PolarityTE, Inc.
Q3 2010 Earnings Call Transcript

Published: 15 Sep 2010

[Operator:]

Good afternoon and welcome to the Majesco Entertainment Company fiscal third quarter 2010 earnings conference call. All participants will be in a listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Todd Greenwald [ph], Director of Investor Relations and Strategic Planning. Please go ahead, Mr. Greenwald. Thank you, operator and good afternoon. I'd like to welcome you to Majesco Entertainment's conference call.

[Todd Greenwald:]

Thank you and good afternoon. I would like to welcome you to Majesco Entertainment’s conference call. Before we get started I would like to remind you that the call is being recorded, and an 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 31st, 2009, 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, settlement of litigation, changes in the fair value of warrants, the closure of the California development studio, severance, and the 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 a 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, interim Chief Financial Officer. I'd now like to turn the call over to Jesse.

[Jesse Sutton:]

Thanks, Todd. I will open the call with some highlight and an overview of our performance in the third quarter. Mike will follow with the financial review and I will conclude with an update on our product slate for the rest of the year, and then we would be happy to take your questions. While our revenues were down for the quarter versus last year, they were consistent with our internal expectations. The revenue decline was almost entirely due to a lighter release slate than the same quarter a year ago. This year, our only significant new release in the quarter was Tetris Party Deluxe, compared to last year’s releases of the Night at the Museum, continued strength of Gardening Mama, as well as 11 other releases on the Wii and DS in the quarter. Going forward, our fourth quarter is off to a strong start and will be driven by Greg Hastings Paintball 2, Crafting Mama, and My Baby 3 and Friends. We are especially excited by this year’s holiday line-up, which includes Babysitting Mama, a significant new addition to the Mama franchise, as well as Zumba Fitness, which is an innovative dance fitness party that will be released on the new Kinect for Xbox 360, PlayStation Move, and the Wii. Initial demand from retailers is shaping up well for both Babysitting Mama and Zumba Fitness. We continue to make progress with new properties, including Martha Stewart, Zumba Fitness, and My Baby 3. We also have much more in store for next year with many new titles and brands that we have not yet announced. Our efforts to leverage the strength and popularity of our Cooking Mama franchise continue and for the first time, we will be launching two new Mama brand extensions this holiday

[Mike Vesey:]

Thank you, Jesse. First, I will recap our results for the quarter then close with some comments about our guidance for the year. To start, I would like to point out that our revenues and operating results vary significantly from quarter to quarter based on the timing of our new release titles and the holiday selling season. We operate with a fiscal year ending October 31st. So generally our highest revenue quarters are first and fourth quarters, which reflect the holiday selling season while the second and third quarters are generally slower. You will see our results for the third fiscal quarter of 2010 reflect lower revenues, lower expenses and a reduced non-GAAP net loss from the prior year. Revenues for the three months ended July 31st, 2010, were $12.2 million, compared to $17.2 million in comparable quarter last year. The prior year’s quarter results include revenues from two initiatives that we decided to move away from as related operating expenses resulted in unacceptable levels of profitability, namely, the introduction of our line of Go Play branded titles for the Nintendo Wii, which required substantial advertising support, and the building of a direct distribution business in Europe. We have now transitioned to a licensing model in Europe, which we expect will result in comparatively lower revenues, but also lower operating expenses and better profitability. As far as significant releases in each quarter, the third quarter of fiscal 2010 included Tetris Party Deluxe for the Nintendo Wii and DS. The prior year’s quarter was impacted by two releases

[Jesse Sutton:]

