Description

Thqi develops and sell video games for ps2, xbox, game cube, gameboy, and the pc. Its leading titles are related to professional wrestling titles (WWE) and also target the medium volume titles with the nickelodeon license. Its development costs per game is in the $3-5m range and therefore doesn’t take big beats on single titles.

The company had $5.35/share or $206m in cash at the end of sep. Based on accounts receivable collections estimated at $50-60m in the march q, the company should have an additional $1.30 for a total of $6.65/share, prior to stock buyback. The company bought back $25m of stock in October/November, then announced another $25m buyback in late November. We expect them to continue to use cash to buy back stock at these levels.

Thqi generate 20-25% of revs from the Nintendo game boy platform. Nintendo will release a new back lit color product in march that could provide a boost to thqi game software sales.

Thqi high exposure to developing titles for the Nintendo handheld market should give it an advantage over the competition as more games move into the wireless phone market. Thqi games tend to have lower development costs and are easier to port to the smaller screen.

At E3 in june, i would expect a further price cut on ps2 and xbox by $50 to $150. price cuts in hardware will expand the installed base of game consoles which should in turn drive higher software sales. The attach rate of software to hardware is at least 10 titles for every game console.

Software sales fell short of expectations in the dec q, but the company is able to manage new product launches and quickly reduce its operating expenses to cut down on cash burn during its seasonally weak mar q. As a result, the loss in the mar q will be 15c or $5-7m.

We estimate that the company should be able to earn at least 60c in 2003, which values the company at about 10x eps excluding the cash.

Catalyst