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Mad Catz Interactive, Inc. (NYSEMKT:MCZ)

Q4 2014 Earnings Conference Call

June 05, 2014 05:00 PM ET

Executives

Norberto Aja - IR

Darren Richardson - President and CEO

Karen McGinnis - CFO

Analysts

Sean McGowan - Needham & Company

Justin Ruiss - Sidoti & Company

Stephen McGinnel - Wedbush Securities

Elliot Gerstenhaber - Private Investor

Stan Trilling - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Mad Catz’s Fiscal 2014 Fourth Quarter Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, June 5, 2014.

I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead, sir.

Norberto Aja

Thank you, operator, and good afternoon everyone and welcome to Mad Catz’s fiscal 2014 fourth quarter and yearend results conference call. With me on the call today are Darren Richardson, Mad Catz’s President and CEO; and Karen McGinnis, Mad Catz’s Chief Financial Officer. Darren will provide an overview of the results and the principal drivers behind them. Afterwards, Karen will review the financial results in greater detail, before turning the call back to Darren for some closing remarks.

However, before we begin, let me just take a few minutes to read the Safe Harbor language as today’s discussion will contain forward-looking statements about the Company’s financial results, estimates and business prospects that involve substantial risks and uncertainties. The Company assumes no obligation to update the forward-looking statements contained in this conference call as a result of any new information or future events or developments. You can identify these statements by the fact that they use words such as anticipate, estimate, expect, project, intend, should, plan, goal, believe and other words in terms of similar meaning in connection with any discussion or future operating or financial performance.

Among the factors that could cause actual future results to differ materially are the following: the ability to maintain or renew the Company’s licenses, competitive developments affecting the company’s current products, first party price reductions, availability of capital under our credit facility, commercial acceptance of new in-home gaming consoles, the ability to successfully market both new and existing products domestically as well as internationally, difficulties or delays in manufacturing, and anticipated product delays or a downturn in the market or industry. A further list and description of these risks, uncertainties and other matters can be found in the company’s reports filed with the appropriate regulatory authorities.

Today’s call and webcast on June 5, 2014, include non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable measure calculated and represented in accordance with GAAP can be found in today’s press release.

With that, I would now like to introduce Darren Richardson, President and Chief Executive Officer of Mad Catz. Darren, please go ahead.

Darren Richardson

Thank you, Norberto, and good afternoon everyone. We appreciate you joining us on the call today to review our fiscal 2014 fourth quarter and yearend financial results. At Mad Catz, we’re focused on developing products for passionate gamers and when we say that, we mean people who play games as part of their lifestyle and not just when there is nothing interesting to watch on TV. Passionate gamers play across multiple platforms, and as a result, we’re platform agnostic and we develop products for gamers wherever they are looking to engage. And today, that means developing products for consoles, PCs and increasingly for mobile.

With that in mind, I’d like to take a few minutes to review the industry as we see it today and more importantly, what we think it would look like in the not too distant future.

The 2013 holiday quarter was certainly pivotal for the games industry with the launch of two new game consoles, marking the inflection point in the console transition. Even more exciting for our longer term outlook, sales to date of the new consoles have set new adoption records and exceeded the already lofty expectations. Although, the sales of accessory products for new consoles typically lag the launch, we believe the new consoles open up opportunities for innovation that will kick-start another multiyear period of excitement and revenue growth for console products as a whole.

Products for next gen consoles accounted for 11% of the sales for our fourth quarter, clear evidence that our console business is rebounding strongly. The PC games market continues to attract hardcore gamers. We added our first PC products to our sales mix a few years ago and products for PC gaming have steadily growth to account for 47% of our sales and include products like our R.A.T. mice, S.T.R.I.K.E. keyboards, F.R.E.Q. and TRITTON gaming headsets and Saitek flight simulation products.

Lastly, the single largest opportunity in consumer products today is in the mobile space. Smart devices are rapidly establishing themselves as very capable platforms for all forms of the entertainment including music, movies, books, social media and especially games. It’s also important to note the relative size of the market. The Xbox 360 has sold over 80 million units in the seven years since it launched, a considerable accomplishment for a gaming console, but there were over 1.2 billion smartphones and tablets sold in 2013 alone and over 2 billion units forecasted for 2017.

Gaming is a leading activity on the mobile platform by almost any measure, including hours spent, apps downloaded, and app monetization. Until recently all those games have been focused on a single method of control, the touch screen. The touch screen is great for many games but it’s not ideal for first person shooters and sports games, two of the largest gaming genres. The recent announcements from Apple and Google introducing support for controllers and other gaming peripherals establishes the infrastructure to support a core gaming experience on mobile. And by core gaming experience, I’m referring to mobile gaming on a big screen in the living room rather than on a touch screen.

