Fiscal 2007 Key Achievements
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FISCAL 2007 KEY ACHIEVEMENTS :: Posted 12th consecutive year of revenue growth with record net sales of more than $1 billion :: Gained share in each of our major markets - North America, Europe and Australia/New Zealand* :: Achieved operating margins equal to peak of last console cycle :: Established two owned intellectual properties, Saints Row™ and Company of Heroes™ :: Grew revenue from our licensed franchises, shipping nearly 8 million units of Disney•Pixar’s Cars, 4 million units of WWE® SmackDown® vs. Raw ® 2007 and 4 million units combined of our new Nickelodeon titles :: Published 8 games that shipped more than one million units :: Secured the long-term videogame publishing rights to the Ultimate Fighting Championship® (UFC)® :: Expanded our Studio System to more than 1,500 people and 16 studios :: Increased our percent of revenue from internally developed games to 40%, up from 30% a year ago :: Increased our international revenue to 42% of total sales and further expanded our global footprint in Europe and Asia :: Positioned the company to take advantage of the growing trends of digital content creation and distribution *Source of all market data referenced herein: The NPD Group, Inc., UK Chart Track and GfK This annual report 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 revenue for the fi scal year ending March 31, 2008; the company’s expected percent of fi scal 2008 revenue generated from owned intellectual properties and from internally developed properties; the company’s anticipated fi scal 2008 platform mix; the company’s ability to continue to generate record results and for the company’s product releases and other fi nancial performance 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. 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 fi nancial results, described in other documents that THQ fi les from time to time with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fi scal period ended March 31, 2007, 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. In addition to results determined in accordance with United States generally accepted accounting principles (“GAAP”), THQ discloses non-GAAP fi nancial measures that exclude stock-based compensation expense, associated income taxes and the payroll tax effects of our historical stock option grant practices from the company’s Consolidated Statement of Operations. The use of such non-GAAP fi nancial measures allows for a better comparison of results in the fi scal year ended March 31, 2007 to those in the same prior year period that did not include FAS 123(R) stock-based compensation expense. The non-GAAP fi nancial measures included herein have been reconciled to the comparable GAAP results 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. SOLID GROWTH CHAIRMAN’S LETTER THQ Inc. Fiscal 2007 marked another record FY06 FY07 year for THQ. I am pleased to report that we successfully executed Net Sales (Millions) $807 $1,027 against each of our stated strategies Operating Margin (GAAP) 4% 8% as we began to capitalize on the Operating Margin (Non-GAAP)(1) 4% 10% growing installed base of new gaming platforms while continuing to harvest Diluted EPS (GAAP) $0.49 $1.01 revenue and profi ts from the large Diluted EPS (Non-GAAP)(1) $0.54 $1.24 installed base of legacy systems. THQ has never been better positioned as we enter the exciting growth years of the new hardware cycle. Our company’s fi nancial position has never been stronger as we continue to execute on our planned growth through the new videogame cycle. At March 31, 2007, we had nearly GROWING MARKET OPPORTUNITY $7 per share in cash and short-term investments and our NORTH AMERICA AND EUROPE SOFTWARE DOLLAR GROWTH stockholders’ equity was $769 million. (1) Non-GAAP operating margin and non-GAAP EPS exclude $0.23 and $30 $0.05 per share in stock-based compensation expense, associated income taxes and the payroll tax effects of our historical stock option grant practices, for fi scal 2007 and fi scal 2006, respectively. $15 $ Billions THQ GAINED SHARE IN ALL MAJOR MARKETS REVENUE GROWTH % IN FY2007 $0 2006 2007E 2008E 2009E PC CONSOLE HANDHELD NEW OPPORTUNITIES 40 35% 31% Source: International Development Group; DFC Intelligence Group; 30 Juniper Research 23% 20 13% 11% 10 4% 0 $1 Billion Sales Mark Achieved in Fiscal 2007 NA EUR AUS/NZ Fiscal 2007 marked our 12th consecutive year of revenue MARKET THQ growth. We posted record net sales of more than $1 billion, Source: The NPD Group, Inc., UK Chart Track and GfK up 27% from fi scal 2006, and we signifi cantly outperformed the market in our major territories. We also achieved substantial operating leverage in fi scal Global Market Share Gains 2007. We doubled our non-GAAP operating margin to 10%, In fi scal 2007, our diverse product portfolio and platform already achieving our peak margin from the last cycle. strategies drove THQ’s share gains in each of our major Moreover, our fi scal 2007 earnings per diluted share more markets: North America, Europe and Australia/New Zealand. than doubled from a year ago. We grew revenue in North America 23% compared with THQ INC. PG.1 IInd03E_THQ_AR2_InsPgs.inddnd03E_THQ_AR2_InsPgs.indd Sec1:1Sec1:1 66/8/07/8/07 110:50:430:50:43 PMPM industry growth of 13% in the US. Our revenue from Pixar videogame to date. We shipped more than four million Europe climbed 35% versus 11% market growth in the units of WWE ® SmackDown ® vs. Raw ® videogames and major European territories and our Asia-Pacifi c revenue four million units of our new Nickelodeon titles combined. increased 31% compared to 4% market growth in Australia/ In the growing market of games aimed at girls, we shipped New Zealand, our primary Asia-Pacifi c market. more than 1.5 million units of our Bratz ™ title. Our global product portfolio and expanding marketing and Life-to-date shipments now stand in excess of 30 million sales footprint drove THQ’s international revenue increase units for each of our Disney•Pixar, Nickelodeon and WWE to $427 million, or 42% of total revenue, up from $317 franchises, and shipments of Bratz have now exceeded million and 39% of total revenue in fi scal 2006. In fi scal three million units life-to-date. 2007, we opened new offi ces in Italy, Mexico and Switzerland. In fi scal 2008, we expect continued growth in our international In fi scal 2007, THQ added to this foundation of strong revenue, which will help drive operating leverage as we ship licensed brands by securing the exclusive global more units of each title. rights to publish games based on the Ultimate Fighting Championship. The UFC is one of the fastest-growing sports targeting the coveted 18–34 male demographic. We look forward to continuing to build on our solid INCREASING INTERNATIONAL REVENUE foundation of both owned and licensed franchises to INTERNATIONAL REVENUE - ABSOLUTE DOLLARS AND AS PERCENT OF TOTAL THQ REVENUE support our future growth. And although we believe we have one of the strongest $500 portfolios of licensed franchises, over time we expect $400 42% revenue from owned intellectual properties to increase at 39% a faster rate than from our licensed properties. We are $300 38% currently targeting about one third of revenues from $200 29% $ Millions owned properties in fi scal 2008, up from 20% in fi scal 2007. $100 % of total revenue $0 FY 04 FY 05 FY 06 FY 07 Source: THQ A FOCUS ON GROWING OWNED IP THQ REVENUE MIX % O Owned and Licensed Franchises to Support Future Growth 7 W % 6 0 O N 8 W P E I 2 We’ve built a solid foundation of both owned and licensed P D N I FY07 0 FY08E D E I % D D P E E $1.0B $1.1B S I franchises. In fi scal 2007 we successfully launched new S 3 P N 3 N E E % C C I I L owned and internally developed titles Saints Row and L Company of Heroes. We now have six owned and internally developed franchises that have exceeded the one-million- unit shipment threshold. LICENSED IP OWNED IP THQ also grew revenue from our proven licensed franchises. Source: THQ In fi scal 2007, we shipped nearly eight million units of games based on Disney•Pixar’s Cars, making it the fastest-selling PG.2 THQ INC. IInd03E_THQ_AR2_InsPgs.inddnd03E_THQ_AR2_InsPgs.indd Sec1:2Sec1:2 66/8/07/8/07 110:50:550:50:55 PMPM Increasing Internal Development PlayStation® 3 and PC platforms.