ValleyFastTrack/w/spotlight/1stjc/32inches/mark2nd By WADE DANIELS Contributing Reporter A few years ago, Calabasas-based game software publisher THQ Inc. looked like a goner, losing tens of millions of dollars by over-producing often subpar games for Sega and Nintendo machines alongside better selling competitors. Founded as a toy maker in 1990, with the aim of capitalizing on licensing from popular movies, THQ lost $30 million in 1993 and 1994. During those sour times, THQ concentrated on the second generation of home video games, called 16-bit systems after the size of their processors. But when chief operating officer Brian J. Farrell was elevated to CEO in January of 1995, he saw the company’s salvation in making games for a product the industry was leaving behind but which were in millions of homes Nintendo’s hand-held Game Boy. “Everybody had walked away from Game Boy, and I said, ‘Wait a minute, there’s about 11 or 12 million of those sold in the U.S. and probably a likewise number in Europe, so let’s get the best possible titles so we can dominate the market,” said Farrell. THQ set about gathering licenses to make GameBoy versions of popular games such as John Madden Football, FIFA Soccer and NHL Hockey being produced by its competitors solely for console systems. Revenues rebounded sharply. “Our competitors were getting revenue from products they weren’t exploiting, and we were getting revenue and cash flow to keep the company going and from an already proven product,” said Farrell, who formerly worked as a CPA with Deloitte and Touche LLP and then in real estate investment. He joined THQ in 1990 as its chief financial officer, was promoted to chief operating officer in 1993 and then to CEO in 1995. “I say in jest that as the company did worse and worse they gave me more and more responsibility,” he said. Another problem for THQ (the name stands for Toy Headquarters) was that it overproduced its games in anticipation of huge sales, often saddling the company with large unsold inventory and the associated losses. To correct that, Farrell has instituted an inventory policy whereby games are manufactured in limited quantities as needed rather than by the hundreds of thousands all at once. “So (nowadays) even if I think we ought to ship 100,000 units of product X, that’s not what we order. Our sales department comes with a forecast based retailer by retailer,” Farrell said. The publicly traded company has climbed out of a 1994 net loss of $17.5 million to net income of $601,000 for 1995 and $1.9 million for 1996. The company projects a net income of nearly $2.8 million for 1997. In February, THQ completed its second stock offering, selling 1.5 million shares and earmarking the $11.5 million it raised for product development. Farrell cited poor product development as another reason why the company did so poorly before he took over. He explained that the company first learned its lesson about game quality through its experience with the industry switch from 8-bit to 16-bit games in the early 1990s. Before the switch, an 8-bit game’s success was practically ensured through the licensing of a popular movie or sports figure, as THQ did with Gretsky Hockey and Home Alone. But when 16-bit games were introduced in the early 1990s and possibilities for graphic and conceptual creativity expanded, “the difference between a good game and an okay game were much more discernible.” THQ’s downfall was that it continued to focus on rushing the games to market while its competitors were spending more time developing their games. “THQ has definitely come back from the brink and beyond, doing a good job of licensing 16-bit games for the hand-held units,” said Jason McGruder, an analyst with Jeffries & Co. Inc. “They should have strong earnings over the next couple of years,” McGruder said. “One problem they might face is Sony and Nintendo’s recent lowering of the price of their machines (from $199 to $149) and what that might mean for people moving to those (machines) and away from Game Boy.” Farrell said he knows better than to rely on the Game Boy niche for the company’s continued success. “This is a hits-driven business, and you’ve got to build a base revenue of lower risk products in our case the Game Boy games on which you build the hits,” he said. To this end, THQ is developing games for “next generation” play stations, namely the Nintendo 64 and 32-bit Sony Playstation. Farrell said that before THQ will produce a game for a play system, the product must have a large enough “installed” base of users to help insure against a flop. “We don’t think it’s so important to be first on a system but wait to see if there’s going to be a meaningful installed base,” he said. “When we launch games for Nintendo 64 later this year, it will be a year late but then again there will be the game consoles out there to use them.” Snapshot THQ, Inc. Year founded: 1990 Core business: Developer, publisher and distributor of entertainment software, primarily for hand-held and console systems by the likes of Nintendo, Sega and Sony. Employees in 1994: 40 (worldwide) Employees in 1997: 55 (worldwide) Revenues in 1994: $13.3 million Revenues in 1996: $47.2 million Net Income in 1994: ($17.4 million) Net Income in 1996: $1.6 million Top executive: Brian J. Farrell, 42, President and CEO Goal: To become the leading provider of exciting, high-quality interactive entertainment software that appeals to to a broad range of consumers for use on a variety of platforms.