THQ Inc. Reports Operating Results (10-Q)
Thq, Inc. has a market cap of $9.3 million; its shares were traded at around $1.215 . Thq, Inc. had an annual average earning growth of 14.7% over the past 10 years.
Highlight of Business Operations:We provide our products through both the retail channel and through online digital delivery methods. Recently, the interactive entertainment software industry began delivering a growing amount of games, downloadable content and product add-ons by direct digital download through the Internet and gaming consoles. We believe that much of the growth in the industry will come via online distribution methods, including, multi-player online games (both subscription and free-to-play), free-to-play micro-transaction based games, paid downloadable content ("DLC"), and digital downloads of full-games. Conversely, based on industry data, we believe retail sales for the industry will continue to be a decreasing revenue source over the next several years. For the nine months ended September 30, 2012, reported retail software sales in the U.S. for the industry decreased 23% compared to the same period in 2011 according to the NPD Group; for the same period, across U.K., Germany, France, Spain and Benelux, aggregated retail software sales decreased 19% compared to the same nine-month period in 2011 according to GfK. However, digital sales for the industry are expected to grow over 22% worldwide in calendar 2012 and almost double, over calendar 2011 levels, in the following five years to $71.1 billion worldwide according to the International Development Group, Inc.'s Forecast Update (August 2012). Accordingly, we plan to emphasize the digital components in our future core game releases. In the event our games are released with increasingly more undelivered elements at the time of sale, such as the online service present within some of our games, more of our revenue may be deferred, which will impact the timing of our revenue recognition but not our cash flow from operations.
Included in net sales before changes in deferred net revenue in the three and six months ended September 30, 2012 was $19.1 million and $32.5 million of digital revenue, which was 34% and 33% higher than the same periods last fiscal year. Digital revenue primarily consists of digital downloads of full-games and paid downloadable content.
Net sales in Europe in the three and six months ended September 30, 2012 decreased $7.8 million and $31.0 million compared to the same periods last fiscal year. We estimate that changes in foreign currency translation rates during the three and six months ended September 30, 2012 decreased our reported net sales in this territory by $2.9 million and $3.9 million, respectively. The decreases in the three and six months ended September 30, 2012 were primarily due to fewer units sold of Darksiders II compared to the number of units sold of titles we released in the same periods last fiscal year. These decreases were partially offset by a higher average net selling price on Darksiders II in the three months ended September 30, 2012 and higher average net selling prices overall in the six months ended September 30, 2012 compared to the same periods last fiscal year.
License amortization and royalties expense consists of royalty payments due to licensors, which are expensed at the higher of (1) the contractual royalty rate based on actual net product sales for such license, or (2) an effective rate based upon total projected net sales for such license. Net sales from our licensed properties represented 34% and 38% of our total net sales in the three and six months ended September 30, 2012, respectively, compared to 47% and 48% of our total net sales in the three and six months ended September 30, 2011.
Accounts Receivable. Accounts receivable decreased $9.3 million, from $16.0 million at March 31, 2012 to $6.7 million at September 30, 2012. The decrease was primarily due to lower sales volumes in the second quarter of fiscal 2013 as compared to the fourth quarter of fiscal 2012. Accounts receivable allowances were $47.8 million at September 30, 2012, a $22.6 million decrease from $70.4 million at March 31, 2012. Allowances for price protection and returns as a percentage of trailing nine-month net sales, excluding the impact of changes in deferred net revenue, were 13% at September 30, 2012 and 2011. We believe our current allowances are adequate based on historical experience, inventory remaining in the retail channel, and the rate of inventory sell-through in the retail channel.
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