PolarityTE, Inc.
Q1 2014 Earnings Call Transcript

Published: 13 Mar 2014

[Operator:]

Good afternoon, and welcome to the Majesco Entertainment Company Q1 Fiscal 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince of LHA. Please go ahead, Ms. Prince.

[Stephanie Prince:]

Thank you, Denise, and good afternoon, everyone. Welcome the Majesco Entertainment’s first quarter fiscal 2014 earnings conference call for the quarter ended January 31, 2014. With me on today’s call are Jesse Sutton, Chief Executive Officer and Mike Vesey, Chief Financial Officer. Before we get started, I would like to remind you that this call is being recorded and an audio broadcast and replay of the teleconference will be available in the Investor Relations section of the company’s website after the conclusion of this call. As a reminder, this call may contain forward-looking statements, including statements regarding management’s intention, hope, expectations, representations, plans or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results or actual future results to differ materially from the expectations set forth in the forward-looking statements. Factors that could cause actual results to differ materially are specified in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013 and other filings with the SEC. The company does not undertake and specifically disclaims any obligation to release publicly the results of any revision that may be made to any forward-looking statements to reflect the occurrences of the anticipated or unanticipated events or circumstances after the date of such statements. In addition, in order to facilitate a comparison between the reported periods, the company has presented both GAAP and non-GAAP financial measures. GAAP financial measures include expenses related to non-cash compensation, changes in the fair value of warrants, severance costs and the benefits from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income and diluted income per share have been adjusted to report non-GAAP financial measures that exclude these items. These non-GAAP measures are provided to enhance investors’ overall understanding of the company’s current financial performance and the company’s prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered as substitute or superior to GAAP results. Reconciliation between GAAP and non-GAAP financial measures is included in the earnings press release issued earlier this afternoon. I would now like to turn the call over to Jesse Sutton. Jesse?

[Jesse Sutton:]

Thanks, Stephanie. Today, in an effort to articulate a clear picture of our strategy amidst the current industry dynamics, Mike will review our first quarter financial results first and then I will layout our strategy for the year ahead, speak about industry developments and conclude with some comments on our upcoming releases before opening up the floor for questions. As we said on our year end call in January, the holiday retail season was soft again this year and our holiday releases met with mixed sales results. Demand for casual games is still sluggish reflecting the ongoing transition to next-gen console platforms and the fragmentation of the market into online, mobile and social platforms, which is giving consumers more choices. I would now like to pass the call to Mike Vesey, our Chief Financial Officer to provide a financial review of our first quarter, the financial outlook for the balance of fiscal 2014. Mike?

[Mike Vesey:]

