THQ 2006 Annual Report Download - page 31

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The following is a discussion of our operating results and the primary trends that affect our business.
Certain of these trends and other statements made herein may be “forward-looking” within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements are included herein because
management believes that an understanding of these trends is important to understand our results for the
fiscal year ended March 31, 2006 (“fiscal 2006”), 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 Form 10-K, including in the remainder of “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” or the consolidated financial statements and
related notes. The discussion and analysis herein may be understood more fully by reference to the
consolidated financial statements and notes to the consolidated financial statements. Additionally, readers
should refer to our cautionary statement on page 1herein as well as “Risk Factors” set forth in Item 1A.
All references to “we,” “us,” “our,” “THQ,” or the “Company” in the followingdiscussion and analysis
mean THQ Inc. and its subsidiaries.
Overview of Fiscal 2006 Results
Net sales in fiscal 2006 increased 7% over the fiscal year ended March 31, 2005 (“fiscal 2005”), from
$756.7 million to $806.6 million. The increase in net sales for fiscal 2006 was primarily attributable to
worldwide sales of 10 titles that sold more than one million units. In fiscal 2005, we published six titles
which shipped more than one million units.
In fiscal 2006, our operating margin declined by 560 basis points over fiscal 2005, to 4% of net sales. Our
operating margin declined in fiscal 2006 due primarily to (i) higher catalog sales as a percentage of total
net sales (ii) a change in development strategy for our WWE games wherein we ceased internal product
development for wrestling games and as a result we wrote-off the underlying capitalized software
development costs to software development amortization, and (iii) high price protection and software
development amortization for the current-generation title Full Spectrum WarriorTM: Ten Hammers.
Net income for fiscal 2006 was $34.3 million, or $0.52 per diluted share, compared to net income of
$62.8 million, or $1.04 per diluted share, for fiscal 2005. Fiscal 2006 results reflect increased investment in
development of video games for next generation consoles. Net income for fiscal 2005 was positively
affected by $7.8 million, or $0.13 per diluted share, from the recognition of research and development
income tax credits claimed for prior years.
Cash provided by operations was $42.8 million during fiscal 2006, as compared to $60.5 million in fiscal
2005. The decline in cash provided by operations was primarily due to lower net income, higher spending
for software development, and higher payments of accrued expenses, partially offset by lower cash
spending for licenses.
Fiscal 2007 Outlook
We expect net sales in fiscal 2007 to increase 12% to 18% as compared to fiscal 2006, resulting in expected
net sales of $900 to $950 million. Key titles that we expect to release in fiscal 2007 are Cars on nine
platforms, Saints Row on Xbox360 and WWE Smackdown vs. Raw 2007. We also expect to release titles
based on Nickelodeon brands and core gamer PC titles such as Company of Heroes and Supreme
Commander. We expect our SKU count in fiscal 2007 to increase to approximately 70 from 64 in fiscal 2006
and title count to remain flat in fiscal 2007 compared to fiscal 2006. Our catalog sales are expected to be
25% of our product mix, down from 34% in fiscal 2006.