Bt Investments Blog

All numbers in thousands of U.S. Dollars

Three Months Ended 12/31/09

Net Sales – $356,678  [compared to $357,310 three months ended 12/31/08]

Net Income (loss) – $542 [compared to $(191,754) three months ended 12/31/08]

Full press release and link to financial statements after the break.

– Company Bolsters Portfolio with Multi-Year License Agreements with WWE(R),DreamWorks Animation and Sony Pictures Consumer Products;Establishes New Original Core Game Franchise Darksiders(TM) –

AGOURA HILLS, Calif., Feb 03, 2010 (BUSINESS WIRE) — THQ Inc. (NASDAQ: THQI) today announced financial results for the three months ended December 31, 2009. Fiscal 2010 third quarter net sales were in line with the company’s guidance; the company did not provide earnings guidance for the quarter. The company also reaffirmed its outlook for net sales, profitability and cash position for the fiscal year ending March 31, 2010.

“We are pleased to report solid profitability in the third quarter and we are on track to achieve all of our fiscal 2010 financial targets that we announced at the beginning of the fiscal year,” said THQ President and CEO Brian Farrell. “This marks a significant turnaround for THQ in just one year and underscores the success of our focused strategy and reduced cost structure.”

For the fiscal third quarter ended December 31, 2009, THQ reported net sales of $356.7 million, compared with $357.3 million in the prior-year period. On a non-GAAP basis, for the three months ended December 31, 2009, the company reported net sales of $357.0 million, compared with $385.6 million a year ago.

For the three months ended December 31, 2009, the company reported net income of $542,000, or $0.01 per share, compared with a net loss of $191.8 million, or $2.86 per share, in the prior-year period. On a non-GAAP basis, the company reported net income of $26.6 million, or $0.35 per share, compared with a net loss of $9.6 million, or $0.14 per share, in the same period a year ago. Fiscal 2010 third quarter non-GAAP earnings per share would have been $0.39 if the company had not been required to use the “if-converted” method due to its August 2009 issuance of convertible senior notes.

For the nine months ended December 31, 2009, THQ reported net sales of $701.5 million, compared with $659.7 million in the prior-year period. On a non-GAAP basis, for the nine months ended December 31, 2009, the company reported net sales of $691.2 million, compared with $658.3 million a year ago.

For the nine months ended December 31, 2009, the company reported net income of $1.4 million, or $0.02 per share, compared with a net loss of $334.2 million, or $5.01 per share, in the prior-year period. On a non-GAAP basis, the company reported net income of $8.3 million, or $0.12 per share, compared with a net loss of $65.4 million, or $0.98 per share, in the same period a year ago.

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

Farrell said, “In addition to meeting our financial targets, we launched two new franchises, UFC and Darksiders, and significantly strengthened our balance sheet. We also secured new long-term license agreements and continued to migrate our brands to digital platforms in order to drive THQ’s growth over the next several years.”

Fiscal 2010 Third Quarter Highlights and Recent Developments

Market Share/Product Sales

THQ gained market share in the US in calendar 2009, ranking as the #4 independent publisher with a 4.7% share1.

UFC(R) 2009 Undisputed(TM) ranked among the top ten new video game releases in the US1 for calendar 2009.

The Biggest Loser was the #1 best-selling fitness game by an independent publisher in the US for the December quarter1.

New License Agreements

In December, THQ and WWE(R) entered into a new direct eight-year agreement granting THQ exclusive worldwide rights to develop and publish video games based on WWE content effective January 1, 2010.

In December, THQ announced multi-year, multi-property video game license agreements with DreamWorks Animation granting THQ exclusive worldwide rights to develop and publish video games based on DreamWorks Animation’s upcoming animated feature films Kung Fu Panda: The Kaboom of Doom and Puss in Boots, as well as the CG animated feature show, The Penguins of Madagascar.

