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Mad Catz Interactive, Inc. (NYSEMKT:MCZ)

F3Q13 Earnings Call

February 5, 2013 5:00 PM ET

Executives

Norberto Aja – IR

Darren Richardson – President and CEO

Allyson Evans – Interim CFO

Analysts

Justin Ruiss – Sidoti & Company

Elliot Christian Auburn – Private Investor

Stan Trilling – Credit Suisse

Paul Slack

Sean Liddell

Brian Hopes

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Mad Catz Fiscal 2013 Third Quarter Results Conference Call. During this presentation, all participant lines will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) Quite note, this conference is being recorded, Tuesday, February 5, 2013. And it is now my pleasure to turn the conference over to Norberto Aja. Please go ahead sir.

Norberto Aja

Thank you, operator. Good afternoon everyone and welcome to Mad Catz’s fiscal 2013 third quarter conference call. With me on the call today are Darren Richardson, Mad Catz’s President and CEO; and Allyson Evans, Mad Catz’s Chief Financial Officer.

Darren will begin the call by providing an overview of the results and the principal drivers behind them. Afterwards, Allyson will review the financial results in greater detail, before returning the call back to Darren for some closing remarks.

Before we begin however, let me just take a few minutes to go over the Safe Harbor language. Today’s discussions will contain forward-looking statements about the Company’s financial results, estimates and business prospects that involve substantial risks and uncertainties. The Company assumes no obligation to update the forward-looking statements contained in this conference call as a result of new information or future events or developments taking place.

You can identify these statements by the fact that they usually contain or use the words such as anticipate, estimate, expect, project, intend, plan, believe, and other words in terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause actual results to differ materially are the following: the ability to maintain or renew the Company’s licenses, competitive developments affecting the Company’s products, current first party price reductions, price protection taken in response to price cuts, the ability to successfully market both new and existing products domestically as well as internationally, difficulties or delays in manufacturing, delays in the Company’s ability to obtain products from its manufacturers in China, and market and general economic conditions. A further list and description of these risks, uncertainties and other matters can be found in the Company’s reports filed with the appropriate regulatory authorities.

Today’s call taking place February 5, 2013 and a webcast includes non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release.

With that, I would now like to introduce Darren Richardson, President and Chief Executive Officer of Mad Catz. Darren?

Darren Richardson

Thank you, Norberto, and good afternoon everyone. Thank you for joining us on our fiscal 2013 third quarter conference call. Clearly it has been a difficult 12 months in the videogames space with a number of publishers and retailers filing for Chapter 11 Bankruptcy protection and similar uncertainty on the PC side. But our fiscal third quarter sales started with – while our fiscal third quarter sales started with promise, they began to fade up with Thanksgiving in the phase of weaker than expected consumer demand, the losses from retail placements in the United States and the ongoing decline of our legacy product categories.

That said the performance of specific Mad Catz categories, our ongoing international sales growth and our year-to-date results including the second highest net sales in the Company’s history demonstrate we’re outperforming the industry. In the third quarter of fiscal 2013, sales of PC and Mac input device products predominantly gaming mice and keyboards grew 40% and accounted for 19% of sales. Sales of audio products grew 33% and accounted for 54% of sales.

That translates the 73% of the business growing at over 30% for the quarter, something we’re very proud of. And on the international front, third quarter sales to Europe and other countries rose 6.6% to $26 million and accounted for 58% of net sales. For the first nine months of fiscal 2013, sales of PC and Mac input device products grew 52% and accounted to 20% of sales. Sales of audio products grew 33% and accounted for 48% of sales.

On a year-to-date basis, net sales grew by 11% with European net sales up 15%, Asia-Pacific up 126% and Canada up 44%. This solid international growth was partially offset by a 4% decline in U.S. net sales. With 68% of our business growing at over 30% on a year-to-date basis, we’re confident that the initiatives undertaken over the past couple of years to reposition the Company are now evident in our operating trends, despite the ongoing cautious consumer environment and challenging industry trends.

We’re continuing to realize the benefits of our investment in additional sales and marketing in the fast growing Asia-Pacific region. In this regard, sales to other countries accounted to 2% of sales in fiscal 2011, 5% of sales in fiscal 2012 and 7% of sales in the first three quarters of fiscal 2013. Our gross margins for the fiscal third quarter and the year-to-date periods fell just shy about 30% goal. They improved significantly over the comparable prior year periods and were a key factor in our return to profitability on a year-to-date basis.

