Majesco Entertainment Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Majesco Entertainment (COOL)

Majesco Entertainment (NASDAQ:COOL)

Q2 2013 Earnings Call

June 10, 2013 4:30 pm ET

Executives

Stephani Prince - Vice President of New York Office

Jesse Sutton - Chief Executive Officer and Director

Michael Vesey - Chief Financial Officer and Principal Accounting Officer

Analysts

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

Operator

Good afternoon, everyone, and welcome to the Majesco Entertainment Second Quarter Fiscal 2013 Financial Results Conference Call. [Operator Instructions] Please also note that today's event is being recorded.

I would now like to turn the conference call over to Stephanie Prince of LHA. Please go ahead, Ms. Prince.

Stephani Prince

Thank you, Jamie, and good afternoon, everyone. Welcome to Majesco Entertainment second quarter of fiscal 2013 earnings conference call for the quarter ended April 30, 2013.

With me on today's call are Jesse Sutton, Chief Executive Officer; and Mike Vesey, Chief Financial Officer.

Before we get started, I would like to remind you that this call is being recorded, and an audio broadcast and replay of the teleconference will be available in the Investor Relations section of the company's website.

As a reminder, this call may contain forward-looking statements, including statements regarding management's intention, hope, expectations, representation, plans or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results or actual future results to differ materially from the expectations set forth in the forward-looking statements. Factors that could cause actual results to differ materially are specified in the company's annual report on Form 10-K for the fiscal year ended October 31, 2012, 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 noncash compensation, changes in the fair value of warrants, severance costs and the benefits from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income and diluted income per share have been adjusted to report non-GAAP financial measures that exclude these items. These non-GAAP measures are provided to enhance investors' overall understanding of the company's current financial performance and the company's prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute or superior to GAAP results.

Reconciliation between GAAP and non-GAAP financial measures is included in the earnings press release issued earlier this afternoon.

I would now like to turn the call over to Jesse Sutton. Jesse?

Jesse Sutton

Thanks, Stephanie. Today, I'll start with some opening comments before turning the call over to Mike who will review our financial results. As is our custom, I'll conclude with some comments on our upcoming product releases before opening the call up for questions.

Our second quarter results were consistent with the first quarter and continue to reflect the ongoing industry transition to next-generation hardware. Mike will go over all the details in a few minutes.

Over the course of our 20-year operational history, we have become adept at managing through these industry transitions, which occur roughly every 6 to 8 years. As we announced in January, we have adjusted our infrastructure and reduced our fixed costs. We're confident that our strong balance sheet with $25.5 million in cash and no debt will carry us through this cycle.

We're keeping a very close eye on how the industry is shaping up as new consoles are introduced. We are excited to learn of all the new developments for the new consoles at E3 this week. We're confident in our ability to identify opportunities for Majesco in our family-friendly casual gaming market as we have done many times in the past.

One of the strategic advantages that we have are our established relationships with every major licensing company and studio in the industry, which will help us bring ideas to market quickly. We think that our current strategy is the right one for the evolving landscape. Focusing on high-profile branded games based on characters created by companies such as Disney will help us break through the market clutter.

We will also expand our leading Zumba franchise across new platforms to reach new audiences. For example, we're bringing Zumba to the mobile tablet market with Zumba Dance, the first ever motion-based fitness app. Fans of this global fitness phenomenon, as well as newcomers to the Zumba program can now maintain a healthy lifestyle and reach their fitness goals with this convenient and effective experience that offer the customizable workout solution on the go.

In September, we're going to launch Agent P DoofenDASH, a mobile game on iOS and Android focusing on Perry the Platypus, the breakout star from Disney's #1 animated hit, Phineas and Ferb. We also have several other exciting mobile games in development that we look forward to announcing in the coming months.

Speaking of Zumba, we're very pleased to have announced the extension of our partnership with Zumba Fitness this morning. The Zumba franchise represents our most important and successful partnership, selling over 9 million units since our first game was introduced in 2010. The renewed license encompasses interactive entertainment products across current and emerging platforms through 2016.

In summary, our focus on partnerships with high-profile, brand name companies provides us with an additional edge in the marketplace. They give us exposure to the brands' established audiences, which supplements the audiences that we reach through Majesco's traditional marketing channels.

I'd now like to pass the call to Mike Vesey, our Chief Financial Officer, to provide a financial review of our second quarter and discuss the outlook for the second half of the fiscal year. Mike?

