THQ Inc. Q1 2009 Earnings Call Transcript

| About: THQ, Inc. (THQIQ)

THQ Inc. (THQI) Q1 2009 Earnings Call July 30, 2008 12:00 PM ET


Julie MacMedan - Vice President of Investor Relations and Corporate Communications

Brian Farrell - President and Chief Executive Officer

Colin Slade - Executive Vice President and Chief Financial Officer


Ben Schachter - UBS Securities

Eric - Lehman Brother

Colin Sebastian - Lazard Capital

Brent Thill - Citi

Edward William - BMO Capital Markets

Tony Gikas - Piper Jaffray

Arvind Bhatia - Sterne Agee

John Taylor - Arcadia Investment Corp

Doug Creutz - Cowen & Company

Sean Lavin - Oppenheimer & Co.

Ralph Schachter - William Blair

Justin Post - Merrill Lynch

Todd Greenwald - Signal Hill Group


Good afternoon. My name is Jason and will be your conference operator today. At this time, I would like to welcome everyone to the THQ Inc. Fiscal 2009 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to Julie MacMedan, Vice President of Investor Relations and Corporate Communications. You may begin your conference.

Julie MacMedan - Vice President of Investor Relations and Corporate Communications

Thank you good afternoon everyone. On today’s call, our 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, 2008 Form 10-K. A copy of this filing may be obtained from our website. 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.

In describing THQ’s financial performance, we will discuss non-GAAP measures including net sales and EPS. Please refer to the reconciliation of these measures to GAAP results in the tables provided in today’s results release.

On today’s call Brian Farrell, THQ’s President and Chief Executive Officer will review our performance and key initiative and will then turn the call over to Colin Slade, our Executive Vice President and Chief Financial Officer who will discuss THQ’s results for our fiscal 2009 first quarter and our guidance for fiscal 2009. Brian will then provide closing remarks before we conduct a question-and-answer session.

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

Brian Farrell - President and Chief Executive Officer

Thank you, Julie, and good afternoon everyone. During the first quarter of fiscal 2009 THQ posted net sales of a $121 million and a net loss of $0.38 per share inline with our expectations. We also made progress on the three key initiatives we discussed on our recent calls. First, the introduction of a strong product slide in fiscal 2009. Second, the continued focus on product quality. And third, a realignment of our cost structure in order to create operating leverage. We believe we have a competitive product line in fiscal 2009. During this first quarter we ship more than 1 million units of games based on WALL-E and successfully launched our new wholly owned Wii title Big Beach Sports. We are also pleased with the continue strength of our WWE and MX versus ATV franchises.

We recently have the opportunity to show up several of our upcoming drive titles at the E3 Media and Business Summit and we are very pleased with the response to our games. Owned intellectual properties the Blob and Deadly Creatures will recognize these top Wii titles of the show based on their originality and innovation on the platform.

Other owned THQ titles that received a lot of attention at the show were Saints Row II and Red Faction Guerilla, as well as a new intellectual property Darksiders.. In addition Warhammer, 40,000, Dawn of War II for PC, the highly anticipated sequel in our Dawn of War franchise when accolades in the real time strategy category as well as broader PC platform phrase.

Our Trainee SmackDown vs. war franchise was formerly recognized once again for its strength but in the broader fighting games genre. Finally we were thrilled to see the UFC 2009 Undisputed win top awards in the general sports category. This new franchise represents a significant opportunity for THQ in early fiscal '10 and beyond.

In addition to the title we showed at E3 we have a solid fiscal 2009 Kids lineup. We plan to continue to ship WALL-E as the film rolls out around the globe. Our Nickelodeon lineup this holiday will be led by SpongeBob including SpongeBob Drawn to Life as well as Naked Brothers Band, Avatar and TAC. And we plan to launch games based on the Bratz Doll line for holiday.

In terms of our second initiative, product quality the awards are games 183 demonstrate the progress we have made in improving the quality and competitiveness of our games. As we discussed in our E3 Analyst Meeting, our new creative development group is focused on raising production values of THQ's drive titles. They are already making a difference on some fiscal 2009 releases including the de Blob, Deadly Creatures and Red Faction, Guerrilla. They are also playing an important role in the creative development of new projects for THQ several of which are already underdevelopment.

Also related to our product quality initiative, we made some decision related to the release timing for certain of our titles including drive title Saints Row 2 which was moved to the holiday quarter. While these decision result in a light fiscal 2009 first half, we believe we are focused on product quality and competitiveness will pay a long-term dividends for THQ, our customers and our stock holders.