At the same time, we’ve made considerable improvements to the balance sheet and a significant year-over-year reduction in inventory and lower net debt. Operational execution was solid this holiday with new markets in the market early – with new products in the market early and with appropriate inventory levels. The high local licensing program in particular was very successful with multiple products arriving in stores around the world prior to launch supported by store displays and promotional programs.

Notably, although we still have some inventory in the channel, it’s not at levels that create any material price protection exposure. Our focus and our goal is to bring to market aspirational products to passionate [ph] our gamers. The results reported today indicated that Mad Catz can continue to succeed if we build on our strength and focus on targeted segments within the videogame industry while expanding our distribution footprint. In doing so, we are bringing consumers products with designs and features that are central to their gaming experience.

With that I’d like to turn the call over to Allyson to provide some additional color on the results. Allyson?

Allyson Evans

Thanks Darren. Beginning with a review of the income statement. Net sales for the third quarter of fiscal 2013 decreased by 3% to $45 million, compared to $46.2 million in the third quarter of fiscal 2012. This slight drop was primarily driven by the continued reduction of sales of legacy products, particularly in the U.S. markets and was partially offset by the strong performance of our Tritton audio products and our Mad Catz branded gaming mice and keyboards, both domestically and abroad.

Looking at our sales by geography, North American sales decreased by 13% to $19.1 million for the third quarter of fiscal 2013 and represented 42% of total net sales, compared to 48% of sales in the prior-year period. European net sales increased 2% to $23.2 million and represented 52% of total net sales compared to 49% of net sales in the third quarter of fiscal 2012. Net sales to other geographies increased 78% to $2.8 million representing over 6% of total third quarter net sales, compared to 3% a year-ago. Overall, non-US market now accounts for over 59% of our sales, the highest percentage to-date.

In spite of the slight downturn in sales, gross profit increased by 15% to $12.9 million from $11.2 million in the prior-year period, and gross profit margin improved 4.3% from the prior year period to 29% in the third quarter of fiscal 2013. The increase in gross margin was primarily related to reduced inventory obsolescence reserves taken during the third quarter compared to those recorded in the prior year period. Going forward, we expect gross margins to remain at these levels over then plus or minus 2.5% of 30%.

Total operating expenses for the quarter decreased 3% to $8.8 million, representing 19% of net sales and leading to an operating profit of $4.1 million. This compares to $9 million of operating expenses, an operating profit of $2.2 million in the prior fiscal third quarter. The decrease in operating expenses was primarily driven by a strategic reduction in headcount in the sales and marketing team. The Company recorded a foreign exchange gain of less of $0.1 million in the third quarter of fiscal 2013 compared to a loss of $0.5 million a year-ago. The volatility in each period was primarily due to the fluctuation of the British pound and euro against the U.S. dollar and Hong Kong dollar.

For the third quarter of fiscal 2013, the company recorded income related to warrant liability revaluation of $0.3 million, compared to a $0.2 million in the prior period. After income tax expense of $1.1 million, net income for the third quarter of fiscal 2013 was $3.1 million or $0.5 per diluted share. In the prior year period, the Company recorded an income tax credit of less than $0.1 million resulting in net income of $1.5 million or $0.02 per diluted share.

Adjusted EBITDA, a widely used measure of financial performance was $4.9 million in the fiscal 2013 period compared to adjusted EBITDA of $2.5 million in the prior-year period. Looking at our cash flow, Mad Catz generated approximately $5.2 million in free cash flow during the third quarter of fiscal 2013, compared to a usage of $1.2 million in the prior year period.

Looking at our results for the first nine months of fiscal 2013, net sales grew 11% to $98.1 million leading to a gross profit increase of 25% to $28.2 million and operating income of $3 million, versus an operating loss of $4.3 million for the first nine months of fiscal 2012. This led to net income of $1 million and diluted EPS of $0.01, a very favorable comparison to the net loss of $2.4 million and diluted loss of $0.04 per share during the first nine months of fiscal 2012.

Moving onto our balance sheet, as of December 31, 2012, we reported borrowings under the revolving credit facility of $18 million, and a net position of bank loan less cash of $13.5 million. This compares to borrowings of $18.9 million and a net position of bank loan less cash of $15.5 million as of December 31, 2011. We have amended our credit agreement with Wells Fargo to remove the monthly EBITDA covenants. On a go-forward, basis the agreement will only provide for a fixed-charge covered ratio covenants. The credit limit of $30 million remains unchanged.

