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THQ, Inc. (THQI)

F3Q07 Earnings Call

February 02, 2007 11 am ET

Executives

Julie MacMedan - Director of IR

Brian Farrell - Chairman, President & CEO

Ed Zinser - EVP & CFO

Analysts

Heath Terry - Credit Suisse

Colin Sebastian - Lazard Capital Markets

Justin Post - Merrill Lynch

Edward Williams - BMO Capital Markets

Evan Wilson - Pacific Crest Securities

Michael Savner - Banc of America Securities

John McPeake - Prudential

Tony Gikas - Piper Jaffray

Arvind Bhatia - Sterne Agee

John Taylor - Arcadia Investment

Todd Greenwald - Nollenberger

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the THQ 2007 third quarter earnings conference call. [Operator Instructions] As a reminder this conference is being recorded for replay purposes.

At this time I would now turn the presentation over to Ms. Julie MacMedan, Director of Investor Relations. Please proceed, ma'am.

Julie MacMedan

Thank you. Good morning, everyone. On today's call management will make forward-looking statements and projections regarding our expectations, estimates, and predictions of the future. These statements about our business are based in part on assumptions made by management and are not guarantees of future performance. Therefore, actual results may differ materially from today's forward-looking statements. Due to the risk factors that are described in our March 31, 2006, Form 10-KA. A copy of this filing may be obtained from our website.

In describing THQ's financial performance, we will discuss non-GAAP measures. Please refer to the reconciliation of these measures to GAAP results in the tables provided in today's results release. In addition, please note that comparisons to prior-year periods reflect restated fiscal 2006 results due to the stock option grant review. Finally, any market share data mentioned in our remarks was obtained from MPD Group, UK Chart-Track, and GFK.

On today's call Brian Farrell, THQ's President and Chief Executive Officer will review our recent accomplishments and will then turn the call over to Ed Zinser, our Chief Financial Officer, who will discuss THQ's financial results for our fiscal 2007 third quarter, our guidance for the remainder of fiscal 2007, and our guidance for fiscal 2008. Ed will also provide our calendar 2007 market growth and hardware platform assumptions. Brian will then close with a discussion of our plans for fiscal 2008 and long-term growth. We will then conduct a question-and-answer session following prepared remarks.

I would now like to introduce Brian Farrell, our President and Chief Executive Officer. Brian?

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Brian Farrell

Thank you, Julie, and good morning, everyone. We're obviously pleased with our record sales and net income for the third quarter of fiscal 2007. With our strong third quarter, we now expect to post our 12th consecutive year of revenue growth with net sales of $1 billion this fiscal year, up 24% from fiscal 2006, clearly outperforming the market in our major territories.

We are achieving significant leverage in fiscal 2007. Our expected operating margin of approximately 10% is more than double last fiscal year. We achieved this higher margin while continuing to make investments in our studio system and a growing pipeline of Next Generation titles.

As Ed will cover in more detail, we expect to report fiscal 2007 earnings per share of $1.23, excluding $0.23 per share in stock-based compensation expense. Our company's financial position has never been stronger as we continue to execute on our planned growth over the video game cycle. At December 31, 2006, we had $6 per share in cash and our stockholder's equity was $735 million.

Executing on our long-term strategy allowed us to make the right products on the right platforms at the right time. During the quarter, we shipped nearly 4 million units of WWE SmackDown versus Raw up from 3 million units a year ago based on the strength of the PS2 product and the addition of an Xbox 360 SKU. We also shipped more than 3 million units of Cars this holiday, including a new Nintendo Wii and Xbox 360 SKU. Cars video games have now surpassed 7 million units shipped, becoming the fastest selling Pixar title to date.

During the holiday quarter, we also shipped more than 1 million units each of Avatar and SpongeBob from our Nickelodeon franchise, with both launching on the Nintendo Wii platform. In calendar 2006, THQ grew market share in each of our major markets. In the US, we were the number three independent publisher. Our US sales grew 19%, more than three times the industry growth rate. And we successfully migrated our number one position on GameBoy Advance to the DS platform.

In the UK, we were the number two publisher up from number four a year ago as we grew our UK sales 24% compared with 1% growth for the market. We also gained share in all other major markets, including Australia, France, and Spain. Our share gains reflect THQ's increasingly global portfolio and expanded direct sales presence around the world. We recently opened direct sales operations in Zurich, Switzerland, and Milan, Italy, bringing our total number of direct sales locations outside of the US to 13.

We are also expanding our studio system with the recent acquisition of Mass Media, we now have more than 1400 people and 16 studios, up from 1100 people a year ago. Our focus on product quality is evidenced by 11 award nominations from the Academy of Interactive Arts and Sciences. Importantly, our studio system delivered two new owned intellectual properties in fiscal 2007, Saints Row and Company of Heroes. Saints Row was the top new original IP from an independent publisher on the Xbox 360 in 2006. To date, we have shipped more than 1.3 million units of Saints Row on Xbox 360 alone. We recently announced the PS3 version of this game scheduled for the spring and we look forward to building on the Saints Row franchise for many years to come.

Our Relic Studio was named PC developer of the year and Company of Heroes was named best PC game of the year. THQ has six owned internally-developed franchises with 1 million unit pedigrees. In addition to creating new intellectual properties, our studio system is aggressively managing costs by sharing tools, technologies, and assets as well as outsourcing through our XDG Group. Building our base of big license franchises, we recently announced the exclusive global rights to publish games based on the Ultimate Fighting Championship through 2011. The UFC is one of the fastest growing sports leagues, targeting the coveted 18 to 34 male demographic.