Our third key initiative is to realign our cost structure so that we gain increased operating leverage while continuing to invest in profitable growth. we are taking a number of important steps in this area and Colin will speak to these in more detail in a few moments.

In summary during the first quarter, we achieved our financial targets and demonstrated progress on our three key initiatives. We continue to expect to deliver significantly improved revenue and profitability in fiscal 2009. However, due primarily to the timing of product shipments weighted heavily towards the second half, we are moderating our expectation for the second quarter and for full fiscal year.

With that, I will turn the call over to Colin to review our Q1 results and fiscal '09 forecast in more detail. Colin?

Colin Slade - Executive Vice President and Chief Financial Officer

Thanks Brian. Good afternoon to everyone. Today I will review our Q1 financial results, in addition I will provide guidance for the September quarter and updated guidance for fiscal 2009.

As I discuss our financial performance in more detail, I will use non-GAAP results, which are comparative to prior quarter's non-GAAP results. There will be three adjustments to GAAP reporting to get to non-GAAP reporting and one of the adjustments is new. First, non-GAAP results will exclude the impact of stock-based compensation expense and this is consistent with the prior quarter and prior year treatment.

Second, as I mentioned last quarter, we are deferring a portion of revenue and cost for GAAP reporting. For purposes of non-GAAP reporting, we will treat this revenue in the same way we have historically and we will not defer any portion of the revenue or related cost of sales.

Third, as I discussed last quarter we will exclude from non-GAAP reporting, the impact of business realignment charges associated with our cost structure realignment initiative.

As Brian mentioned our first quarter results were inline with our expectations. Net sales for the first quarter of fiscal 2009 were $121 million excluding the debt impact of deferred revenue. This represented 16% growth versus the prior year quarter and was consistent with our expectations.

Our top line growth was the result of both growth in catalog sales partly driven by continued strength of the WWE and MX versus ATV brands and the current quarter releases of WALL-E and Big Beach Sports.

Owned IP was up over 200% compared to the prior year quarter driven by Big Beach Sports, Battle of the Bands and the MX versus ATV brand. As we anticipated currency exchange rates increased during that sales during the quarter by $5.5 million or 5%.

Product costs at 46% of net sales were up 4.5 points versus the prior year quarter. This increase is primarily the result of a mix shift driven by increased sales of lower priced Wii titles in the current quarter. In addition to a lesser extent, we experienced a higher rate of sales returns and allowances and modestly higher product costs.

Softer amortization and royalties at 16% of net sales was 6 points above the prior year's quarter. First quarter. This was the result of broadly higher amortization rates across our product line largely due to higher development cost and lower than expected sales of Battle of the Bands. However, 16% of the rate is a little below our expectation for the year end, well below the rates experienced for the full fiscal year `08.

License amortization and gross cost of 11% of net sales decreased by about two points compared to the first quarter of the last fiscal year, due primarily to the greater mix of owned intellectual property this year. Nature partner was roughly flat at about 1% compared to the prior year quarter.

As a result of higher product cost and softer development amortization as a percent of net sales, the gross margin was 26% versus 34% in the prior year quarter. Product development expenses of $29 million were up $5 million compared to the prior year quarter. This increase is the result of increased product development activity to support future growth and the timing of the capitalization of cost. As a percent of net sales we expect product development to trend down during the future quarters. Selling and marketing expenses were $28 million or 23% of net sales, up from 21% in the prior year quarter. The increase reflects higher spending to introduce owned- IP and higher marketing cost to introduce new products in future quarters.

G&A expenses was $17.8 million up from $16.6 million in the prior year quarter but were down a point as a percent of net sales. Interest and other income for the quarter were 2.5 million down $4.9 million from the prior year quarter, primarily as a result of lower interest earnings driven by lower yield on lower average investment balances, and the absence of foreign exchange gains seen in the prior year.

Combined with the tax benefit of $14.1 million an income from discontinued operation and debt loss for the first quarter was $25.4 million or $0.38 per share. This compared with a net loss in last years first quarter of $6.2 million or $0.9 per share which included $0.10 per share onetime tax benefit.

In summary, sales upon $121 million were inline with our guidance and the loss per share was the positive and are guided to range.