Michael Vesey

Thank you, Jesse. I'll begin by recapping our results for the second quarter and first 6 months of fiscal 2013 before closing with some comments about our outlook for the year. As is our custom, I'll use non-GAAP results when discussing our financial operations.

Revenue for the 3 months ended April 30 was $9.7 million, a 68% decline from the $30.4 million reported in the second quarter last year. The decrease reflects timing differences in the release of new titles and a decline in sales of our products for the Nintendo Wii.

Last year, we released Zumba Fitness Rush on Kinect for the Xbox 360 in North America and Europe during our second fiscal quarter. In contrast, in this year's second quarter, there were no new Zumba Fitness releases. In fact, we have no significant console game releases scheduled until our fourth fiscal quarter for 2013.

Also, retail sales of our catalog of Zumba games for the Wii were lower than in the prior year as sales of games for the Wii platform have decreased industry-wide.

Net revenue in the European market decreased to $1.5 million from $6.5 million during the second quarter last year due to the same factors. Overall, Zumba sales accounted for 65% of our net revenues during the 3 months ended April 30, 2013, compared to 86% a year ago.

Our gross margin was 31% in the second quarter compared to 40% a year ago. The decrease in gross profit primarily reflects lower average selling prices and products mix changes compared to the second quarter last year.

On a non-GAAP basis, operating expenses decreased approximately 46% from $9 million to $4.8 million this year. This was primarily due to lower selling and marketing expenses of $1.5 million compared to $4.7 million in the prior year second quarter, reflecting decreased media advertising related to the Zumba Rush launch in the prior year and lower commissions and other costs associated with lower sales volumes. Operating expenses also reflect lower personnel expenses as a result of cost reduction initiatives implemented in the prior quarter.

Despite the eye on controlling our operating expenses, we continue to invest in the development of a more focused holiday console game slate, as well as games for emerging platforms, recording expenses of approximately $800,000 for mobile game development during the second quarter. We plan to incur a total of approximately $3.8 million in expenses related to mobile games during 2013.

Accordingly, we reported a non-GAAP net loss of $1.9 million for our second fiscal quarter of 2013 compared to non-GAAP net income of $3 million during the same quarter in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.05 compared to a $0.07 profit in last year's quarter.

For the first 6 months of fiscal 2013, net revenues were $33.2 million, a 66% decline from the $96.6 million in the year ago period. Gross margin was 31% compared to 36% last year. The decrease primarily reflects lower average selling prices and higher development and license fees this year, as well as changes in product mix from year-to-year.

The non-GAAP net loss was $3 million or $0.07 per fully diluted share in 2013, compared to non-GAAP net income of $10.3 million or $0.25 per share in 2012. Overall, Zumba sales accounted for 67% of our net revenues during the 6 months ended April 30, 2013, compared to 80% for the same period in the prior year.

Now turning to our balance sheet. We ended the second quarter with $25.5 million in cash and equivalents and an additional $2.1 million available to us under our Factoring Agreement, giving us total cash and availability of roughly $28 million.

We continue to have no debt on our balance sheet.

Net cash provided by operating activities for the 3 months ended April 30, 2013, was $7.7 million compared to $19.5 million in the 2012 second quarter. The decrease reflects the net loss in the second quarter compared to net income of $2.7 million in the prior year period, which was somewhat offset by the timing of cash received from sales and disbursements for licenses and development costs.

As of April 30, we had approximately $5.7 million invested in capitalized software and prepaid license fees, primarily for games to be released later in the calendar year.

We ended the second quarter with $2.5 million in inventory compared with $7.8 million at the end of the second quarter last year. We expect both of these balances to increase seasonally between now and the end of our fiscal year as we invest in our holiday game slate.

I'd now like to discuss our outlook for the second half of fiscal 2013. As many of you know, our strategic realignment reduced overhead in several areas and converted all product testing and mobile development to a variable expense model. This was done to preserve our cash and liquidity position as the market and user base for next-generation consoles develops. We expect these initiatives to provide us with the flexibility to control our operating expenses appropriately through this transition. Given the decline in revenue for the first 6 months of our fiscal year, we continue to expect that revenue for all fiscal 2013 will be significantly below fiscal 2012 and that this will result in a loss for the full year fiscal 2013.

In summary, we're confident that our strong balance sheet and liquidity position will support us through this transitional year in our industry. We remain focused on carefully managing and preserving all of our liquidity resources as we prepare for renewed industry growth in 2014.

Jesse will now review our upcoming product releases. Jesse?