Inventories declined to $28.1 million from $36.2 million a year ago, in line with our expectation coming out of the holiday season. Inventory turns on a trailing four quarter basis were 2.7 times compared to 2.6 times in the prior four quarter period. The inventory reduction is primarily the result of selling the Tritton headsets that had been received late during the third quarter of fiscal 2012.

Accounts receivable of $28.4 million increased from $26.1 million a year-ago, primarily reflecting longer DSOs. Our gross DSOs were 66 days compared to 50 days a year-ago.

In summary, we are pleased with the progress we are making in the business as reflected in our results, particularly in our ability to drive increasing levels of profits to the bottom line. We are also comfortable with the continued help with our balance sheet and the liquidity position which gives us the ability to invest in the long-term growth of our business.

I’d now like to turn the call back to Darren for some closing remarks. Darren?

Darren Richardson

Thanks Allyson. The fiscal fourth quarter is trending similar to the third quarter, with continued international sales growth being offset by ongoing weakness in the U.S, markets. Although we expect the Xbox 360 and PlayStation 3 consoles to have a number of years left in their lifecycle, we are now at the backend of the current console lifecycle and there are no definite dates for new console launches.

As a result, we expect to see the potential for some price compression as calendar 2013 progresses. We’ve made some meaningful progress on inventory reductions this year, but we believe there is still more room for further improvements, and working capital efficiency and gross margin improvements remain key goals. We’re excited about our GameSmart initiative announced earlier this month. There is little doubt smartphones, tablets and smart TVs have made significant inroads in delivering all forms of entertainment including music, movies, and books and that is also a vibrant games market by some of touch screen interface.

Smart devices also have the capability to connect to large screen TVs and when paired with the controller, deliver a gaming experience compatible to that of a console. Similarly when attached to a computer monitor and paired with the mouse and keyboard, smart devices can deliver a comparable PC gaming experience. Unfortunately the lack of standardization and compatibility across these devices makes it difficult to establish a vibrant ecosystem which is essential to sustaining a growing market.

There are currently a number of products tied to specific games through proprietary controllers, devices and interfaces that provides great proof of concept. However, we believe that consumers want to play the games of their choice, on the device of their choice, with the peripheral of their choice, just like the PC market today. They don’t want to be restricted to a subset of games that is solely compatible with a particular controller or device.

Over the past year, we’ve worked with chip suppliers, platform owners, handset makers, game publishers and developers, to create and promote a standard protocol and make that available to developers and publishers. As such, the bulk of the R&D costs are behind us and last month, at the Consumer Electronics Show, we announced the first wave of GameSmart products which we expect to launch in the first half of calendar 2013. Our GameSmart products incorporate proprietary technology. The platform is by as very nature open and not proprietary. In other words, proprietary in design, yet agnostic in application.

Most of the GameSmart products work on both PCs and Macs and in some cases consoles, so the success of the individual products is not tied solely to the GameSmart initiative. This is an ambitious project and will take time for the ecosystem to evolve, so we don’t expect meaningful revenue in calendar 2013. However we believe it could be very exciting for the medium term and beyond.

Going forward, we remain committed to our five key strategic initiatives for driving growth and profitability. Expanding our line of innovative products for passionate gamers, expanding our global distribution footprint, increasing our marketing and awareness efforts, investing in targeted software opportunities that present manageable risk by completing our hardware initiatives, and supporting the professional gaming community and developing products that live up to their exacting demands.

That concludes my prepared remarks for today. Before we move into the Q&A session, I wanted to take a moment to thank the entire team at Mad Catz for their continued commitment toward achieving our goals. I’ll now turn the call back to the operator so we can answer any questions. Thanks, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) First question tonight comes from the line of Justin Ruiss. You may now proceed with your question.

Justin Ruiss – Sidoti & Company

Hello?

Darren Richardson

Hi Justin.

Justin Ruiss – Sidoti & Company

How are you?

Darren Richardson

Good, thanks.

Justin Ruiss – Sidoti & Company

I just have – I had a quick question, with a lot of these publishers, it seems like we saw THQ, followed the website, you know it looks like there might be some consolidation or maybe just some – people just exiting the whole industry altogether, but do you think that the big players, the EAs and activations [ph], do you think they are big enough to sustain a growth rate for themselves in the industry and for you as well?

Darren Richardson

Yes, I think if you look at, I think Take-Two announced their results this afternoon as well and I haven’t had a chance to look at the detail but certainly the headline looks like they are very strong results. So what you’re seeing for AAA titles and AAA publishers that market is strong, it’s vibrant and there is no question that there is a consumer for a AAA gaming experience. And when you look at the product line that we’ve put together, it’s targeting that consumer that is really focused on that experience.

