PolarityTE, Inc.
Q1 2012 Earnings Call Transcript

Published: 13 Mar 2012

[Operator:]

Good afternoon, and welcome to the Majesco Entertainment First Quarter 2012 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Todd Greenwald, Director of Investor Relations. Mr. Greenwald, the floor is yours, sir.

[Todd Greenwald:]

Thank you, and good afternoon. I'd like to welcome you to Majesco Entertainment's conference call. Before we get started, I'd like to remind you that the call is being recorded, and the audio broadcast and replay of the teleconference will be available in the Investor Relations section on the company's website. 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 year ended October 31, 2011, 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 anticipated or unanticipated events or circumstances after the date of such statements. 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 a benefit 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 press release issued earlier today. With me on the call are Jesse Sutton, Chief Executive Officer; and Mike Vesey, Chief Financial Officer. I'd now like to turn the call over to Jesse.

[Jesse Sutton:]

Thanks, Todd. I'll open the call with some highlights and an overview of our performance in the first quarter. Mike will follow with the financial review, and I'll conclude with an update on our product slate for the rest of the year, after which, we'll be happy to take your questions. In Q1, a year ago, we experienced growth of over 60% as we introduced the Zumba Fitness brand to the world of interactive entertainment. In Q1 of this year, we are pleased to show that we followed up that breakout performance with another strong quarter and with substantial year-over-year growth. Sales grew 37% year-over-year to $66.2 million in the quarter fueled by the strong global sales of the industry's leading fitness title, Zumba Fitness. In addition to solid catalog sales of Zumba 1, we launched Zumba 2 on the Wii, which has gotten off to a great start and sold over 1 million units worldwide in its first 3 months. At the same time, we were able to reinvest some of our earnings in the marketing and development of our most important brands, as well as our new emerging Social and Mobile business. As a result, we delivered over 35% revenue growth in Q1 with healthy gross margins of 35% and a non-GAAP operating margin of over 12%. We also delivered a robust release slate this holiday season, easily one of the largest in the company's history, including Zumba Fitness 2, Cooking Mama 4 for 3DS and Camping Mama for the DS, Alvin & The Chipmunks

[Michael Vesey:]

Thanks, Jesse. First, I'll recap our results for the first quarter then close with some comments about the outlook for 2012. As I discuss our financial performance compared to the prior year, I will use non-GAAP results in both periods. Revenues for the 3 months ended January 31, 2012, were $66.2 million, an increase of 37% from the $48.5 million reported from the comparable quarter of last year. We had several new releases in the quarter, including the Zumba Fitness 2 on the Nintendo Wii, Cooking Mama 4 on the Nintendo 3DS, Twister Mania for Microsoft Kinect, Jillian Michaels' Fitness Adventures for Kinect, JAWS

[Jesse Sutton:]

Thanks, Mike. I'll now provide some comments on our lineup for the rest of 2012. As I noted earlier, we delivered one of our largest release slates for the company's history this past holiday season. While that speak to the depth and the capacity of our team here, we didn't get as higher return on that investment as we'd hoped. A few products had a hard time finding their audience and didn't perform. This year, we're taking a little bit of a different approach. We're planning for a much smaller release slate but one that's more concentrated in fewer, bigger and higher-quality titles. While I really wish I could talk in detail about a couple of our key upcoming titles, the timing is not yet right from a development and marketing standpoint. However, we are incredibly excited to announce to the public a number of our upcoming games in the next 2 to 3 months, and we'll certainly have a lot to say on our next earnings call. The balance of this year will largely be comprised of the following key titles. Zumba Fitness 2 and Zumba Fitness Rush are already out on retail shelves and should continue to sell well throughout the year, as fitness product tends to sell all year long, not just around holiday season. We will also be bringing additional downloadable content to Zumba Fitness Rush players later this year and are looking at other Xbox LIVE marketplace opportunities to extend this franchise digitally. And of course, we are hard at work on new and unique ways to bring Zumba further into the world of interactive entertainment, and we'll have another innovative version of Zumba coming out for the 2012 holiday season. We also have a very unique new motion-based game being developed in partnership with the NBA, which we believe is innovative, different and will turn a lot of heads. We recently showed it off to some select retail partners, and the response we got was extremely positive. Finally, we're also looking at an interactive fitness game based around the 5-Factor Fitness Program created by Harley Pasternak. Harley is the pre-eminent Hollywood trainer, responsible for some of the best celebrity bodies onstage and screen, including Katy Perry, Megan Fox, Lady Gaga, Robert Downey, Jr. and many more. Harley should also begin seeing increased awareness as a result of his new daytime show on ABC called The Revolution, which he is co-hosting with Tim Gunn and other top lifestyle experts. We continue to make progress on our digital initiatives and are pleased to see the games and development in our Social and Mobile Games business. And today, we're happy to announce that Majesco's first internally developed social game, Mini Putt Park, will be coming to Facebook very soon, giving players of all ages the ability to create their very own miniature golf course, with full creative control over every hole. Mini Putt Park is the ultimate Facebook platform Mini Putt experienced. Players can either visit Putter Island and conquer course after course, each complete with a crazy boss to defeat or take the fun to their friends list by sharing their own custom courses with friends to complete. We believe that Mini Putt Park will combine a learning from our previous games and deliver a fresh experience on Facebook. This game should be out on Facebook in the next few weeks. We're also very excited about our mobile strategy. Majesco has historically done very well with its titles in the handheld space, and we feel that this experience will translate well in the mobile market, especially with the iOS and Android smartphone devices. We plan to release at least 4 mobile titles this fiscal year with at least half of our titles launching with the free-to-play business model. In summary, we are pleased to have delivered significant revenue growth in our first quarter, along with a very healthy non-GAAP operating margin of 12% despite a higher marketing spend and investing over $1 million on our digital initiative. We're encouraged by our performance in Q1 and look forward to start revealing more to you about our exciting lineup for this year and next, over the coming months. That concludes our formal remarks. Operator, if you can review the Q&A instructions, please?

