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CORPORATE FOCUS—THQ Primed for Next Stage Of Interactive Game Wars

Summary Business: Entertainment software developer Headquarters: Calabasas Hills CEO: Brian Farrell Market Cap: $1.17 billion Dividend Yield: N/A* Total Liabilities: $1.17 billion P/E: 82.08 Long-Term Debt: $0.0 *THQ does not pay dividends If there is one company in Calabasas Hills that’s ready for the game, it’s THQ Inc. Along with the game platform makers it supplies software to, like Sony Corp., Microsoft Corp. and Nintendo Co., THQ is ready to take advantage of an expected boom in interactive games. The game maker is prepared to supply software for no less than four new game platforms, including Sony’s PlayStation 2, before the end of the year. The interactive game industry appears to be experiencing the calm before the storm. Sony released PlayStation 2 last fall, Nintendo released its handheld Advanced GameBoy last month and, in time for the Christmas shopping season, Microsoft will introduce Xbox and Nintendo its GameCube. “This is the beginning of a three- or four-year growth cycle for the industry,” said Arvind Bhatia, an analyst with Southwest Securities Inc. Analyst Robert DeLean of Morgan Keegan and Co. went so far as to say, “Over the next four or five years, this industry doubles again.” As the race to supply what is expected to be a very high demand for new games gets serious, THQ also is prepared to take a commanding position in a field developing interactive software for game systems that has been relatively easy for even small companies to maneuver through. “But we’re getting to the point where development is getting very expensive,” DeLean said. “The weaker players will fall out or get acquired.” With plenty of cash on hand and plans to raise more with a stock offering in the fall, THQ is expected to be a full participant in a round of consolidation analysts anticipate in the near future. Having acquired four companies already this year, THQ still has about $70 million in cash on hand for more and is preparing to ask for shareholder approval to increase the number of authorized common shares by 40 million. THQ now has 21.3 million outstanding shares. Its stock price closed at $56.40 on July 20. Electronic Arts Inc. (according to DeLean, “clearly the 800-pound gorilla here”) is about three times the size of THQ, which many consider to occupy the second tier of interactive video game companies with Activision Inc. “THQ wants to be a much bigger, stronger company,” Bhatia said. “It will get there too.” While THQ is happy enough to supply games for all the platforms this Christmas in fact, it will introduce 60 new game titles before the end of the year it is Christmas 2002 the company is most interested in, when the hardware supply is expected to catch up with consumer demand. Little of this comes as a surprise to the stock market. THQ’s stock price has been on a steady upward trajectory since April 2000 when it traded as low as $14 a share. That is in spite of the zigzag nature of its quarterly earnings statements, tied closely to the vagaries of the computer game market. Many investors clearly find THQ an attractive stock. “Investors are looking for companies that are not going to miss their earnings marks,” DeLean said. “They’ve got the brands and they’ve got very good management. We’re now going up this new peak of growth and the stock is ahead of that.” Net income for the second quarter of this year was $3.5 million on revenue of $55.2 million By comparison, THQ recorded a net income of $3.9 million on revenues of $32.4 million in the second quarter of 2000. “Last year was an anomaly,” Bhatia said. “You had no PlayStation 1 availability. That impacted the top and bottom line for many companies, not just THQ.”

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