Majesco Entertainment Company (NASDAQ:COOL)
F2Q10 (Qtr End 04/30/2010) Earnings Call
June 14, 2010 4:30 p.m. ET
John Gross - EVP and CFO
Jesse Sutton - CEO
Gui Karyo - EVP of Operations
Welcome to the Majesco Entertainment Company's fiscal second quarter 2010 earnings conference call. (Operator Instructions)
At this time, I'd like to turn the conference over to John Gross, Majesco's Executive Vice President and Chief Financial Officer.
Thank you, operator 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 intentions, hopes, 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 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, 2009, 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. 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'll open the call with some highlights and an overview of our performance in the second quarter. John will follow with the financial review, I'll conclude with an update on our products slate for the rest of the year, and then we would be happy to take your questions.
While revenues were down versus last year for the quarter, they were consistent with internal expectations, and we're still tracking towards our full year guidance of $80 million. Looking at the year, some of our strongest titles are in the second half of the year, including the recently released Tetris Party Deluxe, which is off to a good start. We also have Greg Hastings Paintball 2, Crafting Mama, and Zumba Fitness.
Our holiday line-up includes two Mama titles for the first time ever, and we already have in place some strong holiday distribution deals. We continue to make progress with new properties, announcing Martha Stewart, Zumba Fitness, and My Baby 3. Our efforts to leverage the strength and popularity of our Cooking Mama franchise continue, and for the first time, we would be launching two new Mama brand extensions this holiday, Crafting Mama for the DS, and Babysitting Mama for the Wii.
Babysitting Mama is particularly exciting, given its new and innovative play mechanic that lets girls play with a plush doll as they play the game.
We continue to control our costs to drive profitability. Our operating expenses are down 36% in total, largely due to the closure of our studio and reduction in staff earlier this year. We are committed to achieve and improve and sustain profitability.
We also have a strong team in place, fortified by the recent addition of Chris Gray as Senior Vice President of Production. We are thrilled to have someone with Chris's talents and wealth of experience join the Majesco team. Chris's successful record, designing and developing great games is perfectly aligned with our goals for the future of our product line.
His critical expertise will help ensure we are publishing a world-class portfolio of mass market games. Chris is an industry veteran and brings more than 25 years of experience of our company. Most recently, at Electronic Arts, he served as Vice President and Executive Producer of their Hasbro business unit. There, he worked on a range of high profile franchises, including Littlest Pet Shop, Harry Potter and the Sorcerer's Stone and EA's NASCAR franchise.
Finally, we recently announced the planned departure of our EVP of Operations, Gui Karyo. We are in the process of recruiting a top-tier executive who will complement Chris and expand our executive team with our strategic goals in mind. I want to thank Gui for all his contributions for the company over the past three-plus years, and wish him much luck in his future endeavors.
I would now like to pass the call to John Gross, Majesco's Chief Financial Officer, to provide the financial review of our fiscal second 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.
Net revenues for the three months ended April 30, 2010, decreased to $10.9 million from $20.5 million in the comparable quarter last year. While performance was consistent with internal expectations, comparisons to last year should be put in context. The decrease was primarily due to the strength of the first Jillian Michaels title, which continued to sell strongly in the second quarter of last year, and also, the second quarter included the introduction of Gardening Mama last year. We had no such strong releases in the second quarter of this year.
For the second quarter, Wii revenues were $2.6 million, a decline of 75%, the majority of which was due to the performance of Jillian Michaels Fitness Ultimatum last year.
DS revenues were $8 million, down 14% versus 2009 due entirely to last year's introduction of Gardening Mama. The lack of a new title in this quarter, as well as weakness in the Wii SKUs contributed to a decline in sales for the Mama line. Having said that, we're looking forward to two new titles for the upcoming holiday, at least one of which is expected in this fiscal year.
Finally, in terms of geographic mix, the U.S. business comprised over 95% of sales for the quarter, both this year and last.
Our gross margin in the quarter was 28.5%, down from the 32.7% in the year-ago period. The decreased margin was almost entirely due to higher manufacturing cost per unit, as our mix shifted dramatically to the more expensive DS titles from the heavier Wii mix last year.
This was partially offset by lower royalties from the decrease in Jillian Michael sales from last year which had a high royalty rate. Margins were also unfavorably impacted by a lower wholesale selling price resulting from the mix of higher priced Wii releases last year and higher allowances for this year's Jillian Michaels product.
Our wholesale price can vary dramatically from quarter-to-quarter depending on the number and type of new releases we have in a particular quarter, as well as the mix of product between DS titles and usually high priced Wii titles.
