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Majesco Entertainment (NASDAQ:COOL)

Q3 2013 Earnings Call

September 09, 2013 4:30 pm ET

Executives

Stephanie Prince

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, and welcome to the Majesco Entertainment Third Quarter Fiscal 2013 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stephanie Prince of LHA. Please go ahead, Ms. Prince.

Stephanie Prince

Thank you, Denise, and good afternoon, everyone. Welcome the Majesco Entertainment's third quarter fiscal 2013 earnings conference call for the quarter ended July 31, 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 after the conclusion of this call.

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 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 the anticipated or unanticipated events or circumstances after the date of such statements.

In addition, in order to facilitate a comparison between the reported periods, the company has presented both GAAP and non-GAAP financial measures. GAAP financial measures are -- 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 as 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 I turn the call over to Mike, who will review our financial results. As is our custom, I'll conclude with some comments on our product releases for the upcoming holiday season before opening the call up for questions.

2013 has been a transition year in the gaming industry, which is reflected in our third quarter and year-to-date financial results. As we've said before, through our over 25-year operating history, we've become adept at managing through these industry transitions, which occur roughly every 6 to 8 years. Throughout this year, we have been working to put the right pieces in place for renewed growth in 2014.

Our strong balance sheet, with $18.8 million in cash and no debt and the strategic realignment that reduced our fixed costs earlier in the year, have been carrying us through this cycle and enabling us to invest in growth opportunities. I'll go through our holiday release slate in more detail after Mike's comments, but we believe we have the right strategy for this holiday season. A smaller slate of high-profile branded games based on characters created by world-known companies such as Disney.

Kicking off the start of the holiday season in late November is the release of Microsoft's Xbox One and Sony's PlayStation 4 consoles. The entire gaming industry has been waiting for these next-generation consoles, and we are supporting the Xbox One with the release of Zumba Fitness World Party.

Breaking through with an innovative gameplay experience helped us find a new audience for our lead Zumba franchise in the mobile market. In July, we launched Zumba Dance, the first ever motion-based fitness app for mobile tablets. This interactive fitness game reached the top of the iPad fitness ranking and has generated good revenue. We're continuing to explore other ways to market Zumba Dance and build its base of users.

We're also building out our mobile portfolio with Agent P DoofenDASH, which will launch on iOS and Android this October. The app focuses on Perry the Platypus, the breakout star from Disney's #1 animated hit, Phineas and Ferb. The game invites you to play as Agent P and his fellow agents as they battle Dr. Doofenshmirtz, stop his evil plot and save the town of Danville. Players will experience unique gameplay every time they play and can challenge friends for the top secret agent score.

We also expect to launch one additional mobile title by fiscal year end. And as a reminder, our mobile gaming strategy will be focused around free-to-play games.

Since our last earnings call, we've announced 2 important strategic initiatives, which will help us return to growth in fiscal 2014. The first is our entry into online social and casino gaming through our 50% interest from GMS Entertainment. GMS expects to close on the acquisition of the assets and operations of Orid Media and its subsidiary, Pariplay, Pariplay Limited, during our fourth fiscal quarter. Pariplay had a core expertise in 3 areas: real Money iGaming, real money iLottery and social gaming. For more details about Pariplay, go to pariplaylimited.com or pariplayltd.com. And to see those social slots game, Crazy Cash Slots, go to Facebook and download the game now.

Pariplay also offers the option as a white-label partner for online gaming. As an Isle of Man gaming licensee, Pariplay can build an online gaming site for anyone and handle all of the operations from A to Z. This iGaming, iLottery, social gaming segment of the market is growing rapidly. And looking ahead, additional jurisdictions are expected to legalize real money online gaming and online lottery, which will fuel further market expansion.

The second initiative is our entry into digital independent games with the formation of a new division, Midnight City games. We're leveraging our established game development expertise on relationships with the indie development community to build a platform for independent game publishing that will offer a wide range of services and support, including everything from first-party relations to quality assurance and promotion. This will enable the development teams to concentrate all of their energy on building their games. These games are slated for digital distribution on popular platforms such as Steam, XBLA, PSN, as well as iOS and Android and Nintendo digital platforms, too.

We've hired 2 key executives to run the division. We expect to launch our first titles in early 2014.

In summary, we believe that the actions we've taken during this transition year, reducing our fixed costs in January, focusing on the release of high-profile branded games, investing in online casino and social gaming and establishing our newly formed indie publishing label, Midnight City, are the right moves to position Majesco for renewed growth in 2014.

