THQ Reports Fiscal 2013 Second Quarter Results

  THQ Reports Fiscal 2013 Second Quarter Results

Business Wire

AGOURA HILLS, Calif. -- November 05, 2012

THQ Inc. (NASDAQ: THQI) today reported financial results for the second
quarter ended September 30, 2012.

                                      For the Three Months
(in millions, except per share data)   Ended September 30,
                                        2012     2011   
Net Sales - GAAP                       $ 107.4     $ 146.0
Net Sales - Non-GAAP                   $ 91.8      $ 119.6
Net Loss - GAAP                        $ (21.0 )   $ (92.4  )
Net Loss - Non-GAAP                    $ (12.1 )   $ (46.9  )
Diluted Loss Per Share - GAAP          $ (3.06 )   $ (13.52 )
Diluted Loss Per Share - Non-GAAP      $ (1.76 )   $ (6.86  )
                                                            

Fiscal 2013 Second Quarter Financial Highlights and Recent Developments

  *Q2 Non-GAAP net sales were $91.8 million, compared to guidance of $75
    million to $85 million.
  *Q2 Non-GAAP net loss per share was ($1.76), compared to guidance of
    ($3.50) to ($4.50). Net loss per share amounts for the current and prior
    period were adjusted for the 1-for-10 reverse split of the company’s
    common stock effected on July 5, 2012.
  *The company’s digital revenues for the second quarter of fiscal 2013 were
    $19.1 million, or approximately 21 percent of non-GAAP net sales, a 34
    percent increase from $14.3 million one year ago.
  *The company ended the quarter with $36.3 million in cash and equivalents,
    and outstanding borrowings of $21.0 million on its credit facility. The
    company’s total liquidity at quarter end was in line with internal
    expectations.
  *A reconciliation of GAAP to non-GAAP results is provided in the
    accompanying financial tables, and a supplemental consolidated
    reconciliation can be found at http://investor.thq.com.
  *Darksiders^® II received highly-favorable critical reviews at launch,
    achieving an average Metacritic score of 83. The company shipped 1.4
    million units of the title in the second quarter.

Product Slate

THQ announced today that South Park™: The Stick of Truth™ is now planned for
launch worldwide in early fiscal 2014. South Park: The Stick of Truth had
previously been slated for release on March 5, 2013.

Additional changes to fiscal 2013 release dates include those for Company of
Heroes^® 2 and Metro: Last Light, both of which are expected to ship in March,
later than initially planned.

“When I joined THQ the company made a public commitment to quality titles. We
always expected that in some cases this would mean that more time would be
needed to make sure that every title is of the highest possible quality,” said
Jason Rubin, THQ’s President. “Our fourth quarter releases are the first
titles that I have had the ability to materially impact, and experience told
me that the games needed additional development time to be market-ready.

“I believe South Park’s market opportunity is significant. It is shaping up to
be one of the most anticipated titles of calendar 2013. It is also an
expansive title, encompassing multiple television seasons’ worth of content.
We have been working closely with the co-creators of South Park, Matt Stone
and Trey Parker, to make sure all of the game’s content performs to the high
standards of the TV show, and this takes time. THQ is committed to giving
gamers no less than the rich South Park game they have been waiting for and
deserve.

“We are also inspired by the potential for Metro: Last Light and Company of
Heroes 2. I believe Metro: Last Light is a title that should set standards for
visuals with its stunning atmosphere, unique location and cutting-edge style.
Company of Heroes was one of the highest rated RTS titles in history, and
Relic insists that the sequel live up to its pedigree. Giving both of these
titles time to reach their full potential is the right thing to do for the
products.

“THQ is excited about our position and pipeline of games beyond fiscal 2013,
including the sequel for Saints Row: The Third, Homefront 2 and the
as-yet-unannounced game from Turtle Rock Studios. In total we have ten titles
in development for fiscal 2014 and later, almost all of which are based on our
own IP. We intend to announce more details about our future slate in the
coming months.

