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Majesco Entertainment (NASDAQ:COOL)

Q4 2013 Earnings Call

January 14, 2014 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 Fourth Quarter and Full Year 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, Amy, and good afternoon, everyone. Welcome the Majesco Entertainment's Fourth Quarter and Full Year Fiscal Year 2013 Earnings Conference Call for the year ended October 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, 2013, 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.

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 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 turning the call over to Mike, who will review our fourth quarter and full year financial results. I'll conclude with some comments on our holiday releases before opening the call up for questions.

A year ago, we could see that the transitional changes in the industry required some adjustments to our business model and would impact our financial results for fiscal 2013. The casual gaming market has fragmented and spread from our primary market of games for handheld and console devices sold through retail to a number of new digital platforms. This has led to numerous new choices for consumers to explore casual game experiences on online, mobile, and social platforms, fueling industry growth and opportunity on new platforms while causing disruption and declining opportunities on some old ones.

Accordingly, it was necessary for us to change our business and invest to participate in new growing markets. Adjusting, adapting and changing are not new to Majesco. We've proven our ability to adapt to changes at the market over our 25-year operating history, and we are confident that we will do so again.

We have previously discussed our strategy for working through this transition. First was to preserve our cash and liquidity by reducing our fixed cost and utilizing an outsourced variable cost model that allows us to respond quickly to changing market conditions in each segment that we operate. The second was to invest in growing digital segments while maintaining our capability to publish games at traditional markets.

During 2013, we invested in online casino and social gaming and established an independent publishing label for online games. We believe that these are the right moves to position Majesco for renewed growth.

We ended the year with approximately $18.2 million in cash and available advances under our factory agreement and no long-term debt. We intend to continue to closely manage our cash resources in the upcoming year as we pursue our strategy to diversify our business. As we approach the holiday season, we released 2 titles for retail distribution in our fourth quarter: Phineas and Ferb and Monster High. The remainder of our holiday slate was released early in our fiscal quarter of 2014 -- our first fiscal quarter of 2014. We found the retail market to be generally soft overall and performance of these 2 titles mixed. Phineas and Ferb underperformed our expectations at retail, while Monster High performed well. Our takeaway from this is that the opportunity for casual games at retail is more limited than in our prior years, but there's still some opportunity for innovative or well-timed branded products.

For the holiday, we also released our newest set of titles based on the successful Zumba Fitness franchise. Zumba Fitness World Party and Zumba Kids represent the fifth and sixth games in a series of titles we released in partnership with Zumba Fitness since 2010. We made a significant investment in Zumba Fitness World Party using all of the latest technology to develop an innovative game experience that can be enjoyed on both legacy and next-generation Nintendo and Microsoft consoles.

After careful analysis, we've decided not to develop a new Zumba game in 2014. We expect the overall market for the software on the legacy Wii and Xbox 360 platforms to continue to decline, and we already have a robust catalog of titles to serve those markets. With the installed base for the new generation still in its early stages, it makes better economic sense for us to leverage our investment by marketing the existing Zumba Fitness World Party title as the installed bases grow.

We also released several mobile games this quarter, including Agent P DoofenDASH, which features Perry the Platypus, the breakout star from Phineas and Ferb, the hit Disney animated television show; and Zumba Dance, the best tablet fitness app of 2013, now also available as an innovative motion-based fitness app for iOS and Android smartphones.

On our last earnings call, we talked about 2 important strategic initiatives: Our investment in online, social and casino gaming through 50% partnership with GMS Entertainment and a formation of a new division: Midnight City games. These new business lines, while still early stage, are expected to be positive contributors to our results as the year progresses.

As expected, GMS disclosed on the acquisition of the assets and operations of Orid Media and its subsidiary, Pariplay Limited, during our fourth quarter. Pariplay has a core expertise in 3 areas: real money iGaming, real money iLottery and social gaming. This iGaming segment of the market is growing rapidly. Online casino gaming is legal in the U.K. and other parts of Europe and just became legal in New Jersey. We believe that other states will follow in the coming years, which will fuel additional market expansion.