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

Michael Vesey

Thank you, Jesse. I'll begin by recapping our results for the third quarter and first 9 months of fiscal 2013 before closing with some comments about our balance sheet and liquidity position through the end of the fiscal year. As is our custom, I'll use non-GAAP results when discussing our financial operations.

Revenue for the 3 months ended July 31 was $4 million, a 56% decline from the $9.1 million reported in the third quarter of last year. This decrease was primarily due to declines in sales of our Zumba Fitness products. We released our third Zumba Fitness title in October 2012 and sales have been less than the previous Zumba Fitness products. We believe that this is partially due to lower software sales for console games overall, which reflect the late stage of the console cycle. This is particularly true for the Nintendo Wii, which was the dominant platform for our original Zumba Fitness products.

To give some data points on our sources of revenue for the quarter. Net revenues in the European market decreased to approximately $400,000 from $2 million during the same period a year ago. Overall, Zumba sales accounted for 66% of our net revenues during the 3 months ended July 31, 2013, compared to 79% in the prior year period.

The gross margin was 31% for the third quarter compared to 38% for the comparable period last year. The decrease primarily reflects lower average selling prices as a result of increased promotions and price reductions on our catalog products.

On a non-GAAP basis, operating expenses decreased approximately 33% from $6.7 million to $4.5 million this year. This was primarily due to lower advertising and marketing expenses, the closure of our social game studio and other expense reductions that we implemented in January of this year to rightsize the company for our smaller game slate and console transition.

Prior year results reflect approximately $500,000 of prelaunch marketing activities related to NBA Baller Beats and media advertising related to the midyear launch of Zumba Fitness Rush, which we did not incur in the 2013 quarter. Included in the third quarter expenses is approximately $800,000 for our mobile games business. Comparably, we incurred expenses of approximately $1.1 million during the same period last year for the development of social and mobile games.

We continue to plan to incur a total of approximately $4.1 million in expenses related to mobile games during fiscal 2013. We reported a non-GAAP net loss of $3.3 million for the third fiscal quarter of 2013 compared to a non-GAAP net loss of $3.2 million during the same quarter in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.08 compared to a $0.09 net loss in last year's third quarter.

For the first 9 months of fiscal 2013, net revenues were $37.2 million, a 65% decline from the $105.7 million in the year-ago period. The decrease was primarily due to lower sales of our Zumba Fitness products and lower revenues from Kinect and 3DS games, reflecting the scaled down slate of new releases for these platforms.

The decline in Zumba sales was due to the timing of our newer released titles when compared to the last year, as well as lower demand for our latest Zumba Fitness sequel. Gross margin was 31% compared to 37% in the prior year. The non-GAAP net loss was $6.3 million or $0.15 per fully diluted share in 2013 compared to non-GAAP net income of $7.1 million or $0.17 per share in 2012.

Nine-month net revenues in the European market also reflect year-on-year differences in Zumba release timing, declining sales on the Nintendo Wii platform and a higher percentage of sales being derived through licensing rather than product sales. As a result, total revenue declined from $25.2 million to $8 million in Europe. Overall, Zumba sales accounted for 66% of our net revenues during the 9-month period compared to 79% in the prior year period.

Now turning to our balance sheet. We ended the quarter with $18.8 million in cash and equivalents and another $1.4 million available to us under our accounts receivable Factoring Agreement for a total liquidity of approximately $20 million. We continue to have no long-term debt on our balance sheet.

As of July 31, we have approximately $7.3 million invested in capitalized software and prepaid license fees, primarily for games to be released later in the calendar year. We ended the third quarter with $2.4 million in inventory compared to $7.8 million at the end of the third quarter of last year.

As in years past, we expect our inventory and accounts receivable balances to increase seasonally between now and the end of our fiscal year as we invest in our holiday game slate. We generally end our year with most of our cash balance invested in the working capital necessary to bring our holiday game slate to market. This leaves us with a lower cash balance, but higher availability under our accounts receivable Factoring Agreement at the end of our October fiscal year. Our cash balance is then replenished as we begin to collect these balances in our first quarter of the following fiscal year.