“I firmly believe releasing our fourth quarter titles without extra time for
polish in the current environment would lead to underperformance that could in
turn lead to future additional capital shortfalls. But extending development
schedules in order to make the best possible titles also has financial
implications. Yet there can be no doubt which path has the greatest chance of
leading to the long-term success of the company. We must follow the course
that generates the highest quality games, and will establish THQ as a mark of
quality for the consumer," concluded Rubin.

“Clearly, THQ faces a number of opportunities and challenges,” added Brian
Farrell, THQ’s Chairman and CEO. “I am confident about the opportunities that
lie in our robust slate of games and in our studios. But we also face
challenges operating with limited capital resources in the highly competitive
market for games, and we are working diligently to resolve those challenges.”

Company Exploring Strategic Alternatives

The calendar movement for the release of games will likely create a need for
additional capital. THQ has engaged Centerview Partners LLC to assist the
company in evaluating strategic and financing alternatives intended to improve
THQ’s overall liquidity, including raising additional capital, preserve the
company’s ability to bring the best possible games to market during the most
advantageous release windows and to help address the $100 million 5%
convertible senior notes due August 2014. There can be no assurance that the
evaluation of strategic and financing alternatives will result in a
transaction or financing, or that, if completed, said transaction and/or
financing will be on attractive terms. THQ does not intend to disclose
developments with respect to the progress of its evaluation of strategic and
financing alternatives until such time as the Board of Directors approves or
completes a transaction or otherwise deems further disclosure appropriate.

Guidance

The company is suspending net sales and earnings guidance, and withdrawing its
previous guidance for fiscal 2013.

Investor Conference Call

THQ will host a conference call to discuss the information in this press
release today at 2:00 p.m. Pacific/5:00 p.m. Eastern. Please dial (877)
356-8075 domestic or (706) 902-0203 international, conference ID 41908751, 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, 2012 by dialing (855) 859-2056
domestically, or (404) 537-3406 internationally, conference ID 41908751.

Non-GAAP Financial Measures

In addition to results determined in accordance with GAAP, the company
discloses certain non-GAAP financial measures that exclude the impact of the
following:

  *stock-based compensation expense,
  *certain deferred revenue and related costs,
  *business realignment and related expenses,
  *capitalized interest, and
  *other significant charges and benefits.

Non-GAAP results also include the impact of any foreign currency fluctuations
on available-for-sale investment securities, when classified in equity for
GAAP purposes.

For non-GAAP purposes, the company uses a fixed, long-term projected tax rate
of 15% to evaluate its operating performance, as well as to forecast, plan and
analyze future periods.

THQ may consider whether other significant items that arise in the future
should also be excluded in calculating the non-GAAP financial measures it
uses. The company excludes these items from its non-GAAP financial measures
primarily because its management does not believe they reflect the company's
primary 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 this 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 of 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. The company defers revenue and related costs from the
sale of certain titles that have undelivered elements upon the sale of the
game, such as online services, and recognizes that revenue upon the delivery
of the undelivered elements or over the estimated service period as
applicable. As there is no impact to its operating cash flow, THQ's management
excludes the impact of deferred net revenue and related costs when evaluating
the company's operating performance, when planning, forecasting and analyzing
future periods, and when assessing the performance of its management team. In
addition, the company believes these measures provide a more timely indication
of trends in its business, provide comparability with the way its business is
measured by analysts, and consistency with industry data sources.

Business Realignment and Related Expenses. Although THQ has incurred business
realignment expenses in the past, each charge relates to a discrete event
based on a unique set of business objectives. THQ’s management does not
believe these charges reflect the company's primary business, ongoing
operating results or future outlook. As such, the company believes it is
appropriate to exclude these expenses and related charges from its non-GAAP
financial measures.

Impact of Capitalized Interest. The company capitalizes interest expense and
other financing costs as a component of capitalized software development.
THQ's management considers interest cost to be a financing cost in the period
in which it is incurred, and thus excludes the impact of the capitalization of
interest costs to software development and the subsequent amortization expense
when evaluating the company's operating performance, when planning,
forecasting and analyzing future periods, and when assessing the performance
of its management team.

Other significant charges and benefits. THQ does not consider certain
significant charges and benefits that are related to discrete events or market
conditions to be indicative of ongoing operating results or future outlook. As
a result, the company believes it is appropriate to exclude expenses and
benefits such as legal settlements or market-related impairments, from its
non-GAAP financial measures.

Fiscal Periods

The company’s fiscal year ends on the Saturday nearest March 31st. For
simplicity, all fiscal periods are presented as ending on a calendar month
end. THQ’s fiscal 2013 second quarter ended on September 29, 2012, and its
fiscal 2012 second quarter ended on October 1, 2011.

About THQ

THQ Inc. (NASDAQ: THQI) is a leading worldwide developer and publisher of
interactive entertainment software. The company develops its products for all
popular game systems, personal computers, wireless devices and the Internet.
Headquartered in Los Angeles County, California, THQ sells product through its
network of offices located throughout North America and Europe. More
information about THQ and its products may be found at http://www.thq.com/.
THQ, Company of Heroes, Darksiders II, Metro: Last Light, Saints Row, Saints
Row: The Third and their respective logos are trademarks and/or registered
trademarks of THQ Inc.

All other trademarks are property of their respective owners.

THQ Inc. Caution Concerning Forward-Looking Statements

This press release contains statements that are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
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"), including, but not limited to, estimated
product release dates and the exploration of strategic and financial
alternatives. These statements are based upon management's current 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, business, competitive, economic, legal,
political, and technological factors affecting the industry, operations,
markets, products, or pricing.

Development of quality products requires substantial up-front expenditures and
thus THQ expects to utilize a substantial portion of its existing cash and
cash equivalents and other working capital to develop its upcoming products.
In addition to its cash and cash equivalents, the company has an asset-based
credit facility that provides up to $50.0 million in financing that the
company has drawn against in order to fund its business operations. As
described above, the company has delayed the release of South Park: The Stick
of Truth, which was originally scheduled for release on March 5, 2013, to
early fiscal 2014 due to the need for additional development time and the
release of Company of Heroes 2 and Metro: Last Light, both of which are
expected to ship later in the fourth quarter of fiscal 2013 than were
initially planned. Because of the calendar movement for the release of games,
the company will likely need to raise additional capital, and may need to
defer and/or curtail currently planned expenditures, cancel projects currently
in development, sell assets, and/or pursue additional funding or additional
external sources of liquidity, which may not be available on financially
attractive terms. To assist with this, THQ has engaged Centerview Partners LLC
to assist the company in evaluating strategic and financial alternatives
intended to improve its overall liquidity and preserve its ability to bring
games to market during advantageous release windows and to help address its
$100 million 5% convertible senior notes due August 2014. There can be no
assurance that the evaluation of strategic and financing alternatives will
result in a transaction or financing, or that, if completed, said transaction
and/or financing will be on attractive terms. THQ’s inability to successfully
complete a transaction or financing on attractive terms would have a material
adverse impact on the company's ability to comply with the requirements of its
credit and debt facilities and to sustain its operations.

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 Annual Report on Form 10-K for the fiscal period ended March 31,
2012, and subsequent Quarterly Reports on Form 10-Q, and particularly the
discussion of trends and risk factors set forth therein. 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 are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date of this press release.

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,
                         2012       2011        2012       2011     
                                                                  
Net sales               $ 107,357     $ 146,004     $ 241,044     $ 341,157
Cost of sales:
Product costs             36,379        57,986        74,865        125,049
Software amortization     37,788        77,893        75,141        142,813
and royalties
License amortization     4,179       23,156      9,928       31,295   
and royalties
Total cost of sales      78,346      159,035     159,934     299,157  
                                                                  
Gross margin              29,011        (13,031 )     81,110        42,000
Operating expenses:
Product development       11,583        27,954        20,878        58,143
Selling and marketing     27,324        37,765        41,963        88,441
General and               9,809         12,037        19,941        24,086
administrative
Restructuring            (297    )    6,082       1,092       5,942    
Total operating           48,419        83,838        83,874        176,612
expenses
                                                                  
Operating loss            (19,408 )     (96,869 )     (2,764  )     (134,612 )
Interest and other       700         2,467       (53     )    2,910    
income (expense), net
Loss before income        (18,708 )     (94,402 )     (2,817  )     (131,702 )
taxes
Income taxes             2,272       (2,017  )    2,778       (872     )
Net loss                $ (20,980 )   $ (92,385 )   $ (5,595  )   $ (130,830 )
                                                                  
                                                                  
Loss per share —        $ (3.06   )   $ (13.52  )   $ (0.82   )   $ (19.15   )
basic
Loss per share —        $ (3.06   )   $ (13.52  )   $ (0.82   )   $ (19.15   )
diluted
                                                                  
Shares used in per
share calculation —      6,854       6,834       6,853       6,833    
basic
Shares used in per
share calculation —      6,854       6,834       6,853       6,833    
diluted
                                                                  

Presentation gives effect to the Reverse Stock Split, which occurred on July
5, 2012.

THQ Inc. and Subsidiaries

Reconciliation of GAAP net loss to Non-GAAP net loss((a))

(In thousands, except per share data)

                     For the Three Months Ended  For the Six Months Ended
                      September 30,                September 30,
                        2012       2011        2012        2011     
Net sales             $  107,357     $ 146,004     $ 241,044      $ 341,157
Changes in deferred     (15,559 )    (26,394 )    (110,721 )    (80,308  )
net revenue
Non-GAAP net sales    $  91,798     $ 119,610    $ 130,323     $ 260,849  
                                                          
                      For the Three Months Ended   For the Six Months Ended
                      September 30,                September 30,
                        2012        2011        2012         2011     
Operating loss        $  (19,408 )   $ (96,869 )   $ (2,764   )   $ (134,612 )
Non-GAAP
adjustments
affecting operating
loss:
Changes in deferred      (15,559 )     (26,394 )     (110,721 )     (80,308  )
net revenue
Changes in deferred      19,762        18,757        67,109         28,155
cost of sales
Business
realignment and          1,552         44,173        5,949          48,864
related expenses
^(b)
Stock-based              813           1,708         1,428          3,339
compensation
Amortization of
capitalized              1,194         1,538         2,034          2,734
interest ^(c)
Product development     (625    )    —           (625     )    —        
cost reimbursement
Total non-GAAP
adjustments             7,137       39,782      (34,826  )    2,784    
affecting operating
loss
Non-GAAP operating    $  (12,271 )   $ (57,087 )   $ (37,590  )   $ (131,828 )
loss
                                                          
                      For the Three Months Ended   For the Six Months Ended
                      September 30,                September 30,
                        2012        2011        2012         2011     
Net loss              $  (20,980 )   $ (92,385 )   $ (5,595   )   $ (130,830 )
Non-GAAP
adjustments:
Non-GAAP
adjustments              7,137         39,782        (34,826  )     2,784
affecting operating
loss
Capitalized
interest expense         (1,670  )     (1,421  )     (3,164   )     (2,830   )
^(c)
Business
realignment              (955    )     913           (834     )     913
expenses ^(b)
Income tax              4,403       6,252       9,025        18,753   
adjustments ^(d)
Non-GAAP net loss     $  (12,065 )   $ (46,859 )   $ (35,394  )   $ (111,210 )
                                                                  
Non-GAAP loss per
share — diluted      $  (1.76   )  $ (6.86   )  $ (5.17    )  $ (16.28   )
^(e)

___________________

Notes:

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

(b) Business realignment and related expenses in the three months ended
September 30, 2012 reflect actions taken through September 30, 2012 and
include: $1.8 million of cash charges for severance and other employee-related
costs and a benefit of $1.2 million related to changes in estimates related to
contract and lease terminations, as well as long-lived asset write-offs and
other adjustments.

(c) Represents interest expense capitalized to software development and
subsequent amortization.

(d) For non-GAAP purposes, the company uses a fixed, long-term projected tax
rate of 15% to evaluate its operating performance, as well as to forecast,
plan and analyze future periods.

