PolarityTE, Inc.
Q4 2010 Earnings Call Transcript

Published: 19 Jan 2011

[Operator:]

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Company's Fiscal Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Todd Greenwald, Director of Investor Relations and Strategic Planning. Please go ahead.

[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, 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 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 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'll open the call with some highlights and the overview of our performance in the fourth 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. Then we would be happy to take your questions. In Q4, we generated a much smaller operating loss compared to the same quarter a year ago as a result of the healthier gross margin and a more prudent marketing investment. I would also point out that as a result of our October fiscal year end, essentially, all of our key holiday releases fell into our Q1 results and are not be reflected in this Q4 report. Importantly, fiscal 2011 is off to a strong start, driven by the November launches of Zumba Fitness and Babysitting Mama as well as the continued reorders for the late October release of Crafting Mama. We recently announced that Zumba Fitness has quickly surpassed the 500,000 unit mark, and we expect to see continued reorders of that product throughout the coming year. The Mama brand is alive and well and continues to grow. We recently shipped our 8 millionth unit in the Mama franchise and experienced successful recent launches of Crafting Mama on the DS and Babysitting Mama on the Wii. Crafting Mama was a creative extension of the Mama brand and, combined with Gardening Mama, proves that Mama resonates with consumers and players will follow her in her many adventures. This provides us significant potential to further grow the franchise into many new directions. With the release of Babysitting Mama, we created a product that allows girls to play with the Mama in a unique and innovative way, using an interactive doll packaged in with the game. Designing and manufacturing the hundreds of thousands of plush toys was a big undertaking, but we shipped the product on time and to a warm reception at retail. Finally, we'd note that essentially all of Mama's success to date has come on only two platforms

[Michael Vesey:]

Thank you, Jesse. I'll first recap our results for the quarter and close with some comments about our guidance for the year. Before I start, I'd like to remind everyone that our revenues and release slate is significantly concentrated during the holiday selling season. In the case of the just ended 2010 holiday season, two of our primary releases, Babysitting Mama and Zumba Fitness, were released in November 2010, which falls in the first quarter of our 2011 fiscal year. Additionally, Crafting Mama for the Nintendo DS was released during the last week of fiscal 2010 on October 26. As a result, the large majority of our holiday sales will be reported in our first fiscal quarter of 2011 ending on January 31, 2011. We'll be reporting these results in March. As an overview, the fourth fiscal quarter of 2010 reflects a reduced non-GAAP net loss from $5.4 million in the fourth quarter of 2009 to $1.5 million in the current year on slightly lower revenues. The improved operating performance is attributable to a decrease in impairments of games in development and reduced selling and marketing expenses resulting from a shift from a direct distribution to a licensing model in our European operations. Revenues for the three months ended October 31, 2010, were $23.4 million compared to $23.9 million in the comparable quarter last year. As I mentioned, during the fourth quarter of fiscal 2010, we released Crafting Mama along with five other titles

[Jesse Sutton:]

Thanks, Mike. With the 2010 holiday now behind us, I'd like to also take a moment to recap our holiday experience. First, the industry got a nice jolt of energy from the robust launches of new motion control devices from Microsoft and Sony. Both Kinect for the Xbox 360 and the PlayStation 3 Move got off to very good starts, and we are optimistic about their potential moving forward. We are very excited about these new initiatives, and we feel they reflect a common sense within the industry consistent with our strategic focus that the great opportunity ahead continues to be offering quality entertainment experiences to the broadening gaming demographic. And whether it's 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 impacting all sectors, great software will gain great traction. Majesco supported all motion platforms, including Wii, Kinect for Xbox 360 and PlayStation Move with our exhilarating Zumba Fitness product, and we believe this support is paying off. We expect to have even more products launching in 2011, which will support all of these new platforms as well as the brand-new Nintendo 3DS, which launches in North America in March. In addition to Zumba Fitness, both Babysitting Mama and Crafting Mama experienced successful launches with hundreds of thousands of units sold and should be valuable additions to the Mama franchise and to our overall catalog. As a franchise, Mama has now sold over 8 million units across eight titles in the past five years. We are also excited to announce that Mama has just launched on Facebook with the exciting new app, COOKING MAMA FRIENDS' CAFÉ. The game is free. It's free to play with the freemium model and is an exciting new opportunity to broaden awareness for the Mama brand while introducing a viable new revenue stream for the company. While the game is free to play, we will monetize the game play by selling virtual goods. Despite currently being in beta mode and with almost no marketing support as of yet, COOKING MAMA FRIENDS' CAFÉ for Facebook already has over 250,000 active users. COOKING MAMA FRIENDS' CAFÉ's game play and art style are highly innovative and differentiated from other games on Facebook. The experience features immersive mechanics and an overall aesthetic similar to those in the Cooking Mama console and handheld games. Moving beyond the holiday, let me discuss some of the exciting new areas for the industry, which we think Majesco is well positioned to capitalize on. In addition to the recent introductions of the Kinect and the PlayStation Move, we are also extremely excited about the new 3DS handheld system from Nintendo, which is expected to launch in North America this March. We believe this will be another huge hit for Nintendo, building on the success of the original DS, which has now sold over 135 million units of hardware worldwide. While our growth of the DS sales have been somewhat sluggish as of late, we believe the 3DS will usher a robust upgrade cycle and be a meaningful catalyst for the handheld market, which should be beneficial to Majesco as well. In 2011, we will be supporting the 3DS with our biggest and best brands as well as some new IPs, which will take full advantage of the 3D screen, camera and accelerometer controls. Just today, we announced two new titles in development for the 3DS

