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THQ Inc. Reports Operating Results (10-K)

June 11, 2012 | About:

THQ Inc. (THQI) filed Annual Report for the period ended 2012-03-31.

Thq Inc has a market cap of $47.27 million; its shares were traded at around $0.69 with and P/S ratio of 0.06.

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 twelve months ended December 31, 2011, retail software sales in the U.S. for the industry decreased 7.8% compared to the same period in 2010 according to The NPD Group; for the same period, across the U.K., Germany, France, Spain and Benelux, aggregated retail software sales decreased 7.4% compared to the same twelve-month period in 2010 according to GfK. However, digital sales for the industry are expected to grow over 20% worldwide in calendar 2012 and almost double, over calendar 2011 levels, in the following five years to $58.7 billion worldwide according to the International Development Group, Inc.'s Forecast Update (February 2012). Accordingly, we plan to continue integrating digital components into our core game franchises. 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.

Partially offsetting the decrease in software development amortization as a percent of net sales were higher title cancellation and impairment charges in fiscal 2011 compared to fiscal 2010. In fiscal 2011 we had charges totaling $9.9 million related to the cancellation of Company of Heroes Online and WWE Online (see "Note 8 — Restructuring and Other Charges" in the notes to the consolidated financial statements included in Item 8) and impairment charges of $7.0 million. In fiscal 2010 we had charges totaling $7.9 million related to titles that were cancelled in connection with the fiscal 2009 realignment plan.

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. Also included in license amortization and royalties expense in fiscal 2010 is venture partner expense totaling $14.5 million (see "Note 2 — Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in Item 8 of the fiscal 2011 10-K). Net sales from our licensed properties, excluding the impact of changes in deferred net revenue, represented 65% and 70% of our total net sales in fiscal 2011 and fiscal 2010, respectively.

Accounts Receivable. Accounts receivable decreased $145.6 million, from $161.6 million at March 31, 2011 to $16.0 million at March 31, 2012. The decrease was primarily due to lower sales volumes and timing of releases in the fourth quarter of fiscal 2012 and fiscal 2011, as well as expedited collections of receivables under the Purchase Agreement. Accounts receivable allowances were $70.4 million at March 31, 2012, a $17.2 million decrease from $87.6 million at March 31, 2011. 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 8% and 11% at March 31, 2012 and 2011, respectively. The decrease was primarily due to improved sell-through of certain of our recent releases. 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.

Advertising. We have certain minimum advertising commitments under many of our major license agreements. These minimum commitments generally range from 3% to 10% of net sales related to the respective license. Included in the table above in fiscal 2013, fiscal 2014, fiscal 2015, fiscal 2016, fiscal 2017, and thereafter, are advertising commitments of $1.3 million, $2.2 million, $2.3 million, $2.4 million, $2.5 million, and $4.7 million, respectively, for a total of $15.4 million of advertising commitments that were cancelled in connection with the termination of the license agreement we had with Zuffa to make video games based on their UFC content (see "Note 22 — Subsequent Events" in the notes to the consolidated financial statements included in Part II, Item 8).

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Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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