(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Ever heard of the Latin expression "ex unbra in solem"? If you haven't, it means "from the shadow to the light." This reminds me of the transition that I expect for Majesco Entertainment Co. (COOL) from a horrible 2013 into a bright 2014 and beyond.
The latest quarter, fiscal 3Q 2013, was certainly the low point of the last three years. Revenues of $4 million were nearly 60% below consensus estimate of $8.8 million. Losses were also higher than consensus. Results were adversely affected primarily due to the transition to next-generation console launches. However, the company managed to burn only about $3.5 million of cash due to the implementation of cost-cutting initiatives and the strategic realignment to a variable expense model. Nevertheless, at the end of the quarter the company still had a healthy balance sheet featuring $18.8 million in cash (46c/share) and no debt. I expect that the cash burn rate will fall significantly in 4Q 2013 and net cash to increase in 1Q 2014 coinciding with the launch of Microsoft's (MSFT) Xbox One and Sony's (SNE) PS4. The company has taken a number of steps to help preserve cash as it works through the console transition.
COOL is a provider of video game products primarily for the family oriented, casual-game consumer. Its products are sold primarily to large retail chains, specialty retail stores, and distributors. It publishes video games for all the major video game consoles including PS3, Xbox 360, Wii, and others. It also publishes and distributes games for digital platforms such as Xbox Live and PlayStation Network, mobile platforms such as the iOS and Android phones, and online sites such as Facebook (FB) and Steam.
COOL will report 4Q 2013 (ending on October 31, 2013) financial results after hours on Tuesday, January 14, 2014. Investors will only have to wait 6 more weeks for results of a strong and most likely profitable 1Q 2014. The consensus revenue estimate for 4Q 2013 is $14. 2 million is 47% lower than 4Q 2012 and a loss 4c/share. However the consensus revenue estimate for 1Q 2014 ending January 31, 2014 is $39 million up 66% from $23.5 million in 1Q 2013!! Consensus net income for 1Q 2014 is 9c/share, up significantly from a loss of 2c/share in 1Q 2013.
Majesco's Product Line-up for the Holiday Season (4Q 2013 and 1Q 2014)
The company announced the following releases for 2013's holiday season:
- Zumba Dance, the first ever motion-based fitness experience for mobile tablets (Launched in July)
- Phineas and Ferb: Quest for Cool Stuff on the Xbox 360® games and entertainment system from Microsoft, Wii U™, Wii™, Nintendo 3DS™ and DS™, is based on the top-rated Emmy Award-winning hit series from Disney. Join Phineas and Ferb as they travel to out-of-this-world places in their newest invention, the All-Terrain Transformatron, an upgradeable, customizable, ultra-cool amphibious ride that lets the boys collect treasures to display in their backyard Museum of Cool. (Launched in August)
- Agent P DoofenDASH on iOS and Android, focuses on Perry the Platypus, the breakout star from Disney's Phineas and Ferb. Play as Agent P and his fellow O.W.C.A. 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. (Launches in October)
- Monster High™13 Wishes Shadow Secrets (distributed by Majesco, published by Little Orbit) on Wii U™, Wii™, Nintendo 3DS™ and DS™ 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™. (Launches in October)
- Young Justice: Legacy (distributed by Majesco, published by Little Orbit) on PlayStation®3, Xbox 360 and Wii U™ is based on the acclaimed Cartoon Network animated series inspired by the DC Comics characters. Players assemble their Young Justice team from 12 heroes including NightWing, Kid Flash, Robin and more. Track down notorious villains and be mentored by powerful superheroes as you explore, customize and battle in this action-packed, RPG styled game (Launches in November during first quarter of fiscal 2014 coinciding with the launch of Microsoft's Xbox One and the Sony PS4).