Pariplay, as an Isle of Man gaming licensee, can also white label an online gaming site and handle all of the operations for any third party. Wintingo.com is an example of a white label site managed entirely by Pariplay. Pariplay also provides solutions to lottery providers, lottery operators looking to implement digital lottery offerings, and we expect them to have a live scratch and instant win games operating in several U.S. states in the upcoming year, opening up a promising opportunity for Majesco.

Finally, Pariplay operates a social slot machine game, Crazy Cash Slots on Facebook. They are currently optimizing monetization and customer acquisition strategies for this product.

With respect to Midnight City games, we are leveraging Majesco's established game development expertise and relationships with the indie community, building a platform for independent game publishing that offers a wide range of services and support to smaller developers, including quality assurance and promotion.

The development team is focused on building their games while Midnight City distributes them on popular digital platforms such as Steam, XBLA, PSN, as well as iOS and Android. We have begun distributing the first set of titles under the new label. While it will take time for these investment initiatives to bear fruit, we believe we are investing in the right markets given our core competencies. In our hit-driven industry, Majesco has a long history of identifying market opportunities during periods of change and responding quickly to these opportunities.

We believe the steps we've taken during 2013 are the right ones to position Majesco for renewed growth. I'd now like to pass the call to Mike Vesey, our Chief Financial Officer, to provide a financial review of our fourth quarter and full year. Mike will also talk about our outlook for fiscal 2014. Mike?

Michael Vesey

Thank you, Jesse. I'll begin by recapping our results for the fourth quarter and full year of fiscal 2013 before closing with some comments about our balance sheet, liquidity position and outlook for fiscal 2014. As is our custom, I will use non-GAAP results when discussing our financial operations.

Please keep in mind that the close of our fiscal year end is October 31, the financial results that we are reporting today 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, are street dated in November 2013. Therefore, sales for these products will be reflected in our first quarter fiscal 2014 financial results, which we will report in mid-March.

Revenue for the 3 months ended October 31 was $10.1 million, a 62% decline from the $26.6 million reported in the fourth quarter of last year. This decrease was primarily due to the timing of the release dates for our Zumba Fitness titles prior to the holiday selling season and lower catalog sales. In 2012, we released Zumba Fitness Core in the month of October. As a result, approximately $11 million of launch revenues were included in our fourth quarter results last year. Comparably, Zumba Fitness World Party and Zumba Kids were released in November 2013. Therefore, launch revenues for these titles will be included in our first quarter 2014 results. We also experienced comparatively lower catalog product sales for software in the legacy console platforms in the current year's fourth quarter.

Net revenues in the European market during the fourth quarter of 2013 were negligible. This compares to $4 million in the same period a year ago, again, due to the timing of the Zumba release dates previously discussed.

Overall, Zumba sales accounted for 14% of our net revenues during the 3 months ended October 31, 2013, compared to 70% in the prior year period, again, primarily driven by the difference in the release dates around the October 31 year end.

Gross margin was 7.4% for the fourth quarter compared to 18% for the comparable period last year. The decrease reflects the change in product mix with a lower percentage of our sales being derived from the Zumba products and the underperformance of the Phineas and Ferb title released in 2013.

On a non-GAAP basis, operating expenses decreased approximately 35% from $7.4 million to $4.8 million this year. This was primarily due to lower marketing and product development costs given a smaller release slate of console games, as well as lower fixed operating expenses resulting from cost reductions we began to implement last year.

As you may remember, we closed our social games development studio and reduced certain other fixed expenses in favor of a variable cost model to enable us to be more flexible and better allocate our resources based on seasonality and changing market conditions.

These savings were somewhat offset by legal expenses related to the Pariplay investment and litigation, as well as a write-off for some capitalized licensing fees for products that we did not think will be successful in the current market.