As for our operating expenses, they remain under control and in decline as we remain committed to achieving profitability on an annual basis.
In the second quarter last year, total operating expenses were $7.3 million. Current operating expenses declined to $4.7 million this year, a decline of 36%. Our product research and development cost declined by $600,000, or 46%, with the closure of the California Studio.
Selling and marketing expenses declined $1.7 million, or 53%, driven by a substantial cutback in media advertising and the substantial reductions in the costs associated with our European business. In addition, our reductions in staff in the first quarter benefited the year-over-year comparisons throughout the organization.
G&A expenses were $2.3 million, an increase of $200,000 from the comparable period in 2009. The increase is primarily due to higher expenses related to Sarbanes-Oxley compliance.
Our operating loss for the quarter was $1.6 million versus an operating loss of $600,000 last year. The non-GAAP operating loss was $1.2 million this year versus a non-GAAP operating income of $500,000 in the year-ago period. The net loss for the quarter was $1.6 million versus a net loss of $1.7 million in 2009.
And finally, the company's basic and diluted net loss per share for the quarter was $0.04 compared to a net loss per basic and diluted share of $0.06 in same period last year. Non-GAAP basic and diluted earnings net loss per share was $0.03 compared to a net income per share of a penny last year.
For the six months ended April 30, 2010, the company's net revenues decreased 25% to $40.1 million versus a year-ago period. The majority of the year-over-year decline is the result of lower Jillian sales. During the same period, the company reported operating income of $900,000, compared to operating income of $3.1 million in the same 2009 period.
Non-GAAP operating income for the six-month period was $2.3 million, compared to $5.3 million for the comparable 2009 period. And the company's basic and diluted earnings per share for the six months ended April 30, 2010 was $0.06, while both per share amounts were $0.09 for the corresponding period of the prior year. The company's non-GAAP basic and diluted per share earnings for six months ended April 30, 2010 was $0.04 compared to $0.16 in the comparable 2009 period.
Turning to our balance sheet, it remains solid as of April 30. We had $11.5 million in cash and cash equivalents. We have an additional $4.7 million available to us under our factoring arrangement. The due from factor was $1.9 million on accounts receivable of $5.4 million sold to factor. Inventories are down from year end, and are comprised primarily of Cooking Mama titles and Alvin and The Chipmunks DS.
Our capitalized software is $3.5 million, down slightly from year end but up from last quarter and it's comprised almost entirely of our titles not yet released, with no individual title more than $500,000. Our current liabilities are down $7.5 million from year-end, and $3.8 million from last quarter.
Now for our 2010 outlook: We are confirming our full year guidance for net revenue of approximately $80 million, and for non-GAAP EPS of approximately $0.05. The year's guidance for profitability is based upon these successful initiatives: Our expectation of a return to profitability for the year based on our release of titles discussed for the balance of 2010, the continued success of Cooking Mama franchise, and continuing control and reduction of operating expenses.
Although we've experienced a drop-off of product revenue from last quarter, we remain confident in our remaining 2010 product releases and continue to be on track to reach our revenue goal of $80 million, and profitability of $0.05 per share. As a reminder, our profit per share non-GAAP for six months already stands at $0.04.
I would now like to pass the call back to Jesse Sutton to provide an update on our product slate in 2010. Jesse.
Thanks, John. With E3 on the eminent horizon, I would also take a moment to talk about our excitement about the show and the rest of the year ahead. As many of you know, we are expecting big first party announcements this week. This has already begun with the announcement from Microsoft that Project Natal will now be called Kinect for the Xbox 360.
We are very excited about these new initiatives, and we feel they reflect the common sense within the industry, consistent with our strategic focus that the great opportunity ahead continues to be offering quality entertainment experiences to the growing demographics in gaming. Whether our partners, competitors or analysts speak to the new control device, the new digital initiatives or the new licenses, a common and general theme is that mom, kids and families are all playing more games, more than ever.
We believe this is an affirmation of the general strategy we have pursued, and that despite the fluctuations of the economy felt in all sectors, great software will gain great traction. Indeed, the future looks very bright in the interactive entertainment industry, and we intend on playing a positive role in that future.
Our 2010 line-up we feel is exactly suited to take advantage of these trends. And for this reason, we are anxious to share our key upcoming releases with media and retail at this year's E3. We'll be featuring a solid lineup of titles, some promising brand extensions to quality licenses and fresh IP. Featured products in our Meeting Room number 512 include Zumba Fitness, Greg Hastings Paintball 2, Crafting Mama, Babysitting Mama, Swords, Monster Tale and even Gardening Mama for the iPhone.