[Operator:]

[Operator Instructions] And the first question is from Sean McGowan of Needham.

[Sean McGowan:]

Couple of questions about the outlook. Looking at the change in revenue that you're forecasting, I would think that you would get more leverage from that kind of revenue growth given the amount of reduction that you've seen in your operating expenses. Can you talk about whether or not there are changes going on at the gross margin level or at other costs that might offset some of that leverage?

[Michael Vesey:]

Yes, sure. I think the gross margins next year we're projecting to be improved over the current year mainly from the launch of Zumba. It's maintaining a good price point with very little discounting, so the gross margins are higher there. But as you've probably seen, we run a couple of TV advertising campaigns for both the Babysitting Mama and the Zumba line. So I think our advertising expenses will be higher next year. So some of the higher gross margin dollars are getting invested in advertising. And then we also are making a -- as we ramp up our game development, we're making an investment in our development capabilities. About a quarter ago, we announced we brought Chris Gray on out on the West Coast to enhance our development capabilities, and we're establishing a little bit of a presence on the West Coast that will have a slight increase in our product research and development costs out there.

[Sean McGowan:]

Now regarding the first quarter, which you say is off to a pretty strong start, would you expect that quarter to show increased sales and earnings per share as compared to first quarter of 2010?

[Jesse Sutton:]

We're not commenting on the first quarter with specific numbers at this time, but I would say that we're very happy with the results as is. And they were definitely, being that the first quarter represents probably the most important quarter for us historically, that will probably be the same thing here.

[Operator:]

And the next question is from Jon Gruber of Gruber & McBaine.

[Jon deRoy Gruber:]

Question on the Mama franchise. It was down $12 million last year, according to my calculation. It was 49% to 44%. How do you expect it to do this year?

[Jesse Sutton:]

From a percentage standpoint, I think we probably remain relatively consistent into this year as far as forecasting is concerned. The continued success of Zumba and other products might impact that over the course of the year. But from a forecasting perspective, I think that's a fair general point.

[Jon deRoy Gruber:]

Well then, if that's the case, if it's the same percentages, then it’ll go up in dollars or if even it’s flat in dollars, with Zumba being such a big number, I don't know how the heck you get $75 million to $80 million, $85 million to $90 million, which is lower than you were a year ago, $94.5 million a year ago. I mean you got huge jump in Zumba this year. That means that everything else is down a lot.

[Jesse Sutton:]

Actually, really, what it does is essentially, if you look at the 2009 numbers, where Jillian Michaels was a major and impactful player at that time, I would say that you can definitely make a corollary between the success that Jillian had in 2009 and the success that we're seeing now with Zumba, these are [ph] more platformed Zumba. And we'll see how they continue to sell. We're optimistic about it, and we'll give you more information as the first quarter earnings call comes up in March.

[Jon deRoy Gruber:]

If that's the case, why wouldn't it be over '09 then, your guidance, instead of under?

[Michael Vesey:]

I think there's a wide range of possibilities in terms of the reorder tail on Zumba. So obviously, we made some estimates that weigh into that. And as the year goes on, we may find out that the actuality is different than our estimates. In terms of a split this year, the original question was about the Mama line. And when you look at the Mama line this year, we have the addition of Babysitting Mama. So we expect to get some reasonable growth from that, which we did not have the prior year we released like that. And we're looking for Zumba to contribute significantly in the first quarter, but there's probably a wide range of estimates we can make for the reorders for the rest of the year.

[Jon deRoy Gruber:]

Zumba, your wholesale price you get is how much?

[Jesse Sutton:]

Well, the retail price points on the Zumba, there's three different platforms

[Operator:]

The next question is from Ed Woo of Wedbush.

[Edward Woo:]

How would you characterize the retail environment right now? I know we had a very strong sales on Kinect, but it seemed that Wii and DS were down a lot year-over-year.