In the fourth quarter, we expensed approximately $700,000 for the development of mobile games compared to approximately $1.3 million during the same period of last year. We reported a non-GAAP net loss of $4.2 million for the fourth quarter of fiscal 2013 compared to a non-GAAP net loss of $2.7 million during the same quarter in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.09 compared to a $0.07 net loss in last year's fourth quarter.

For the full year fiscal 2013, net revenues were $47.3 million, a 64% decline from $132.3 million in the year ago period. The decrease was primarily due to lower revenues from our Zumba products and a smaller slate of new releases for the Kinect for Xbox 360.

We believe the decline in Zumba sales was impacted by declining sales for Wii software industry wide due to the console life cycle. The number of Zumba sequel titles released to date and the timing issues are previously discussed regarding our fourth quarter sales.

12-month net revenues in the European market declined $8 million from $29 million, reflecting declining software sales for the Nintendo Wii platform and 100 percentage of sales being derived through licensing rather than direct product sales. Overall, Zumba sales accounted for 55% of our net revenues for the full year compared to 76% in the prior year. Gross margin for the full year was 25.7% compared to 32.9% in the prior year. The decrease was primarily due to the higher development in licensing fees for our products, as well as lower average selling prices related to the late console life cycle for the Wii.

Operating expenses were $22.2 million compared to $38.1 million in the prior year, a decrease of 42%. The decrease is primarily due to reduced sales and marketing expenses reflective of our lower level of sales. We also incurred lower fixed operating expenses in products research and development and general and administrative expenses, which were related to the cost reductions we made in these areas last year. As I discussed earlier, we closed our social games studio and reduced certain other fixed expenses in favor of a variable cost model to enable us to be more flexible and better control our costs in relation to revenue as we transition our business.

As a result, non-GAAP net loss for the full year was $10.5 million compared to $4.4 million in the prior year. Non-GAAP diluted loss per share for the 12 months was $0.25 compared to net income of $0.10 in 2012.

Now turning to our balance sheet. We ended the year with $13.4 million in cash and equivalents and another $4.8 million available to us under our accounts receivable factoring agreement for a total liquidity of approximately $18 million. We continue to have no long-term debt on our balance sheet. Net cash used in operating activities for the 12 months ended October 31, 2013, was $4.6 million compared to $6.1 million of cash provided in operating activities in the prior year. The change was primarily due to the operating loss in 2013, partially offset by lower working capital needs due to the lower sales levels.

You will note that we accounted for our investment in GMS and Pariplay as a joint venture under the equity method. Accordingly, we recorded a $3.5 million expenditure for the acquisition of our interest in GMS Entertainment and we will report our 50% share of Pariplay's earnings on a quarterly basis.

We also reported $2 million of cash proceeds from the sale of common stock to a former investor in Pariplay during the period.

As of October 31, we have approximately $7.8 million invested in capitalized software prepaid license fees, primarily for games to be released in our first fiscal quarter of 2014.

We ended our year with $4.9 million in inventory compared to $7.8 million at the end of last year, reflecting our smaller slate of releases.

Now to discuss 2014. We expect the market for casual games to continually shift from software for dedicated handheld and console systems sold at retail to a variety of digital platforms. Accordingly, we will continue the transition of our business in 2014 from one that derives substantially all of its revenue from retail sales to more diversified sources of revenue such as Jesse described earlier.

If these businesses are in our early stage of development, we expect to continue to invest in them in 2014. We will also continue to carefully manage our operating expenses to preserve our liquidity resources as we position the company for future growth. Given our early stage of these business units, we are not providing revenue or net income guidance for fiscal 2014.

I'll now turn it back to Jesse to review some of our upcoming product releases. Jesse?

