FWIW, here is my feeling on recent developments in THQ.
I was very disappointed with the 4th quarter conference call. There was no mention of why the first two quarters are going to be down, other than that WCW sales were large last year, and that Rugrats 64 was pushed out to coincide with the movie in the fall. And there has yet to be any kind of real announcement to shareholders, other than through the analysts reports that attended the meeting. I was quite disappointed that BF acted as if the movement of earnings during the year was a very minor issue, and as if it had been disclosed and explained well.
Hardly an adequate explanation in my book. What is made in the two quarters is not really important in the grand scheme of things. WHY they are not making it is very important. BF seems to make the argument that revenues are going to be down. If this is the case, I can live with it, especially if it has to do with conservative shipments of WWF product. But everything seems to argue against this. You have WM2K, TS2, and Smackdown in this quarter.
Last years Q1 sales were $78 million. Assuming 1 million Smackdown, 400,000 WM2K (Gameboy & N64), and 200,000 TS2 should yield close to $50 million in sales, comparable to WCW sales last year. You throw in some lessor sales of "B" titles and comparable foreign sales and releases, and it seems that THQ should come at least close to the sales volume as last year.
From that $78 million last year, THQ generated earnings before taxes of $16.5 million. If you assume that THQ is going to only make $.25/share this year, it means they expect to make something like $8 million before tax.
Working backwards, if you assume the same basic percentages for cost of goods and royalties, as well as fixed portions of overheads, it appears that THQ generates about 30% incremental margin on sales.
Therefore, this would lead me to conclude that either:
A) Revenue will be somewhere in the $50 to $55 million range which is down significantly from last years $78 million, with costs basically equivalent to a year ago.
B) Revenues will be fairly flat from $78 million a year ago, but costs are going to be up by something like $8 million, or 10% of sales higher than last year.
C) Something in-between, with lower revenues in the mid-$60 millions and costs up $4 million from a year ago.
I guess the most likely is scenario C, since it appears that THQ does have full channels of everything other than WWF titles which will limit any shipments other than these, and with its stream of studio employee adding, has bloated the cost structure of THQ.
Disappointing, especially since BF seems so unwilling to talk about what is going on. I am not looking for a disclosure of specific royalty terms, or items that may put THQ at a competitive disadvantage. However, forecasting a range of sales, and explaining what kinds of revenue producing projects your employees are working on seems to me to be fair to the shareholders to make an informed decision about THQ's prospects.
I have yet to sell any of my position, but the story is not very compelling anymore. THQ is probably valued fairly right now, with as much downside risk as upside.
I hold yet for the potential of the WWF license, the next-gen of consoles, tax avoidance, as well as a reasonable value in a sea of ridiculous tech valuations.
Unfortunately, the amazing appeal of wrestling can no longer power THQ earnings alone due to higher staff levels and failed forays into development. It is unclear where THQ can turn to generate the extra sales to support those staff levels.
Kory |