On February 1, 2010, THQ announced two multi-year license agreements granting the company the exclusive worldwide rights to develop and publish video games based on Sony Pictures Consumer Products popular game show properties, “JEOPARDY!” and “Wheel of Fortune”.

Owned Franchises

In January, THQ launched new original game Darksiders(TM), which achieved an average Metacritic rating of 83 and delivered strong commercial sales, with shipments of approximately 1.2 million units in its first four weeks. The Darksiders franchise is now added to THQ’s growing portfolio of owned brands, including de Blob(TM), Drawn to Life(TM), MX vs ATV(TM), Red Faction(R) and Saints Row(R).

Core and Online Game Development

Consistent with its strategy to migrate its key brands online, THQ today announced the realignment of two of its development studios that will now focus on the creation of games for digital distribution.

Consistent with its strategy to reduce development costs while delivering high product quality, in December 2009, THQ announced plans to establish a new video game development studio in Montreal, Quebec.

Litigation Settlement

In December 2009, THQ, World Wrestling Entertainment and JAKKS Pacific, Inc. reached settlement agreements with respect to the WWE video game license and the termination of the THQ/JAKKS Pacific LLC joint venture. As a result, THQ reported a one-time settlement of $29.5 million, which is included in the venture partner expense line in its GAAP financial results for the fiscal 2010 third quarter ending December 31, 2009.

1Source: The NPD Group

Business Outlook

Fiscal Year Ending March 31, 2010

The company reaffirmed its expectation to report non-GAAP fiscal 2010 net sales higher than those reported in fiscal 2009, and to achieve profitability for fiscal 2010.

The company also reaffirmed its expectation that its fiscal 2010 year-end cash balance will be at least $50 million higher than at the end of fiscal 2009, excluding the net proceeds from the $100 million convertible senior note offering, the $32.8 million settlement payment to JAKKS Pacific related to the preferred return rate arbitration, and the $13.2 million settlement payment to WWE.

Fiscal Fourth Quarter 2010

Consistent with prior guidance, THQ expects to report fiscal fourth quarter non-GAAP net sales in the range of $175 million to $185 million. The company expects to report fiscal 2010 fourth quarter non-GAAP EPS of approximately breakeven.

Pursuant to THQ’s product strategy, key releases scheduled for the fourth quarter of fiscal 2010 include:

Fiscal Fourth Quarter

Games

Platforms

Darksiders(TM)

Xbox 360(R), PlayStation(R)3

Metro 2033(TM)

Xbox 360, Windows PC

Warhammer(R) 40,000(TM): Dawn of War(R) II – Chaos Rising(TM)

Windows PC

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 trading Auction Rate Securities,

material litigation settlements, charges and benefits, and

related income tax effects for each of these items.

Beginning in fiscal 2010, for non-GAAP purposes, the company has adopted 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 the 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 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. Beginning in fiscal 2008, the company began recognizing 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 its net revenue and costs with respect to these titles, there is no adverse impact to its operating cash flow. Internally, THQ’s management excludes the impact of deferred net revenue and costs related to packaged games when evaluating the company’s operating performance, when planning, forecasting and analyzing future periods, and when assessing the performance of its management team. The company believes that excluding the impact of deferred net revenue and related costs from its non-GAAP financial measures is important to facilitate comparisons to prior periods when the company did not defer the recognition of such amounts.

Business Realignment Expense. Although THQ has incurred business realignment expenses in the past, each charge has been 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.

Investor Conference Call

THQ will host a conference call to discuss fiscal 2010 third quarter results today at 2:00 p.m. Pacific/5:00 p.m. Eastern. Please dial 877.356.8075 domestic or 706.902.0203 international, conference ID 51325405 to listen to the call or visit the THQ Inc. Investor Relations Home page at http://investor.thq.com. The online archive of the broadcast will be available approximately two hours after the live call ends. In addition, a telephonic replay of the conference call will be provided approximately two hours after the live call ends through February 5, 2010, by dialing 800.642.1687, domestic, or 706.645.9291, international, conference ID 51325405.