Now for an update on our outlook for the balance of 2013. Given the decline in revenue for the first 9 months of our fiscal year, we continue to expect that revenues for all fiscal 2013 will be significantly below 2012 and that this will result in a loss for the full year of fiscal 2013. Remember that the end of our fiscal year is October 31, so our fiscal year results do not reflect sales from the holiday months of November and December 2013.

The majority of our holiday releases for 2013, including Zumba Fitness World Party and Zumba Kids, will be street dated in November 2013. Therefore, sales for these products will be reflected in our first quarter fiscal 2014 financial results.

Now I'll turn it back to Jesse to review our upcoming product releases. Jesse?

Jesse Sutton

Thanks, Mike. I'll now provide some comments on our release slate for the 2013 holiday season. As I said earlier, we believe our current strategy focusing on high-profile properties with established audiences is the right one for the evolving landscape and will help us break through the market clutter. I've already talked about our mobile games. Our internally developed releases include the August launch of Phineas and Ferb: Quest for Cool Stuff on the Xbox 360, Wii U, Wii, Nintendo 3DS and DS. 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. We anticipate this to be a nice stocking stuffer for the holiday season coming up.

In November, we released Zumba Fitness World Party, the latest game in the successful dance fitness franchise that have sold more than 9 million units worldwide. Available on Kinect for Xbox 360, Wii U, Wii, as well as Xbox One, Zumba Fitness World Party is a fun fitness journey that embodies Zumba's global reach of over 185 countries by taking your workout to exotic locations around the world. 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. The first brand extension of the best-selling Zumba franchise, Zumba Kids, is custom designed for younger players. Launching this November on Kinect for Xbox 360 and Wii, Zumba Kids features a range of dance styles, creative mini games, customization and chart topping hits from Justin Bieber and Willow Smith to keep the kids moving.

This holiday, we will also release 3 titles from our new distribution agreement with Little Orbit, a license-focused game publisher known for their work with major entertainment companies. Monster High 13 Wishes Shadow Secrets whisks fans away on an amazing adventure with their favorite freaky gad 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 DS. Young Justice: Legacy will be available in November 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.

Also, 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. Keep a look out for other partnerships like this in the future as we leverage our distribution infrastructure for incremental revenue streams.

In closing, we believe that our release slate is the right strategy for this transition year in our industry. With the upcoming release of the next-generation consoles and our 2 new strategic initiatives, we believe that we are now well positioned for renewed growth in 2014.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Ed Woo of Ascendiant Capital.

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

I was just curious about your recent announcement to go into casino gaming. Was this something that you guys have been looking at for a while? Or was there any specific recent event to cause you to decide to make this investment?

Jesse Sutton

Thanks, Ed. We've been looking at this space for quite a while. It's an area that is growing and has been growing rapidly, and we've been exploring the different potential opportunities. As the industry is growing at such a fast pace, we felt that it would be important to get in early as the jurisdictional issues open up in the U.S. and find the right partner to do that with. And that's what we hope we did.

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

Great. And then looking towards the new consoles that are coming out this year, have your expectations changed over the past 12 months? I know that it seems as if retailers of computers [ph] are stronger than it's ever been for any consoles and that they are getting more bullish. Has your expectation changed? And also, how much more difficult has it been to be able to work on the new platforms versus prior console transitions?

Jesse Sutton

Okay. So I'll go with your first question first. So as far as the new platforms are concerned, we are extremely excited about them. I think that the energy that these new platforms are going to infuse in our industry will be very high. The games that are coming out for them that has, thus far, been announced are extremely exciting, and we think that our offering of Zumba World Party on the Xbox One is just going to be something that the market truly take notice of as something that differentiates us from everything else in a very positive way. As far as the development process is concerned, I would say that nothing more than the usual. Having been in this industry for 25 years and about 5 or 6 transitions, I would say nothing more than the usual transition issues and just getting used to the new software development kits and the new technologies. But the developers that we work with and now our internal team is very experienced to manage it.

Operator

[Operator Instructions] The next question will come from Chris Mix [ph] of UBS.

Unknown Analyst

I'm sorry, my question was just answered.

Operator

[Operator Instructions] And at this time, I show no additional questions in the queue. I would like to turn the conference back over to Mr. Sutton for his closing remarks.

Jesse Sutton

Thank you all for joining us today. We look forward to reporting back to you on the 2013 holiday season on our year-end call in January. At that time, we anticipate updating you on holiday sales, initial business development and our partnership with GMS and our first launch of the Midnight City brand. Have a wonderful day.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.

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