We launched our M.O.J.O. Micro Console last year, Amazon recently launched the Fire TV and Google and Apple are also rumored to be launching micro consoles later this year. At the worldwide developer’s conference held earlier this week, Apple introduced their new Metal API that their spokesman said would deliver core rates up to 10 times faster than the current API and brings console level graphics to iPhones and iPads. Apple also showed demos from leading game developers, Crytek, Epic and EA including a clip of EA’s Plants versus Zombies and described it as a console level title and something they felt would never come to mobile. We’re eagerly awaiting the launch of Ouya Everywhere with the inclusion of Ouya’s portfolio of over 680 games on M.O.J.O. we’ll be working closely with Ouya to promote the Ouya Everywhere app.

And lastly we’re excited to be working with OnLive to optimize and promote their cloud gaming service on M.O.J.O. OnLive allows gamers to play 100s of PC games streamed to M.O.J.O. from the cloud and through their Cloudlift service, play a selection of Cloudlift enabled PC games from your Steam account. OnLive delivers 100s of PC games from AAA publishers and makes them playable in the living room on M.O.J.O.

We believe these developments are great for our game smart product range as well as our M.O.J.O micro console, because they’ve expansed the user base and validated the concept. There’s no doubt controller supported games on mobile devices is an emerging category and it’s going to take some time for game developers to leverage the full potential of the new operating systems to exploit the graphics, and add full controller compatibility, but we believe it’ll happen and we believe the opportunity will take shape this year. Products for smart devices accounted for 4% of our sales in the fourth quarter and we expect that percentage to grow as we move into fiscal 2015. In short, our console game sales are rebounding, we have some exciting new PC products launching to drive our PC sales, and while the mobile opportunity is a wild card, there’s some really exciting early signs, and everything we get to mobile is incremental to our console and PC sales.

Our focus and our goal is to bring to market compelling products for passionate gamers on a global basis. We believe that Mad Catz can succeed if we build on our strength to pursue targeted segments within the games industry, and leverage our strong and deep distribution footprint to deliver products with the right design and features that are essential to the passionate gamer’s experience.

With that I’d now like to turn the call over to Karen to provide some additional color on the results. Thanks Karen.

Karen McGinnis

Thanks Darren, I’ll begin my comments with a review of our income statement. Net sales for the fourth quarter were $20.2 million which represents an 18% decline from the fourth quarter last year, while net sales for the full year were $89.6 million, a 27% decline from the prior year. In both the fourth quarter and full year, we experienced a sales decline in all regions due primarily to an expected decrease in demand particularly with our larger retail customers due to the gaming console transitions that occurred in November 2013. As we have discussed in prior quarters this decline in net sales is more pronounced in the Americas where a greater percentage of our net sales are products developed for console gaming, compared to EMEA where a greater percentage are products developed for gaming on the PC and Mac. Although we experienced decline across all product category, the largest impact was the reduction in sales and products developed for the legacy gaming consoles, particularly audio products. Sales of audio products declined 20% in Q4 and 28% in fiscal 2014 compared to the prior year period. These declines are driven primarily by decreases in sales of our higher priced headsets, offset partially by increases in sales of headsets at lower price points, such as our Kunai range of headsets. However, with the console transition behind us we are excited about our products designed for the next gen console and believe they will contribute to overall sales growth in fiscal 2015 and beyond.

Outside of console gaming products we also experienced a decline in sales of products designed for the PC and Mac of 17% in Q4 and 2% in fiscal 2014. We’d experience growth in this category during fiscal 2014 until the fourth quarter. In the fourth quarter, the decline primarily related to a decrease in sales of our gaming mice, which was driven by a reduction in product placement at some US accounts compared to the prior year and to a lesser extent a slight decline in sales ahead of our new R.A.T. product launches including our recently launched R.A.T. tournament addition. Sales of our Saitek Flight Simulation products in the fourth quarter and fiscal 2014 were down only slightly compared to prior year period, and they represented over 10% of our net sales during those period. As Darren mentioned in Q4, we saw growth and sales of our products design for smart devices and are optimistic about this emerging market opportunity.

Looking at the results by geography, fourth quarter net sales and EMEA declined 11% to $12.6 million and represented 62% of total net sales in the quarter, compared to 57% a year ago. For the full year net sales in EMEA declined 14% to $53.1 million and represent a 59% of our total net sales for the year, compared to 50% in the prior year.