Thank you, Jesse. I will begin by recapping our results for the first quarter fiscal 2014 before closing with some comments about our balance sheet, liquidity position and the outlook for the balance of fiscal 2014. As is our custom, I will use non-GAAP results when discussing our financial operations. Net revenue for the three months ended January 31 was $21.9 million, a 7% decline from the $23.5 million reported in the first quarter of last year. On a net basis, the decrease is due to lower licensing fees for our Zumba Fitness titles in Europe. This resulted in net revenue in European market of $3 million compared to $6.1 million in the first quarter last year. However, there are some timing issues that impacted the comparability of our quarterly results year-over-year domestically. We released Zumba Fitness World Party and Zumba Kids during our first quarter fiscal 2014. While our new Zumba release for the prior holiday selling season, Zumba Core was released late in the fourth quarter of fiscal 2012. Therefore, approximately $11 million of launch revenue was included in our fourth quarter results of fiscal 2012, while all launch revenue for World Party and Kids are in our first fiscal quarter of the current year. Overall, Zumba sales accounted for 72% of our net revenue during the three months ended January 31, 2014, compared to 67% in the prior year period. Gross margin was 15% for the first quarter compared to 30% for the comparable period last year. The decrease reflects development and licensing costs of our new Zumba releases, higher development and licensing costs compared on our newest Zumba releases when compared to the prior year. We incur a fixed development and licensing fees to develop a game and amortize these costs based on expected sales of the game. When sales volumes decreased, amortize development and licensing costs increase as a percent of revenue because they are spread over a smaller revenue base. We developed our latest sequel Zumba Fitness World Party for both current gen and next gen console platforms resulting in higher development expenses relative to revenue when compared to previous titles. On a non-GAAP basis operating expenses were $7.1 million compared to $8.1 million last year. The decline was primarily due to lower product development costs related to a smaller game slate and closure of our social game development studio last year. This was partially offset by $400,000 of higher selling and marketing expenses primarily for our mobile game releases. The 2013 first quarter including the charge of $800,000 for severance related to the closing of our social games development studio and reduction of certain other fixed expenses in favor of a variable cost model. This has enabled us to be more flexible and better allocate our resources based on seasonality and changing market conditions. In the first quarter of 2014 we recorded a charge of $247,000 representing our 50% share of Pariplay’s net loss. We account for our investment in GMS/ Pariplay as a joint venture under an equity method and accordingly report 50% – our 50% share of Pariplay’s earnings on a quarterly basis. We reported non-GAAP net loss of $4.1 million for the first quarter fiscal 2014 compared to a non-GAAP net loss of $1.1 million during the same quarter in the prior year. Non-GAAP net loss per share for the quarter was $0.09 compared to a $0.02 net loss in last year’s first quarter. Per share results are based on 44.7 million weighted average shares outstanding compared to 40.5 million for the first quarter last year. The change primarily reflects the sale of common stock to a former investor in Pariplay in the third quarter of last year. Now turning to our balance sheet, we ended first quarter with $12.3 million in cash and equivalents and another $3.6 million available to us under our accounts receivable factoring agreement. We continue to have no long-term debt. Net cash provided by operating activities for the three months ended January 31, 2014, was $1 million compared to $8.8 million in the comparable period last year. The change was primarily due to a larger operating loss and timing related to our seasonal working capital needs. As of January 31, we have approximately $2.1 million invested in capitalized software and prepaid license fees primarily representing unamortized development costs for games that were released in the first quarter. We ended the quarter with $3 million in inventory compared to $4.9 million at the end of last year’s first quarter reflecting our smaller slate of releases. Now, regarding our outlook for the balance of fiscal 2014, as Jesse had mentioned the retail market for casual video game software for dedicated handheld and console platforms particularly the Nintendo Wii and DS systems, for which we previously derived the majority of our sales, has experienced a decline related to the transition to next-gen consoles and computing online and mobile platforms. As a result, we have implemented initiatives to focus on segments with higher expected growth such as online, mobile and casino, as well as selected opportunities on next-gen consoles as the installed base develops. We believe these segments will offer the best opportunities for us to deploy our traditional model of carefully managing our capital resources and diversifying risk among several projects with reasonable budgets. As these initiatives are in their early stages, we are not providing specific guidance for the year. However, given that our first fiscal quarter generally has the significant impact on our full year results due to seasonality, we expect a revenue decline and a corresponding net operating loss for 2014. As a final point, you will note from our previous filings that we have been informed by NASDAQ that our shares’ common stock are subject to delisting has not met the minimum bid price requirement of $1 for a specified period. We have scheduled the hearing to present a plan of compliance in NASDAQ, which includes a reverse stock split, which was proposed to our shareholders in our proxy statement filed on February 28. I will refer you to these publicly filed documents for further information. I will now turn it back to Jesse to go through our strategy and our upcoming product releases. Jesse?

[Jesse Sutton:]

Thanks Mike. In our hit driven industry, Majesco has had a long history of identifying market opportunities during periods of change and responding quickly. We are confident that we can do so with them. Our strategy is focused on four business units

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Ed Woo of Ascendiant Capital. Please go ahead.

[Ed Woo:]

Yes, congratulations. Good to see Mama coming back.

[Jesse Sutton:]

Thank you, Ed.

[Ed Woo:]

Thank you, Ed. I did have a question, you mentioned on the gambling initiative that there is already been a launch of operations in some states. Do you see that as a roll-off that’s going to happen pretty quickly across the board or if it’s going to be very targeted initially?