A few days ago, we announced the appointment of Gary Rieschel to our Board. Based in Shanghai, Gary brings 25 years of operating and investing experience in the tech industry to THQ. We look forward to leveraging his expertise as we continue to expand in Asia. Before I turn the call over to Ed to review our financials, a few weeks ago we reported that a Special Committee of our Board completed its investigation of our stock option grant practices. As we anticipated, the Committee found no fraud or misconduct by any person with respect to the Company's historical stock option grant practices. Ed?

Ed Zinser

Thank you, Brian, and good morning. Today I'll review our Q3 financial results and provide guidance for the upcoming March quarter and the full-year outlook for fiscal 2007. In addition, I'll provide our calendar 2007 market assumptions and financial guidance for fiscal 2008. THQ's financial results will include stock-based compensation expense and the adoption of FAS 123R.

As I discuss our financial performance in more detail, I'll use the non-GAAP numbers, which give the true apples to apples comparison versus prior-year line items. Net sales for the third quarter of fiscal 2007 were $476 million, consistent with our January 11, announcement and ahead of the guidance range of 400 to $425 million on our last call. This represents 33% growth versus the prior-year quarter.

We reported non-GAAP net earnings of $1 per share, which exceeded our January 11, announcement of $0.97 and the guidance range of $0.69 to $0.74 established on our last call. The $1 per share was $0.27 ahead of the prior-year quarter. Net sales in the third quarter were driven by WWE SmackDown versus Raw 2007, Cars, Nickelodeon's SpongeBob and Avatar, and Destroy All Humans! 2.

From a geographic perspective, all regions recorded significant double digit gains versus the prior-year quarter. North America was up 30%, Europe was up 39%, and Asia Pacific was up 25%. Gross margin for the quarter was 66%, up 118 basis points versus the prior-year quarter. The increase was due primarily to higher ASPs for the Xbox 360, Nintendo Wii and DS platforms, and premium price for the WWE on PS2.

License amortization and royalty costs of 10% of net sales decreased by 125 basis points compared to last year, due primarily to sales of owned intellectual properties, Destroy All Humans!, and Saints Row this year. Software development amortization of 15% increased compared to the prior year of 9%. This was primarily due to the higher cost Next Generation titles in the current quarter. Product development expenses of $20 million declined by $6 million versus the prior-year period as more of our titles have reached technical feasibility.

Selling and marketing expenses were 11% of net sales, down from 12% in the prior-year quarter. G&A expenses were $20.6 million, up from $14.5 million in the prior-year quarter. Legal and professional fees related to the SEC inquiry regarding stock option grants were the primary reason. The $2.1 million gain on sale of discontinued operations was from the sale of MINICK in December of 2006.

Net income for the third quarter was $68.1 million, or $1 per share, excluding stock-based compensation expense of $0.09 per share compared to net income of $47.8 million or $0.73 per share in the prior-year quarter. Our strong holiday lineup led by WWE and Cars drove our bottom line performance.

Now let's turn to the balance sheet. THQ ended the quarter were $407 million or $6 per diluted share in cash and short-term investments. This represents an increase of $36 million versus the March 31, 2006, balance, and an increase of $111 million versus the prior-year quarter end. Net accounts receivable of $181 million decreased from $188 million at December 31, 2005. Our day sales outstanding on a rolling 12-month basis were 66 days, which reflected sales timing in the quarter and international mix. This decrease from 83 days in the prior-year period due primarily to payment terms reductions in North America.

Accounts receivable reserves were $112 million at quarter end, up from the $80 million balance at December 31, 2005. The coverage on a trailing nine months of net sales basis was 10% versus 9% for the prior-year quarter end. Inventory was $46 million, an increase from $42 million at September 30, 2006, and up from the $31 million balance at the prior-year quarter end due to growth in the business. On a rolling 12-month basis, inventory turns were 9 versus 10 a year ago.

Our investment in licenses of $88 million decreased from $105 million at September 30, 2006. The reduction in the quarter was primarily from amortization of Nickelodeon titles, which shipped this quarter. Capitalized software development decreased to $129 million at quarter end, down from $145 million at September 30, 2006, due primarily to the amortization of WWE SmackDown versus Raw 2007, Destroy All Humans! 2, and Company of Heroes in the quarter.

As expected, our investment has grown versus the prior-year balance of $96 million to support future Next Generation titles. The prepaid expense and other current asset increases were primarily for product-related payments in both the international territories and in North America. Property and equipment of $43 million was up $5 million from the March 31, 2006, balance due primarily to development kits, facilities, and business system software.

Total current liabilities were $251 million, up from the March 31, 2006, balance of $149 million. The increase was primarily due to vendor payments for manufactured products, product development, and amounts due our joint venture that have been accrued at the old payment rate. Until a new rate is determined, which we expect to be lower, this accrued balance will grow as it will remain unpaid.

The Company's current ratio is 3.3 to 1 with working capital of $575 million, up from $460 million a year ago. On a rolling 12-month basis, operating cash flow was $112 million versus $64 million in the corresponding prior-year period. Higher net income and improved use of working capital were the key drivers of the increase. Return of on invested capital on a rolling 12-month bases was 20% versus 16% in the prior-year period. We had no borrowings at quarter end and total stockholder's equity was $735 million. That concludes the financial discussion for the third quarter of fiscal 2007. Now we will turn to THQ's projections for the fourth quarter and full-year fiscal 2007.

For the fourth quarter of fiscal 2007, our projections remain unchanged from our January 11, announcement. We are projecting approximately $146 million in net revenue with a profit of approximately $0.14 per share. Our fourth quarter results are expected to be driven by Supreme Commander and STALKER, both on PC, continued sales of Cars and WWE and our back catalog. For the full year, fiscal 2007, our revenue guidance is approximately $1 billion, which reflects our better than projected results in the third quarter. Our full-year EPS is projected at approximately $1.23 per share, which is more than double the net income of $0.55 per share in the prior year on 24% higher revenues.