About THQ

THQ Inc. (NASDAQ: THQI) is a leading worldwide developer and publisher of interactive entertainment software. Headquartered in Los Angeles County, California, THQ sells product through its global network of offices located throughout North America, Europe and Asia Pacific. More information about THQ and its products may be found at http://www.thq.com and http://www.thqwireless.com. THQ, Darksiders, de Blob, Drawn to Life, MX vs. ATV, Red Faction, Saints Row and their respective logos are trademarks and/or registered trademarks of THQ Inc.

Microsoft, Xbox, Xbox 360, Xbox Live, the Xbox logos, and the Xbox Live logo are either registered trademarks or trademarks of Microsoft Corporation in the U.S. and/or other countries.

“PlayStation” is a registered trademark of Sony Computer Entertainment Inc.

All other trademarks are property of their respective owners.

This press release contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, the company’s expectations for the fiscal fourth quarter and year ending March 31, 2010, and for the company’s product releases in future periods.These forward-looking statements are based on current expectations, estimates and projections about the business of THQ Inc. and its subsidiaries (collectively referred to as “THQ”) and are based upon management’s beliefs and certain assumptions made by management.Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, economic, competitive and technological factors affecting the operations, markets, products, services and pricing of THQ, and our ability to successfully implement our cost reduction plans.Unless otherwise required by law, THQ disclaims any obligation to update its view on any such risks or uncertainties or to revise or publicly release the results of any revision to these forward-looking statements.Readers should carefully review the risk factors and the information that could materially affect THQ’s financial results, described in other documents that THQ files from time to time with the Securities and Exchange Commission, including its Quarterly Reports on Form 10-Q and its Annual Report on Form 10-K for the fiscal period ended March 31, 2009, and particularly the discussion of risk factors that may affect results of operations set forth therein.Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.

Link to full press release and financial statements.

-Justin

This teaser ad looks like it’s the launch of a new service from Christian DeHaemer, who has blessed us with a great many “Indiana Jones” teasers over the years, talking about the tiny companies he’s been ferreting out in frontier markets and war zones for the newsletters he used to edit at Taipan — now he’s apparently moved over to Angel Publishing, yet another arm of the Agora octopus, and started a new letter called Crisis and Opportunity. Time will tell if it brings as many enticing teaser stories as his old Crisis Trader letter (I had a particular soft spot for his many teasers for Dragon Oil), but it’s certainly worth taking a look …

The teaser today is all about Mongolia:

“How to legally* raid ‘China’s Pantry’

“Insiders feed us the 24 resource deals that will make one obscure nation Beijing’s top growth partner…

“And hand you a chance at 57 times your money

“*(This info falls into a legal “gray area” and may soon be subject to an injunction. Your chance to profit from it could end by February 10, 2010.)”

The “gray area” stuff is a little silly — but Brian Hicks, the publisher, goes into a little more detail on that a bit later:

“Technically, I don’t think I’ve broken any laws by printing the inside ‘intel’ that The Hammer learned in his meetings with Mongolian banking bigwigs and government dignitaries…

“But then again, I don’t know what he told them to GET those meetings.

“I don’t know whether they were perfectly clear on who The Hammer was — or why he was there. Perhaps they were under the impression that he was an oil or energy man. Or maybe a liaison to some U.S. government committee…

“Again, I don’t know.

“But I’m sure of this much: They probably didn’t know he was a ’spy’ for an investment research service.

“Bottom line: If they get ticked at me for revealing something sensitive (like that fact that their stock market’s a Wild West show right now), they could probably find legal justification for slapping an injunction me.

