My estimate for Q3:
Q2A Q3E
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Net sales $29,325 $35,050
Cost of sales 13,611 15,346
Royalties 4,922 7,500
Product development 1,521 1,800
Selling 3,775 3,600
General & admin. 1,840 2,100
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Total expenses 25,669 30,346
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Operating income $ 3,656 $ 4,704
Interest income 310 275
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Pretax income 3,966 4,979
Tax provision 1,083 1,693
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Net income $ 2,883 $ 3,286
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EPS $0.37 $0.41
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Average shares 7,799 8,000
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Reasons: Q3- Lower cost of sales, offset by higher royalties,
higher tax rate and higher number of shares out.
Product development correlates roughly to programmer/developer
headcount. The big increase is due to the addition of the GameFX
people on the payroll, as well as some increased external development.
I believe that it will continue to increase from 3.2% of 1998E sales
to 4.4% of 1999E sales. This compares to 1.8% of 1997 sales.
I don't know the reason for the PSX delays, except for BASS, which
wasn't good enough to ship with the PC game. I don't believe that
THQ is losing faith in the PSX market. But with increased competition
from other titles, THQ wants to make certain that their games are as
good as possible. I agree that many of THQ's PSX games have been less
than wonderful (to say the least). Much of this is related to the
developer. For example, XING was pretty bad, IMNSHO. They made K-1 and
Bravo. Ray Tracers was made by Taito, who is making G.Darius. Taito is
a better developer. The problem was not that Ray Tracers was bad, but
that it was too short. Consequently, the game mags recommended renting
it. Ghost was very good, but it was only popular with certain gamers.
Granstream is similar, although it should have more broad appeal.
Broken Sword was best used with a PSX mouse, which many players didn't
have. And it had some minor gameplay issues. It really was better on PC.
It remains to be seen, but I truly believe that the upcoming PSX
titles will be more successful, either because of the license
(Rugrats), niche (Brunswick, BASS), or gameplay (G.Darius, Penny
Racers).
I'm not counting any reorders of Nitro in Q3, because I'm guessing
that enough was shipped in Q2. Nitro isn't nearly as popular in Europe
as it is in the US. And I think that the domestic market has enough of
Nitro at the current price point.
Two things. First of all, GKM has been obsessed with using a fully
taxed model, as have several THQ analysts. While this provides for a
nice, stable comparison, I think it's ridiculous. The fully taxed rate
McGowen is using is 38%. I don't think that THQ will pay 38% any time
in the next few years. For one thing, the NOL will have a positive,
albeit small effect. Second, the international operations can
effectively lower the overall tax rate, Gysi said to expect 33-34% in
Q3 and Q4. I'm using 34%, to be conservative, FWIW. The second issue
is that Gysi low-balled the gross margin question completely. I see
56% gross margins for the rest of the year, as well as the full year.
That's a 1000 basis point improvement from last year, not 300-500 like
he just said. Of course, I could be wrong, but the product mix is fairly
indicative of the gross profit. The only major variable is total
sales.
I firmly believe that GKM is an analyst of limited value, as the estimates
and "insights" are fairly worthless, IMNSHO. A client/broker of GKM would
learn much more by reading the THQ thread than he would by reading this
"analysis."
Todd |