Once you get to the more casual games and that middle market of games, that’s where the whole mobile space, social games have really hollowed out the business so that now you have this really bifurcated market where you’ve got a vibrant AAA hardcore core gaming experience and then you also have a vibrant mobile space based on freemiums and all of those kind of things. So today we’re almost exclusively getting around the touch interface.

What we’re doing with the GameSmart initiative is to also open that space up to a console experience and to be able to create console style core gaming experiences using smart devices. And I think for game developers and publishers, but also for consumers you now provide an opportunity for people to take that some of that content across and to be able to run, if not the actual games themselves at least subsets of all those games on devices that they carry in their pockets so that they can actually play when they’re on the road, they can play at their friends place or in some cases for teenagers whose smartphone or tablet is the center of their universe, that could become their primary motive of playing games.

Justin Ruiss – Sidoti & Company

Thanks very much.

Darren Richardson

Okay, no problem.

Operator

Our next question comes from the line of Elliot Christian Auburn [ph] – Private Investor. You may now proceed with your question.

Elliot Christian Auburn – Private Investor

Hi Darren.

Darren Richardson

Hi Elliot, how are you?

Elliot Christian Auburn – Private Investor

I am well, thank you. I was hoping for a larger revenue number but taking it in perspective for what’s happening around the world to come close to last year, probably you can declare a victory. That being said several years ago, the goal was to get Mad Catz to be a $300 million to $500 million a year Company and the diversification was supposed to lead us in that direction. You’ve now got three years of experience, admittedly we are heading into a difficult macroeconomic period, but can you based on that experience to try to assess when we might get to that $300 million level?

Darren Richardson

Yes, in fact the $300 million to $500 million target is really one of necessity rather than just ambition, because as a public company, we have a fairly hefty burn rate in terms of public company expenses just to stand still. So the $100 million Company you just have too much of your OpEx go into being public and so you need to get to that $300 million mark before the public company cost becomes nominal rather than material to the earnings of the Company. So that’s still an essential goal for the Company to be successful. We need to get after that $300 million to $500 million.

Clearly the industry is going through some real challenges right now, not just the videogames space, but I think also the PC space and consumer electronics in general. Smartphones have been incredibly disruptive, and even in the last two years looking at the impact not just on videogames, but certainly across a broad spectrum of industry, that made massive changes. So we’ve had to adjust our goals and our targets and what we are doing in line with that, it’s been a hard to kind of find the correct entry point on the smartphone and smart device platform because of the number of different variations out there, but I think we’re now getting to a point where we can see a pathway to creating an ecosystem that provides the potential of a solid revenue stream coming of those devices.

Hopefully in the next not too distant future we’ll also see new consoles coming out from Microsoft and Sony, and that should certainly help drive the market forward. But I don’t think there is any doubt that – yes, there is disappointment across the entire space with where the macro environment is at today, but if we kind of scale back and look at what we’ve achieved within certain segments and regions of our business, I am very pleased with what we have achieved. If the overall market was in a different place, yes, there would be a much, much better outcome but that’s not what we are dealing with today. So we have to deal with what’s on the ground. So I believe we’re heading the right direction. The real question is when do we actually get to that point where we break out and if we can’t get to the point when we break out then I guess you then come to the conclusion that it does not make sense to be a public company with the kind of earnings results that you have and so you then have to take a different path.

Elliot Christian Auburn – Private Investor

Well in that regard Darren, are you seeing with the different product mix the opportunity to not be dependent on the third quarter for the highest sales in the year? Are you seeing any evening out in the long run or near term?

Darren Richardson

I guess the short answer is yes, we have got some reduction in that reporting the third quarter it to us. And over the years, we have seen the fourth quarter become a more meaningful quarter mainly because of the affect of gift cards and you’re seeing that across also the different industry segments. That said, I would still like to have a very strong holiday, strong and vibrant holiday period and frankly this year that’s not been the case.

Elliot Christian Auburn – Private Investor

Okay. Let me go to Combat Pilot for one second because that came out late in the third quarter and I am sure it did not have any meaningful impact on it? With regard to Combat Pilot, is that something that was developed so that you could increase Saitek sales and then put it in Saitek products or was it done as the opportunity to really making a standalone money maker for Mad Catz?