Before I discuss our initial guidance for fiscal year 2008, I would like to review some of our market assumptions. There are many variables impacting our industry this year that make it challenging to predict market performance this early in the year. Nonetheless, our initial expectations for calendar 2007 offer software dollar growth for North America and Europe of 12 to 15%. As the year unfolds, we will update you based upon market trends and conditions. We expect that select titles on Next Generation platforms will continue to achieve a premium price.

Our unit hardware forecasts in North America for each platform are as follows. Xbox 360, 5 to 5.5 million units; Nintendo Wii, 5 to 5.5 million; PS3, 3.5 to 4 million; PlayStation 2, 3.5 to 4 million; DS, 7 to 7.5 million, and PSP 3 to 3.5 million. In Europe and the other PAL territories our forecast for each platform are as follows. Xbox 360, 2.5 to 3 million; Nintendo Wii, 3.5 to 4 million; PS3, 3.5 to 4 million; PlayStation 2, 2.5 to 3 million; DS, 5.5 to 6 million; and PSP, 2.5 to 3 million. On a worldwide basis we expect minimal shipments of Xbox, GameCube, and GBA.

Turning to THQ's fiscal year 2008, our sales and profit projections reflect healthy software growth, yet take into account the uncertainties of Next Generation console installed base growth. We are projecting net revenue of approximately 1.12 to 1.15 billion, which is 12 to 15% growth versus the fiscal 2007 projection. As Brian will discuss, our revenue will be driven by a strong product line up, which includes a well-balanced mix of new and sequeled owned intellectual properties and new releases with our partners Disney-Pixar, the WWE, and Nickelodeon.

From a geographic perspective, approximately 43% of our revenue is expected to come from international, up from 41% this fiscal year. By platform, revenue is expected to be driven by Next Generation consoles of approximately 50%; PS2, of 15 to 20%; handhelds of 20 to 25%; and PC and other of approximately 10%. Net income is projected at $1.34 to $1.44 per share excluding the impact of stock-based compensation expense of $0.23 per share.

Our title count is essentially flat versus the fiscal 2007 projection. Our SKU count is expected to increase to approximately 80 from 66 this year to support multiple platforms per title. Catalog is planned at approximately 20% of the sales mix comparable to the fiscal 2007 projection. Wireless net revenues are expected to show growth of approximately 45% to almost 30 million as we execute against a product strategy, which leverages THQ's strong portfolio of owned and licensed properties. This excludes the impact of MINICK, which was sold in December 2006.

Turning to the expected full-year income statement next year, we expect gross margins to improve versus the fiscal 2007 level due primarily to pricing from the greater mix of next generation console titles. License amortization and royalties should decrease in fiscal 2008, reflecting the 40% revenue mix from owned intellectual properties versus 20% this fiscal year.

Our product creation costs, which include both software amortization and product development expense, are expected to increase as a percent of sales. We anticipate marketing and selling expenses to increase in fiscal year 2008 as a percent of net sales as we launch new intellectual properties and spend to fully support new titles based upon our owned and licensed properties. Our G&A is expected to decrease as a percent of net sales.

As a result our operating margin is expected to improve to approximately 11% of net sales. Our effective tax rate for 2008 is planned at 30%. This is subject to change due to geographical profit, mix, and other factors. The fully diluted share count was planned at a little under $71 million.

In summary, in fiscal year 2008, we plan to generate approximately 1.12 to $1.15 billion in net revenue with a bottom line of $1.34 to $1.44 per share, excluding stock-based compensation expense of $0.23 per share.

I would now like to turn the call back to Brian.

Brian Farrell

Thank you, Ed. In fiscal 2008, we plan to continue to execute our successful platform strategy with the right products on the right systems at the right time. And we'll continue to deliver on our content strategy, releasing games based on our three big license brands as well as our growing portfolio of owned franchises. Our fiscal 2008 growth will be driven primarily by increased sales of proven owned intellectual properties, a cornerstone of our strategy.

Our newest original property, Frontline's Fuel of War is already garnering significant critical acclaim from the press. In addition to Frontlines, we also plan to launch sequels to proven million-unit franchises. With Stuntman Ignition, we are bringing a brand which sold more than 1.5 million units on PS2 alone to Next Generation platforms. And we've add the hot import, Knight's Brand to our Juiced title, which has shipped more than 2 million units live to date. We also plan to publish a sequel to our MX franchise, which is the number one off-road series with 4 million units shipped live to date. Obviously, these games represent incremental growth in fiscal 2008.

Earlier this week, we announced that Saints Row is coming to PS3 in Q1 of fiscal 2008. Saints Row was the first open world action title on the Xbox 360 platform and will be the first open world action title on the PS3. We think you'll share our enthusiasm for all of these titles when we demonstrate them at our March 2, investor day event in San Francisco. We intend to make more product announcements in the coming months.

In addition to our lineup of owned intellectual properties, we also intend to build on our licensed franchises next year. We plan to once again deliver a great lineup of WWE, Pixar, and Nickelodeon titles. For WWE, we plan to add a PS3, Wii, and DS SKU to the Xbox 360, PS2, and PSP platforms. For Pixar, we plan to publish games based on the highly anticipated film, Ratatouille across all platforms, including wireless.

Like Cars, the film is scheduled to launch in North America in June followed by a rolling launch throughout the fall in Europe and Asia Pacific. Pixar Films set the standard for great animation and story-telling. Congratulations to our friends at Pixar and Disney for Cars numerous awards, including the recent Golden Globe Best Animated Picture award.

