscal 2007 fourth quarter net sales of $172.1 million and net income of $6.5 million, or $0.09 per diluted share, which included stock-based compensation expense of $0.06 per diluted share. New releases Supreme Commander and S.T.A.L.K.E.R.: Shadow of Chernobyl for Windows PC drove fourth quarter results as well as continued strong sales of WWE SmackDown vs. RAW 2007 and Disney/Pixar's Cars. In the same period a year ago, the company reported net sales of $148.1 million and a net loss of $8.6 million, or $0.14 per share, which included stock-based compensation expense of $0.02 per share.

"We are very pleased to report record revenues and net income in fiscal 2007. Additionally, our non-GAAP operating margin reached 10%, already meeting our peak margin in the last cycle. We expect continued revenue and margin expansion in each of the next several years," said Brian Farrell, president and CEO, THQ.

"During a challenging hardware transition, THQ significantly outperformed the market in our major territories," added Farrell. "Our success in fiscal 2007 was driven primarily by multi-million unit sellers Cars and WWE SmackDown vs. RAW 2007 and the successful launch of Saints Row, a new internally developed and owned intellectual property with sales in excess of one million units."

Farrell continued, "The industry is entering an exciting growth period as the new hardware reaches critical mass. In fiscal 2008, we plan to release an increasing number of titles for the growing base of new hardware, including owned original properties Frontlines: Fuel of War, Juiced: Hot Import Nights and Stuntman: Ignition. With three 30-million unit licensed franchises and a growing portfolio of internally developed original franchises, we are well positioned to expand our leadership position in the video game industry."

Fiscal 2007 Accomplishments:

  • THQ reported its 12th consecutive year of net sales growth
  • THQ gained market share in each of its major markets - North America, Europe and Australia
  • THQ established two owned and original franchises Saints Row and Company of Heroes
  • THQ published eight titles that shipped more than one million units, including Disney/Pixar's Cars at nearly eight million units and WWE SmackDown vs. RAW 2007 at four million units
  • THQ expanded its studio system to include more than 1,500 people based in 16 studios across North America, Australia and Europe
  • THQ's operating cash flow grew more than 50%, even with substantial investment in next-generation game development

Fiscal 2008 Guidance

THQ reaffirmed previous guidance for the full fiscal year ending March 31, 2008 and provided initial guidance for the fiscal first quarter ending June 30, 2007:

Consistent with previous guidance, for the fiscal year ending March 31, 2008, THQ expects net sales in the range of $1.12 billion to $1.15 billion and net income in the range of $1.34 to $1.44 per diluted share. This excludes forecasted non-cash stock-based compensation expense of $0.23 per diluted share.
For the first quarter of fiscal 2008, the company expects net sales of approximately $110 million and a net loss of approximately $0.26 per share, excluding forecasted non-cash stock-based compensation expense of $0.05 per share.

In addition to results determined in accordance with United States generally accepted accounting principles ("GAAP"), THQ discloses non-GAAP financial measures that exclude stock-based compensation expense and related income tax effects from the company's Consolidated Statement of Operations. The use of such non-GAAP financial measures allows for a better comparison of results in the fourth fiscal quarter and fiscal year ended March 31, 2007 to those in the same prior year periods that did not include FAS 123 R stock-based compensation expense. 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.

More specifically, THQ believes it is appropriate to exclude stock-based compensation expense from the Consolidated Statement of Operations because the company adopted FAS 123 R, "Share-Based Payment" beginning in its fiscal year 2007. When evaluating the performance of its business, THQ does not consider stock-based compensation charges. Likewise, THQ 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 THQ'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.

Video game platforms have historically had a life cycle of four to six years, which causes the video game software market to be cyclical. THQ's management analyzes its business and operating performance in the context of these business cycles, comparing the company's performance at similar stages of different cycles. For comparability purposes, THQ believes it is useful to provide a non-GAAP financial measure that excludes stock-based compensation in order to better understand the long-term performance of its core business. In addition, given the adoption of FAS 123 R, "Share-Based Payment" beginning with the fiscal year ending March 31, 2007, THQ believes that a non-GAAP financial measure that excludes stock-based compensation will facilitate the comparison of its year-over-year results.

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

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