[Jesse Sutton:]

I think if you had the right products in both platforms, you still did pretty well. I mean, the Wii on Zumba is a very successful product for us. Babysitting Mama is a successful product for us on the Wii, and Crafting Mama is doing really well for us on the DS. As a whole, I think we've seen that the DS and the Wii have consistently been really good holiday sellers as opposed to throughout the year. And I think this year's launch of the 3DS will not only have a major impact on the 3DS, but I think Nintendo will reinvigorate the DS market as well with promotions and what have you. There's still going to be a very large installed base, and they're going to continue to make important titles like Pokémon Black and White and many others throughout the course of the year to help install some energy in that platform. So I think retail is -- there is a change going on. There's the shift happening in the industry. And I think that the shift that's happening is benefiting us in many ways, primarily the most exciting launches coming up are ones that focus on demographics that we focus on today.

[Edward Woo:]

What do you think about the market opportunity for Zumba outside of the U.S. ? Do you think it could be as big as the regular market is?

[Jesse Sutton:]

Well, we have launched the Kinect version in Europe, and it's successful and is a top 10 Kinect title in the U.K. , which is the leading market in Europe for the Kinect platform. And we'll be launching the Wii and PS3 versions in February. And Zumba has a very big following in Europe, so we're hoping that it continues to add to the momentum we built here.

[Operator:]

[Operator Instructions] The next question is from John Taylor of Arcadia Investment Corp.

[John Taylor:]

Seems like one of the things which has gotten in the way of profitability in the past is either green lighting games or get killed before they ship or the secondary titles that don't come through. So I wonder if you can talk a little bit about what you're doing to eliminate the losers and allow some of the profits from the good things flowing through. Let me just give you my list here if I can. The second thing is I wonder if you could give us any kind of attempt at quantifying what the market spend is going to be. I think this is a little bit of a difference from what you've done in the last couple of years when you've really been watching your operating expenses closely. So maybe give us a sense of what you're willing to bet on the winners. The third one is what's going to be the full dilution count for a profitable quarter and for the year? What are you assuming there? And then the last question, I guess, is on the licensing deal for Zumba internationally and whatever else, is that a per-unit thing you're getting a percentage? Could you give us a sense of kind of how we can try to guesstimate what that is based on how the thing sells in Europe?

[Jesse Sutton:]

I'll answer the first question and, Mike, you can take the next two. So as far as what we're doing better to make sure we essentially make less mistakes and give us more opportunities for the big hits, there's a few things. First of all, and I'd like to point out specifically, with the hiring of Chris Gray, who was at Electronic Arts and brings a lot of those processes that he learned there here, along with his production staff that he's built that's based in San Francisco and probably here as well, and we've put in a very rigorous green light tracking process that not only looks at a product early on to determine whether it's going to be green-lit but very closely watches the development process from an expectation standpoint and makes sure that we're doing everything we can to make sure the product itself lives up to what our expectations are for it to be and if it doesn't, to cut the cord really quickly. And on the other side of the coin, with Christina Glorioso coming on and what we've been doing for the last year, we've been really focused on research, doing lots of research whether it's research on demographics itself, whether it's research on brands, whether it's research on kinds of game play mechanics and for that matter, whether it's even research on packaging, which Zumba, for example, is the perfect example of, as well as Babysitting Mama. We have really taken a very focused approach towards learning as much as we can about the product, the marketplace, the demographic and everything that comes with the products that we’re potentially determining, and before we determine to green light it, while it's in development process and prior to its launch. These are things that we're spending a lot more time on and that we have a lot more expertise in the company than we historically have. So those are just a couple of things that we're doing.

[John Taylor:]

Have you cut anything out since you've got Gloria and the new guy from EA on?

[Jesse Sutton:]

Have we cut anything out?

[John Taylor:]

Yes. In other words, there was stuff in the pipeline prior to their arrival. Have you eliminated any of that?

[Jesse Sutton:]

What I would say is that things that were not necessarily green-lit yet were maybe more quickly removed than they might have been beforehand. But no specific examples to point out.

[Michael Vesey:]

Yes, I’ll address the marketing spend first. So the year that just passed with our reduced marketing or advertising plans from the year before, we spent about 11% of our net revenues in marketing. We think we're going to have a higher number next year as we discussed. Want to point out it’ll be concentrated in titles that have at least a proven acceptance with consumers as opposed to the marketing we did a couple years ago, which was for trying to establish our own brands. But that could increase to as much as 15% for the year next year of net revenues, with first quarter being skewed towards the first quarter as we did our holiday and launch advertising. So it could be a couple points higher than that in the first quarter but expect it to settle right around 15% for the year. In terms of our share count outstanding, the first quarter, you'll see about 37.5 million shares outstanding, and it'll be a little over 38 million for the year for the share calculation.