In addition to Ratatouille, we plan to launch a sequel to Cars at holiday. Our partners at Disney and Pixar believe that Cars has the potential to be a long-term franchise and we are working closely with them on building this brand. We believe that Ratatouille, Cars II, and a growing Pixar catalog will show a strong year-over-year comparison for the Pixar franchise as a whole. We also expect strong sales from our Nickelodeon lineup led by Avatar and NickTunes. And we plan to continue to release games based on our Bratz license which has shipped more than 3 million units to date.

Our product portfolio has always aligned well with Nintendo's platforms. Similar to our successful migration of GBA sales to the DS platform, we expect to grow our share on the Wii as we migrate our number one Game Cube independent market share to that platform. We currently have 11 Wii titles scheduled for release in fiscal 2008. Consistent with our strategy to exploit new revenue streams, we plan to offer microtransactions and in-game advertising in at least four titles in fiscal 2008, including Juiced, MX, and Stuntman. We expect revenue from in-game ads and microtransactions of approximately $5 million in fiscal 2008. And as Ed mentioned, we expect our wireless revenues to grow about 45% next year.

In summary, our fiscal 2008 lineup is comprised primarily of proven original and licensed franchises with a select number of targeted new introductions. We've just provided you with a road map to our fiscal 2008 expected strategies and results. When you think about fiscal 2009 and beyond, there are three important takeaways we would like to leave you with.

One, THQ has established six owned franchises which have reached the million-unit mark and our pipeline is growing.

Two, our long-term license franchises, the WWE, Pixar, and Nickelodeon, have each shipped 30 million units.

And three, we are exploiting new revenue opportunities such as microtransactions and in-game advertising and we continue to expand our global footprint. As a result, we believe that we can grow revenue at or above the market and improve operating margins each year. We now look forward to responding to your questions.

Operator, please open up the call for questions.

Question-and-Answer-Session

Operator

[Operator Instructions]

Your first question comes from the line of Heath Terry with Credit Suisse.

Heath Terry - Credit Suisse

Brian, you mentioned expecting $5 million in incremental advertising revenues in 2008. Can you talk about how that's going to come across which products you're expecting? For comparison purposes, EA has talked about generating $5 million just on Need for Speed in one quarter. So is that a conservative -- it sounds like a really conservative number given the success you guys have had with some of your franchises that could support in-game advertising?

Brian Farrell

Well, the $5 million is what we expect today. As you know, Heath, this is a growing market. We have placed ads now in MX, Juiced, Stuntman, and at least one other franchise. So that's the only four franchises we've talked about so far. It's certainly possible that that number could grow. It is a growing market, as I just mentioned, but for right now our best estimate is $5 million. But I would not surprised to see that number go up.

Heath Terry - Credit Suisse

Great, thank you.

Operator

And our next question comes from the line of Colin Sebastian with Lazard Capital Markets. Please proceed.

Colin Sebastian - Lazard Capital Markets

Thanks. And congratulations on the quarter. A couple of quick questions. I'm just curious, number one, how pleased you are with the Wii software sales, or do you think this is a platform where first party titles might dominate once again, like they did in the Game Cube? And then secondly, in terms of your industry model, are you assuming any hardware price cuts there?

Brian Farrell

First of all, with respect to the Wii, yes, we're very pleased with the way the Wii has gone on a number of levels. Obviously hardware has had great momentum. The software has been very pleasing to us on a number of levels. But it's very typical of a launch.

We've seen more of a trend toward the early adopter early on and we think based on Nintendo's strength with the family in mass market is really good for us. If you look back over the last 10 or 15 years, share gains for Nintendo have been good for THQ.

So we're very bullish both on the Wii and the DS and we think our product line maps very, very well to both of those platforms. We intend to have very strong market shares on both those two growing platforms.

Ed Zinser

And the second part of your question, as far as hardware price cuts, our numbers right now, your best bet really is to talk to the hardware manufacturers. But in terms of the assumptions that we have, we're not really planning on anything at this time.

Colin Sebastian - Lazard Capital Markets

Okay. Lastly, if I may, on Ratatouille, just wondering if you can comment at least relative to Cars, what you think the potential for that franchise is for this year? Thank you very much.

Brian Farrell

Well, as we said in our prepared remarks, Cars is the fastest-selling Pixar title ever. Based on that and the fact that Ratatouille is launching in a very crowded competitive window, we have not planned Ratatouille at the level of Cars.

I think we've said that a number of times. But what we have said, also, is between Ratatouille, Cars II, and the Pixar catalog, the strong Pixar catalog that we've established now, we think the overall Pixar franchise will grow next year but that Ratatouille probably won't comp with Cars. That's our best estimate.

Operator

And with Merrill Lynch, you have a question from the line of Justin Post.

Justin Post - Merrill Lynch

Brian, just taken as a whole, as you look at Wii, Playstation 3, and the Xbox 360, how has the Next Gen console hardware done relative to the last cycle? Do you think we're ahead of last cycle's pace or inline and how does the PlayStation 2 strength play into that?

Brian Farrell

Well, I think the one very strong difference we have this cycle is the different price points. As you know, the PlayStation 3 is at $599, the 360 is at $399, and you've got the Wii at $249.

So I think the dynamic you're seeing so far is the Wii has had more momentum being at the lower price point, and I think the 360 and the PS3, they've performed to our expectations. I would like to focus everyone on the fact that Sony said that the PS3 actually sold more units between launch and the end of the year than the PS2 did in a similar time frame.

So I think once again expectations got a little ahead of themselves. It is early in the cycle. These are key strategic areas to all three hardware manufacturers. I think that's something we need to keep a focus on. They will do what they need to do to gain market share and drive the hardware.