Jesse Sutton

Thanks, Mike. I'll now provide some comments on our release slate for the third quarter and going into the 2013 holiday season. As we discussed when we announced our strategic realignment in January, we have planned a smaller slate of console and mobile games for 2013 to focus on higher-profile, more risk-averse titles than in previous years. These new console releases are supported by leading brands with established audiences. Our mobile gaming strategy is now focused on high-profile free-to-play games.

Earlier in my comments, I spoke about the upcoming Zumba Dance and Agent P DoofenDASH mobile releases. We've also announced other titles that will be released in the coming months that we are very excited about. These titles include Phineas and Ferb: Quest for Cool Stuff based on the Emmy Award-winning animated Disney hit series, which will be released in August. Coming to Xbox 360, Wii U, Wii, Nintendo 3DS and DS, the game invites players to join Phineas and Ferb as they travel to "out of this world" places in their newest invention, the All-Terrain Transformatron, an upgradable, customizable, ultracool amphibious ride that lets the boys collect treasures to display in their backyard Museum of Cool.

The next iteration of the Zumba franchise will launch in October on Kinect for Xbox 360, Wii U and Wii, and later this year, on a newly announced Xbox One. Zumba Fitness World Party is a fun, freeing fitness journey that embodies Zumba's global reach of over 185 countries by taking your workout to exotic locations around world. Players can burn up to 1,000 calories per hour with new modes, dance styles and 40 high-energy new routines set to a world-class soundtrack featuring Lady Gaga, Daddy Yankee and Pitbull.

At E3, we will also be featuring 3 tiles from our new distribution agreement with Little Orbit, a license-focused game publisher known for their work with major entertainment companies. Young Justice: Legacy will be available in September on PlayStation 3, Xbox 360 and Wii U. The game is based on the acclaimed Cartoon Network animated series inspired by the DC Comics characters.

In October, we will be launching Monster High 13 Wishes Shadow Secrets, which whisks fans away on an amazing adventure with their favorite freaky fab ghouls who jump, climb and swing through multiple magical levels to save Monster High. This game will be available on the Wii U, the Wii, Nintendo 3DS and the DS.

And in November, we will be distributing Barbie Dreamhouse Party on the Wii U, Wii, Nintendo 3DS and DS, which will take fans behind the pink doors and into the fantastic world of the Barbie Dreamhouse mansion.

We look forward to featuring Zumba World Party, Phineas and Ferb and the Little Orbit titles at E3 next week. This year, the E3 conference is a pivotal event for the industry given the next-generation hardware announcements. We look forward to discussing our key takeaways from the conference with you on our next call. We also expect to make additional 2013 game announcements in the months ahead.

In closing, we believe that our release slate is the right strategy for this transition year in our industry. We remain focused on preserving cash as we watch how the market develops so we can best position ourselves for fiscal 2014.

We're confident that our 20-plus years of experience through several industry transitions will serve us well as we prepare to resume growth as the next-generation market develops.

We will now open the call up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ted Woo from Ascendiant Capital.

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

I had a question. As you are making developments for the new console, has there been any significant change in development costs?

Jesse Sutton

Ed, it's Jesse. So, so far, what we've been doing is doing a lot of -- for now, what we have under development that we've announced, we have a cross-platform approach that we've built with a unique development strategy. So, so far, we haven't seen any major cost changes with development on the new platforms.

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

Okay. And has there been any update for any new Cooking Mama games?

Jesse Sutton

Oh no, there is not. Thanks for asking.

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

Okay. And the last thing I want to comment is, is there any big difference between the European market and the U.S. market now?

Jesse Sutton

In terms of what, specifically?

Edward M. Woo - Ascendiant Capital Markets LLC, Research Division

In terms of retail sales. I know that you guys previously were pulling back a little bit in terms of doing direct sales into Europe, moving to distribution agreements?

Jesse Sutton

I would say that from the point of view of the marketplaces in general, the way to view it is that Europe is going through the same transition that the U.S. is. And that's how the season, as we see it, will be a mass-market opportunity for the older consoles and as the newer consoles are launched and delivered primarily to early adopter hard-core gamers. So for us, we're treating both strategically the same way.

Operator

[Operator Instructions] And at this time, I'm showing no questions. I'd like to turn the conference call back over to management for any closing remarks.

Jesse Sutton

Thank you, operator. Well, we look forward to reviewing our third quarter results with everyone in September, and we'll let everybody know as well how E3 went. Have a great day.

Operator

Ladies and gentlemen, the conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.

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