Hello, this is the Chorus Call operator. Welcome to the Majesco Entertainment Company’s fiscal first quarter 2010 earnings conference call. As a reminder all participants will be in listen-only mode. (Operator Instructions) This conference is being recorded. At this time I’d like to turn the conference over to John Gross. Mr. Gross?
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, 2008 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 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 investor’s 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. A 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 Gui Karyo, Executive Vice President of Operations. I’d like to now turn the call over to Jesse. Jesse?
Thanks, John. I will open the call with some highlights and an overview of our performance in the first quarter and an update on our product slate for the rest of the year. John will follow with the financial review and then we would be happy to take your questions.
We had a very solid first quarter and holiday season. Our results were in line with our internal expectations, and we remain on track to deliver improved profitability for the full year. In the quarter we were up against very difficult comparisons from the year ago period, in which we reported our strongest quarter under our mass market gaming strategy. 2009 benefited from an impressive performance from Jillian Michaels 2009, and this year we had a number of products that were able to replace most of the Jillian volume.
2010 first quarter revenue of $29.2 million was led by the performance of our Cooking Mama franchise, which once again delivered impressive results. We also benefited from our strategy to expand our relationships with established brands with releases from Alvin and The Chipmunks and Hello Kitty.
In the quarter, we shipped 8 new SKUs, including four DS one Wii and one Xbox LIVE Arcade. We are making progress on our efforts to fine-tune our strategy for fiscal 2010 and better position the company in the current operating environment with the goal of improving our bottom line performance and specifically being profitable.
We are focusing our resources on our best opportunities and the evaluation of our production pipeline and green light process is ongoing. Our current product focus is on both licensed product and bringing innovative titles to market. We have made substantial progress in our efforts to publish stronger titles by working with known licensed brands and in expanding the Mama franchise. We also continue to look for innovative ways to capitalize on the strength of the brand and to bring Mama to our fans and to expand to our following.
Last week we announced our second line extension for our Cooking Mama franchise, Crafting Mama, and expect to introduce an additional line extension later in calendar 2010. Our lineup also has titles for several well known brands, including Tetris Party Deluxe, Zumba Fitness and Greg Hastings Paintball 2. The other titles we are looking to green light must possess unique innovation, as reflected by games such as 3D Attack of the Movies and Ghostwire. In addition, we are closely watching the new platform extensions that are expected later this year and look forward to supporting them as they come to market.
Our costs remain under control and we are starting to benefit from the steps we have taken to drive additional efficiencies and further reduce our overall cost structure. The initiatives we announced on our last call for our domestic and international operations are well advanced and in line with our expectations of realizing $2.5 million to $3 million in annual savings.
In summary, we delivered solid results in what we remained a difficult environment for the industry. We are making prudent adjustments to our strategy, which will better position us in the current retail landscape. Our operating costs remained under control and we have taken additional steps to further reduce our expenses which will further improve our operating efficiencies. We continue to look at a number of higher quality new business opportunities and believe we have the right strategy and management team to capitalize on the growth of the mass market gaming segment. We remain focused on improving our profitability and building value for our shareholders.
I will now provide some comments on our 2010 line up. Fiscal second quarter titles include The Daring Game for Girls for Wii and DS. It’s based upon the best selling How-To book, the Daring Book for Girls, the ultimate can-do, how-to manual that celebrates the female spirit. The games guide adventurous girls in a range of daring and practical activities from building a campfire to exploring caves, tending a garden, crafting items, playing sports and games and making new friends.
In fiscal 2010, looking at the rest of 2010, some of our announced titles include Tetris Party Deluxe for the Wii and Nintendo DS, represents a strategic partnership with Tetris Online to support the North American launch and distribution of the two newest additions to the Tetris franchise.
Zumba Fitness for systems for platform to be announced is a one-of-a-kind exercise program that pairs Latin rhythms with red-hot international dance steps so you can have a blast as you party your way into shape. Through invigorating, high calorie-burning fitness classes, Zumba Fitness has helped to melt the pounds and inches off more than five million Zumba-enthusiasts in more than 75 countries.