Darren Richardson

Well put it this way, we’d like it to be a standalone money maker but if all it was, was a marketing wheel of vehicle for the Saitek product line that that would be a success as well. One of the things on Combat Pilot is it’s not a big investment there, it’s done in-house with a very small team and it’s intended to be a longer term project that we think we can actually develop some momentum overtime. So that’s not a project where, A, we’ve spend a lot of money or B, we’ve spend a lot of marketing today. It’s really a matter of getting the product out there, getting it wedded, the reviews from the people who are on our own board and there are hardcore communities that’s on board are all very positive. And so we’ll see how we go, but we see the Saitek flight initiatives as really community building exercise in and around the Saitek brand and something that we’re committed to on a longer term providing we don’t burn a lot of cash doing it.

Elliot Christian Auburn – Private Investor

And I am curious what number of players on the Combat Pilot would you consider a success?

Darren Richardson

All…

Elliot Christian Auburn – Private Investor

To be standing success as opposed to just the additional sales of Saitek product?

Darren Richardson

It’s in the low thousands. So this is not something where we’re taking on quality or something like that, this is – it’s a fairly small initiative but it’s initiative that appeals to the hardcore of the flight sim community with all the leaders in terms of buying our flight hardware.

Elliot Christian Auburn – Private Investor

Okay. So relatively few thousand makes it worthwhile in your estimation?

Darren Richardson

I guess it’s not a particularly high investment in the development because it’s basically a community that sits on top of the existing Microsoft FSX software that most people use these days. So the model is actually quite innovative from that perspective and that it’s a community builds on top of a product that’s a phenomenal product that’s got millions and millions and millions of dollars spend developing it.

Elliot Christian Auburn – Private Investor

Okay. And I believe you said that you think that this is going to rollout overtime, can you give me or give us of some idea of how much time you think it will take to become a part of the Mad Catz community?

Darren Richardson

Well I think it would be very much part of the Saitek community rather than Mad Catz community, but it’s something that we can continue building on and similar initiative for the foreseeable future.

Elliot Christian Auburn – Private Investor

Good. And Darren you were constantly making reference to the passionate gamer, and I know those people are out there but that is probably in a limited universe, it seems that with the introduction of the mouse product and the F.R.E.Q.5, you are sort of opening the door to a wider universe of people to buy Mad Catz family of products, is that the case?

Darren Richardson

Well certainly with the M.O.U.S.9, there is a lot of people who love the R.A.T. and the R.A.T. has got the so many programmable options on it, that by the time you kind of like it takes someone who has got some technical capabilities to set that up and operate it. The M.O.U.S.9 has all of the adjustability that the R.A.T. does, but it’s a plug and play, simple product, so it’s a product that you can’t play games with, there is no question about that but if you want a similar product for work or for home or something like that it works nicely and we’re really responding that to a gap in the market that we see and the ability to crossover the success of some of our big homerun products that are hardcore gaming into a little bit of a lighter gaming franchise.

Elliot Christian Auburn – Private Investor

Okay. And then you I think have shied away from the – what I call the audio file markets, not wanting to compete with Beats and some of those people and yet the reports that I get on the quality of sound from the Tritton products is that it’s excellent. So if you don’t want to be in a head to head competition with the other players in the audio file market, is there any way to license the technology and create an income stream for Mad Catz without having to produce additional product or get into a market you don’t want to be in on a Company basis?

Darren Richardson

Yes, I think we haven’t shied away from lifestyle or headset products, just if you look at the majority of the Tritton products and certainly the best known Tritton products have surround sound as well as voice chat which is not that important when it comes down to just listening to music. But within the GameSmart project, we will be bringing out products there that become much more universal in the way you actually use products and the options, even with the F.R.E.Q.M. for example, you’ve got a product there that A, you can play the games, B, you can use it for PC gaming, C, you can use it via smartphone or any – or tablets all those kind of things and you could make calls, receive calls.

So we definitely view that space, but coming out with a Beats competitive is just – is a new Beats with – we don’t think that that’s A, we have the marketing resource or B, that’s very, very competitive space. And if you were at CES this year, you would see that probably one out of every five booths there was a new headset brand. So we think that’s an opportunity, but we want to come out at it where our primary consumer is our core gaming consumer and that consumer also does other things within their lifestyle.

Elliot Christian Auburn – Private Investor

I appreciate that and I am not encouraging you to open up a new area of competition. My thought was really more that Mad Catz and all of its components seems to be producing some really neat engineering capability and is there a way to take that engineering capability and make it itself a profit center outside of the products that you want to make?

