Post of the Day
May 11, 1998
From our AOL
Subject: Re: Redchip
Haines and all sorry I'm a bit late with my post. My son got online just before I got back from RedChip, about 5:00PM AZ time, and then of course my girlfriend insist I take her to dinner. Well I'm finally back and here is my THQ report:
Just returned from the RedChip Review Conference. THQ presented (2:00pm local) just before TAVA Technology and of course I was there "front & center" for both THQ & TAVA. (See TAVA board for that post later this weekend). btw, I had lunch with John Jenkins, CEO of TAVA. Brian had not arrived by lunch time yet. Met fellow 'Fool" Kelly McLain (Mclainjk) prior to THQ's presentation. Nice chap who seems to know how to pick stocks.
I attended six (6) company presentations during the course of the day. Farrells overall presentation, imo, was #1. (Jenkins slide show was #1 ). Of course I am a bit biased. Farrell was cordial, confident, enthusiastic and quite knowledgeable. I was very impressed with him and his presentation. He did not fit the CPA "stereotype" that I had of him (neither does Haines). He was wearing a Bass Master Fishing Tie. Debra Lake, Dir. Investor Relations was there from the very beginning. (btw Haines, she is prepared for you at E3 this year). So in between each company presentation that I attended I would spend a few minutes with Debra asking her questions. I did not meet Brian until after lunch.
Debra Lake Discussion
- Mulan was being demo'ed. Looks good.
- Color Gameboy: - THQ has not received the specs from Nintendo yet. This is a 16 bit system instead of the current 8 bit. Nintendo plans on shipping the Color GB's this year. However, THQ will wait for a sufficient installed base before they publish for this platform. They do plan on supporting the Color Gameboy probably sometime by late '99.
- Quest 64 - will definitely ship in June. Probably around June 15th. She would not comment on the initial shipment of games planned. Company policy. I mentioned that NWO sold out quickly and that there seemed to be a longer than anticipated delay in re-orders. She seemed a little surprised stating that they monitor sell-through very closelywith the retailer and Nintendo 64 re-orders average about 3-4 weeks. Re-orders will not be a problem. No comment on projected unit sales, although it was obvious to me that they have made internal projections and based on her and Brians coyness and "body language" I suspect they are quite high. They feel they have a 6 month lead on Zela 64.
- Bass Masters Classic - PC late summer. PSX late this year. Their official release schedule shows "Winter '98".
- WCW License - The sales (to date) generated were greater than THQ projected. She did say they bid aggressively for the license and were disappointed that they were not successful. Some factors that came into play and influenced their decision; they owned the market, no competition to date, there will be competition in the near future. How much Wrestling could the market support?. Warzone due out this summer. Uncertainty about continued popularity of the Genre in '99. They own the code (engine) so new wrestling games would be developed in-house.
- RugRats - Could be some tie-ins, cross-marketing with the movie and TV show?. Not sure at this point. Seemed very positive about it being quite successful.
Brian Farrell Discussion
Prior to Brians presentation McLain and I spoke to Brian briefly. I asked him if he had shipped more WCW in Q1 than he normally would have if he had retained the license. He laughed and played coy, but it was obvious to me, and probably Mclain, that they had done just that and will continue to do so.We talked about technology transitioning, Segas new console "Katana", high end PC 3D games and GameFx's technology and strategy going forward. He is quite excited about GameFx, as I am. He feels they were acquired for a very modest investment. Feels that THQ should be trading at least 80-90% of the ERTS multiple. Feels the stock is worth min. 40.00 right now.
Very assured, polished and professional with a tinge of humor. However, for the most part, the presentation revealed nothing more than we already know. Approx. 80 people in attendance. No analysts, probably no Institutional Investors, although I did note a couple of Institutional Investors in attendance at a couple of other presentations.
THQ's Growth Strategy
- Shift to higher margin platform
- Increase proprietary and exclusive content
- Expand internal development
- Increase Global presence
- Build PC business
- Maintain Cost & Inventory control
|WCW License - The sales (to date) generated were greater than THQ projected. She did say they bid aggressively for the license and were disappointed that they were not successful. Some factors that came into play and influenced their decision; they owned the market, no competition to date, there will be competition in the near future.|
They have 15 programmers. They designed the software for 3DFx road show. 3DFx has an investment in GameFx, and by association, THQ. The GameFx game Excession is planned for a Spring '99 release. One other game is planned, at this time, for '99 by GameFx (unnamed).