Attack of the Movies 3-D is the first-ever 3-D shooter designed exclusively for Wii and the Xbox 360. The game transports players into six fantastic movie-themed worlds and features classic enemies culled from the annals of film history. The game also comes packaged with four pairs of 3D glasses to support four player multiplayer action.
And, Ghostwire: Link to the Paranormal, for Nintendo DSI is the first game to fully utilize DSI camera to extend your game experience into the real world. This augmented reality game turns your handhelds into a portal to the astral plane overlaying real game play on the world around you. This detection and communication tool lets you find, summon, capture and interact with ghosts living amongst us. Ultimately, you can help them find peace as you develop your own paranormal prowess within an augmented reality that promises to change your perspective forever.
And Crafting Mama for the DS is the newest brand extension of the Cooking Mama franchise that has sold more than six million units. Using the stylus as a universal crafting tool, crafters will sew, mold, glue, cut and paint under Mama's masterful direction as they create 40 different projects, from patchwork quilts to earrings, candles and even kaleidoscopes.
I would now like to pass the call to John Gross, Majesco’s Chief Financial Officer to provide the financial review of our fiscal first quarter results. John?
Thanks, Jesse. I’ll first recap our results for the quarter, and close with some comments about our guidance for the year. Revenue in the quarter was $29.2 million, down $3.6 million from the year ago period. The comparison to last year was challenging as we launched our first Jillian Michaels title, which had very strong performance selling almost 300,000 units as it benefited from limited competition in its genre.
The 2010 Jillian title performed as expected but it was down substantially versus last year. Our Cooking Mama franchise had another had another strong performance as it sold over 500,000 units in the quarter benefiting from the launch of our third DS title, Shop and Chop, as well as the continued strong sales from the Mama catalog.
DS revenues in the quarter were $20.3 million versus $11.2 million in the year ago period led by the Mama titles, and a strong showing from Alvin and The Chipmunks. Wii revenues were $8 million in the quarter versus $21 million last year, primarily as a result of the strength of last year’s Jillian title.
Turning to our product costs, we experienced a 400 basis point increase as a percent of sales due to the mix shift from Wii to DS versus last year. Wii products typically carry lower unit costs and have higher wholesale selling prices. Our gross margin in the quarter was 29.8%, down from the 36.1% in the year ago period.
We recorded a $900,000 charge in the quarter, which accounted for almost half the difference. This charge relates to two titles, not yet released, whose expectation declined over the past month. We routinely do evaluations of titles in development and when necessary write down the capitalized value to the expected cash flows for that title.
As for our operating expenses, as Jesse indicated, we are committed to being profitable, a big part of that is our ability to control and reduce costs. In the first quarter, our operating expenses were down both in dollars and as a percent of sales. Total operating expenses were down 24% or $2 million and almost 400 basis point versus 2009. By closing the studio, making substantial reductions in the UK and further reducing headcount and expenses at our headquarters, we’ve been able to reduce our cost structure by between $2.5 million and $3 million on an annualized basis.
Our headcount is down more than 20% from the beginning of last year and we’ve attacked our cost structure in several areas including occupancy and our outside services. We will remain vigilant in our efforts to build the cost structure that will help sustain our profitability.
Total operating expenses declined, as I said, $2 million. Selling and marketing expenses declined $1.1 million or 25.9% and were 10.5% of sales down from 12.6% last year resulting from lower marketing expenditures in the 2010 quarter.
G&A expenses declined $400,000 or 15.2% and as a percent of sales its decline was from 7.6% to 7.3%. Our GAAP operating income was 2.5 million this year versus 3.7 million last year. Non-GAAP operating income was 3.5 million this year versus 4.8 million in the year ago period. Our GAAP net income was 3.8 million versus 4.1 million last year, and our non-GAAP net income was 2.9 million versus 4.3 million last year.