[Operator:]

[Operator Instructions] The first question we have comes from Darren Aftahi of Northland Capital Markets.

[Darren Aftahi:]

Just a few here. One, if maybe you could break down, maybe revenue split between Zumba 2 and Zumba 1 in the quarter? Number two, maybe comment, seemed like international was pretty strong in the quarter, whether that trend is continued in the February. Three, there seemed to be a pretty large spike year-on-year software development costs and licensing fees, maybe you could shed a little bit more color on that. And then on the mobile games initiative, if maybe you could talk about, if all of those will be original IP and kind of the timing of launch of those. That's it.

[Jesse Sutton:]

Okay. This is Jesse. Let me sort of go backwards on you here. So for the mobile initiative -- mobile games, they're launched sporadically throughout the course of the rest of this fiscal year. So that's why I would expect it's about 4 or 5 titles sporadically. As far as the European continued sales for Zumba into February, we really don't comment on results post the quarter but they're as expected. I will tell you that what we haven't talked about is that we have launched over 1 million units of Zumba 1 -- of Zumba 2 rather and it continues to sell well. Mike, if you want to talk about the international split?

[Michael Vesey:]

Yes. It's 2 things. One, in terms of the Zumba 1 versus Zumba 2 split, we're not going to release specific title-by-title revenue numbers so -- what we normally do is update benchmarks. So in the case of Zumba -- or milestones, not benchmarks. So if there's a meaningful milestone for the title, we'll give that information. So we gave the 1 million units on Zumba 2 today, and we continue to update the overall units sold for Zumba. But we're not going to give quarterly updates on each product just because it's competitive and we don't want to do that over the long term. The other question you asked was the software development costs going up in the first quarter, software development and royalty costs and cost of sales. And that's really due to the fact that we released a large slate of products for the holiday in the quarter. So generally speaking, we will record a lot of those expenses in the period of release and then we get the leverage off of the products in the subsequent quarters to the extent they're successful. So in the first quarter, that was higher because there are some products in the mix that we spent money to develop and maybe they weren't very high performers. So their investment in development, as a percent of revenue, is very high compared to the quarters we just had successful products.

[Darren Aftahi:]

Great. And then just one follow-up on the mobile, were all 4 or 5 of those titles be original IP or any of that be licensed content?

[Jesse Sutton:]

Most of them will be original IP.

[Operator:]

The next question we have comes from John Taylor of Arcadia Investment Corp.

[John Taylor:]

Well, the first one is, I wondered if you could talk about what you're cash budget is for product development this year and how that contrasts to last year? And did the cancellation of that $1 million property, whatever it was, does that impact your budget? Or are you just going to redeploy that and put that against other initiatives?

[Jesse Sutton:]

Yes. The -- you mean what was remaining on that contract?

[John Taylor:]

No, what I mean is because you capitalized and write off when they ship. What I'm looking for kind of is what your cash budget for product development is for this fiscal year as opposed to-- your cash budget as opposed to trying to figure out whether it's been expensed or not kind of idea. So you're run rate on R&D, I guess, is from a cash standpoint. And does that cancellation impact it?

