THQ 2007 Annual Report Download - page 33

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25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Thefollowing is adiscussion of our operating results and the primarytrends that affect ourbusiness.
Certain of these trends andother statements made herein may be “forward-looking”within the meaning of
the PrivateSecurities Litigation Reform Actof 1995. Such statements areincluded hereinbecause
management believes that an understandingof thesetrends is important to understand our results for the
fiscalyearended March 31, 2007 (“fiscal 2007”), as well as our future prospects.This summary is not
intended to be exhaustive, noris it intended to be a substitutefor the detailed discussion andanalysis
provided elsewhere in this Form 10-K, includingin the remainder of “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” or the consolidated financial statements and
related notes.Thediscussion and analysis herein may be understood more fully by reference to the
consolidated financial statements and notes to the consolidated financial statements.Additionally, readers
shouldrefer to our cautionary statement on page 1 herein as well as “Risk Factors” set forth in Item 1A.
Allreferences to “we,” “us,” “our,” “THQ,” or the“Company” in the following discussion and analysis
mean THQ Inc. and its subsidiaries.
Overview of Fiscal 2007 Results
In the fiscal year ended March 31, 2007,we recorded thehighest total annual revenue in our history. Net
sales in fiscal2007increased27%over the fiscalyear ended March 31,2006 (“fiscal 2006”), to $1,026.9
million, up from $806.6 million.The year-over-year growth in our net sales was due primarily to significant
growth in sales of games from ourkey long-termlicensed properties; Disney"Pixar, WWE and
Nickelodeon as well as sales of ournew, owned intellectual property, Saints Row. Titles released in fiscal
2007 underour key licensed properties included Cars,WWE SmackDown vs. Raw 2007 and a newtitle from
our Nickelodeon license, Avatar: The Last Airbender. Additionally, in fiscal 2007, our operating margin
improved by 367 basis points over fiscal2006, to 8% of net sales. Our operating margin improved in fiscal
2007 due primarily to improved grossmargins on our key titles,ledby multi-million unit sales of Cars and
WWE SmackDown vs. Rawand leverage of our selling and marketing and general and administrative
expenses.
Net income from continuing operations for fiscal 2007 was$65.0 million, or $0.96 per diluted share,
compared to net incomefrom continuing operations of $32.1million, or $0.49 per diluted share, for fiscal
2006.Net income for fiscal 2007 was$68.0 million, or $1.01perdiluted share, and included a $3.1 million
gainon sale of discontinued operations. Our fiscal 2007 results include our continuedinvestment in
development of games based on new generation consoles.
Cash provided by operations was $64.0 million during fiscal 2007, up 50% as compared to fiscal 2006,
which had $42.8 million. Theincrease in cash provided by operations was primarily aresult of an increase
in earnings, improved workingcapital andamortization of licensesand software,partially offset by
increases in cash payments for software development and licenses.
Prospective BusinessTrends
We operate in one business segment: video game development andpublishing. We derive revenue
principally from salesof packaged interactive software games designed for playon video game consoles,
handheld devicesandpersonalcomputers.
Transitionto new generation console systems. In fiscal 2007, ourindustrycontinuedto transition from the
legacy consoles, Sony PlayStation 2 (“PS2”) and Nintendo GameCube, to the new generation consoles,
Sony PlayStation 3(“PS3”) and Nintendo Wii. Additionally,infiscal 2006, Microsoft launched its new
generation platform, the MicrosoftXbox 360 and twonewhandheldplatforms were launched, the
Nintendo DS and Sony PSP. With the new generation of console systems and new handheld platforms, we
believe that marketsegmentation will be extremely important. We have designed our publishing strategy to