(e) Non-GAAP loss per share presentation gives effect to the Reverse Stock
Split, which occurred on July 5, 2012, and has been calculated using diluted
shares before applying the “if-converted” method relative to the Notes issued
in August 2009.

THQ Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands)
                                                            
                                               September 30,   March 31,
                                                 2012         2012    
ASSETS
Cash and cash equivalents                      $  36,269       $ 75,977
Accounts receivable, net of allowances            6,730          15,994
Inventory                                         12,382         18,485
Licenses                                          10,209         21,927
Software development                              80,738         105,220
Deferred income taxes                             4,656          5,732
Income taxes receivable                           339            687
Prepaid expenses and other current assets        16,435       46,011  
Total current assets                              167,758        290,033
Property and equipment, net                       22,890         22,132
Licenses, net of current portion                  37,380         42,594
Software development, net of current portion      23,216         25,348
Other long-term assets, net                      14,170       12,687  
TOTAL ASSETS                                   $  265,414     $ 392,794 
                                                               
LIABILITIES AND EQUITY
Accounts payable                               $  57,430       $ 42,905
Accrued and other current liabilities             49,794         83,693
Deferred revenue, net                             33,958         144,686
Secured credit line                              21,000       —       
Total current liabilities                         162,182        271,284
Other long-term liabilities                       44,407         53,837
Convertible senior notes                         100,000      100,000 
Total liabilities                                 306,589        425,121
Total stockholders' deficit                      (41,175  )    (32,327 )
TOTAL LIABILITIES AND EQUITY                   $  265,414     $ 392,794 
                                                               

THQ Inc. and Subsidiaries

Unaudited Supplemental Financial Information

(In thousands)
                                                       
              Three Months Ended                          Six Months Ended
              September 30,        September 30,         September 30,        September 30,
Platform      2012                  2011                  2012                  2011
Revenue Mix
Consoles                                                                               
Microsoft     $ 38,240    41.6  %   $ 36,098    30.2  %   $ 52,220    40.1  %   $ 87,640    33.6  %
Xbox 360
Sony
PlayStation     35,804    39.0        28,115    23.5        45,665    35.0        63,897    24.5
3
Nintendo        58        0.1         15,503    13.0        3,254     2.5         34,527    13.2
Wii
Sony
PlayStation    445       0.5       1,292     1.1       729       0.6       2,311     0.9   
2
               74,547    81.2      81,008    67.8      101,868   78.2      188,375   72.2  
Handheld
Nintendo        2,233     2.4         17,677    14.8        5,700     4.4         38,961    14.9
Dual Screen
Sony
PlayStation     582       0.6         1,974     1.6         1,223     0.9         4,096     1.6
Portable
Wireless       429       0.5       730       0.6       850       0.6       1,466     0.6   
               3,244     3.5       20,381    17.0      7,773     5.9       44,523    17.1  
                                                                                            
PC             14,007    15.3      18,221    15.2      20,682    15.9      27,951    10.7  
Non-GAAP        91,798    100.0 %     119,610   100   %     130,323   100.0 %     260,849   100.0 %
net sales
Changes in
deferred       15,559               26,394               110,721              80,308
net revenue
Net sales     $ 107,357             $ 146,004             $ 241,044             $ 341,157
                                                                                            
Geographic
Revenue Mix
Domestic      $ 53,460    58.2  %   $ 68,757    57.5  %   $ 76,785    58.9  %   $ 156,500   60.0  %
Foreign        38,338    41.8      50,853    42.5      53,538    41.1      104,349   40.0  
Non-GAAP        91,798    100.0 %     119,610   100.0 %     130,323   100.0 %     260,849   100.0 %
net sales
Changes in
deferred       15,559               26,394               110,721              80,308
net revenue
Net sales     $ 107,357             $ 146,004             $ 241,044             $ 341,157
                                                                                            

Contact:

Investor and Media Inquiries:
Lisa Mueller
THQ Inc. Investor Relations
818/871-5125
 
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