The other thing I would say, is we've seen a lot of evidence the Wii is expanding the market. That's something that we're pretty bullish on. They seem to be testing very well against women and people who do not normally play games, which was a big part of their strategy. If the Wii can in fact expand the market, I think that's a positive for everyone. So I think it's very much aligned with our expectations on a number of levels. So we're looking forward to the knockdown drag out among these guys over the next five to six years.

Justin Post - Merrill Lynch

Okay. Could you talk a little bit about the strength of the WWE? It's been able to, as far as I can tell, hold $50 pricing. Are you seeing still reorders? Is that part of your guidance for this quarter?

Brian Farrell

I'll let Ed speak to how much a part of the guidance it is. But, yes, it's a great franchise and it's a very strong brand, as you know. But once again, I've got to credit our development and marketing teams, we executed flawlessly on this one. We brought several highly-rated products to market, marketed them very effectively around the world. We're seeing some good strength in the WWE brand overseas. It's a very strong brand and I think we're executing flawlessly on it.

Ed Zinser

In terms of our sales for the fourth quarter, yes, that's expected to continue to sell well in the fourth quarter. Of our top four titles being Supreme Commander and STALKER, which we've talked about, as well as continued sales of Cars, WWE is one of those for the fourth quarter.

Justin Post - Merrill Lynch

Any conflicts with the UFC getting that brand on to THQ as well?

Brian Farrell

No, we actually see those brands as highly complementary. The UFC, as you might know, the age demographic is slightly older than the WWE. Rather than the WWE with all of our story mode that we have in the game, the UFC being mixed martial arts is more of a sport.

So those products will be positioned very, very differently in the marketplace. We see them as quite complementary and the fact that we have both of those key brands that can be positioned very differently, we think is a very strong advantage for us.

Justin Post - Merrill Lynch

Okay. Last question, I know Saints Row is one of the six, but could you just list out the six franchise brands you referred to, just so we can have them right in a row.

Brian Farrell

Right. So as you mentioned, Saints Row, Stuntman, which will be released this year, Juiced, which is the sequel to a product we launched a couple years ago, Destroy All Humans!, MX, and my favorite, Red Faction.

Justin Post - Merrill Lynch

Thank you.

Operator

From the line of BMO Capital Markets with the next question, we have Edward Williams. Please proceed.

Edward Williams - BMO Capital Markets

Good morning, guys. Just to a follow-up a little bit on the UFC question, when will we see the first game from it, and any ideas as to where the development from the title is going to come from, whether it's an internal studio or a partially-owned studio.

Brian Farrell

As you know, we just landed the license, Edward, we're in the game design stage right now. We do not expect the title to come in fiscal '08 just because our intention here is to build as we have with the WWE a long-term franchise with very high-quality products and we're not prepared at this time to discuss the developer.

Edward Williams - BMO Capital Markets

Okay. Then if we could, Ed, just to take a quick look at the cash spent on investigating the options. Can you give us an idea as to how much your G&A was affected by the option investigation?

Ed Zinser

Sure. The total spend between legal and professional fees was a little over $5 million, most of which hit in the third quarter.

Edward Williams - BMO Capital Markets

Okay. Then as far as the $5 million, Brian, that you alluded to in the in-game ads and microtransactions, I'm assuming this is a figure net of whatever Microsoft or the hardware company may collect on the ad side of it. So is there any other expense or material expense associated against that $5 million, or should we think of that as being a revenue plus a pretax number?

Brian Farrell

For the most part, you should think of that as a revenue and pretax number. There's not much expense associated with particularly in-game advertising. The $5 million we talked about, that's primarily in-game advertising. We do record it net of any outside fees or deductions, including Microsoft or the third party provider. It is a net number.

With respect to some of the microtransactions, as you might know, there are some marginal costs or can be some marginal costs in bringing those to market, but you should think of most of that $5 million as being net incremental.

Edward Williams - BMO Capital Markets

Okay. And then if we're kind of looking at this to -- when do you think we'll be able to identify what that number could be on a going-forward basis? If you were to sell 3 million copies of a WWE title on a going-forward basis, how much incremental revenue could you get from microtransactions and in-game ads?

Is it something you'll be able to answer in calendar '07, or will we have to wait until calendar '08 before we'll have enough data to try and answer that?

Brian Farrell

I think you make a good point. We run a ton of models here, but the answer is these are both -- both the in-game advertising and microtransactions are new and growing markets and we have a pretty wide range of estimates and we could throw some numbers out there, but I'd rather not do that. Let's watch it.

What we wanted to communicate is, we're out there in these markets, our titles are garnering significant attention from the in-game advertisers based on the demographics they speak to. We're very bullish, we've become increasingly bullish on the in-game advertising market as we talked about on our last call. How high can it get, how fast will it get there? We can debate that for a while, but the key takeaway is this is something we're working very seriously on and we think it's going to be a growing business for us.

Edward Williams - BMO Capital Markets

Okay. My last question for you is the -- what do you think is the sustainability of the $60 price point for premium software in this platform cycles? Something that you think will extend beyond calendar '07 or is calendar '07, in your view, the last year that we see that level of pricing?

Brian Farrell

We think it's sustainable. There's a lot of pros and cons in this side of the argument, Edward, but we do think it's sustainable for a number of reasons. If you go back, unfortunately as I do, back to even the 8 bit software days, there was software at $59 back when the hardware was even much cheaper and the games were nowhere as near as complex as they are now. The other datapoint that would support that is the very, very high tie ratio on the Xbox 360 with the $59 price point.

So the takeaway is if you deliver compelling content, if you really do deliver a premium game, the consumer is willing to pay that price. That's our view looking forward as to why that price point should hold for the foreseeable future. Obviously at some point when you have 5 to 10, or 5 to 10s of millions of units of hardware out there, at some point you do the economic analysis, as we've always done, do you sell more units at a lower price point, and therefore is there a crossover later in the cycle? That's really the question we're going to answer, but I think that's a couple years out.