Now lets turn to the balance sheet. THQ ended the quarter with $332 million or $4.98 per share in cash and investment, including $49 million in long term investments which I will discuss in a moment. This balance was down sequentially by $38 million in the prior quarter and primarily reflects the net use of cash to fund operation. Net accounts receivable of $37 million decreased from $113 million at the prior fiscal year end. The decrease is primarily due to lower net sales for the first quarter of fiscal year `09. DSO of 28 days was down sequentially from 47 days last quarter and down 4 days from 32 days at the end of the prior years Q1. The reduction in DSO was primarily due to the timing of sales and collections within the current quarter. Accounts receivables reserves were $96 million in quarter end. The coverage ratio was 10% flat with the prior fiscal year end and up from 7% in the prior year quarter end.

Inventory was $47 million, an increase from the $38 million at the prior fiscal year end primarily related to additional inventory for WALL-E in the UK which had a July 4 release date. Inventory returns were 10, down just one turn from last quarter.

Our investments in licenses was $107 million up from $87 million at the prior fiscal year end. This primarily reflects new licenses entered into during the quarter. Capitalized software development increased to $228 million at the end of the current quarter up from $181 million at the end of the prior fiscal year. This growth reflects the investment key titles including Saints Row II, Red Faction Guerrilla, Darksiders, Dawn of War and WWE SmackDown versus Raw 2009 and relatively modest amortization as a result of lower sales in the quarter.

Long term marketable securities were $49 million at the end of the quarter. As I discussed last quarter, this balance reflects auction rate securities, which we are now classifying as long term. Beginning in mid February, we have seen auctions for these securities fail in the ARS market due to the disruptions in the credit markets.

All of the securities are investment grade and we have no reason to believe that any of the underlying issuers of these securities are presently at risk or that the underlying credit quality of the assets backing these securities has been impacted by the reduced liquidity of these investments. However, because we are uncertain when liquidity will return to this market, we determine that we should reclassify these securities as long term.

Total current liabilities were $286 million, down a little from $299 million at the end of the prior fiscal year. The change is primarily due to the timing of trade accounts payable and other accruals as well as an increase for accrued royalties associated with new licenses entered into during the quarter.

Other long term liabilities were down $5 million from the prior fiscal year end to $40 million primarily reflecting payments to licensors. We had no borrowings at quarter-end and total stockholders’ equity was $723 million.

That concludes the financial results for the current quarter.

Turning now to our guidance for the rest of the year. For our fiscal second quarter, we expect net sales of approximately 160 to $170 million. The sales are low relative to our original expectations and largely reflect three factors. First, as you know we moved our drive title Saints Row II to Q3. Second, a smaller impact was our decision to move Destroy All Humans: Path Of The Furon and Bratz Girlz Really Rock to Q3. Finally, the quarter reflects modestly lower expectations for WALL-E.

The lower sales in the quarter are expected to produce a net loss of about $0.35 to $0.39 per share again on a non-GAAP basis. The loss per share in the second quarter reflects lower sales resulting from the move of the titles I just mentioned. While we have reduced expenses in response to the product moves, we will see significant increase over the first quarter in selling and marketing expense to support the product introductions in Q3. finally, we will see a smaller than usual tax benefit in Q2 as a result of the non-recurring tax item.

Based on our current projections, future quarters will show significant improvement in profitability as we will see nearly all of our major new products introduced in the second half.

Looking forward to THQ's fiscal year 2009, we now expect net revenue in the range of $1.150 billion to $1.175 billion. We are lowering guidance primarily to reflect a more conservative view of revenues and the timing of product shipments.

We are projecting an effective tax rate in the range of 34 to 35% and this is modestly lower than 37% we discussed last quarter. The change reflects a refinement of our estimates around expected credits and does not reflect anticipation of a renewal or retroactive application of a federal R&D tax credit.

Combined with an estimated 68.2 million average outstanding shares, we are now projecting earnings per diluted share in the range of $0.80 to $0.90 for the full year, again on a non-GAAP basis.

Now before I close, I would like to provide an update on our progress on our cost structure realignment initiative. As Brian mentioned, we have three key initiatives focused on driving shareholder value in fiscal year 2009. One of these initiatives is to realign our cost structure. There are several key elements of the cost structure realignment plan. First; we are undertaking a companywide plan to reduce infrastructure and overhead cost with the goal of improving efficiency and productivity. During the quarter, we formed a multifunctional team focused on driving cost reduction. It's a targeted effort with the full support of the executive team. We have already identified some significant potential savings and I am encouraged by our early progress.

