THQ 2004 Annual Report Download - page 34

OVERVIEW
THQ is a leading global developer and publisher of interactive entertainment software that is playable on the following platforms:
• Home video game consoles such as Sony PlayStation and Sony PlayStation 2, Microsoft Xbox, and Nintendo GameCube;
• Handheld platforms such as Nintendo Game Boy Advance;
• Personal computers; and
• Wireless devices.
Sony and Nintendo recently announced that they would be introducing new handheld gaming devices, PlayStation Portable (“PSP”), is currently expected
to be released in March 2005, and the Nintendo DS potentially late in 2004. We have products in development on both handheld platforms, as well as the
next generation platforms, and will launch them when the platforms are released.
Our business involves the development, marketing and sale of video game products, either internally, through co-development relationships, or by license.
We develop our products using our internal development resources and external development resources acting under contract with us, some of which are
independent and in some of which we take an ownership position. We typically select our external developers based on their track records and expertise
in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the
original game. We believe that selecting and using development resources in this manner allows us to strengthen and leverage the particular expertise of
our internal and external development resources that we anticipate will add to the quality of our products. In the United States, we primarily sell our
products on a direct basis to mass merchandisers and national retail chain stores. Our products are sold internationally in more than 70 countries, on a
direct-to-retail basis and through sub- distributors. We conduct our international activities through offices in the United Kingdom, France, Germany,Australia,
and Korea.
Our profitability is directly affected by revenues from the sales of our video game software. After the gross margin on the sales of our titles recoup
development and marketing expenses for internally developed titles, the gross margin on the incremental net sales positively impacts our operating
margin. For externally developed titles, development fees are paid to third party developers. Once the development fees are recouped, the gross
margin less royalties on the incremental net sales directly impact our operating margin.
Consistent with our business strategy, our focus with respect to future game development will primarily be to continue to build a well-diversified product
portfolio. We are executing against our strategic plan to increase our share on PS2, Xbox and PC while maintaining our leadership position in the family
and handheld market. We plan to achieve this through the launch of high-quality new original properties for the mature and serious gamer as well as
continuing to capture the mass-market consumer with titles based on well-known licenses. In fiscal 2005 we intend to publish games from our leading
franchises, including Disney/Pixar, WWE, Nickelodeon, Sega and Warner Bros. Upcoming titles being developed include games based on three major holi-
day movie releases:Walt Disney Pictures Presentation of a Pixar Animation Studios film The Incredibles, Nickelodeon’s The SpongeBob SquarePants Movie,
and Warner Bros. Polar Express. Additionally, our mass-market lineup in fiscal 2005 will include popular Nickelodeon titles such as The Fairly OddParents,
Jimmy Neutron and Nicktoons. We intend to continue to develop new original properties and core gamer titles as well, such as Full Spectrum Warrior,
which was released in June 2004, as well as the upcoming titles S.T.A.L.K.E.R.: Shadow of Chernobyl,Warhammer®40,000: Dawn of War,The Punisher and
Destroy All Humans!.
In addition to acquiring or creating high profile games, we will also continue our focus on establishing strong technology and internal development
capabilities. In April 2004, we bolstered our internal development capabilities with the acquisition of Relic. With the addition of Relic, our development
operations now include 17 teams and nearly 400 people located in eight studios. We are aggressively building on this base of talent and expect to spend
an additional $10 million in product development in fiscal 2005, up from the $37 million spent in fiscal 2004. These funds will be used to support current
generation projects such as bringing development for key franchises in-house, as well as developing tools and establishing shared technologies for next-
generation consoles and new handheld devices. We will also continue to work with independent studios, maintaining our balance of internally and
externally developed content.
Our business strategy also includes investments in emerging applications, such as wireless gaming. In fiscal 2004,THQ Wireless executed on its strategy
of building relationships with many major carriers worldwide, securing content with leading brands and establishing a direct-to-consumer portal for games
delivery. THQ Wireless recently entered into agreements with the National Football League (NFL) and the National Hockey League (NHL) and their
respective players’ associations to develop officially licensed mobile content based on the teams and players of the NFL and NHL. THQ Wireless also
recently renewed its license agreement with Major League Baseball (MLB) and the Major League Baseball Players Association (MLBPA). Additionally, in April
2004,THQ Wireless acquired a controlling interest in Minick Holding AG, a European-based mobile applications and billing expert. This acquisition gives
THQ Wireless one of the largest direct-to-consumer billing and distribution network solutions in the world, building on its strength as a turnkey solution
for consumers, carriers and handset manufacturers.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS