I spoke to the company today.
As many of us suspected, "'Brunswick First Strike
Bowling' is scheduled for OEM release spring 1999," means that THQ is bundling the game with new Pentium III systems. I couldn't find out which OEMs (i.e. CPQ, DELL, GTW, etc.) or how the revenues and margins will compare to retail. THQ may release other titles through OEM distribution in the future, so this may become a new business model for the company. I would imagine that revenues/unit will be tiny, but volume is significant. If we assume that THQ's unit cost for a normal retail PC game is $4, and the wholesale price is $24, the gross margin is 83%. If THQ is paid $10 per unit by OEMs, the cost would be much lower, perhaps $2, because bundled software generally consists of no packaging. Gross profit in this hypothetical case is 80%. And if 500,000 PCs are sold that bundle the game, that's $5 million in revenues, the same as if the title sold $200,000 at retail. This could be a good strategy in the future, supplementing the retail distribution. THQ expects to offer the Brunswick title at retail in the future.
The Rushware acquisition was important for several reasons.
First, the German market is considered one of the top markets for video games (behind North America and Japan). Rushware has the exclusive license for all LucasArts titles for the next 1.5 years, I believe, in Germany. Star Wars titles should be big. Here's a quote from the PR:
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Rushware's publishing subsidiary, Softgold, recently announced that it has signed a 21-month agreement to continue distributing the PC and PlayStation products developed and published by LucasArts Entertainment Co. LLC in German-speaking Europe, including the upcoming products based on ''Star Wars: Episode One -- The Phantom Menace.''
''Acquiring Rushware is an instrumental part of our stated strategy of continuing to expand our international sales and distribution capabilities,'' said Brian J. Farrell,
president and chief executive officer, THQ. ''We now have direct distribution capabilities in a market that has a population of over 80 million.''
''Gaining direct access to the German retail market is key to solidifying our position as a top publisher,'' said Tim Walsh, vice president of international, THQ. ''We are
extremely pleased with the acquisition and what it will enable this company to achieve.''
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Aside from the LucasArts titles, THQ wanted Rushware to gain access to one of the largest markets for video games. Another reason is the acquisition of a strong distribution channel for THQ's own games. By distributing THQ games through Rushware, THQ achieves a higher margin than it would by selling the titles to outside distributors. The final, and least important, benefit of the deal is that THQ can distribute titles from other publishers into the German market. I think that the acquisition was slightly accretive to 1998 EPS, and it should be very accretive to 1999 EPS.
I'm eager to see the financial results of Rushware and THQ combined, and I'm excited by the opportunities presented to THQ, as a result of this acquisition. On top of that, THQ is testing a new distribution channel, the OEM market, which could add nicely to future revenues. Finally, we now know that GameFX is working on more than Sinistar. I think that GameFX is also actively developing a WWF title and a BASS fishing title, for both PC and Dreamcast (DC). And if the bowling game is successful for PC, we may see it for DC by year-end. Also, it seems likely to me that THQ will begin to develop a DC version of Rugrats for early 2000.
Indeed, the future looks bright for ol' THQ.
And trading at less than 8 times 1999 estimates? When will Wall Street learn?
Todd |