Second, we are realigning resources in our studio system with the objective of achieving greater efficiency and focusing our resources on our most strategic franchises. We made progress on this initiative during the quarter with headcount and other cost reduction.

Third, we are implementing several new processes to ensure that both the product development and marketing dollars we spend are spent more efficiently by focusing the largest investments on the best opportunities. These new processes are up and operational.

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

Brian Farrell - President and Chief Executive Officer

Thank you, Colin. As I mentioned upfront, we are looking forward to a strong second half for THQ. We have a robust slide of key titles scheduled to launch in each of the next several quarters starting with de Blob in September, Saints Row 2 and WWE SmackDown vs. Raw 2009 in the holiday, Red Faction Guerrilla, Darksiders and WWE Legends in Q4 and UFC in Q1 of next fiscal year.

Longer term, our growth will be driven by our well balanced portfolio strategy, continued international expansion and emerging digital opportunities. We have a robust pipeline of both licensed and owned franchises. We are obviously excited about the potential to bring a new franchise with the launch of our first UFC games next spring. As many of you saw at E3, UFC 2009 Undisputed captures the energy and excitement of this fast growing sport.

Our first games based on Marvel Entertainment Super Hero Squad are scheduled for the fall of 2009. Marvel is one of the hottest entertainment companies today and we are very pleased to be working with them under our recently announced long term agreement. We are also excited about our new partnership with DreamWorks Animation to publish games based on their 2010 feature film. DreamWorks Animation is one of the most proven brands in entertainment with their exceptional creative talent and box office success.

We plan to continue to build our library of own franchises. Our strategy is to launch sequels to our proven brands and one to three new original titles each year to keep building our portfolio. We are very excited about several projects in our future pipeline and we look forward to unveiling them over the coming year.

We plan to launch these strong franchises globally using our extensive network of direct sales offices in all major markets. In fiscal 2009, we expect international net sales to exceed to more than 50% of total sales we achieved last year. We continue to explore opportunities in emerging markets such as Eastern Europe, South America, and particularly Asia. We are starting to see momentum building in our Asia online gaming efforts. We have been working with developers and operators in several Asian markets for the past few years and are encouraged by the opportunities to grow our online gaming revenue in these territories. Company of Heroes online is on track for our fiscal 2009 release. We recently demonstrated the first playable version of the game at the China Joy 2008 Trade Show and we were pleased with the response to the game. We have other initiative in these territories that we will be speaking about in the coming months.

We are also working on another exciting digital opportunity, our Warhammer 40,000 massively multiplayer online game currently in development at our Vigil Studio. This game has all of the elements of a successful MMO and experienced development team and a very popular universe of characters with a unique science fiction hunt. We are pleased with what we have seen to-date and we will keep you posted as the game progresses.

In short, we believe we have a strong product line for fiscal 2009 and beyond and we have a solid strategy to return to profitable growth. We understand that it's all about execution. We are committed to delivering a high quality product pipeline, which we believe will generate strong financial results and build value for our stockholders.

With that, I would like to ask the operator to open up the call to questions.

Question-and-Answer Session


(Operator Instructions).

Your first question comes from Ben Schachter from UBS Securities.

Ben Schachter

Brian, I was wondering if you could talk about what really happened with volume in terms of, where it came out versus recommendation what you think didn’t work in the marketplace and do what did work in the marketplace?

Brian Farrell

Well, as you know we already gone up to a terrific box office, very strong start to box office and we shift about a million units in North America primarily. As we set a number of times we expected WALL-E to exceed wraps, and while it is exceeding WALL-E III from last year it is not exceeding it by as much as we expected and our new revised guidance reflects that.


Your next question comes from Eric (Hend Dler) from Lehman Brothers


Hi, thank you very much. Brian, can you talk a little bit what you are seeing with the reconcile in terms of this year versus a number of new IP launches with that platform you had Battle of the Bands and Big Beach Sports based on the MPD data that results a pretty lackluster, can you give us a sense of how you are feeling they like the Wii market right now?

Brian Farrell

Obviously we liked the Wii market a lot, and let’s talk about the two title as you mentioned, but lets talk more importantly about the upcoming launches that we have. We have said Battle of the Bands did not meet our expectations but Big Beach Sports has been an unmitigated success in European markets if you follow those. We ship several hundred thousands there and that game has have quick hit and botchy ball and that was much more of a European product. But clearly, if you look at our E3 success as I pointed out in my prepared remarks, both the Blob and deadly creatures received a number of awards both for innovation and creativity. So we think the balance between new IP like the Blob, like deadly creatures we’re hearing very good things from retail about our upcoming All Star Cheer that uses the Wii Fit Balance Board, between those titles and things like WALL-E, I mean, WALL-E is still doing very, very well on the Wii and we have a strong expectation WWE on the Wii that between that balance of both license franchises and these innovative new titles we think the future for us on Wii is very bright.


