AGOURA HILLS, Calif.–(BUSINESS WIRE)–THQ Inc. (NASDAQ: THQI) today announced financial results for the three months ended December 31, 2010, that exceeded the company’s guidance due to strong sales of its new uDraw GameTablet.

“We posted a strong holiday quarter led by our new uDraw GameTablet, which shipped 1.2 million units. This owned intellectual property provides THQ with a new growth opportunity focused on innovative and creative game play”
For the fiscal third quarter ended December 31, 2010, THQ reported net sales of $314.6 million, compared with $356.7 million in the prior-year period. On a non-GAAP basis, for the three months ended December 31, 2010, the company reported net sales of $323.1 million, compared with $357.0 million a year ago.

For the three months ended December 31, 2010, the company reported a net loss of $14.9 million, or $0.22 per share, compared with net income of $542,000, or $0.01 per share, in the prior-year period. On a non-GAAP basis, the company reported net income of $28.5 million, or $0.37 per share, compared with net income of $26.6 million, or $0.35 per share, in the same period a year ago. Fiscal 2011 and 2010 third quarter non-GAAP earnings per share would have been $0.42 and $0.39, respectively, if the company had not been required to use the “if-converted” method of calculating earnings per share.

A reconciliation of non-GAAP to GAAP results is provided in the accompanying financial tables.

“We posted a strong holiday quarter led by our new uDraw GameTablet, which shipped 1.2 million units. This owned intellectual property provides THQ with a new growth opportunity focused on innovative and creative game play,” said THQ President and CEO Brian Farrell. “Our fiscal fourth quarter continues our robust release schedule of high quality, high profile games including Homefront, WWE All Stars, and de Blob 2.”

Farrell added, “THQ is poised for significant net sales and earnings growth in fiscal 2012 as a result of aggressive investment in owned intellectual properties and major franchises, a lean cost structure, and growing digital revenues. Fiscal 2012 will be driven by the strongest core games line-up in our history, including: Red Faction Armageddon, Warhammer 40,000 Space Marine, MX vs. ATV Alive and the newest installment of our Saints Row franchise.”

FISCAL 2011 THIRD QUARTER HIGHLIGHTS AND RECENT DEVELOPMENTS

Product Performance

In November, THQ launched in North America the uDraw GameTablet, a first-of-its-kind, innovative gaming accessory, which quickly became one of the top-ranked gaming products of the 2010 holiday season. THQ shipped 1.2 million units of the uDraw GameTablet during the holiday quarter. The company plans to release the uDraw GameTablet in international territories during the March quarter.
During the holiday quarter, THQ shipped approximately 2.7 million units of WWE® SmackDown® vs. Raw® 2011.
New Intellectual Property Agreements

Furthering its strategy to partner with top creative talent, in December, the company announced a new multi-year agreement with Guillermo del Toro, writer and director of Hellboy and the Oscar-winning Pan’s Labyrinth, to create inSANETM, an original trilogy of triple-A titles to be developed by THQ’s Volition, Inc.® studio.
Q3 Accounting Charges

The company reevaluated the sales potential of games based on its kids movie-based licenses during the preparation of its fiscal third quarter financial statements. Consistent with recent industry trends, the company lowered expectations for this category, which resulted in an impairment of $30.3 million of kids movie-based licenses for games that are expected to be released in fiscal 2012 and beyond. This impairment was excluded from the company’s fiscal 2011 third quarter non-GAAP results.
In the fiscal third quarter, the company reevaluated its strategy of adapting certain Western content for free-to-play online games in Asian markets. As a result, the company’s fiscal third quarter non-GAAP results exclude a charge of $9.9 million related to the cancellation of Company of Heroes® Online and WWE® Online.
Repositioning of Kids, Family and Casual Business

THQ’s Kids, Family and Casual Business Unit is increasing its focus on popular new play patterns and devices such as Kinect™ for Xbox 360®, PlayStation®Move, the uDraw GameTablet and Nintendo 3DS, with a strong fiscal 2012 line-up scheduled for these platforms, as well as online network games and games for mobile devices.
In January 2011, THQ and Mattel, Inc. announced an alliance whereby THQ plans to produce and distribute interactive entertainment based on Mattel’s leading brands. THQ plans to publish these brands on the uDraw GameTablet as well as other popular gaming platforms, including mobile devices and social networks.
BUSINESS OUTLOOK

Fiscal Fourth Quarter 2011

THQ issued new guidance for fiscal fourth quarter non-GAAP net sales in the range of $245 – $260 million, and non-GAAP EPS of $0.05 – $ 0.15, before applying the “if converted” method of calculating EPS; after applying the “if converted” method of calculating EPS, the top end of the range would decline by one cent.

The new guidance primarily reflects the move of UFC® Personal Trainer into fiscal 2012, and lower expected sales of kids movie-based licensed games.

Fiscal Year Ending March 31, 2011

THQ expects to report non-GAAP fiscal 2011 net sales in the range of $800 – $815 million and a non-GAAP net loss per share for fiscal 2011 in the range of $0.25 – $0.35.

Non-GAAP Financial Measures

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

stock-based compensation expense,
the impact of certain deferred revenue and related costs,
business realignment expense,
other-than-temporary impairment on investments and any subsequent realized gains on those investments, and mark-to-market adjustments on investments, and
other significant charges and benefits.
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 expenses 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 recognizes the revenue and related costs from the sale of certain titles for which the online service is determined to be a deliverable over the estimated online service period. Although the company defers the recognition of all or a portion of its net revenue and costs with respect to these titles, there is no impact to its operating cash flow. THQ’s management excludes the impact of deferred net revenue and costs when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team.

Business Realignment Expense. 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. 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 from its non-GAAP financial measures.

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 appropriate to exclude expenses and benefits such as legal settlements or market-related impairments, from its non-GAAP financial measures.

Fiscal Periods

The company reports its fiscal year on a 52/53 week period with its fiscal year ending on the Saturday nearest March 31st. For simplicity, the company presents all fiscal periods as ending on a calendar month end. The company’s fiscal 2011 third quarter ended on January 1, 2011, and its fiscal 2010 third quarter ended on January 2, 2010. The fiscal three month periods ended December 31, 2010 and 2009 consisted of 13 and 14 weeks, respectively.