The decline in EMEA in the fourth quarter was driven primarily by a decrease in sales of audio products and legacy console and to lesser extend a decline in sales at gaming mice, ahead of our new R.A.T. product launches as noted before.

Fourth quarter net sales in the America declined 35% to $5.3 million due to weakness in legacy console related sales and a significant reduction in product placement across in key US accounts compared to prior year.

Net sales in the America’s represented 26% of total net sales in the fourth quarter compare to 33% a year ago. For the full year, net sales in America declined 45% to $28.5 million and represented 32% of total net sales for the year, compared to 42% in the prior year.

As we bring to market new product and work through the new console cycle, we expect sales in America’s to regain momentum and represent a greater percentage of overall sales. Additionally, we’ve invested additional sales resources in this region over the past couple of months that we believe will drive growth in our existing customer base, as well as profitable product placement at new account.

Fourth quarter net sales in Asia Pacific was relatively flat at $2.4 million and represent a 12% of total net sales in the fourth quarter up from only 10% a year ago. For the full year net sales in Asia Pacific declined 14% to $8 million and represented 9% a total sales for the year, compare to 8% in the prior year.

Consistent with our other geographies, weakness in legacy console related sales was a primary factor behind softness in Asia Pacific, offset in the fourth quarter by sales of product for smart devices. We expect sales in this region to grow as our product and focus increases.

As a result of the decrease in overall net sales and to a lesser extend a gross margin decline, gross profit for the fourth quarter decreased 24% from the prior year fourth quarter and gross profit for the full year decreased 34% compared to the prior year.

Gross margin in the fourth quarter was 24% compare to 26% in the fourth quarter last year. While, gross margin for the full year was 26% compared to 28% in the prior year. The decrease in gross margin over the prior year fourth quarter was due primarily to an increase in distribution center cost as a percentage of net sales, and increases in sales of product with lower margin, offset partially by a decrease in inventory write downs as a percentage of net sales.

The decrease in gross margin for the full year was due primarily off to an increase in distribution center cost, returns and allowances and inventory write downs as a percentage of net sales offset partially by a decrease in royalties and license as a percentage of net sales.

As we noted the last quarter the increase in inventory write down s for the year was driven primarily by a 1.0 million write down taken in the third quarter a raw material related to product from legacy gaming consoles. This should also resulted in a write-off $500,000 of prepaid royalties to these raw material.

Additionally during the holiday season, we often close our pricing until of our older, slower moving inventory. We expect gross margin to improve in fiscal 2015. Total operating expenses in the fourth quarter was $6.5 million, down 22% from the fourth quarter last year, excluding last year goodwill impairment of $10.5 million. For the full year operating expenses were $29.4 million down 12% from the prior year, again excluding the goodwill impairment.

The decrease in both the fourth quarter and full year was driven primarily by decline in variable corporative advertising expense, as a result of decrease sales, a considered effort to reduce overall ordering expenses and a decrease in incentive compensation expense. These decreases and expense were partially offset by investments in additional sales resources and an increase in professional fee.

We will continue to closely manage operating expense across the board, while investing in strategic areas to drive growth. As a result, we expect operating expense in fiscal 2015, on an absolute dollar basis, to be relatively flat compared to fiscal 2014. Despite the decline in net sales compare to the prior year, our operating expense reduction efforts resulted in an operating loss of $1.7 million. An improvement from $2 million operating loss generated in the fourth quarter last year, not including the prior goodwill impairment.

Other income and expense which primarily represent interest expense in our outstanding debt, foreign currency exchange gains and losses and changes in the fair value of our warrant liability generated a expense of $220 in the fourth quarter this year compare to income of $636 in the fourth quarter last year. This change was driven primarily by foreign currency exchange losses in the current year fourth quarter compared to foreign currency exchange gains in the same quarter last year.

For the full year, we generated expense of $1.3 million compared to income of $352,000 last year. This change is also driven primarily by the foreign currency exchange losses in the current year compared to foreign currency exchange gains in the prior year as well a decrease in income recorded for the fair value of our warrant liability. These items were offset partially by reduction in interest expense, due to the reduction in the average debt balance during the current fiscal year.