[John Taylor:]

Does your guidance include some of the things you intimated? Like, does it include all the 3DS? Does it include Martha Stewart if and when something gets announced? Does it include the Harley Pasternak stuff? So in other words, does it include titles that don't have names yet or launch date?

[Jesse Sutton:]

Yes, it absolutely does. It doesn't include to-be-determined product. It includes all the products that we know that we're in the process of developing and marketing and publishing this year.

[Operator:]

Your next question is from the David Bench of Trinidad Capital.

[David Bench -:]

Can you talk for a minute about your expectations in Europe on a percentage basis for the year? Obviously, you're launching Zumba there. Is there anything else that you're looking to do in Europe? Also, it looks like based on your schedule here, that you have nothing for the 3DS launch. Is that true? Are you waiting for the fourth quarter? And if so, why did you decide to go that route?

[Jesse Sutton:]

I'll take the second one first. Mike, if you want, you take the first one. So in terms of the 3DS platform, David, we feel like building a little bit of an install base will be helpful for the products that we're coming out with. It's nice to have launch titles, but the development process on the 3DS is a lot more rigorous than it is on the DS and requires real -- it's a brand-new platform. 3DS gaming mechanics is going to be very new to everyone, and we're going to make sure that when we do it, we do it right. So the goal is put products out as the -- likely sell into the holiday season when we always see the biggest movement for our products on retail and acceptance there as well and as the install base grows for the platform as well. Mike?

[Michael Vesey:]

Addressing the amount of European business we have included in our guidance, I guess, was the question. As you know, we just entered into a licensing type of business model there, and we did enter into an agreement to distribute our holiday titles from this holiday season with Zumba being the front-runner there. The revenue included in our guidance is probably a nominal number, say, 1% of revenues or less. We didn't really plan for a lot of upside there yet. As we work through our slate for the rest of the year and sign those up to licensing opportunities, perhaps we'll have updates there. But it's not a significant part of our revenue in our current plan.

[David Bench -:]

And can that scale at any point if Zumba does what it did in the States or was doing actually in the States and get much higher number than 1%? Or are you really just netted out pretty low on that?

[Michael Vesey:]

I mean, it has the potential to do that. We don't have any -- until it gets released and we see what the traction is going to be, we don't have anything to really base, say, a statement on upside on.

[Jesse Sutton:]

Yes, I mean, the leading platform right now for us for Zumba is the Wii. The Kinect is not lagging too far behind. The Kinect’s the only platform that launched so far in Europe, and the Wii is yet to launch. So as we get more data and we have more information, we'll be able to give you more accuracy relative to the European business.

[David Bench -:]

And then on the holiday season, holiday releases, it looks like based on the guidance you're giving, that you're really pushing everything into 2012 with the exception of a couple 3DS games here. Can you talk to that a little bit in terms of is there a possibility for more to kind of shift forward into October? Or are you just assuming a lot in November again in 2012 or 2011, '12?

[Jesse Sutton:]

The answer is a little bit of both. First, we haven't announced all our titles that will be released during the fiscal year yet. Even though, we're working on titles and we're determining what the release date will be, some of which will probably be in fiscal 2011. Until we come up with a final range of dates and a final name and concept for the game, we don't release them to the public. So we'll be filling out this chart as we go throughout the year. We think a lot of the games we're working on for the holiday will flow into 2012 as they did this year. Perhaps some of them will be released late in the Q4, and we'll have to update that later.

[Operator:]

Your next question is from George Strum [ph] of Morgan Stanley.

[Unidentified Analyst:]

Just wondering in your projections for this year, what are you looking at in Zumba as far as sales are concerned? And also, what comes down up to the -- what gross do you make on every Zumba that you sell, gross revenues?

[Jesse Sutton:]

We don't talk about specific gross revenues per product, gross profits on revenues per product. And as far as the overall expectation is concerned, we put it in as part of the rest of the portfolio. We don't break out products. What I could say is that as we hit certain milestones like we have already, having sold over 500,000 units, the next milestone, as we hit 1 million units, you could expect to hear that information from us. So as material information develops here, we'll make sure that the market is aware of it.

[Unidentified Analyst:]

I want you to know I called Best Buy and Walmart and Target, and they were all out of it. So I had to go on to Amazon, and I actually paid $61. And it just got delivered today because I'm going to have my grandchildren take a look at it. I think I got ripped off. That's for the Wii.

[Jesse Sutton:]

Well, I can tell you, we are doing everything we can to make sure everybody is fully stocked, and we're happy to tell you things are moving along very well, so.

[Operator:]

This concludes the question and answer session. I would like to turn the conference back over to Jesse Sutton for any closing remarks.

[Jesse Sutton:]

I want to thank everybody for coming on this call today. Happy New Year to everyone. Looking forward to talking to everyone again on our first quarter earnings call in March. Have a great day.

[Operator:]

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.