Edward Williams - BMO Capital Markets

Okay. Thank you very much.

Operator

Our next question comes from the line of Evan Wilson representing Pacific Crest Securities. Please proceed.

Evan Wilson - Pacific Crest Securities

Hi. Thanks for taking the question. Was hoping you could comment on the linearity of fiscal 2008. You've given us some guidance, but last year e got, I think the caught, the Street got caught in general with the first fiscal quarter with Cars coming out, still didn't contribute a lot of revenue because how that was recognized throughout the year. Can you talk about how you expect that revenue to roll through the year?

Second question would be, I know you're not going to announce any new titles on the call today, but can you give us a number of idea on the number of SKUs that are in guidance that you haven't yet announced what properties they are?

Brian Farrell

Okay, sure. As far as our revenue by quarter, what we'll actually, Evan, as you know, on our next call, we'll give guidance for Q1 and we'll also give a range of revenue by quarter for the full year.

I think at this point I can certainly say that our first quarter is planned to be light. When you consider that in comparison to last year, which was also a very light first quarter. You'll see a little bit stronger fourth quarter in fiscal 8 than you did in fiscal 7. Like I said, we'll give a lot more visibility on our next call as far as a breakout by quarter.

Ed Zinser

As far as our SKU count, as I mentioned in the prepared remarks, this year we were at about 66 or so SKUs and again a SKU being a title platform combination. Next year we're looking at approximately 80, which will be spread across the year obviously, a little more heavily weighted in the second and third quarters. With a fairly flat title count which runs in the 25 to 30 range. Pretty consistent with fiscal 7.

Evan Wilson - Pacific Crest Securities

Of the titles that you haven't made an announcement of yet, how many are -- are there a significant number of those properties that you still have not announced, or are we talking about like one or two?

Ed Zinser

There's -- in terms of new properties, there are certainly a couple that we have not talked about. There's a number of other properties that are not necessarily new original ones that we haven't discussed either. I think Brian gave a fair amount of visibility on the call to a lot of our 2008 lineup.

We're certainly not going to give everything, but in terms of our three big franchises, in terms of the WWE and Cars and the platforms, and so forth, I think we've given a lot of visibility there. But as far as any specific additional titles, we'll give more visibility as the year unfolds.

Evan Wilson - Pacific Crest Securities

Great. With the acquisition of Mass Media today, they have an undisclosed Next Gen title in development. Is that a product planned for fiscal 2008?

Brian Farrell

The way to think about Mass Media, is they're a real high technology shop. We love their cross platform development tools and so I wouldn't necessarily think of them as a product shop that actually is going to produce an individual game.

They're a technology shop that we think is going to be a great enabler for our PS3 cross platform development tools. That was the real key strategic thinking behind the acquisition of Mass Media.

Evan Wilson - Pacific Crest Securities

Great. Thanks very much.

Operator

And from the line of Banc of America Securities with the next question we have Michael Savner.

Michael Savner - Banc of America Securities

Hi, good morning. Thanks. I would just actually like to follow-up on that last question. That focused a lot on the quantity of the SKUs and what hasn't been announced yet. My question then would be, you've talked for a long time about targeting 40% of revenue from owned IP.

So from a qualitative standpoint, the key franchises that we've already got visibility towards in fiscal '08, do you feel comfortable that those titles on their own get you most of the way to that target, or are you holding back some dry powder with some of the new franchises that you do think would be material contributors to get you to that number.

And then just one, second one, if that's all right. Maybe just a little bit more clarity on the software development, Ed, how we think about that both sequentially in the fourth quarter and into '08 given certainly there's still been a big ramp-up this quarter for the Next Gen. So just kind of how to think about that on an absolute dollar basis would be helpful? Thanks very much.

Brian Farrell

This is Brian, Michael. The way to think about our owned intellectual properties next year. Yes, between the titles we talked about in our prepared remarks, Juiced, Stuntman, Frontlines, and MX, that would be the lion's share of the products. Including, by the way, we said Saints Row PS3.

So that's the other one, I want to make sure that we understand that. Between those five titles, that would be the lion's share of what we're expecting to come from owned intellectual properties. But there are some announcements to come.

Ed Zinser

In terms of a way to think about our software costs, as I mentioned, you have to look at obviously two lines on our P&L. You have to look at our product development expense and then software amortization. The two of those combined, which are in the 25% of sales range are really what we spend on creating products each year, what we call product creation costs.

The product development expense tends to be a little more flat as you look to that by quarter. Tends to be fairly consistent quarter to quarter, much differently than obviously the amortization, which is much more a function of the dollars of amortization based on the revenue in the quarter.

So a way to think about it is when you combine the two, the full-year number is, as I mentioned on the call is going to be increasing as a total percent of net sales in '08 versus '07 and then you should obviously allocate that based upon the unit sales in each quarter. But the total number is obviously going to be up from the 25% or so that we spent in fiscal '07.

Michael Savner - Banc of America Securities

Very helpful. Thanks very much.

Operator

And representing Prudential, the next question comes from John McPeake. Please proceed, sir.

John McPeake - Prudential

Thank you. You had a very strong fiscal year '07. It seems like implicit in your industry software guidance and your fiscal year '08 guidance that you might grow towards the low end, although I don't have an exact comparer, because it's fiscal versus calendar, at the low end of your industry software guidance. I'm trying to get a sense as to whether you think that's just because your '07 was so strong, or you'd just rather be conservative given that we're early in the year?

Ed Zinser

Yes. I'm not quite sure I understand the low end part of your comment. We gave industry growth rates of North America and Europe about 12 to 15% and that's consistent with what we think our top line is going to grow of 12 to 15 and we've got a pretty solid product lineup that gets us into that range.