There will be a lot of noise around the new first-party PlayStation move and Microsoft has recently announced Kinect. And Majesco is excited to be supporting both with our exhilarating Zumba Fitness product.
In addition, Babysitting Mama and its innovative Play Mechanic with plush doll will be showcased prominently for media and retail demos. Nintendo will also be speaking to their new 3DS system, the next version of the Nintendo DSi, and Majesco had several products that will be included in their third-party support announcement.
In terms of talent, Greg Hastings, the Michael Jordan of the Paintball industry will be on sight all three days of the show for interviews and presentations. And Zumba Fitness creator and superstar, Beto, along with the Zumba celebrity instructor, Tanya Bearsley, both of who were intimately involved in the motion capture for the game will be on hand for Zumba Fitness game demos and interviews.
That said, we are looking forward to a very productive show that will lay the groundwork for successful Q4 and Q1 product launches. Fiscal third titles include Tetris Party Deluxe for the Wii and DS. The games build on the previously released Tetris Party for WiiWare by adding new modes and features to enrich the overall game play experience. With more than 20 exciting modes, online battles and multiplayer fun for groups of family and friends, Tetris Party Deluxe is a must have for Tetris and puzzle fans.
Zumba Fitness for the Wii and PlayStation move on the newly announced Microsoft Kinect 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 melt the pounds and inches off 7.5 million Zumba enthusiasts in more than 75 countries.
I want to say that we're very excited to announce that as of this morning, Los Angeles time, Zumba was presented at E3 by Microsoft at one of only 15 launch titles for the new Kinect device for the Xbox 360.
Crafting Mama for the Nintendo DS is the newest brand extension of the Cooking Mama franchise that has sold nearly seven million units. Using the stylus as a universal crafting tool, players 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 vases.
Greg Hastings Paintball 2 for the Xbox 360, Wii, and PlayStation 3 is the most realistic paintball experience to date from the most successful name in the sport. The game introduces more than 10 single and multiplayer game modes, each staged in all new paintball locations, based on actual fields around the world. Featuring three new event branches, Tournament Speedball, Recball, and Tournament Woodsball, players can build and develop their team of professional ballers and even cheat to stay in the game.
My Baby 3 & Friends for Nintendo DS is the third installment in the My Baby franchise that has sold nearly two million units worldwide. My Baby 3 lets players experience the joy of parenting as they feed, bathe, change and cuddle with their in-game baby. What's more, the game also sparks new social development skills via interaction with another baby and puppy.
That concludes our formal remarks. Operator, if you could review the Q&A instructions please.
(Operator Instructions) Our first question comes from (David Bunch at Trinod).
There must have been some technical difficulties there on the Q&A. Quick question for you guys, you mentioned Guardian Mama for iPhone. Can you talk about other potential digital initiatives? And also, if you could just talk a little bit about the next Nintendo platform, and if you're given, what type of games you would be developing for that?
With regard to other platforms, what I would say is what I've always said about our philosophy is, that our strategy is that we are platform agnostic and demographic focused. Wherever our demographic to migrates to, you will see us creating products on those platforms.
I would say that we generally will wait for those platforms to mature a little before we jump on to those platforms; that we make the most of our entry. That being said, without question the platforms that you will hear Majesco announce products for in the near future will be the Facebook social gaming platform as well as the iPhone and iPad.
I think the iPhone and iPad still have to mature a little bit. It's an incredibly fast-growing platform, and we intend on taking advantage of both of that and Facebook and other social networks that may come up.
That being said, the big news about Nintendo's 3DS handhelds platform that they're going to be announcing at E3 is really not much has been announced. There will be products from Majesco announced in Nintendo's announcement, however, and we have to wait to see what those are.
Our next question comes from (Kenneth Hyman), a private investor.
I'd like to know how the company plans on addressing the delisting from NASDAQ issue that's looming at the end of August? And if the company doesn't meet the requirements, can the company ask for an extension on that?
Yes, the company will continue to work vigorously to maintain a NASDAQ listing. As of now, we believe we will qualify for an additional grace period of about 180 days, following August 30, in which we can comply with the $1 bid price, and we would continue to pursue that extension to the fullest that's available.
That's all the time we have for questions. I would now like to turn the conference back over to management for any closing remarks.
I want to thank everybody for listening to our call today, and we look forward to speaking to you again in September regarding our Q3 results. Have a great summer everyone.
Additional questions maybe directed to Majesco's Investor Relations firm (Book & Company). Contact information is available on their website. Thank you for attending today's presentation. You may now disconnect.