Darren Richardson

And that’s something we would be kind of interested to explore as well, no question.

Elliot Christian Auburn – Private Investor

But is there any of that exploration now or is that for the future?

Darren Richardson

It would be for the future.

Elliot Christian Auburn – Private Investor

Okay. And you’ve always been somewhat shy about guidance, you said that the fourth quarter was already under some pressure, can you give us any level of expectation on what the fourth quarter can produce, because we’re basically going into a four month silent period until you have – the earnings call from you?

Darren Richardson

Yes, in fact one of the challenges we have with our business especially with the transformation of the business that we’re going through and the turmoil in the market, we have very limited visibility in terms of outlook for the business. And so at the moment, for the fourth quarter, it’s actually trending in a way that looks similar to the third quarter. What happens between now and the end of March, I don’t see anything that’s going to drive a material change to that, but it’s a skittish retail landscape, consumer spending is cautious, and so I don’t know see anything at the moment that changes, hopefully it gets better but difficult to predict.

And the other thing, we’re in a business where the bulk of our purchase orders are received on a daily basis with a two day fill window and if you don’t fill that then it’s killed and it regenerates again in the following week. So we don’t have a business where we have an order book that is out there for the next three months to give visibility. So when it comes to forecasting the business, trying to predict how resellers are going to actually model their inventory and where they’re going to place their bets, very, very difficult environment, I think for everybody not just for Mad Catz, but I think you’ll find that for pretty much everybody in the videogame and consumer electronic space.

Operator

And we’ll move on to our next question comes from the line of Stan Trilling. Stan Trilling, you may now proceed.

Stan Trilling – Credit Suisse

Hi Darren. Can you give us any sort of input on what products might be coming out in the next couple of quarters?

Darren Richardson

Yes, the key ones were the ones the products that we announced at the CES. And so that’s the R.A.T.M which I think is really cool product which is the mobile version of the award winning R.A.T Gaming Mouse and it works with PC Mac as well as for smart devices. So if you have certain Windows 8 tablets, it works on that, so you can actually put the mouse straight up with Bluetooth Smart or you can use a dongle if you are using a tablet that also accepts dongles.

There is a headset that goes along with that which is our first mobile headset. We also have the M.O.U.S.9 which we just talked about with Elliot with the simplified plug and play version of the R.A.T. but with all of the adaptability including our patented adjustable palm rest. And then the last one is the C.T.R.L.R, which is much more in and around the kind of heart of the GameSmart project. So that would take a little bit of time until we finalize and get to the board, on board with some additional operating systems and the likes. So that one’s much more of a development project but we have to have something out there in the next year.

Stan Trilling – Credit Suisse

All right, what size of the markets that you are going after with these different products?

Darren Richardson

Well if you look at the R.A.T.M, I mean obviously the – our PC-ID business is at the moment around that $25 million a net thousand and growing at 40% or 50% for the year. So we just continue to kind of build out all the products that augment that. Mobile mice has a category, it is a very large category. Mobile gaming mice, we actually think has a solid opportunity as well. So it looks – I think that’s a product that will get a lot of attention.

Stan Trilling – Credit Suisse

Can you be a little bit more definitive on the size of some of these markets?

Darren Richardson

Honestly, if you took the third-party data that’s out there in total, like measure the market, it has almost no correlation to what the market is. And so because so much of the business is done through e-commerce now and e-commerce is growing, it’s very, very hard to kind of get market data. Now our market share in that whole space is still relatively small. And so we know we’ve got a lot of upside in the space, but we are growing and if you look at other major players that in mice and keyboards, then you can see how much business they are doing and what their sales trends are, clearly we’re doing some things right.

Stan Trilling – Credit Suisse

Okay, thank you very much and good luck.

Darren Richardson

Okay, thanks Stan.

Operator

We have a few more questions. First question from the line of Paul Slack [ph]. You may now proceed with your question.

Paul Slack

Darren, thanks for taking my call. Couple of comments, yesterday I think we’re all disappointed about the soft sales that I’ve got to commend you on the operational progress you’ve made in increasing profitability and also those cash flow improvement numbers are astounding from the last year.

Darren Richardson

Yes.

Paul Slack

Kind of a quick question I had is are you going to maybe consider once again doing a reverse stock split in this coming year, next fiscal year, and if you don’t mind, what are the pros and cons of doing that?