John McPeake - Prudential

For calendar '07?

Ed Zinser

I'm sorry? For?

John McPeake - Prudential

For calendar '07, you're going to grow at that rate?

Ed Zinser

Yes, for calendar '0 -- yes, for our fiscal '08, we've given revenue guidance of 12 to 15%. We've given calendar growth for '07 as 12 to 15%.

Brian Farrell

We just don't see much difference or lag in the three months differential between our fiscal and the year. So yes, just to short circuit it, John, we think in that time period the industry is going to grow about 12 to 15%, and that's how we targeted our growth rate.

What we're trying to say is we're not expecting to grow at the low or high end of any range. We think there's a good range of market growth, and that's where we've pegged our company growth.

John McPeake - Prudential

All right. Sorry for the misunderstanding on that one. And then just also on the PS3, we know about Saints Row, how many titles are you planning for the year for PS3?

Brian Farrell

We haven't said. What we have said with respect to our title counts for Next Gen hardware across the PS3, the 360, and the Wii, more than half of our revenue will be coming from those three platforms. Obviously the largest of those three will be the 360 based upon the larger install base.

John McPeake - Prudential

Okay, thanks.

Operator

And with Piper Jaffray, you have a question from the line of Tony Gikas. Please proceed, sir.

Tony Gikas - Piper Jaffray

Hi, guys. A couple of questions. What are the drive titles for the international side of the business? You indicated that we're going to see a greater percentage of sales next year coming from international. Second question, do you have a view or a feeling for what the tie ratios have been for the PS3 post-Christmas?

Brian Farrell

Let me take the first part of that question, Tony. When you look at our line-up for next year, if we talk about the key incremental growth titles, things like Juiced, it actually did more units outside the US on its first version, so we would certainly expect Juiced to continue that trend.

The Moto GP game has always performed better outside of North America. Stuntman is clearly a global brand. That one should perform very, very well outside the US as well. The Worms license, which is not a big brand, but it's been very strong for us in the European markets.

Those are probably the key differentiators between US and Europe. But that being said, remember, I think we're saying that international grows from about 41% of revenues to about 43, if my numbers are correct. And obviously the Pixar stuff does very, very well. And interestingly, the WWE continues to grow outside the US, which has been very positive both for them and for us.

Tony Gikas - Piper Jaffray

And then the tie ratios on the PS3?

Brian Farrell

The tie ratios on the PS3 seem to be improving. As you know, they were fairly light in the December quarter according to NPD. We haven't seen anything, obviously, other than anecdotally as we talk to our retail partners about the January time frame. But I think we had the eBay factor in the December quarter where people were buying it to resell rather than buying software. What we're hearing it's incrementally better, but I can't give you any numbers because I don't have anything that firm.

Tony Gikas - Piper Jaffray

Okay, thanks. Great job.

Brian Farrell

Thanks, Tony.

Ed Zinser

Thank you.

Operator

From the line of Sterne Agee with your next question, we have Arvind Bhatia.

Arvind Bhatia - Sterne Agee

Good morning, guys.

Brian Farrell

Good morning.

Arvind Bhatia - Sterne Agee

A couple of questions. First, not sure if I missed this, but what was the catalog for the quarter? And then my second question is, if you can shed some light on Saints Row on PlayStation 3. What sort of cost would go into that relative to the 360 version? And my last question is, if there is any progress on the arbitration situation with Jacks as far as the WWE product is concerned?

Ed Zinser

I'll take the first one, Arvind, I'll take the easy one and Brian can have the two hard ones. Our catalog in the third quarter was 15%, of sales.

Arvind Bhatia - Sterne Agee

Okay.

Brian Farrell

And then Ed, chime in if you can, but on the Saints Row PS3, yes, this is taking technology that we developed for the Saints Row on 360, so the cost to get it from 360 to PS3 is a fraction -- I think we heard on UB's call that they were saying 15%, I don't know if we have that sharp a pencil, but I think something in that range is probably not a bad guesstimate for getting one title from 360 to PS3 or vice versa. That's probably as good an estimate as anything. It's truly a fraction of the cost to develop.

As you might know, Arvind, the biggest costs on Next Gen are the creation of the art assets, which aren't readily transferable across the two platforms. It's just a programming environment that needs to change. So when you think about Saints Row PS3, the investment is a fraction of what we invested in the 360 version just because of our cross platform development tools.

There's really no update with respect to the Jack's thing. I think Ed said in his prepared calls -- or prepared remarks what we talked about on our last call which is the preferred return due to Jack's was supposed to have been settled by last July 1. The agreement provides for arbitration if there was no agreement. Since we don't know what number to pay Jack's, we are not paying them and we look forward to getting arbitration.

Arvind Bhatia - Sterne Agee

Okay. Last question, if I can, given the competitive holiday season coming up, are you doing anything different this year at all, or is this -- you've got a good line up and you'll just market it away and, just curious if there's anything different from your standpoint?

Brian Farrell

Well, look at what we've done over the last couple of years. We're mindful, as I'm sure all of you are as to the market potential for both the next Halo and the next Grand Theft Auto. And if you look at the way we've planned our lineup over the last couple of years, I think we've been very strategic as to when we placed our properties.

What we're going to do is, as we did in 2005 when both GTA and Halo were out, our lead properties in those -- in the time frames when those were in the market were things like WWE, Nickelodeon titles, Pixar titles, things that don't go directly head to head. And things like Frontlines, we'll strategically place that around Halo III.

So I think we're going to be -- when you look at when we plan our products to come out, I think we've planned them for windows of opportunity, just like we've done successfully with things like Destroy All Humans!, Juiced, and Saints Row in the past.