Additional Comments by Farrell during the Presentation
- Foreign Markets represent only 20% sales currently. Wants to expand to 40% by 1999. (Most of THQ's competition is at 40-50%)
- 30-40M PSX WorldWide installed base
- PC games $5B market in '98
- Pax was very successful
- Pax III will ship in '99
- GITS was very successful
- Quest 64 - mid-June launch
- Multiple hundreds of thousands Bass Fishing game previously sold.
- Replacing WCW revenue is natural part of business cycle. (He said take a look at previous 10Q's, 10K's. It always lists "significant drivers" of revenue. This item always changes. 1999 will be no different.)
- Their UK sales ship direct to Retail from their office - no distributor.
- 90% of '98 revenue will be from next-gen platforms
- THQ owns the Wrestling code (engine) they will have a Wrestling product for '99.
- Sony Co-marketing (Also completely funding RugRats marketing) Portfolio driven Business. THQ uses a "button-down" approach to a fashionable business.
There were 5 or 6 questions asked. I asked 3 of them. My questions:
- Q - Do you have any revenue projections for GameFx in '99?
A - No meaningful impact in '98 and they have two (2) games scheduled for '99 release. No revenue projections at this time.
- Q - Given that GameFx technology is proprietary and leading edge, is there an interest in licensing this technology to other game developers?
A - Probably only to developers working directly on THQ games.
- Q - Given that THQ will lose WCW revenue in the back-half of '99, are you confident f not only replacing this revenue through the release of new titles, but continuing your current growth rate of > 25-30%?
A - Absolutely. Yes. Not daunted by continued growth of rev/earnings after WCW in '99. The street has made much more of this than THQ has, and they seem much more concerned than we do.
|I can tell you one thing, if there are any short term traders out there you might want to log off now ........ Well its obvious to me he dosen't like you very much (he did not say that in those words). But his body language was obvious.|
I spent about 15 minutes speaking with Brian after his presentation, along with 2-3 other investors. I asked him about the Option Grants. Brian said they were primarily for employees. Both current and new hires. Feels in order to retain and hire talent he must provide this additional compensation in order to be competitve with other companies in the LA area. "Everyone is doing it" His preference would be for straight compensation but the real world dictates Options. He seemed unsure on how many he would be granted, "hopes he gets some" he stated. I asked him then if these options are primarily for employees and not board members? He said Yes! Noah Davis, GameFx would also get some. I told him that many shareholders that I talk too seemed disappointed with THQ's apparent indifference towards them. That they would love to hear terms such as "THQ is Enhancing Shareholder Value" etc. I can tell you one thing, if there are any short term traders out there you might want to log off now ........ Well its obvious to me he dosen't like you very much (he did not say that in those words). But his body language was obvious. He manages the company and not the stock price and he knows he has done a good job of that and will continue to do so. He also feels that the stock price went from approx. 1.50, 3 years ago or so, to over 30.00 and thinks that he has unquestionably enhanced shareholder value already. Its obvious to me he seems disgusted with traders who are in it for a quick buck and seem to whine the loudest. My words not his. I told him my initial position was established pre-reverse. He seemed quite happy to hear that I was a long-term investor. He said as unpleasant as it was he ordered the 1:15 reverse split. Additional comments during the breakout: VS will be shipping to Europe this Qtr?. He would have never sold RugRats during the first or even second year of the PSX console. He feels it takes at least 3 years to reach critical mass and that is why the age demographics are quite favorable NOW for a RugRats game on the PSX this year. Not a lot of competition with this age group. I'm now more convinced than ever that he truly is "Mr. Demographics". He is sharp on this stuff!!
Thats it boys & girls in a nutshell. Overall I was impressed with Brian and the companies prospects going forward. I will be adding to much position, hopefully prior to E3. Good Luck to all Longs.