THQ REMAINS CAUTIOUS ON GAMECUBE

THQ still was “trying to rationalize our GameCube offerings right now.” THQ CEO Brian Farrell had said in Feb. that steps company was taking this year to turn its performance around included reduction in number of GameCube SKUs in development. Gysi said Tues. that THQ also was taking wait-and-see posture whether Nintendo’s GameCube title The Legend of Zelda: The Wind Waker, which started shipping in U.S. last week, was driving console hardware sales. Early word from at least some retailers last week was that game was indeed doing that, but to what extent was unclear. Gysi said THQ was cautious because other eagerly awaited GameCube titles -- such as Metroid Prime -- had failed to spur hardware sales as many had expected. Despite recent strong software releases, he said, “the GameCube continues to be a little bit of a challenged platform.” Although THQ said Tues. it had started shipping game Red Faction II for GameCube, it also shipped versions for Xbox and PC and title originally was made for PlayStation 2 (PS2).

Front-lit Game Boy Advance (GBA) SP that started shipping in U.S. last week seems to have had “good launch,” Gysi said, but THQ had raised one major concern about new handheld machine: In Feb., he had told Goldman Sachs Technology Investment Symposium in Cal. that THQ believed $99 price on handheld system was too high and it hoped company would cut SRP in time for 2003 holiday season (CED Feb 25 p3). Company also is maintaining somewhat cautious approach on what games it should introduce for GBA handhelds. He said sports games, for instance, tended not to be strong performers on handheld platform while children’s titles performed best.

At Tues. conference, Gysi also echoed comments he had made at Lehman Bros. investor conference last month (CED March 14 p5), saying “more and more it looks like it'll be a 7- or 8-year videogame cycle” for current consoles rather than typical 5-to-6- year one. Gysi said last month that his company believed 2006 was likeliest target for arrival of new next-generation consoles although many still expected next cycle to kick off in 2005. He said Tues. that he believed 2006 was more likely year because industry leader Sony Computer Entertainment had few incentives to rush next console out onto market. He also said Tues. that he expected strong PlayStation 2 (PS2) sales in particular to extend beyond 2006, with children’s and other mass market games that THQ specialized in being marketed for PS2 by company into 2007 and “perhaps even ‘08.” THQ, he said, was “agnostic” on whether 2005 or 2006 was year that next cycle would starts. One mistake that THQ made last year, he said, was not releasing certain kids games for PS one, which still had substantial mass market audience.

When asked whether THQ had seen any shift by retailers since holiday season when certain publishers complained that it appeared stores were buying only handful of hit games, Gysi said his company hadn’t actually experienced any problem getting shelf space in late 2002. Although THQ had only one top 10 game in holiday season, Gysi said it still was #2 independent game publisher in that period. But he said retailers “clearly” had appeared cautious in holidays in relation to what they had ordered and what they reordered. What “most surprised” THQ, he said, was that even games from THQ that were selling well -- wrestling and SpongeBob SquarePants titles -- weren’t being reordered in adequate amounts. Gysi said that made it appear that “retailers were in a mode of managing inventory as opposed to maximizing sales.” Good news, he said, was that “we think that the retailers are getting back into the business of selling product as opposed to just managing inventory,” based on what company saw in first 2 months of this year. Gysi said Wal-Mart was THQ’s #1 customer, representing 20-22% of its overall domestic revenue. Its terms with Wal-Mart were “roughly the same” as those with other retailers, he said.

Gysi said THQ still expected 10-15% overall gain in videogame software business this year and predicted “dramatic growth this year” on next-generation videogame hardware. He said company was waiting to see what happened with such factors as war in Iraq before deciding whether it should be more upbeat. Although THQ didn’t meet revenue targets in 4th quarter, he said, it still finished year with strong balance sheet and remained optimistic about its future.

“My expectation is you'll see some consolidation” in U.S. game industry in near future with most weaker publishers likely disappearing altogether, Gysi said. “Maybe the vultures will come in and pick up their 1 or 2 good properties that they have.” He said THQ wasn’t interested in acquiring companies that had only small amount of strong content and whose costly infrastructures would have to be added to THQ. There could be more mergers akin to Sammy-Sega agreement, he said. But Gysi said “we don’t know what’s going on with that” merger anyway -- “that seemed like a very odd deal to us as well as to others in the industry.”

Separately, THQ said in 10-K SEC filing that U.S. Dist. Court, L.A., last month gave preliminary approval to settlement in securities lawsuit reached last in 2002. THQ said its directors’ and officers’ insurance coverage “should reimburse us $10 million towards the settlement and related legal fees.” But company said “a dispute has arisen between us and our directors’ and officers’ insurance carrier,” with carrier contending it was “only obligated to contribute $5.0 million in coverage towards the securities litigation settlement.” It said matter had been “submitted to arbitration under the rules of the American Arbitration Association.” Company took charge of $7 million in quarter ended Dec. 31 “as a result of the settlement agreement… Although we expect to prevail, at this early stage we cannot predict the likely outcome of this dispute.”

Publisher also said in filing that CEO Farrell’s salary increased to $535,456 in 2002 from $469,000 year ago and his bonus to $525,000 from $460,000. He also received 375,000 stock options in 2002 -- up from 300,000. Gysi’s salary increased to $215,029 from $185,000, but his bonus dropped to $80,500 from $85,000. CFO also received 56,250 stock options, up from 37,499 in 2001, filing said. Largest owners of common stock as of March 21 were Capital Group International/Capital Guardian Trust (2.24 million shares for 5.9% stake), Deutsche Bank and affiliates (2.1 million shares, 5.5% stake), Liberty Wanger Asset Management and affiliates (2.33 million shares, 6.1%), Maverick Capital and affiliates (2.24 million shares, 5.9%), J. & W. Seligman and affiliates (3.37 million shares, 8.9%), Tudor Investment and affiliates (2.36 million shares, 6.2%).

Disclosing terms of departure of former COO Jeff Lapin, filing said he agreed not to solicit frequent THQ collaborator Nickelodeon for rights to make games for children under 12 years of age through March 31, 2006, not to make any “disparaging comments” about THQ and not to take part in any efforts to buy more than 4.9% of THQ stock without permission of company. Among items that Lapin was allowed to keep were his PS2 console and laptop computer -- albeit “purged of all company documents and files.” THQ also said it had 747 full-time employees at end of calendar 2002 -- 44 of them in U.K., 52 in Germany, 11 in France, 12 in Australia, 1 in Korea.