Our effective income tax rate fluctuates depending on which jurisdictions generate taxable income or losses. For entities that generate taxable losses we may not always be able to record a tax benefit for these losses if we cannot reasonably predict the ability to use those loss carry forwards in the future. As a result our effective tax rate can fluctuate greatly. During the fourth quarter and full year we recorded a tax benefit of $1.6 million and $394,000 respectively, primarily due to recognized tax benefits for operating loss carry forwards generated in our Asian entity and the release evaluation allowances against net operating loss carry forwards in certain Canadian and European entities.

Overall we generated a net loss in the fourth quarter of $265,000 or less than $0.01 a share, compared to net loss of $12.2 million or $0.19 per share in the fourth quarter last year. For the full year we generated net loss of $7.4 million or $0.12 a share, compared to a net loss of $11.2 million or $0.18 per share last year. These targeted numbers do include the effect of the $10.5 million goodwill impairment.

Moving on to our cash flow statement and balance sheet, net cash provided by operating activities was $7.5 million for the fourth quarter and $4.1 million for the full year. This generation of operating cash resulted primarily from a reduction in accounts receivable in inventory offset by the net loss each period before non-cash items.

Our DSOs were 70 days this quarter, compared to 88 days in the fourth quarter a year ago and our inventory turns on a trailing fourth quarter basis were 3.2 times this quarter compared to 3.1 time in the fourth quarter a year ago. As of March 31, 2014 we had a cash balance of $1.5 million and borrowings under our credit facility of $5.6 million. As a result we ended the quarter with a net position of bank loan less cash of only $4.1 million, compared to $6.1 million a year ago, and $11.1 million last quarter.

As of March 31, 2014 we were in compliance with all of our financial covenants and have entered into an amendment to our credit agreements that sets the monthly financial covenants for fiscal year ‘15. We also reduced the facility size from $30 million to $25 million in order to save some fees on the unused capacity.

Overall this has been a challenging fiscal year for us and others in our industry due to the impact of the gaming console transition. However we remain focused on effectively managing our overall liquidity positions by reducing inventory levels and expenses and managing our accounts receivables collection efforts. We’re pleased with where we ended the year and remain confident that our business strategy, product offerings and financial position are prime to deliver improved results in fiscal year 2015.

With that I’d like to turn the call back to Darren to discuss our fiscal 2015 strategic and operational objectives and we have some closing remarks, after which that we’ll answer -- open the call for questions. Darren.

Darren Richardson

Thanks Karen. In fiscal 2015, our goal is to return to growth and profitability by focusing on the following strategic and operational objectives. Designing innovative products for passionate gamers and executing strong global market launches of those products, growing the market for accessories designed for smart devices, expanding our global sales reach with particular focus on the APAC region. Continuing our discipline in working capital management and product placement profitability, expanding our flight simulation business and identifying strategic opportunities for the expansion of products in adjacent and compatible categories and transactions where Mad Catz can leverage its global distribution capabilities.

In terms of outlook for the year, our console business is rebounding on the back of strong next gen console sales. Products for next gen consoles accounted for 11% of our fourth quarter sales and we expect that growth to accelerate once our Xbox One headset range ships in the summer. We’ll be showing our headset range at E3 the video game trade show in Los Angeles next week. We are adding key new products to our mice and keyboard category, which we believe will revitalize growth of our PC and Mac products.

We are seeing early signs of traction in our GameSmart products for Smart devices. Products for Smart devices accounted for 4% of our sales in the fourth quarter and we expect that growth to accelerate with the launch of new controller-enabled games and a growing installed base of micro-consoles. While sales of our legacy console products are likely to decline, we believe that the console manufacturers’ commitment to support the legacy consoles over the next few years will allow us to continue to sell those legacy products as we build out our line of next gen product offerings.

And lastly, we remained focused on working capital management and OpEx management and expect to return to sales growth and profitability in fiscal 2015. For the current quarter the first quarter of fiscal 2015, we’re expecting the sales decline to stabilize. The first quarter is historically our weakest quarter in terms of profitability, so we’re not expecting return to profitability in the first quarter. But again we do expect to return to growth and profitability for the full year fiscal 2015.

Before we move to Q&A, I wanted to take a moment to thank our talented and dedicated team at Mad Catz who are responsible for moving us forward with our key initiatives. I’ll now turn the call back to the operator so we can answer any questions. Thanks, Operator?

Question-and-Answer Session

Operator

Thank you, (Operator Instructions). Our first question is from the line of Sean McGowan with Needham & Company. Please proceed with your question.

Sean McGowan - Needham & Company

Just two questions, first one is, can you explain the connection with VR, and does anything has to be done to that content to work on your device. And secondly, can you talk about what you’ve seen at retail regarding the next gen accessories, since the end of the March quarter.

