CONFERENCE CALL NOTES:
THQ's goals for 1997 were achieved:
1997 Goal: Increase 1997 sales by 20% from 1996.
Reality: Sales increased by 78%.
1998 Goal: Increase sales by 35% from 1997.
1997 Goal: 50% of 1997 sales from Nextgen (N64, PSX, PC) platforms.
Reality: more than 50% were from Nextgen; 71% of Q4 sales from Nextgen platforms.
1998 Goal: 85% of 1998 sales should come from Nextgen platforms.
1997 Goal: Enter PC market in 1997.
Reality: Successfully launched Pax Imperia; THQ has 6 new products for PC in 1998.
1998 Goal: 10% of sales from PC titles.
1997 Goal: Increase global presence.
Reality: This part still needs work. Ghost in Shell, K-1, NWO have not been shipped yet in Europe.
1998 goal: 50% increase in international sales from 1997's $14 million (20% of 1997 sales).
1997 Goal: Increase gross margins by 300-500 basis points.
Reality: Gross margins increased by approximately 430 basis points.
1998 Goal: Increase gross margins by 300-500 basis points.
In 1998:
THQ anticipates sales and fully-taxed earnings growth of 35+%.
THQ has no plans to sell any 16-bit titles.
THQ will continue to be, as it has been, the largest producer of GB titles after Nintendo.
THQ's goal for 1998 and beyond is to achieve sustainable growth in both sales and earnings.
Tax rate will be about 33%.
THQ's balance sheet and operating efficiency is excellent:
Days Sales Inventory = 5 days (best inventory management in industry, at 34 turns!).
Days Sales Outstanding = 58 days (in 1997, sales increased faster than receivables).
THQ still has a $23 million credit line that has yet to be used.
Reserves against accounts receivables are $7.8 million (25%). THQ is "extremely comfortable" with reserves.
THQ's 1997 sales by platform:
27% N64
22% PSX
24% GB
14% SNES
9% Genesis
3% PC
1% Saturn
THQ's guidance for 1998 sales by platform:
75% N64 and PSX (I'm guessing 40% N64, 35% PSX)
15% GB
10% PC
State of the THQ today:
There are new production, sales, marketing and executive positions that are enhancing THQ's growth.
THQ has new deals with Electronic Arts, Disney, Nickelodeon. THQ has not named the 3rd Disney GB title (could it be Small Soldiers or Yoda Stories?). THQ hopes to support the two Disney animated movies that are released each year. THQ is very optimistic about the Rugrats franchise.
Market conditions are excellent, as N64 and PSX hardware installed base continue to grow rapidly.
WCW negotiations: THQ can't say anything today, because negotiations are ongoing. But THQ will try to extend the license agreement with WCW. Regardless, WCW is only one license, albeit a successful one.
Momentum from Q4 continues into Q1:
Sales of WCW vs. NWO (N64) are still strong.
In Q4, Pax sold well, meeting THQ's expectations. Bravo Air Race actually sold well, Ghost in the Shell sold very well, winning an award for the best use of a license. Lost World and Toy Story (GB) sold well in Q4 also. 16-bit EA sports titles performed very well, as THQ gave its "last hurrah" by continuing to profit from a platform that many publishers "thought was dead 2-3 years ago."
Sales of WCW Nitro (PSX) are very strong. Nitro is selling at a faster rate than WCW vs. World was last year. Sony has included a picture of WCW Nitro on the front of their Playstation unit box, so that buyers of Playstation will want to buy Nitro. Nitro was the 2nd best-selling Nextgen title in January (of all titles on the market). Unit volume for Nitro should be similar to NWO, but sales should be slightly lower, due to THQ's lower wholesale price for PSX titles ($10-12 cheaper than N64 cartridges).
For each quarter in 1998, THQ has at least 1 strong title:
Q1- WCW Nitro (PSX).
Q2- Quest 64, BASS Masters Classic (PSX, PC).
Q3- WCW Nitro (N64), Brunswick Circuit Professional Bowling (PSX, PC), Dead Unity (PSX, PC)-Dead Unity looks great in production now, and it could be really successful.
Q4- Rugrats (PSX, PC)-(TV ratings for kids ages 3-11: Rugrats holds #1, 2 and 7 slots), Bug's Life (GB).
Q1 1999- Rugrats (N64).
THQ is considering publishing BASS Masters for the N64, to compete with Sierra's Bass Fishin' 64. THQ believes that BASS Masters is the strongest franchise.
Quarterly comparisons: What about year-over-year comparisons? (Farrell wants to keep up THQ's 12 quarter streak of year-over-year improvements, doesn't he?)
THQ doesn't expect sequential Q1-Q2 growth, because the Q1 is going to be very good, and Q2 is traditionally the weakest quarter. Farrell said that he isn't scared by the "monstrous 4th quarter, " with regard to comparisons. At the present time, THQ believes it can achieve positive comparisons for all quarters in 1998.
THQ's continued strength in marketing and production has made it more appealing to developers. Case in point: Cyberflix, makers of Red Jack (PC title for Q3), approached THQ, and wanted THQ to publish the title. THQ plans to keep building its business for sustainable growth in revenues and income, through licensing, publishing, and original development. THQ's business will grow "brick by brick."
In addition to previously announced titles, THQ may announce another 2 GB, 1-2 N64, and few more PSX and PC titles.
THQ plans to provide strong marketing support for Quest 64, BASS Masters, WCW Nitro (N64), Dead Unity (Original THQ game). Nintendo and Sony see Rugrats as way to sell hardware to younger consumers, so they may support the product with their own marketing efforts. (For example, they might advertise it on TV, or better yet, bundle it with the hardware unit--Farrell didn't mention the bundling, but it would be a real boon to THQ if Rugrats was bundled with the consoles).
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The call was very bullish, and Farrell was very excited (I guess everyone is excited to have received all those options :o).
I am in the process of re-evaluating my estimates for 1998. I'll post the revised estimates when I finish.
I appreciate all of the "thank you" messages that everyone's been sending me. As I've said to a lot of you, you owe yourselves the "thank you" for being astute enough to buy the stock. I appreciate the offers of drinks, computers (and keyboards) and house-naming, but they're really not necessary. I'm happy that things have worked out well so far. I'm glad that the "little investor" has been able to beat the "big money" with THQ. I look forward to finding other stocks that may do HALF as well as THQI!
I wonder if THQI will reach my $31 price target for today? Are we at 1.5 million shares yet? If people refuse to sell at current prices, we won't encounter resistance. On the contrary, the stock will shoot straight up until people (probably institutions) begin to unload shares.
Todd |