Your next question comes from Colin Sebastian from Lazard Capital.

Colin Sebastian

Thanks for taking my question. The first one I guess just to get a better handle on your expectation for internally on IP this year, are you still expecting I think Colin mentioned 35 to 40% of revenues this year for those titles and how you might expecting that split up among the three new franchises this year?

Colin Slade

I will take that Colin, yeah, we are still looking 35 to 40% from new IP and we are not giving specific guidance to how each of the major titles breaks out we are excited about are our major drive titles especially Saints Row II and Red Faction Guerrilla in terms of their ability to drive that real leverage we are looking at in the second half. Brian if you have got any comments around that?

Brian Farrell

No, its those titles and obviously the weak question was before with the Blob and deadly creatures and again got Darksiders in the back half as well. So, yeah, its clearly Saints Row II and Red Fraction Guerrilla the two Guerrilla’s if you will, but we certainly have a strong and robust pipeline of owned-IP coming in the back half.


Your next question comes from Brent Thill from Citi.

Brent Thill

Thanks. Brian, can you just address the guidance it seems like the last three to four quarters you keep walking down the guidance after you started. Can you just walk through kind of – are we at a point now where you feel that you’ve got guidance at a point or you can actually achieve or are we still – I guess this is the philosophy in terms of how you’re guiding?

Colin Slade

This is Colin, in terms of our guidance I think we mentioned before it’s our intention provide a reasonable range based on our bottoms up forecast as well as our top down analysis. We think the guidance we’ve given right now is appropriately conservative, but as Brian mentioned it’s a very second half story and it’s all about execution. So the market momentum is behind us, its positive and we are very excited about the quality of our title. So right now it’s just about execution.


Your next question comes from Edward William BMO Capital Markets.

Edward William

Hi, couple question first of all just to follow up on – on question on guidance can you comment a little bit about the $25 million you took out in revenue. How much is that is related to WALL-E expectations coming down and how much is that related to the shift in timing of releases that you were talking about?

Colin Slade

I would say the WALL-E revenue coming down is the smaller part of that $25 million and the larger part relates to the – little bit of conservativeness both in general and around the timing of products. With the back half loaded here, we think that that's appropriate to be a little more conservative.

Edward William

Good, what is the date right now for some of those key titles, or the month you expect from those key titles to launch?

Brian Farrell

Well, lets talk about the key titles as we see go on forward, first of all a Edward, de Blob as said scheduled for September 26 launch Saints Row 2, we have firm date of our October 14 WWE is always the first weekend November with respect to our red faction Guerrilla, we are still looking I just there returned last week from the Microsoft vision summit meeting with retail and we are trying to pick the right day while we think we have the best Window auto maximize both in retail and consumer presence in that first calendar quarter our fourth fiscal quarter and I think relatively shortly we will call on exact we got lot good feedback at that show and then Darksiders is late in Q4 of the year.


Your next question comes from Tony Gikas from Piper Jaffray.

Tony Gikas

Hi, good afternoon guys may be just couple quick on address little bit more of the disconnect between the small change to the sales guidance and more significant change to the earnings there is anything there that you could add and then just an update on joint venture with Jacks and I think that you guys enough picked an arbitrator. Any idea of the timing of that what your expectations are and should you win is anything that factor I was some not in your guidance now but I guess what your potential outcome?

Brian Farrell

Yeah, in terms of JAAKS I can be specific about the timing while we or ready to or we got arbitrator so lets its needs to be proved on and I can't really tell anymore about timing obviously we have accrued – we have told you before we accrued at the original royalty rate or original JB rate and I suppose your there is an upside to that if our position in the arbitration prevails, but I cant give an exact dollar amount.

Colin Slade

But there is certainly nothing in our guidance that assumes anything KI Jacks.

Brian Farrell

Upside in the guidance, that is correct.

Tony Gikas

Would it be a one-time adjustment or would you have to -- was it big enough that you have to restate?

Brian Farrell

We would not have to restate, for sure. But and it would most likely would be one -- there would be a one-time item. I can't tell you exactly, but I think most likely it would be one time.