Finally, our earnings per share were $0.10 on a GAAP basis versus $0.15 last year. On a non-GAAP basis, our earnings were $0.08 this year versus $0.15 last year.
Turning to our balance sheet, it remained solid and as of January 31st we had $20 million of cash and availability including $12.7 million in cash or cash equivalents. Availability represents cash available to us through our factoring arrangement. Our due to factor was $6.8 million, our due from factor was $6.8 million, which represents gross receivables sold through the factor of $18.7 million less allowances of $4.9 million and advances from the factor of $7 million.
At 2009 yearend, due from the factor was $1.2 million, which represents gross receivables sold through the factor of $19.3 less allowances of $4.4 million and advances from the factor of almost $13.8 million.
As expected our inventory level came down more than 50% from yearend, and we paid off $6 million in inventory financing. And finally capitalized software and development costs declined to $2.5 million from $3.6 million at yearend. The majority of this is related to games not yet released.
Now for a 2010 outlook. Based upon our current release schedule, we are reconfirming our full year guidance for net revenue of approximately $80 million. Our profit guidance is for non-GAAP EPS of approximately $0.05. Our expectation of return to profitability for the year is based upon the successful implementation of the following initiatives
The continued success of the Cooking Mama franchise with one new line extension and our ability to further leverage the brand; an increase in the number of established brands in our title lineup; a reduction of spend in marketing from 2009; and continued control over fixed costs.
Guidance assumes the release of approximately 37 SKUs in 2010, including approximately 14 DS and 16 Wii, with nine titles in the second quarter, eight titles is expected to be released in the third quarter and 12 titles to be released in the fourth quarter. As a reminder our results are also impacted by seasonality from the December holiday period and variability based on release schedules.
That concludes our formal remarks. Operator, if you could review the Q&A instructions please.
(Operator Instructions) Our first question comes from Sean McGowan at Needham & Company.
Sean McGowan – Needham & Company
Hi guys. I’ll start off with two questions. John, could you comment on your expectations for gross margin trends as the year goes on, how do you see the mix or whatever, any other factors affecting that? And second, should we expect to continue to see sales of the tax – taxing New Jersey tax benefits sales?
Sure. I’ll take the second one first. The New Jersey program is rather hard to predict. We had it both last year and this year, but on a year-to-year basis there is really no way of knowing whether or not it’s going to continue. You could certainly speculate that with the states under duress that it might be less likely than more, and that would just be speculation.
In terms of the margin, as you know, we have a very variable gross margin from quarter-to-quarter. So, I’ll probably stick to just talking about it on an annual basis. I’d suggest that it probably be somewhere between, somewhere in the neighborhood of where we were some quarters a little below, some a little above and end up probably about where we are now, that would be my best guess.
In terms of factors that influence it, obviously it’s the strength of the titles coming out of the individual quarter and then the last thing that is a factor is in the fourth quarter when we can have a substantial amount of distribution revenue to our distributor which typically has a lower margin and depending on how much of our mix that represents, it could effect the margin for the quarter.
Sean McGowan – Needham & Company
Okay, thank you.
Our next question comes from Joel Achramowicz at Blaylock.
Joel Achramowicz - Blaylock
Thank you, very much. John, I was just wondering obviously nice revenues compared to the consensus estimates for the quarter. I am trying to trying to get a handle on the long term strategy of the firm in terms of mapping these valuable properties you’ve developed into the virtual or online type platform, any color that you might be able to give us with regard to your plans in that regard? And thank you very much and good luck going forward.
This is Jesse, I’ll take that. And then, Gui, if you want to try, feel free. The social gaming platform is an important platform for our strategy. Majesco’s strategy has always been based on following the mass market demographic and the mass market demographic while still on the platform is that we’re focused on and even going to other platforms like the PlayStation 3 and the Xbox 360 in the near – mid-term future, we obviously recognize that that demographic had also flourished and has migrated as well to the social gaming platforms, specifically Facebook, and most notably Facebook but also on iPhone and PC.