Darren Richardson

Yes, I saw the - we’re launching an Ouya Everywhere app which will take the Ouya content out on to multiple devices. So we’re going to be a launch device with that on M.O.J.O., so there has been some development work done to localize that, but I think we are very close to being into the launch window there. So we are excited to be working on that because that brings a really nice portfolio of 680 games to M.O.J.O., that are all controller enabled, so that gives M.O.J.O. a much bigger stable of games that build out that playing experience. In terms of next gen accessories at retail, the next gen consoles are selling through at record adoption rate. I think you would know pretty well, but we are still approaching that 10 million consoles in the market versus the sort of 80 million consoles that we have for the legacy gen console. Sales are there and they’re good, and they are growing and you can see by the fact that it’s starting to make meaningful percentage of sales on our last quarter. But it is going to take a little while for the critical mass to build up. I think some of the key things will be price reductions on the consoles themselves, so we are excited to see the new $400 Xbox One that doesn’t have the connect next week which I think opens up another tranche of potential Xbox consumers, and as we move through the balance of the year we should see some more killer apps coming out as we get closer to the holiday. So next week at E3 I think we will see some exciting things that -- again all go to growing that next gen console business, and that’s good for everybody. For us personally, we have been like to market with our Xbox One headsets, but we’re going to have headsets on a number of different booths at E3 next week. So we will be announcing our new headset range and we will have them out for people to try and we will have those in markets for the summer.

Operator

And our next question comes from the line of Justin Ruiss with Sidoti & Company. Please proceed with your question.

Justin Ruiss - Sidoti & Company

A set of quick questions -- few questions. The competitors to M.O.J.O. -- what you said Google and Apple are possibly working on something that could combat that; do you have any idea how fast that would be able to come to market, or is there a dev cycle for that just - or are we looking at years out at this point?

Darren Richardson

I don’t have any visibility to that except that you say these consent room is circulating, and when you look at the developments with things like the middle API for the launch along with iOS 8 in the fall, it really does create an exciting opportunity to sort of have more of a console experience with phones, tablets and potentially other devices. So I couldn’t tell you what the lead time is but the Apple Fire TV is out in the marketplace. It’s been incredibly well-received - sorry the Amazon Fire TV not the Apple Fire TV. And having more of those micro consoles out there, really is proof of the concept give us more platforms for developers and publishers to bring controller enabled games to the mobile platform. As we have been saying for a long time the M.O.J.O. project for us is a really exciting one because one of the things we bring is the highest powered configuration there, say you can actually, for people who are more hard core tech focused, who want the best experience that will give you the best performance. But frankly, having a bigger market for everyone to play in is good; and all of our game smart range of control pads, mice, keyboards, headsets that all connect to mobile; it just creates a larger opportunity for us, so we’re really excited about that.

Justin Ruiss - Sidoti & Company

Also, just looking at the landscape of what’s going on out there, I mean team spending is kind of down, just looking at the price points of all the products, I mean mall traffic isn’t great. Does it concern you at all that any of those types of factors going on may kind of have dissuade customers from coming back I mean is the Web site marketable enough that people can know where to go to shop for all of the stuff?

Darren Richardson

Yeah, if you look at our PC products in particular we ended the PC space really by doing iconic unique never before seen products built on aluminum chassis with full adjustability those kind of things. So the result of that is we’re always at a $20 to $50 premium over where the core of the market is. This year we have a line of R.A.T. mice and then strike keyboards that will be coming out that are actually focused on ultra light weight so our Tournament Edition R.A.T. was designed for professional gamers but it’s one of the lightest gaming mice that’s out there with one of the highest performance lasers and allows us to hit the mass market price points which for wired gaming mice is $80 is one of the sweet spots and so we will be there. Up until now our wired gaming mice that’s the equivalent has been a $100 so we’ve been at a $20 premium to everything else.

So this year we’ll be back in those iconic products up with products that really hit those sweet price points. So we think this year we can drive a lot more volume in the PC space so we’re going aggressively after that. A lot of our products already go through ecommerce as you can see by the breakout of our sales Amazon is now our number one customer which four or five years ago that was theoretically possible but didn’t appear as it was going to happen as fast as it has. And our full PC gaming in particular the bulk of those sales run through ecommerce pretty much everywhere in the world with customers like Newegg and the like who really target that consumer moving a lot of product. And those products -- a lot of the products we do these days are tailored to ecommerce because we’re doing iconic products that people after doing a lot of research say I want that product. And so ecommerce is a great sales depot for us.

