THQ 2010 Annual Report Download - page 28

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20
Over view
The following overview is a top level discussion of our financial results, as well as trends that have, or that we
reasonably believe will, impact our operations. Management believes that an understanding of these trends
and drivers is important in order to understand our results for fiscal 2010, as well as our future prospects. This
summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion
and analysis provided elsewhere in this Annual Report on Form 10-K and in other documents we have filed
with the SEC.
Over view of Financial Results for Fiscal 2010
The video games industry in North America and Europe reported retail software sales of $19.0 billion in the
twelve months ended March 31, 2010, down 12% from the prior-year period, according to The NPD Group,
Chart Track and GfK. Despite these challenging conditions and a weak macroeconomic environment, we
achieved the following in fiscal 2010: 1) we generated higher net sales in fiscal 2010 than in fiscal 2009,
2) we reduced our loss per share by 98%, to $0.13 in fiscal 2010 down from $6.45 in fiscal 2009, and 3) we
generated significant operating cash flow. Additionally, in the twelve months ended March 31, 2010, we
gained market share both in the U.S. and globally according to The NPD Group, Chart Track and GfK; we
were the number four independent publisher in the U.S. with a 4.9% share, up from 3.6% a year ago; and
we were the number four independent publisher globally with a 4.4% share, up from 3.7% a year ago.
Our net loss attributable to THQ Inc. (“net loss”) for fiscal 2010 was $9.0 million, or $0.13 per diluted share,
compared to a net loss of $431.1 million, or $6.45 per diluted share (inclusive of a gain on sale of
discontinued operations, net of tax, of $2.1 million) for fiscal 2009.
Our profitability is dependent upon revenue from the sales of our video games. Net sales increased 8% in
fiscal 2010, to $899.1 million from $830.0 million in fiscal 2009. The increase in net sales was primarily due to
net sales of
UFC 2009 Undisputed
at a higher average selling price compared to games sold in the same
period last year.
Our profitability is also affected by the costs and expenses associated with developing and publishing our
games. These costs and expenses include both cost of sales and operating expenses. Our gross profit as a
percent of net sales, increased 19 points in fiscal 2010, to 30% from 11% in fiscal 2009. The increase in our
gross profit as a percent of net sales was primarily due to decreases in software amortization and royalties
expense because of non-cash charges of $63.3 million in fiscal 2009 related to the write-off of capitalized
software for games that were cancelled as part of our fiscal 2009 business realignment, and additional
amortization expense in fiscal 2009 as a result of lower projected gross sales on various titles. Additionally,
the decrease in cost of sales as a percent of net sales in fiscal 2010 was due to sales of games at higher
average selling prices as compared to fiscal 2009, led by the fiscal 2010 first quarter release of
UFC 2009
Undisputed
.
Our profitability is also affected by our operating expenses, which decreased by $196.6 million in fiscal 2010,
to $282.7 million from $479.3 million in fiscal 2009. The decrease was primarily due to a non-cash goodwill
impairment charge of $118.8 million in fiscal 2009 and lower costs in fiscal 2010 due to our fiscal 2009
business realignment.
Our principal source of cash is from sales of interactive software games designed for play on video game
consoles, handheld devices and PCs, including via the Internet. Our principal uses of cash are for product
purchases of discs and cartridges along with associated manufacturer’s royalties, payments to external
developers and licensors, the costs of internal software development, and selling and marketing expenses.
Our cash, cash equivalents and short-term investments balance at March 31, 2010 was $271.3 million, as
compared to $140.7 million as of March 31, 2009. Cash provided by operations was $33.4 million in fiscal
2010, as compared to cash used in operations of $194.2 million in fiscal 2009. The increase in cash provided
was primarily the result of our lower fiscal 2010 net loss as compared to fiscal 2009, adjusted for non-cash
goodwill impairment and higher amortization of licenses and software development in fiscal 2009.
Additionally, in fiscal 2010 we had lower investments in software development and licenses as compared to
fiscal 2009.