Thanks, Mike. With the 2010 holiday on the imminent horizon, I would like to also take a moment to talk about our excitement about this year’s holiday selling season. There are many new control devices launching in the coming months. In a few weeks, Sony will release the PlayStation Move. And in less than two months, Microsoft will launch Kinect for the Xbox 360. We are very excited about these initiatives, and we feel they reflect the common sense within the industry consistent with our strategic focus that the great opportunity ahead continues to be offering quality entertainment experiences to the growing demographics in gaming. Whether it is new control schemes, new digital platforms, or new hardware platforms, we believe the common theme is that mom, kids and families are all playing more games more than ever. We believe this is an affirmation of the general strategy we have pursued and that despite the fluctuations of the economy itself in all sectors, great software will gain great traction. We believe our 2010 line-up is perfectly suited to take advantage of these trends, and we are encouraged by early indications of demand for our holiday releases. We are featuring a solid line-up of titles. From promising brand extensions to quality licenses and fresh IP. Key titles include Zumba Fitness, Greg Hastings Paintball 2, Crafting Mama, Babysitting Mama, My Baby 3 and Friends, and Flip's Twisted World. Majesco is excited to be supporting both PlayStation Move and Kinect with our exhilarating Zumba Fitness product. In addition, Babysitting Mama and its innovative play mechanic with a plush doll should stand out very prominently on store shelves this holiday season and be a great extension of the Cooking Mama franchise. Looking out to holiday, let me spend a few moments on the titles that we are most excited about here at Majesco

[Operator:]

Yes, sir. (Operator instructions) Our first question comes from Sean McGowan from Needham. Please go ahead.

[Sean McGowan:]

Hi, guys. Actually I have two questions, first, on the Zumba, do you expect, Jesse, that that would primarily be a Wii title in terms of the ultimate sell through even though it may actually play better on Kinect and Move just because we have installed base, so tip towards Wii?

[Jesse Sutton:]

I think that’s a good question. You make a good point in that the installed base is still large on Wii right now that this – that the Move and the Kinect are essentially playing catch-up, but there is going to be a lot of focus on the platforms, on the new platforms, specifically for Zumba, and not only by us, but even by the first party. So, there is going to be a lot of focus on and I believe that the game play mechanics, which play really well on Kinect and same on PlayStation 2 alongside the Wii. But really the Kinect with its fully body movement is going to be really well received and should do justice as well across the board.

[Sean McGowan:]

Okay. And the secondarily, I wanted to ask you about has to do with the two baby products. So, can you comment on kind of the demographics of who would buy My Baby versus who would buy Babysitting Mama, and can you clear up any questions that might be about the rights surrounding My Baby?

[Jesse Sutton:]

Okay. I will work backwards. There is really nothing to – for us to talk about with regard to the rights. We’ll be shipping the product as we announced at the end of – or at the middle of October. That doesn’t change and there is nothing to talk about there. However, as far as the demographics are concerned between the two, they both are geared towards six to 12 year-olds, primarily girls, and – which is really right now for the DS the main demographic for the platform.

[Sean McGowan:]

Okay. Thank you.

[Operator:]

Our next question comes from David Bench [ph] from Trinidad Capital [ph]. Please go ahead.

[David Bench:]

Hi, guys. While I understand the OpEx cost-cutting that you guys have done, can you give a little bit more color on the gross margin and why the percentage was a little bit lower, I know that it was higher than previous years, but it actually was lower than last few quarters. And also if you can go into a little bit more on the 3DS, I know that – I think there was a talk about Bloodrain and some other titles coming back, if you can just talk about that.

[Mike Vesey:]

Sure, David, this is Mike. As far as the gross margin goes for the quarter, this is a slow quarter and our sales were pretty much dominated by catalog sales of our products, which had a lower margin. And also the new release was the Tetris title. So, the Tetris title is a well-known brand with very predictable sales and long legs in terms of its sales cycle. But the – in exchange for that predictability of performance, the royalty rate is somewhat higher than some of our titles where we have a large upfront cost and have higher margin going forward.

[Jesse Sutton:]

As far as utilizing old brands like Bloodrain or for that matter discussing a lot of the potential products down the line, I would just say that you can expect to hear a lot about those new products like that over the course of the next two to three months as things become more complete.

[David Bench:]

Great. And if you guys tell us just – give a sense of what you believe the cash position will look like as of the end of October, that might be helpful for us as well as other investors.

[Jesse Sutton:]

We don’t usually comment on cash position going forward, but I guess Mike can touch on the fact that – if you want to add to this – ?

[Mike Vesey:]

Yes, I think what we can say and what we did say was the – we are purchasing a lot of inventory for the holiday season and we would expect to deploy a substantial amount of our cash balance. So, I think when you – we are not going to be sitting on a large cash balance at the end of the year. We think it will be deployed in inventory purchases.

[David Bench:]

Okay. But, will you be going into your line or you don’t think there are a going to be a need to that at this point?