And from that perspective, you will hear about news and areas of development that we are going to be discussing over the course of the year. We have nothing specifically to announce today, but they absolutely are platforms that we anticipate developing product for, and will expand our portfolio and our reach to the mass market.
Joel Achramowicz - Blaylock
And you would expect hopefully some time during the current fiscal year you will get more color on that?
Joel Achramowicz - Blaylock
And would you expect your margin to expand or at least benefit from that in some positive way?
Well, until we really see the – that particular market right now is still evolving and as it evolves we are going into that market intelligently and prudently and we’re going to – we got to play it by year. If we have a major success, it will have an impact, but as of right now, we view it as far as our forecast is concerned as incremental at best.
Joel Achramowicz - Blaylock
Well, it’s nice to see very solid liquid position on the books, and at least the beginning of the year, and hopefully we’ll see continued progress going forward. Thank you very much.
(Operator Instructions) We have a follow-up from Sean McGowan from Needham.
Sean McGowan – Needham & Company
Hi, a couple of broader questions, whoever wants to take them, Jesse or anybody. What are you seeing more generally in the industry, but maybe narrowing that to the categories where you’re participating and what you see going on industry-wide in the casual gaming sector? And what are your expectations for the holiday, I know that’s the following fiscal year, but you’ve got some view of this holiday season?
I’ll take that, and Gui why don’t you add to it, as you see fit as well. I think that this is going to be really interesting year for our industry on several levels. One is, you have I think the – you still have three platforms battling it out for supremacy, the Wii, the Xbox 360 and the Playstation 3. But the DS had its best sales months historically, Nintendo, the DSi and the plans that they have for it, where the DS is going is exciting to us, I think that’s a category and although the iPhone market has -- act as a formidable option for handheld gaming, Nintendo's platforms will always have the Mario, Pokeman and the brands [ph] that promote the hardware.
We are very confident that they’ll continue to do that as the current numbers seem to show. But as far as the consoles are concerned, the exciting part for us is that it seems that the demographic focus we have had, has now translated into the strategies of Microsoft and Sony with their new peripherals and Sony’s new Move peripheral which is sort of similar to our combination of Microsoft Natal and Nintendo’s Wii – Wii controller technology. It really shows that – and Microsoft Natal, it shows that they are now focusing on the demographic that we were focused on. It gets us excited, it means that we have made the right choices as far as who we are focused on and we are excited about supporting those platforms as they develop, and it’s just part of an opportunity to reach more people. Gui, you want to add to that?
Sure. What I would say overall Jesse, and you made this point with this question in the last is that from the beginning of our mass market strategy we have always said that we are platform agnostic. And when you look at the mass market audience, particularly those demographics that don’t overlap too heavily with the core gaming demographic, what you can say – what I would say I think what we as management would say is that this is a business in great transition.
You have an increasing number of people, adult women, kids, families playing video games in a increasing diversity of ways whether that’s online, on social, or on console or on handheld or on mobile, and that they are evolving in their expectations of game play and in their understanding of what constitutes a video game in a radical way. So when we look at 2010, Sean, what we see is a year of transition. A lot of people, a lot of very creative organizations, a lot of very well funded organizations, including first party as Jesse mentioned are investing just as we are to bringing interesting entertainment experiences to these consumers on a variety of different platforms.
And what I’ll say is that I expect that this will be a great holiday for gaming, where and for what products I think are going to be very interesting, how successful Sony and Microsoft and Nintendo are going to be at promoting their game experiences this holiday is going to be I think revelatory in a variety of different ways. And I think that as we've looked at it, it's really a matter of identifying as we have in the past innovative experiences on any platform, it should be appealing to these audiences as they continue to grow in both their affinity for gaming and their understanding of what a quality game experience is.
Sean McGowan – Needham & Company
At this time, we show no further questions, I’d like to turn the conference back over to management for any closing remarks.
I want to thank everyone for joining us today. And we look forward to speaking to you again on our second quarter conference call in June.
Thank you all very much for participating in the Majesco Entertainment Company’s conference call. This concludes today's event.
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