- Zumba® Fitness World Party on Xbox One®, the all-in-one games and entertainment system from Microsoft, Kinect™ for Xbox 360®, Wii U™ and Wii™ is the latest game in the successful dance fitness franchise that has sold more than 9 million units worldwide. This fun, freeing fitness journey embodies Zumba's global reach of over 185 countries by taking your work out 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. (Launches in November during first quarter of fiscal 2014 and later in 2013 on Xbox One)
- Zumba® Kids on Kinect™ for Xbox 360® and Wii™ is the first brand extension of the best-selling Zumba franchise that is custom-designed for younger players. Featuring a range of dance styles, creative mini-games, customization and chart-topping hits from Justin Bieber and Willow Smith, this engaging interactive experience is packed with gameplay to keep kids moving! (Launches in November during first quarter of fiscal 2014)
- Barbie™ Dreamhouse Party™ (distributed by Majesco, published by Little Orbit) on Wii U™, Wii™, Nintendo 3DS™ and DS™ takes fans behind the pink doors into the fantastic world of the Barbie® Dreamhouse® mansion. (Launches in November during first quarter of fiscal 2014)
Since investors look forward, I will focus my attention on 1Q 2014 to be reported in mid-March 2014 and beyond. Sales of Zumba Fitness World Party appear to be ramping up rather nicely as VGCChartz reported an increase in units sold to 70K from 24K the previous week on the Wii platform. The same source lists 50K global sales on the XOne platform (released on November 22, 2013). The combined revenues for just these two products almost matches the entire 3Q 2013 revenues! I don't have statistics for Zumba Kids but all indications are that this product will also be a huge hit. All Amazon reviews assign 5 stars to this fun product; and the next one will likely be mine because even my 5-year old granddaughter loves it (the product targets kids 7 -12 years old).
But there is a lot more to be enthusiastic about for 1Q 2014 and beyond besides the current product line up. I am talking about the quick progress of the company's latest effort to diversity and to generate future growth: 1) the recent entry into the fast-growing iGaming, iLottery and social gaming segments of the online gaming market, and 2) the formation of Indie Publishing label Midnight City.
On October 14, 2013, Majesco Entertainment finalized the takeover of Orid and Pariplay through GMS Entertainment Limited, a new venture that will focus on the fast-growing online real money casino gambling market. As part of the deals, Majesco will invest a total of $3.5 million to $4.5 million, depending on GMS's future financial performance, to acquire a 50% interest in GMS. The founder of Orid and Pariplay will hold a 50% stake in GMS. Orid designs and develops fixed odd and random-based online and mobile games for use in real money online games, social casinos and lottery systems. Pariplay is a licensed online gambling operator headquartered in the Isle of Man, operating online gaming sites on an owned and white label basis.
Jesse Sutton, CEO of Majesco Entertainment and GMS entertainment commented, "I am pleased that Pariplay has received the requisite regulatory approvals to allow us to complete our investment in this newly formed venture. The iGaming, iLottery and social gaming segments of the online gaming market are growing rapidly, and looking ahead, additional jurisdictions are expected to legalize real money online gaming and lottery, which will fuel further market expansion and opportunity for GMS Entertainment."
It did not take long for GMS Entertainment to score a significant win as Gambling News reported on January 7, 2014 that Trada Casino will switch to the Pariplay platform around mid-January 2014. This news is so fresh that COOL has not issued a press release yet but I expect that it will be discussed in the 4Q 2013 financial results and the quarterly conference call. This will surely open-up additional opportunities in the US as more jurisdictions are expected to legalize real money online gaming and lottery.
The other significant development is the rapid progress that the company's indie label Midnight City is making. The company announced on January 8, 2014 the 1Q 2014 launch of the following games: generative racer Krautscape and throwback brawler Double Dragon: Neon will both be coming to Windows PC via Steam, with Slender: The Arrival making its console debut on Xbox Live online entertainment network for the Xbox 360 games and entertainment system from Microsoft and PlayStation ® Network. All these games have rave reviews with the Slender additionally supporting the Oculus Rift - a next generation virtual headset designed for super immersive gaming! The Oculus Rift intensifies The Arrival's fear-factor giving players a unique, immersive horror experience. The much talked about Oculus Rift Virtual Reality headset is expected to revolutionize gaming and rumored to be launched in mid-2014. Midnight City's is clearly becoming a trend-setter in the gaming industry.
In summary, the financial results of 4Q 2013 are almost a non-issue, and the current depressed price certainly reflect that, but value investors will not wait long to get a position in COOL since the real growth will be reflected in 1Q 2014 - coinciding with the November launch of the new consoles. Majesco Entertainment is expected to benefit from the next-gen console transition as pricing for Xbox 360 and PS3 products will continue to come down. In addition to the next-gen console launch, COOL's fast progress in real-money online gaming with Pariplay's win(s), and the high expectations for indie label Midnight City, will most certainly create a significant investor interest. I expect that the share price will increase significantly from this point forward. This has happened before as seen in the sharp move from 80c on January 10, 2011 to $4.15 on April 5, 2011. The company's recent product diversification and expected added visibility going forward is likely to create interest from larger suitors in the gaming industry. The company has already partnerships with larger players like Zynga (ZNGA) for instance.
No investment in the stock market is free of risks. Despite being a safe investment due to its strong balance sheet and having a significant upside, investors considering buying COOL shares should read the most recent 10-Q and 10-K filings with the SEC to clearly understand the inherent risks and uncertainties of such an investment.