Darren Richardson

Okay, let me hit that one. We looked at that, two years ago when we – the business was in a good place, we felt we had a very positive outlook and we thought that there was a benefit to reducing the share count and moving across the NASDAQ for better visibility. Now the reduced share count, the arguments for that is that a lot of analysts have requirements in terms of market cap limits as well as price per share limits and if you’re under a dollar it excludes you from a lot of different firms.

The second one is for some micro cap funds have $100 million and $5 a share limits in terms of what they can buy. So it is kind of like out at the face value, the ideal share count out there for a company of our size is probably about 20 million shares. Now the contrary to that is all of that stock is simply window dressing and if you go and actually build the company, and get the company operating properly then people will find their way to the share as people will actually find their way to buy. And so at this point we’re focused on getting the company back up and running to back to the promise where we were kind of like two years ago and slipped off the performance – the run that we had where we had those three nice record years in a row.

So today we’re still very much focused on the business. And if we get back to a point that we think that it does make sense to do a reverse split and move to a different stock exchange and give us more exposure to analyst coverage and micro caps then we would definitely put that to a shareholder vote at that stage and people can vote. But that’s definitely one of those things that some people very – feel very strongly for it, some people feel very strong against it. Right now, I think it doesn’t really matter that much, we’re focused on getting the business up to where it needs to be first.

Paul Slack

Darren, thanks for your input and have a good fourth quarter and a great new fiscal year which is coming up for you. Thank you.

Darren Richardson

Okay, thanks Paul.

Operator

We have a question from the line of Sean Liddell [ph]. Sean Liddell, you can now proceed with your question.

Sean Liddell

Hi Darren, something was kind of bothering me for a couple of years now was when the PIPE was done, there was lot of coincidental items that seem to happen, there was your investor presentation for $300 million to $500 million in sales, you had the one-time Rock Band in quarter and your positive commentaries during the conference calls and then the PIPE was kind of out of the blue, lot of focusing to be stored in the box, I was just kind of wondering if that was all maybe orchestrated with the investment bankers or if that was just a bunch of coincidences that happened to be real bad news for a lot of a folks that bought your stock in the ones – at high ones and twos?

Darren Richardson

Okay, let me first of all talk to the PIPE. We had a convertible note that was there at about $14.5 million which at that time had a strike price of a $1.43 and the stock was trading above $2.00 and our concern at the time was having that stock pool start to flow down into the market in an uncontrolled manner. It would have been our preference to do more of an orally take out of that particular $14.5 million note.

We ended up choosing to do a PIPE because of speed, not because we love the idea of doing a PIPE and taking out the risk of that $14.5 million block, just leaking out into the market over a longer period of time which we think would have been quite detrimental to the stock. Also by doing the PIPE and taking out that $14.5 million of convertible shares, we then managed to eliminate about $6 million worth of additional shares – six million additional shares coming out onto the market, and I think that’s loosely the number, so we’re able to avoid additional dilution.

So I note that some people the notion of PIPE equals dilution, we were actually in a very rare situation where the PIPE avoided dilution. And so it was a net positive for shareholders.

Sean Liddell

I guess my main question was – my main question was the part of the strategy worked out with the investment bankers to do the investor presentation with the $300 million to $500 million in revenues that obviously – that’s just a PIPE at this point not unintended?

Darren Richardson

No, and even with Rock Bank 3, we certainly envisage doing additional products along that front. And there is nothing that the $300 million to $500 million statement, by the way it’s being out there for a long time. That wasn’t a new thing and I’d characterize it the same way for the first time to the same way I’ve characterized it on this. If you can’t get the company the $300 million to $500 million, it really has no purpose of being a public company because the drag on earnings of the public company expenses are just too material unless you can generate some kind of extraordinary gross margins, you never kind of get the returns that make it a viable in longer term investment vehicle.

Sean Liddell

So what makes the call, like at what point do we decide that we’re not going to give this a go anywhere, it’s not worth being a public company either we get there?

Darren Richardson

Well if you look at the performance just in this last year, we’ve got 68% of the business growing over 30% year-on-year in a very difficult space and a difficult environment in which I think most people would agree has been a very difficult year for a whole bunch of industries. So it’s not that we don’t have the runway to actually get to those kind of numbers. You then throw on the next generation consoles which hopefully are within the next two years timeframe and then you look at the mobile initiative, the smart device initiative. I think if you look at Xbox has shipped about 70 million units hopefully on the way to a 100 million units, 70 million units in the last seven years and a 100 million units in 10 years. When you look at the numbers of smart devices getting shipped were you’ve got 650 million smartphones shipped in the last year, almost 50 million iPhone5 in the last quarter, having products that attach to devices that have those kind of velocities, you can actually get to that $300 million to $500 million very quickly if you have a product that stays.