[Jesse Sutton:]

Right now we’re in Idaho. And on the VLTs or the video lottery terminals Intralot who support the state with VLTs. And they’re going to be bringing those that same mechanic and that same business model to other states in the coming months. We anticipate that our games will be on those models as well and once we start getting in some real sales numbers of February and March in Idaho and we start seeing what that means in terms of extrapolating out numbers into other states etcetera, we’ll be able to have a better handle on where the potential of that business could go.

[Ed Woo:]

Great. And the other question I have is you mentioned about the next-gen console cycle seed to be doing pretty well and that’s one of the areas of growth. Have you announced anything specifically for that and do you see that development cost would be manageable for casual games?

[Jesse Sutton:]

So in terms of our products chose next-gen platforms, right now we’re essentially looking at it from a conservative standpoint, looking at projects that might be – being developed by either independent developers or publishers from different territories who want presence in the U.S. or a publishing partner at a reasonable cost. From that perspective we – the announcement of Bound by Fire is a distribution deal that incorporates the PlayStation 3 and Xbox 360 and a PlayStation 4 title, which is really the leading platform for it. So those are the kinds of deals that we are looking at now and as the market develops a bigger installed base and opportunities come to us that are within our budget and strategy, we will continue to announce more of those.

[Ed Woo:]

Do you see a big rise in development cost for the next-gen versus the last gen?

[Jesse Sutton:]

In terms of the blockbuster games, there is a bigger cost. I don’t see the cost as – I don’t see the difference in development costs going from PlayStation 3 to PlayStation 4 and Xbox 360 to Xbox One as intensive difference as it was from PlayStation 2 to PlayStation 3 and Xbox, the original Xbox to Xbox 360.

[Ed Woo:]

Great. Well, thank you and good luck.

[Jesse Sutton:]

Thank you.

[Operator:]

(Operator Instructions) Our next question will come from Ted Caldwell of Lookout Mountain Capital. Please go ahead.

[Ted Caldwell:]

Yes. Is Majesco receiving timely payment from the retail outlets that it sells through?

[Jesse Sutton:]

Yes. Mike?

[Mike Vesey:]

Hi. Yes, as you know we primarily sell to big box retailers, Wal-Mart, Target, GameStop, Best Buy and none of those retailers are slowing their payments or showing any signs of any financial difficulties for us we can say.

[Ted Caldwell:]

Okay. As a follow-up question again, is Majesco slowing its payments to any of its game providers?

[Mike Vesey:]

No.

[Ted Caldwell:]

Is Majesco in compliance with the terms of the contracts it has within providers?

[Mike Vesey:]

Yes, absolutely.

[Ted Caldwell:]

Good. And then could you provide a little more color on what portion of your names you see in the future that would come from downloadable games versus the traditional best?

[Jesse Sutton:]

Sure, I will take that. Right now, when you look at the opportunities that are in the market within our cost range and budget, you are looking more along the lines of products that are digital delivery oriented. But that being said, there are also opportunities that are coming up now taking advantage of Majesco’s built-in infrastructure and distribution capabilities and publishing capabilities that we are finding. And so to create a clear answer to you of what percentage is going to be, you know what, I would tell you we have more of a clear answer after we finish going through our next two device conferences, Game Developers Conference and E3 probably end of Q2.

[Ted Caldwell:]

Okay. Then with specifically addressing the next one or two quarters as this transition begins, will Majesco remain in compliance with its contractual obligations to the game providers that it distributes to?

[Jesse Sutton:]

I am sorry you went a little – it wasn’t clear.

[Ted Caldwell:]

Yes. Over the next quarter or two as this transition – as the industry makes a shift, do you see Majesco remaining in compliance with the contracts it has – the existing contracts it has with its game providers?

[Jesse Sutton:]

So just to put into perspective, Majesco has been around for a long time. And we built a fantastic relationship with the development community. And although during the course of the 26 years that I have been here, you are always going through discussions and debates about aspects of a particular relationship. Everyone we have I am very proud of. So but there is a particular project that you are talking about, feel free to let me know, I am pretty clear that we have tremendous relationship among developers.

[Operator:]

And ladies and gentlemen, at this time we will conclude the question-and-answer session. I would like to turn the conference back over to Jesse Sutton for his closing remarks.

[Jesse Sutton:]

Thank you all for joining us today. And we look forward to reporting back to you on our second quarter call in mid June.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.