Your next question comes from Arvind Bhatia.

Colin Slade

You know, I don't thing I answered Tony's second question, or really his first question which is, with the $25 million reduction in the revenue guidance for the fiscal year, we saw - we were talking about, you know, roughly $0.15 down in terms of EPS, in terms of our guidance range. And really, you know, that reflects two things. Most of it, about two-thirds of the EPS delta is lower sales and the math works there. That is about right with about 40% leverage. The remaining is a little bit higher spending in PD, product development, in the fiscal year.


Your next question comes from Arvind Bhatia from Sterne, Agee.

Arvind Bhatia

Thank you, couple question, first of all is Brian can you talk about how many 1 million unit server you have module and then number two is on catalog can you tell us with catalog was in this quarter?

Brian Farrell

Let me start with the catalog. As we mentioned before, the catalog was a quite a bit larger as a percent of our total in the current quarter, primarily because we didn't have any--with the exception of WALL-E, we didn’t and that was just in North America--we didn't have any big new releases catalog this quarter was just over 60%. However, for the fiscal year we're still looking at catalog to be at around 20% down from about the 25% level that we experienced last year. In terms of million-unit sellers, within the--within the quarter are only million-unit item was WALL-E. As we moved through the year, we've got about - about 6 to 10 one million unit sellers and they're primarily the big drive titles and the sequels that we've talked about already.


Your next question comes from John Taylor from Arcadia Investment Corp.

John Taylor

I got a couple here, too. In talking about the business realignment I wonder if you could talk a little bit about what's that's going to save you on an ongoing basis once you get everything locked in and are you going to see the entire the benefit from that or are you going to reallocate some of that savings. That is the first question. And then the second question is on, we in DS, I wonder if you're seeing any change in retailer demands for marketing support as more and more product flows into those shell spots, many of which are bow guarded by catalog titles that have longer lives. I wonder what the merchandising cost situation looks like this year versus last year. Thanks.

Colin Slade

Okay. I'll start with the business realignment question. So our target for the business realignment related savings, and this is primarily from the productivity improvement dimension of the business realignment project that I talked about, would be around 5 to $10 million. I think there is that opportunity within the company. I think there's probably upside to that, but, you know, right now I'm sticking with the 5 to $10 million. Now, I don't know that we see the full 5 to $10 million within the fiscal year, because we'll be identifying savings which hopefully have a longer life, in other words, there are more of annuity where the savings persist. But we might see an exit rate of more like 5 to $10 million with the full fiscal year savings clustered in the bottom end of that range.

Brian Farrell

And then with respect to Wii and DS and product placement and retail, you ask a good question there. It really is becoming like the other key titles. You know, any title in the market now really has to have some sort of reason for being, and that's why I'm very pleased with the way we've now structured our Wii titles specifically where we have the very highly-branded things like, you know, WALL-E, spongeBob, WWE titles. And then alongside of those, either budget titles like big beach sports that have a lot of momentum now in the market. Or, you know, family titles like de Blob, and this highly targeted title of all-star cheer. Almost like the high end of the market. The title has to have a significant positioning. It has to be a quality title. And it has to be marketed and have its right window, and that is the way we're not just thinking about Wii and DS, but all of our launches.


Our next question comes from Doug Creutz from Cowen & Company.

Doug Creutz

Thanks, couple of things, looks like your guidance are going to do 75% of your revenue in the second half of the year. Could you talk about how you're expecting to break out between the third and fourth quarters. And then just also can you also confirm that – I didn’t see the press release if you're still planning to ship to Baja next month. Thanks.

Colin Slade

Yeah the class for your question very easy. Baja is on schedule to ship next month. As well in then with respect to the first part of your question, our guidance does suggest that about 75% of our revenue is yet to come in the fiscal year. We have a very, very light first half of the year. Now, you know, as you know, Doug, you know, the industry overall, about 50% of revenues for the industry are done in the fiscal third quarter, and while we're not prepared to give third and fourth quarter guidance now, I think if you want to think sort of generally how we're thinking is about 50% of that volume would be done in Q3 and about 25% in Q4. And, you know, we're sort of anticipating the question about Q4 and when you look at the product lineup for our fiscal Q4, when you look at things like we talked about some of the owned IP in a previous question, you know, things like Red Faction Guerrilla which I thought show tremendously 83 Darksiders getting a lot of traction, we also have Dawn of War II on PC getting a lot of press, but we also need to highlight WWE legends, the product, the brand extension from the WWE and I am try to reach back in my memory but I don’t recall a product lien that strong in the fiscal Q4 and quite sometime. So, again if you want to think generally 50% in Q3, 25% in Q4.


Your next question comes from Sean Lavin from Oppenheimer & Co.

Sean Lavin

Yeah, thank you just a couple of quick ones. Colin, can you talk about, have you increased your price protection reserves going forward on WALL-E in North America, as the total does seem like its selling a little bit better in Europe. And then secondly, can you just expand a little bit upon the revenue impact from title, from the change in ship dates, I mean, did you expect the Red Faction Guerilla or Darksiders in Q3 before because we had already had it in Q4? Thank you.

Colin Slade

In terms of the price protection reserves for WALL-E I mean, we have taken a prudent or I might even take conservative deal around price protection broadly for our products in this quarter and looking forward we have a regular accrual rate and we go through a very systematic process to look at that. So I would think we are adequately to conservatively accrued there and I think all are appropriate based upon a lot of details work. In terms of the revenue impact in the $25 million shift down, I mean, when I would say in very general is now we didn’t expect, we haven’t talked about Red Faction Guerrilla in Q3, what we’re trying to look at is the potential risk in having that much of our business in the second half and just being a little bit conservative around the possible impact of any kind of a shift in titles within the second half. So I wouldn’t say its specific to a particular title and I would not say that its anything more than that’s being relatively conservative.


Your next question comes from Ralph Schachter from William Blair.

Ralph Schachter

Good afternoon. I was wondering if you could give us sort a rough high level split and the guidance breakdown between peroneal title such as WWE, Nick and Pixar versus new title. And then secondly, I was wondering if you could possibly give us a, sort of a mid July, late July shipment unit number for WALL-E, I think you gave us unit ship in the quarter?

Colin Slade

Okay, could you - on the first question, in terms of - I am not sure if I’ve got this right, so you will have to tell me. But if we look at our peroneal brands, if we look at our license brands of Disney, Pixar, Nick and WWE, you know, I think between the three of those we expect to see that represent maybe 45 to 50% of our revenue within the year. And then the second question?

Ralph Schacter

Yeah, with respect to WALL-E, we shipped about a million units as we said in the June quarter and then in the early part of the second quartet the only character that we’ve launched in at the UK, we’ve shipped several hundred thousand units, I don’t even have the numbers in front of me, but as you recall the way Pixar rolled out, they are still on the territory by territory, so we will just falls on as they go through your France, Germany, Australia so on and so forth. So similar to the previous Pixar releases we will launch in the territories when they launch and the title we just rollout that way. The other thing we should probably say about WALL-E is I think, some of the feedback we’ve gotten from retailers that they have been disappointed about the lack of other consumer products around the WALL-E launch, and I think Disney and its other licensees are gearing up for a pretty strong promotion around the DVD launch or holiday. So like – as we’ve been seeing on the call the current sales of WALL-E are slightly below our expectations, still running ahead of Ratatouille, but remember this is still a very strong brand and we will several million units of it.


Your next question comes from Justin Post from Merrill Lynch.

Justin Post

Hi. Brian, I know you kind of moving more towards the company that can really develop and do their own IP, I was just wondering where do you think you are in that process and how you would rate your progress? And then secondly, I found some -- get some confidence in Saints Row and Red Faction, are there any specific data points you can share at this point as far as product testing on those two that kind of help you with your confidence on those titles, I know they are pretty important measure.

Brian Farrell

Yeah I mean, with respect to our progress against product development and owned IP, overall it give us a B minus rating. And let me draw down on that, we would have to go you know, I got college-aged kids quarter-by-quarter, I think we started slow, I think we had some great success as you know, with the Company of Heros, we had the highest rated real time strategy game ever with Saints Row 1, we had the first open-world game Next-Gen the original Red Faction actually had some ground breaking technology. So we have done great IP before.

Clearly last year, you know, I give us a very low mark, you know, barely passing because we just didn’t execute as well on the owned IP as we should have. So as I look forward the reason we are a lot more confident now as we talked about last year, I don’t want to beet in into the ground, but we have put new people place. We have put new processes in place and I think E3 really showed the progress that we have. Saints Row 2 you know, it’s the biggest Sandbox game ever created. Over-the-top Combat, Great co-op play, the character customization, you could spend hours doing that. We do awareness in purchase intent tracking. We are very pleased with those results so we are very, very confident in the Saints Row launch.