[Michael Vesey:]

Yes. So the cancellation really doesn't impact it. That's a write-off of what we had capitalized in the past. Last year, if you look at our balance sheet through the year, we built up the capitalized software to the balance of ultimately $12 million going into the holiday. We would expect this year, based on our current lineup, to be that amount or less, not an expansion in that budget unless we found something that we're going to talk to you about and add to it.

[John Taylor:]

Right. So was that -- can you give me a sense of what the run rate is? Is that like $20 million, $25 million a year kind of run rate?

[Michael Vesey:]

No. I think what you're looking at -- so it's -- when you look at the income statement, I think you're probably looking at a number that includes the development -- amortization of upfront development costs and then also some recurring royalties. So I guess -- so there's 2 things. If you're looking at what our software development costs and license fees, the percent of revenue, were going to be year-over-year -- the first quarter for the rest of the year we expect them to be similar to the first quarter.

[John Taylor:]

Yes. That's why I'm asking cash as opposed to how much run through the P&L and what not because what if you initiated $10 million product. I'm not saying you're going to but $10 million project for delivery the following year, right, that's going to go into this year's cash flow but it's not going to show whether it's going to be accounted for as capitalized as opposed to running through the P&L?

[Michael Vesey:]

Yes. The way we see that is it would be -- if you're on our balance sheet, right? And then when we release that title, that's when we go through the P&L. But we don't expect it to be different relative to the business. We don't expect it to be different this year than last, I think, is the way to look at it.

[John Taylor:]

Okay. I'll come back to that maybe separately. I wonder if you could talk about the international revenue contribution of profit. Last year, you had kind of de minimis, but I think your were maybe getting royalties. So I wonder on that, whatever that dollar was, I can't find it here on my sheet. But how much of that flow-through is either gross profit or operating contribution?

[Michael Vesey:]

Yes, I can. The -- to just be clear, the last year in the first quarter, the revenues were de minimis and then they picked up during the year, as we released the Zumba titles over in Europe. That was last year. So when you compare the first quarter, we had a big number compared to virtually nothing in the prior year. So we had $16 million, $17 million of revenue compared to 0 in the prior. But margins in our European business -- the gross margins are not significantly different than our overall margins. So we have 35%, 36% type of margin overall. The European margins are not significantly different than that.

[John Taylor:]

Okay. And the operating -- then you got a similar kind of operating contribution or...

[Michael Vesey:]

Yes, the fixed costs there for the European business are $1 million or less.

[John Taylor:]

Okay, great. Okay, good. And then let's see the -- okay, on the Facebook game that you're going to do, I wonder if you could talk about kind of what your back of the envelope operating assumptions are relative to the cost of customer acquisition and maybe what you're hoping for in a range of revenue per user or revenue per paying user. Is there -- I mean, I'm not asking for forecast so much but what would be a range maybe of sort of inputs and outcomes that might be reasonable for that?

[Jesse Sutton:]

Yes. I mean, what I would say, John, is let's put a pin in that for now because the game comes out in a few weeks so we're still tweaking a lot of that between now and then. And as you know when it comes to these games, it's always the first few months with which you really tweak a lot on the analyzed data and make a lot of those determinations. So let's expect to have the same -- allow me to answer that call a lot more thoroughly on the next quarter.

[John Taylor:]

Okay. Well, let me go at it this way then. It seems like there are 2 ways to approach product development for Facebook games. One is to kind of polish it a little bit and make it look good before it goes out. The other is sort of this minimum viable product, cough it up on the table and then fix it as people respond to it. Within that continuum -- on that continuum, where would the Putt Putt game lie?

[Jesse Sutton:]

It will be much more towards the end of the product being appropriately done to get it out there in the marketplace, not minimally done.

[John Taylor:]

Okay, all right. And if that's the case then, is there kind of a launch budget or anything, sort of to get people's attention that is considered a minimum to enter this business?

[Jesse Sutton:]

Yes. Again, it's de minimis in terms of the overall picture of things. But what it is right now, we're still working that out based on a small user base experience that we're analyzing.

[Operator:]

The next question we have comes from Ed Woo of Ascendiant Capital.

[Edward M. Woo:]

The question I had is you mentioned that the games you're producing this year is going to be much more focused. Can you give us a little bit of scale in terms of how it compares with games that you put out last year?

[Jesse Sutton:]

So when you look at the games that we're putting out this year, you're going to notice our games that we believe have more robust experiences. They're more innovative than anything we've released historically. And they have the kind of brand recognition that before were a little lot less than what these brands are. Most notably the NBA brand.

[Edward M. Woo:]

Can you provide us any type of quantitative basis, maybe half of the games produced last year?