“That’s why I’ve taken some steps to protect myself here — like redacting the names of Mongolian officials, and code-naming my “spy” The Hammer… ”

Sounds pretty silly to me, and DeHaemer has certainly talked openly about his Mongolian trip before, in pre-teaser articles before this newsletter was launched, but we can forgive them for trying to make the shroud of mystery around their stock tips a bit more opaque … after all, everyone loves to be part of a sneaky, top-secret operation. And it also gives them a nice urgency to the ad, since Hicks implies that the Mongolians might somehow serve him with an “injunction” within two weeks and somehow stop the publication of this material. That’s so far-fetched as to be a bit ridiculous, but perhaps the Mongolians have a stronger influence on our court system than I think they do.

The ad is a very long one, as all of them are — but it essentially just builds the argument that Mongolia is going to be the next hot market because they are opening up to foreign investment, because Ivanhoe and Rio Tinto managed to move the massive Oyu Tolgoi project forward and get punitive mining taxes rolled back last year, which opens the door for other explorers, and because the massive demand for raw materials from China, their neighbor to the South, will create huge investment in infrastructure to move Mongolian raw materials to China’s factories.

They sum it up nicely here:

• “HUGE, UNTAPPED RESOURCE RESERVES
• “LAND-LINKED TO THE #1 CONSUMER NATION
• “MINISCULE NATIONAL GDP/MARKET VALUATIONS
• “NEW LAWS/POLICIES AIMED AT MASSIVE GROWTH
• “A DELUGE OF FOREIGN LIQUIDITY ACHING TO POUR IN”

They compare the opportunities they’re looking at now to some of the others that DeHaemer has touted in frontier economies before, including the aforementioned Dragon Oil in Turkmenistan, Tullow Oil in Uganda, and a few others, in building a case for investments now becoming 57X gainers.

So they don’t try to tease the one major Mongolia-focused investment, Ivanhoe Mines, because they say this stock has already advanced quite a bit in the wake of last year’s poliitcal agreements, but they do tease three others that DeHaemer is looking at now as having big leverage to Mongolia’s coming explosive growth. So who are they?

Clues, please!

“THE METALS PLAY is a secondary beneficiary of the Oyu Tolgoi gold/copper deal between the Mongolian government and Ivanhoe/Rio Tinto. They license all the territory surrounding the OT deposit itself — and also hold mining/exploration rights in China and other hot zones…

“This firm has exploded in price exponentially compared to gold. The company leveraged a 35% up-tick in gold over calendar year 2009 into more than 316% growth: A ratio of more than nine times over. If gold goes to $1,500 per ounce (as The Hammer predicts), this company could easily multiply in value another 900%…”

This one must be, according to the cogitations of the mighty Thinkolator, Entree Gold (ETG in Toronto, EGI in New York). Entree Gold does own mining and exploration licenses surrounding Oyu Tolgoi, including joint ventures with Ivanhoe, and they do believe that the agreements with the government and the new mining law will be to their benefit as they continue to explore their license areas and define resources. The stock has roughly tripled over the past year, with much of that gain coming as the good news about Mongolian legal and policy changes came in late in 2009. This is how they describe themselves on their website:

“Entrée Gold Inc., as a junior resource company, is trying to meet global demand for products such as gold, copper, molybdenum and coal through concerted exploration efforts. With operations in emerging markets such as Mongolia and China and proven jurisdictions such as Arizona and New Mexico in the United States, Entrée has assembled a portfolio of gold and copper exploration projects balanced between grass roots and advanced exploration.

“Most notably, Entree is a large landholder in Mongolia, where it holds three exploration licenses that comprise the 179,590-hectare Lookout Hill property. Lookout Hill completely surrounds the Oyu Tolgoi project of Ivanhoe Mines, and hosts the Hugo North Extension of the Hugo Dummett deposit and the newly discovered Heruga deposit.”

This is the first I’ve ever heard of Entree — they appear to be in pretty reasonable shape, with a market cap of a bit over $250 million, cash of about $40 million and no debt to speak of, but I don’t know what their joint venture operations with Ivanhoe will require of them in terms of investment, or what their capital investment plans are for the year as they continue to explore. They are still a junior exploration company, with no revenue to speak of, so the stock will move based on estimates of their reserves, new discoveries, and any further political developments — they do have some interests in China and in the US, but it does appear that the Mongolian properties are where the big potential lies.

But there’s more … let’s move on …

“THE COAL PLAY is a company that currently manages to extract coal and coke from some of the highest-quality deposits on Earth for around 17.5% of its market value. They also have exclusive licenses to explore over 800,000 hectares of prime Mongolian coal land…

“Located less than 30 miles from the Mongolia/China border — and ramping up to increase coal production 600% in the next 2 years — this company is strategically positioned for the lion’s share of Chinese coal demand. But you’d better get in now. The way China’s been buying up prime hydrocarbon assets around the world at premium prices lately, you could be passing up a fast 200 – 300% payday on a buyout.”

This sounds as though it must be SouthGobi, yet another company that’s closely related to Ivanhoe Mines — SouthGobi is listed in Canada at SGQ and newly listed in Hong Kong at 1178, with pink sheets trading also available at SGQRF (very low volume be careful about bidding based on the fair price in Canada if you’re interested). SouithGobi’s major holding is the Ovoot Tolgoi coal mine that is already producing tonnes of coal for China, with production expected to quadruple this year and then double again by 2012, and they have been raising plenty of money, most prominently with the new Hong Kong listing. And yes, the mine is about 40 km (which is less than 30 miles) from the Chinese border and sends its coal across to China via truck right now while stronger infrastructure links are built. Ivanhoe currently owns 65% of SouthGobi, according to the company’s website, so it’s starting to look like more cautious investors might still reasonably stick with Ivanhoe as almost a mutual fund of South Mongolia commodity interests.

But we have one more pick — the clues?

“THE OIL PLAY is a company with exploration licenses in several key Mongolian oil blocks. This firm controls far larger petro-assets than its market cap would suggest. At a market price of just $70 per barrel (it’s been well north of that for weeks), shares in this company would have to go up 32 times to be anywhere near the value of its PROVEN reserves…

“And their ‘probable’ oil reserves are more than 5 times their proven assets! That means this firm is trading right now at a discount of as much as 98% to assets. But with on-site drilling at one key oil block starting the instant the ice melts this spring, that will not be the case for long. The news is going to get out on this play, and soon.”

This one is a little less definitive, but I can tell you at least my guess: the strongest candidate for this one appears to be Petro Matad — unfortunately, this one doesn’t appear to trade in North America, its listing is on the AIM in London at MATD. My second best guess on this one is Manas Petroleum, which does have some Mongolian interests but is much more focused on Albania right now (that one does trade over the counter in the US, at MNAP). There are a few other companies looking for oil in Mongolia, or buying up licenses there, but those two seem the most likely candidates to me.

So are you just dying to throw some money at the potentially explosive growth in the Mongolian resources sector? These seem to be the ideas that DeHaemer is currently touting, and there are others as well — we already know some of the big companies that operate in Mongolia, including Rio Tinto with their partnership with Ivanhoe, BHP Billiton, and PetroChina, but for those massive firms their Mongolian operations will never be their major focus.

FYI, other smaller firms that are operating or exploring in Mongolia include Mongolia Energy Corp (another coal company, listed in Hong Kong and on the pink sheets at MOAEF); Centerra Gold (mining gold in Mongolia and elsewhere, this is a spinoff of Cameco — trades at CG in Toronto and CAGDF on the pink sheets); Denison Mines (a uranium miner with worldwide exploration and one joint venture project in Mongolia, trades at DNN in New York); Polo Resources (coal and uranium in Mongolia, partnered with Peabody, listed in London at PRL, also trades on the pinks at POLJF), and I’m sure there are several others that I’m neglecting to mention.

Have a Mongolian favorite? Prefer to keep it simple and stick with Ivanhoe? Let us know what you think with a comment below. And if you’re one of the charter subscribers and would like to be the first to review DeHaemer’s Crisis and Opportunity at Stock Gumshoe Reviews, just click here.