Sean Liddell

Yes. I guess most people have mobile devices because they have the ease of carrying them around, I don’t understand how a peripheral with a mobile device is ever going to gain any kind of traction, I mean this takes the convenience part of the equation right out, I mean I don’t know…

Darren Richardson

What if you were a 17 year old kid and you have a TV in your room and you dock your phone to the room into the TV and you actually lie on your bed and play a videogame on the TV through your smart device?

Sean Liddell

Okay, well I don’t take any more…

Darren Richardson

And that’s the entire thing that we’re talking about here is bringing that whole gaming experience, the smart devices which if you actually try it and you can do it today, it’s shocking with how good the experience is, you’ve got great audio, great graphics, great performance, great games. It’s just that everything is tied to a touch interface which means you are upfront but there is no reason why you can’t dock a tablet to your TV as part of your entertainment center, and actually watch movies, play music or play games straight from that tablet and have a living room experience. Take the tablet upstairs and dock it to your computer monitor with a mice and keyboard and have a very similar PC gaming experience straight off that tablet.

It all exists today, the problem is there is no scandalization in the way that games interact with hardware or that hardware interacts with devices. And we’ve spend a lot of time, talked to a lot of people trying to work out all those things, we’re one part of the puzzle to making that a reality but there is a lot of people – there is not many people you’ve talked to in our industry that sort of think that that’s a stupid idea, most people kind of like get it, so we’d be able to get a lot of support, but that’s a long way for making it a reality. And if you still look at where smartphones have been successful, movies, books, music and then the touch games, they’re all big categories, console gaming is still bigger than each of those categories.

And so there is a massive opportunity out there. And when you look who is well positioned to actually execute on the hardware front, Mad Catz is actually one of the best positioned companies with a global footprint that’s doing killer products for people who would be the first adopters and only adopters of exactly the kind of thing that I’ve explained right there. And what we’re doing is bring out a portfolio of products that are going to be in the marketplace in the next worthwhile [ph].

One of the obstacles to doing games that worked that way is even if you did the game, you don’t have the device, the control devices that you can actually play with, now they exist. So there is one piece of the puzzle solved.

Sean Liddell

Okay, quite appreciated.

Operator

We have a question from the line of Brian Hopes [ph]. Brian Hopes, you may now proceed.

Brian Hopes

Hi everyone. I just want to make a comment, you know in regards to the control you are talking about where everything is going to be interfaced together, everyone is not aware of SteelSeries has one of these out right now and it’s absolutely phenomenal, and I see exactly what you’re talking about, I think the technology has great premise, I mean on the PC gamer and on the finance, you know the thought of having the ability to play a PC game that’s the PCs in my base and I am in my bedroom using my iPad and the controllers, it’s pretty phenomenal. So I like where you’re guys going with that. I had a couple of questions in just regards to the products line. The S.T.R.I.K.E. 7 mechanical keyboard that won a lot of awards, it’s very high priced. I was wondering if similar to R.A.T series you guys were going to be coming out with like a S.T.R.I.K.E. 5 and a S.T.R.I.K.E 3 or some lower priced units.

Darren Richardson

Yes, we did come out with a S.T.R.I.K.E. 5. We announced it a little while ago and it’s in the marketplace today. And so that is the MO [ph], we always try and launch with our lead products and then put all of our marketing in and around the lead product and then bring out the derivative versions so just flow out after that.

Brian Hopes

Okay, thank you. I’ll definitely check that out. And then my one other question was regarding the Tritton headsets, you know a lot of the gamers that I know, we don’t use USB, we use separate regular stereo and mic jacks and I’ve just been wondering for the longest time if Mad Catz would be coming out with a non-USB headset product or maybe there is one I am just not aware of?

Darren Richardson

Yes, you know what, I’d love to be able to tell you, I know the answer to that, but I actually think we do have products that are not just USB but I know that a couple of products are USB on the PC front.

Brian Hopes

Okay. Well thank you so much.

Darren Richardson

Okay. Thanks for the questions.

Operator

Assuming there are no further questions registered at this time. I’ll turn the call back to you.

Darren Richardson

Okay. I would just like to thank everybody for tuning in for the call and look forward to updating you when we get to the fourth quarter. Thanks a lot.

Operator

And ladies and gentlemen that will conclude our conference call for today. We thank you for your participation and you may now disconnect your lines.

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