Arvind Bhatia - Sterne Agee

Great. Thank you.

Operator

And our next question comes from the line of John Taylor with Arcadia Investment. Please proceed.

John Taylor - Arcadia Investment

Hi. I've got a couple of questions as well. I wonder if you could look at your revenue in -- your expected revenue in a couple of ways. One is, give us a sense of how you're thinking, breaks down by format owner. Maybe next year, fiscal '08. Also interested if you could give us -- if you could break revenue into a couple of baskets by property.

You gave us the 40% for internal owned. I was wonder if you could give us maybe some ranges of what the Disney piece, Nick piece, WWE pieces might look like next year? That's one set of questions, maybe Brian.

And then the March 2, meeting you're going to have, are you likely at that point to show us any of the things you do have in your back pocket that are unannounced? Or are we likely not to get that on March 2. And then the third one is, I wonder if you could give us a guesstimate as to what you would have picked up in revenue had you been direct in the European offices last year or kind of how we should think about that incrementally?

Ed Zinser

As far as revenue and a couple ways to think about, I can give you maybe a little bit more insight into our '08 revenue plans, although we've given quite a bit of visibility, I think. With respect to the platforms, as I mentioned in my prepared remarks, the three Next Gen consoles will be a little over half of our revenue. That's the Wii, the 360, and the PS3, of course.

As far as our handhelds, they'll be about 20 to 25% of our revenue next year. PS2, about 15 to 20% and PC and other, about 10%. As far as internal as we said, yes, it will be a little over 40%. It's going to come from internal. If you look at the three key brands, our three key long-term brands, Disney, Pixar, Nick, and WWE, our revenue will cross those -- those properties are going to be somewhere in the 40% or so range as far as revenue mix next year.

John Taylor - Arcadia Investment

Okay. So on the -- I understand you gave it to us by generation. I guess what I'm looking for here is a sense of how important Nintendo is in your revenue mix, but just the Nintendo platforms, if I could narrow it that way?

Brian Farrell

Let me see if I could do it this way, JT. Just to add to what Ed said it. Of the roughly half of our revenue coming from Next Gen consoles, we think you'd weigh it a little more heavily to 360 for a couple of reasons. One, the bigger install base, both here and in Europe, and two, you have a higher price point.

At the $59 retail rather than the $49 retail. Wii, is probably, as you know, we talked about having 11 Wii titles for next year. We think -- we're -- Nintendo has always been a very, very strong platform for us. I think you should be thinking about Wii as incrementally more positive for us than PS3.

That being said again, there's a higher price point on PS3. I think you can kind of get a sense of where we're thinking there. On the handheld, clearly DS is the largest part. We're the number one independent publisher, as you know, on the DS. So on our handheld numbers that Ed gave you, you can think about a significant portion of those handheld numbers coming from the DS.

John Taylor - Arcadia Investment

Okay. Because I'm -- I think I -- in looking at the NPD numbers, you guys had -- do you know offhand what you had in terms of our Nintendo contribution last year as a percent of total? It looks like it was around 40%. I'm wondering if -- according to NPD and the US, right. So I'm wondering if that number is likely to go up north of 50, or -- can you give us any sense on that?

Brian Farrell

We have not cut it that way, but we can certainly talk about it. That's not something that we would be afraid to talk about. We think Nintendo is going to be a big part of our business next year and in the next several years.

John Taylor - Arcadia Investment

Okay. Sorry to belabor the point. How about that March 2, meeting?

Brian Farrell

I don't recall if we're going to show anything new there. It's going to be the titles we talked about. Some of you have seen something like Frontlines, which we think has an incredible potential.

We'll be showing all the products, we'll be showing Stuntman, we'll be showing Juiced, we'll be showing probably -- no MX, Julie? Okay. But we'll be showing a lion' share of the products we talked about on the call today to give you a sense of why we have such confidence in the line this year.

John Taylor - Arcadia Investment

Okay, great. Thank you.

Operator

We only have time for one more question. Your final question comes from the line of Todd Greenwald representing Nollenberger.

Todd Greenwald - Nollenberger

Good morning. Great quarter, guys.

Brian Farrell

Thank you.

Todd Greenwald - Nollenberger

Really, just one quick question about wireless. Just wanted a little bit more color there. Obviously pleased to see the 40, 45% growth forecast. Just wondering how much of that is based on industry growth? How much is your title lineup? What do you expect the overall market to grow at in '07?

Brian Farrell

We've not given an overall growth rate for the market in '07. The data is still all over the place, as you probably know, Todd. So -- but I think what's driving our business, certainly it will be driven in part by industry growth. The main addition is the fact under the new agreement with Disney and Pixar, we have rights to the film Ratatouille, which should be a big driver. Under our Star Wars license, we're going to be bringing Legos Star Wars.

As we talked about over the last couple of calls, we said we are going to be realigning our product line and I think we've made a lot of progress in that area. And I think that's what's going to be driving some of that growth as well. So, yes, we've -- I think in wireless, the takeaway is we've done what we said we were going to do, we've realigned the product line, we've got the expenses in line with the revenue, and now the challenge is, let's really drive those revenues.

Todd Greenwald - Nollenberger

Okay, great. Thank you.

Operator

Ladies and gentlemen, this now concludes the question-and-answer session. At this time, I will turn the call over to Ms. MacMedan for closing remarks.

Julie MacMedan

Thank you. And thank you for joining us today on our third quarter call. Please contact us via e-mail at investor info at THQ.com if you would like more information about the March 2, investor day in San Francisco. Thanks.

Operator

Thank you for your participation in today's conference. Ladies and gentlemen, this concludes the presentation. You may all disconnect and have a good day.

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