[Jesse Sutton:]

Yes. I think if you look at last year, we released quite a few smaller titles. They're smaller cost titles to us for the 3DS market -- handheld market. And this year, we're not going to do that. So I think the number of titles we release are on console and handheld side of the business is probably 1/2 to 2/3. But now, the flip side of that is we are investing in the social game and in the mobile game. This actually ties into John's question before on our development budget. So in essence, we're shifting some of our resources from capitalized costs to develop games for console and handheld and investing it as operating expenses for games for Social and Mobile as the industry is transitioning that way to position ourselves. So I think when you look at handheld and console SKUs, you're going to see we're spending less on the smaller cost titles for the handheld and redeploying that. Unfortunately, due to the accounting into our and operating expenses but it's into the higher growth areas of Social and Mobile.

[Edward M. Woo:]

Okay. And the last question I have is, have you seen any change in any of the game retailers' environment, either international or in the U.S.?

[Jesse Sutton:]

I think the environment is similar to what it has been, which is a -- retailers are more and more choosy as to what parts they get behind. And they're willing to chase successes more than they are willing to get behind something that has a potential for success unless they have an incredible confidence in that.

[Edward M. Woo:]

And do you think that's the same in Europe as it is in the U.S.?

[Jesse Sutton:]

I think -- depending on the platform, I think it's very similar in Europe. Europe has some other challenges with the game having some financial issues. But other than that, I would think it's the same kind of overall mentality.

[Operator:]

[Operator Instructions] The next question we have come from a follow-up from John Taylor of Arcadia Investment Corp.

[John Taylor:]

Let me ask a couple more if I can. So on the mobile front, are you guys doing both iOS and Android kind of simultaneously? Or is that going to be phased?

[Jesse Sutton:]

It's going to be phased. We're going to start off with iOS and move on to Android because they're way on the free-to-play market. The iOS is the right place to go.

[John Taylor:]

Right. What kind of delay you're thinking about?

[Jesse Sutton:]

It really depends on Android. I mean, it depends when they're getting game transactions really going and building, and we'll follow that trend as opposed to jumping in early.

[John Taylor:]

Okay, good. And then, in your guidance, I wonder how much of that is likely to be international? What are you thinking?

[Michael Vesey:]

This is on the iOS and the...

[John Taylor:]

No, no, no. This is the total guidance for the year in your revenue range.

[Michael Vesey:]

Yes, so the first quarter was 25%. I wouldn't expect it to be 25% for the year. It's probably more. Let's give a broad range of 15% to 25%.

[Edward M. Woo:]

Okay. All right, good. And then, let's see, I think -- a follow-up on Edward's question, I think a lot of us are wondering whether there's much of the way of lingering credit risk on people's books out there. So how -- have you guys reserved for everything you need to in a worst-case scenario on that?

[Jesse Sutton:]

You're talking about Europe or overall?

[John Taylor:]

Yes, in the U.K.

[Michael Vesey:]

Yes. In our situation, we're not exposed directly to the retailer credit risk over there. So we reserve for anything we need. And we think our exposure is very negligible.

[John Taylor:]

Okay. So -- and your distributor is going to be -- you don't need to worry about that later?

[Michael Vesey:]

Well, not directly.

[Jesse Sutton:]

And we work together with the distributor to make sure that they're not out there as well.

[John Taylor:]

Right, okay. And then on the Wii front -- so your -- big chunk of your revenue growth came on the Wii platform, which has been sort of losing steam even though fitness does seem to be that category which is keeping it going, fitness and dance. So I'm wondering, what's the channel inventory situation look like as far as you can tell, both either for yourself or in general, for the Wii out there?

[Michael Vesey:]

Yes. For us, we're in good shape. I mean, I think Wii title is Zumba and that inventory kind of -- I think I'll let Jesse comment on the overall view.

[Jesse Sutton:]

Yes, you're right. I think you're right in terms of the trends of the industry as to what sells and what doesn't sell on the Wii these days. Fitness still sells and it still sells really well. And we're definitely seeing probably see 2012 act as the transition year between the development and the continued growth of the Kinect as the Wii hits its high point.

[John Taylor:]

Yes. Have you gotten any anecdotal evidence that suggests that fitness and dance is actually driving adoption of 360 and Kinect?

[Jesse Sutton:]

For the Kinect, probably anecdotal. I think that MTV results are clearly showing that whether it's dance, games or fitness games are the main games driving the sales of that platform, and I think the year of 2012 is going to be the year that Microsoft works on diversifying that trend.

[Operator:]

At this time, we will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

[Jesse Sutton:]

I want to thank everyone for joining us on our first quarter earnings call, and we look forward to communicating our second quarter earnings call in June of this year. Have a great day.

[Operator:]

You too, sir, and to the rest of management, we take you for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.