Jesse Sutton

Thanks, Mike. I'll now provide comments on some of our recent holiday releases. We continue to believe that our current strategy focusing on high-profile properties with established audience is the right one for covering market conditions. As I already mentioned, for the holiday season we released several logo games where we are primarily focusing on free-to-play games. These included Agent P DoofenDASH, which focuses on Perry the Platypus, the breakout star from Disney's #1 animated hit, Phineas and Ferb; and recently released Romans from Mars, a new mobile endless wave castle defense game that brings a fresh perspective to a popular genre by changing the player's perspective to a first person view and introducing them to a whole new take on Roman mythology.

We also released Zumba Dance, which was named the Best Tablet Fitness App of 2013 by Apple. In August, we launched Phineas and Ferb Quest For Cool Stuff, based on the hit Disney show, on the Xbox 360, Wii U, Wii, Nintendo 3DS and DS.

In November, we released Zumba Fitness World Party, the latest game in the successful dance fitness franchise, available on Kinect for Xbox 360, Wii U and Wii. Zumba Fitness World Party was also part of the Day 1 launch lineup for the new Xbox 1. 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.

In November, we also launched the first brand expansion of our best-selling Zumba franchise, Zumba Kids, which is custom-designed for younger players available on Kinect for Xbox 360 and Nintendo's Wii. Zumba Kids feature a range of dance styles, creative mini games, customization and chart-topping hits from Justin Bieber and Willow Smith to keep kids moving.

This holiday season, we saw the release of 3 titles from our distribution agreement with Little Orbit. Little Orbit is a licensed focused game publisher known for their work with major entertainment companies. The titles included Monster High: 13 Wishes Shadow Secrets, Young Justice: Legacy, and Barbie Dreamhouse Party. We continue to explore leveraging our distribution infrastructure with additional partnerships to generate incremental revenue.

In closing, we believe that Majesco is well positioned for renewing growth as the year progresses, as console markets clarify and our 2 new strategic initiatives to get to generate revenue. We will now open the call up for questions. Operator?

Question-and-Answer Session

Operator

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

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

I had a clarifying question. You mentioned that you will not be producing new releases of games in 2014. Does that change that agreement that you announced last summer with Zumba to renew the license?

Jesse Sutton

No, the two are not related. The decision to not put out another game was something that both Wii and Zumba felt was best for the game, as well as the brand. The brand itself is still strong as ever.

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

Great. So there is no change to that agreement that you guys announced?

Jesse Sutton

Well, if the -- that agreement, we have an understanding that we are going to push off the need to put out a game in late 2014 due to the market conditions and then reevaluate for 2015 as we got further down the year.

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

Okay, great. And now that you -- we have a couple of months of sales on the new platforms, what's your perception with how the reaction has been and your outlook for 2014?

Jesse Sutton

My outlook is very positive on the platforms. I think these have been the best platform launches in history as far as hardware goes. I think as we always know in our industry, software -- great software is what's going to drive the hardware. And I think there's some fantastic titles coming up over the next year that should move the hardware to a new high in 2014. And that's when we think as the install bases really grow, that's where we think the casual gamers come in and they become either secondary household owners or new owners of the platform as it becomes more mainstream, and that's when we get the big install bases that allow for better results and bigger results for games like Zumba.

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

Have you seen enough information that makes you feel more confident that you want to invest on certain platform versus another, or is it still too early?

Jesse Sutton

Well, for us, I think it's still about the platforms that we think we could compete in. We're not going to be competing against the first person shooter -- or other first-person shooters in that kind of categories and genres on the large-scale level. We'll be doing that primarily in smaller forms on -- using Midnight City games as a form for that. But for us, it's really about where is the casual game -- what room is there for the casual gamer and which platform will demonstrate the kind of install base that will allow for the casual gamer to enter.

Operator

;

[Operator Instructions] At this time, I'd like to turn the conference back over to Jesse Sutton for any closing comments.

Jesse Sutton

Thank you for joining us today. We look forward to reporting back to you in 2013 holiday season on our first quarter call in mid-March.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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