[Mike Vesey:]

Yes, when you say our line, our factoring agreement, yes, we will be factoring obviously with those as we do now and drawing down on that line as of October, yes, should expect to –

[Jesse Sutton:]

And we do that all year round.

[David Bench:]

Yes. Okay, thank you.

[Operator:]

Our next question comes from John Taylor from Arcadia. Please go ahead.

[John Taylor:]

Hi, I have got a couple of questions too from me. So, with the introduction of Kinect, it gives you guys an opportunity to get back on 360 where you haven’t been for a little while. I am wondering how you are thinking about that in terms of potential revenue contribution, if not in Q4, but I think – yes, not Q4, but say next fiscal year, kind of may be we are thinking single digit percent or double digit percent. How significant might that be?

[Jesse Sutton:]

What I would say is that I guess the best way to respond to that, John, is the way that we are currently viewing this new cycle of platforms, essentially new platform launches with the Kinect and the Move and even the 3DS next year, you will probably see a pretty even portfolio across all of the newer platforms combined with the catalog that we will be bringing into next year. So, I think you are going to see a pretty spread out – a broader base of our sales through all three – all four platforms, readily [ph].

[John Taylor:]

Yes, so because you’ve been pretty much nailed to Nintendo lately and of course Nintendo has been having kind of a rough year. So, this would seem to represent some big new and potential installed bases that open up some blue sky?

[Jesse Sutton:]

Oh, absolutely. We are keenly excited about the potential. I mean we have always been excited and we continue to be excited about the Nintendo platforms for this holiday specifically and especially for 3DS next year. But, this just broadens our demographic. I have always said we are demographic focused and not – demographic focused and platform agnostic. So, we are focused on the moms, the tweens, boys and girls in the family, and wherever those demographics go, we are going to follow.

[John Taylor:]

So, what is – can you give us a sense of what it costs to port a game that you’ve done of Wii already say to the Kinect or to take advantage of the other formats?

[Jesse Sutton:]

I can say categorically you can't really port anything. Everything has to be created from scratch to build a new and unique experience for those individual platforms, and that’s what we intend on bringing to the consumer.

[John Taylor:]

Okay. So, that’s a good lean in for a followup and that is, so, how much are you guys spending on product development in terms of cash, forget whether it gets expensed or capitalized, but what’s your cash development budget, say, for the current fiscal year and how do you think it’s going to differ next year?

[Jesse Sutton:]

What I would say is this. We usually, the way we have talked about it in the past is that our games on Wii had been around $0.5 million to $1.5 million and the games – to develop – and the games on DS have been anywhere from 250 to 700 on the really high end, and – the rare high end. And it really is going to be no different from these new platforms.

[John Taylor:]

Okay. All right, great. And then, could you characterize for me the sales and marketing budget in the fourth quarter compared to the Q4 of last year and do you think that’s going to change much as you go into the next fiscal?

[Jesse Sutton:]

Q4, you want to put in a word –

[Mike Vesey:]

Yes –

[Jesse Sutton:]

As far as the costing.

[Mike Vesey:]

Yes, the sales and marketing budget in terms of how much we are going to spend in the – on holiday marketing –

[John Taylor:]

Yes, because you’ve nailed down operating cost pretty tightly and I am just wondering, are you going to loosen that up a little bit or how are you thinking about that?

[Mike Vesey:]

Yes, we are going to spend some advertising for the holiday season. The majority of it we think would be in the next fiscal quarter although there will be some advertising to spend against our initial launches. So, it will be – we think somewhat in line or slightly lower than last year’s fourth quarter.

[John Taylor:]

Okay. And then last question, the roughly $80 million you are thinking about, whatever the range is, what percent is likely to come from non-US markets and how do you think that percent is going to change next year?

[Jesse Sutton:]

At this point, it’s very, very nominal what we would be expecting from the international markets. Today, we are just licensing out most of our products internationally and not doing distribution, so you are really are talking about less than 5%.

[John Taylor:]

Okay. Okay, great, thank you.

[Operator:]

(Operator instructions) And, ladies and gentlemen, this concludes our question-and-answer session for today’s call. I would like to turn the conference back over to management for closing remarks.

[Jesse Sutton:]

I want to thank everyone for cutting in on the call today. And we look forward to discussing our fourth quarter 2010 highlights in January.

[Operator:]

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.