Red Faction Guerrilla as you mentioned, a lot of people talk about destruction, if you have seen the demo of Red Faction Guerrilla, we have destruction, realtime destruction that’s part of the game play. And gamers understand that is something new in games. You know, and as we said, we are going to launch that product in the right time frame where we can own retail, own mind share. So the whole idea here is product quality launched at the proper time. We are going to be vey, very disciplined about that.

de Blob, you take a look at that product, we took an idea that was a winner of a game contest at the university at U TREKT and turned that into a game that everyone is talking about now and our production department did that and I congratulate them for it. So if you look at the strides, we have made, yes it’s been a very tough period, we are the first to acknowledge that. When you hear what we're talking about, de Blob next quarter, WWE and Saints Row the following quarter, a very robust product line in Q4 anchored by Red Faction Guerrilla, Darksiders, and WWE Legends and Dawn of War II and then getting into a strong start in fiscal '10 with UFC. Yeah, we are very confident in that product line. That being said, we have got to continue that execution on bringing high-quality products to market at the right time.


Your next question comes from Todd Greenwald from Signal Hill Group.

Todd Greenwald

Hi. Thanks for taking the questions. Just wondering, if you wouldn't mind drilling down a little further on WALL-E and just it sounds like why it really has been a little bit below plan, is it the quality of the game, is it content that you had to work with, did the movie maybe see to a slightly older demographic. And then secondly just also on the Wii, just sort of talk about maybe your success with Big Beach Sports versus the slight failure of Battle of the Bands. What did you learn there as far as developing for the Wii. And then just finally, when can we see expect to see Deadly Creatures?

Brian Farrell

A lot there. So I don’t have them three's come back Todd. With respect to WALL-E, in general, as we've been talking about the kids' business, very competitive. We think a lot of kids are playing peripheral games in other Wii titles. Again, let's be clear. WALL-E is off to a very, very good start, slightly better than Ratatouille. So I want to make sure people understand we have slightly lowered our guidance on that based on the trends we've seen, but it still will sell several million units. With respect to Deadly Creatures, we've not announced a launch date, but it will be in the second half of the fiscal year, stay tuned for a date. But, again, that's another title. We were talking at the Microsoft Vision Summit with our retail partners and we do have a date in mind and stay tuned for that announcement shortly. And then with respect to Big Beach Sports versus Battle of the Band, I don't want to put too fine a point on it, but I will tell you what you did learn that when you have a title and a budget range like Big Beach Sports that delivers quality for money, you can sell a lot of units. Battle of the Bands is very sort of difficult game to communicate. So we decided to go at full price and advertise on TV and in retrospect, I wish we had launched that at a budget price.


You have a followup question from Ben Schachter from UBS Securities.

Ben Schachter

A quick question on UFC, that the game looked really good, the E3 had also looked really far along. I was just wondering, do you think you could potentially put that out early. Is there any reason you wouldn't? Do you not want to compete against WWE? And also do you expect to have any competition in that genre by the time it launches?

Brian Farrell

A couple of good questions Ben and I assumed you come back. It seems like you are cut off really the first time. UFC does look great and one of the key take away is there is that game you know, we talked about developing it, but that’s an all-new game engine. You can see that that engine really rocks. It’s a new franchise. As we have said a number of times, we want to build UFC into a strong and as lasting a franchise as the WWE has been. As you know, the two franchises are positioned very differently. I think a couple of conference calls we talked about having the right marketing window and WWE Legends is going to be launched in conjunction with WrestleMania. The game is called Legends of WrestleMania. So that’s the right window for that title. We've been working with UFC around a big launch event that they will have to help us launch the game. We haven't picked an exact date. We're working on some actually very exciting things with the UFC, they are another terrific partner. So it’s all about picking the right window and getting the game into the right stage so we can build a new franchise.


(Operator Instructions). And your final question comes from Arvind Bhatia of Sterne, Agee & Leach.

Arvind Bhatia

Yeah, thank you. Brian, I wanted to talk a little bit about where you are in your buy-back authorization. Can you refresh us what the appetite is perhaps at this point?

Colin Slade

This is Colin. And last year in term of our buy-back, we spent about $55 million, as we entered this year we've got around just under $30 million in total authorization available.

Julie MacMedan

Great. Well that seems to have conclude the questions. We thank you for joining us today on our first quarter conference call. We look forward to speaking with you next quarter. Thank you.


And that concludes this evening's teleconference. You may now disconnect.

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