Justin Ruiss - Sidoti & Company

And then -- that's great. And then lastly just had one question on see upcoming releases that are coming out, is there anything that would point to and maybe not even November but next year, the year after any titles that you could be paired with or you could do the licensing with just seems like right now the next gen titles are kind of not far few between but haven’t been ramping up as quick. But do you see anything on the horizon that might be a potential licensing partner or what have you?

Darren Richardson

Yeah, we’ve actually worked with most of the big AAA game licenses over the years from Call of Duty, Halo, Gears of War and we just launched the line of Titanfall products earlier this year. I think Titanfall is an example particularly when you’re looking at next gen where that game I think will have a legs that actually builds through the course of the year because it’s such a strong title but I think the install base will grow through the course of the year. Next week at E3 I think everybody is anticipating some really exciting new launches. And I think that will be the first signs of what’s available for the holiday. And historically, we’ve had one or two big licenses throughout the course of the year and we want to keep focusing on that.

Operator

(Operator Instructions) Our next question comes from the line of Stephen McGinnel with Wedbush Securities. Please proceed with your question.

Stephen McGinnel - Wedbush Securities

How is it going? I just heard you say that Amazon was your number one customer and so that leads me to ask in regards to the Businessweek article that names you as the manufacturer of the Amazon Fire TV controller. Is that something you can confirm?

Darren Richardson

Look we do a number of different private label projects and most of those projects when you work on those things don’t allow you to comment on that and so unfortunately we can’t confirm or deny any involvements in different private label projects.

Operator

Our next question comes from the line of Elliot Gerstenhaber. Please proceed with your question.

Elliot Gerstenhaber - Private Investor

Karen you first, a great job in terms of cash management and given the difficult year for everybody in the business I think we came out just well as we could. Darren with regard to sales Karen had made a comment during her presentation that you’ve recently beefed up the sales effort. Can you go into a little more detail about how you all have done that?

Darren Richardson

Yeah, we’ve pretty much strengthened the U.S. sales team we’ve added a number of industry veterans and we’ve revitalized and retooled and aggressively going after rebuilding some of the U.S. business.

Elliot Gerstenhaber - Private Investor

Okay, and the product placement of various companies that sell-off during the year was that a Mad Catz choice because you felt that those particular players were weak or just the opposite and what’s being done to reinstate those that you want to get instated?

Darren Richardson

Yes, I think when you look at -- we talk about product placement profitability, we run pretty much a product placement level P&L so we’re attracting each individual placement at each individual retail account to make that A, we’re making money and B, we’re getting a good return on our investment. And to the extent that we can’t make money and cant’ get a reasonable return on investment then we access that placement. We’ll try and get the price increase to have that where we get it reasonable return, but I think one of the things that we’re very focused on is we want to build our gross margin and we want to build our profitability and this is very hard to do that if you sell things and can’t get the equivalent return. The second thing is in the market today you know five to ten years ago, you really had to be in certain retailers to be able to get those sales and one of the things you find is if you pull out those retails and you have products that consumers want, they will buy those products online. And so, if you’re not there, yes, you’re going to give up some sales, but our focus is on building profitable sales and working with retailer partners where we can both makes the money.

Elliot Gerstenhaber - Private Investor

Okay and with regard and online for the holiday season this year where both of those be in the place to help you with M.O.J.O. sale?

Darren Richardson

Yes, and that’s totally online is pretty much ready to roll out now you can download it from the Google Play Store and then the Ouya should be imminent. So we’re very close to the launch on that, but again you know as we said at this doubt M.O.J.O. and GameSmart was going to be a slowburn and we’re starting to add more and more content. And I think as we’ve reiterated before, having other major players come in and do micro-consoles I think it’s great because it opens up the whole micro-console category. And one of the things we bring to the table is other people are trying to sell micro-consoles and hit a particular price point. We’re basically saying, hey, if you want super performance which a lot of gamers want to be able to over clock things and route devices and do also to different things on a device. We have the perfect platform for that. They include being able to play 4K, Meteor and all those kind of things. So we’re very much of the bleeding edge of that. It’s expensive. It’s low volume. But I think it’s positioned us well for our audience and our consumer. And the vision was always to look at having a killer piece of hardware that you can have all the different stores on there the people can get that content. So it’s a softly-softly but we’re happy about the progress.

Elliot Gerstenhaber - Private Investor

Okay one last question please. The announcement of allocation, what do you anticipating there?

Darren Richardson

You know what that was release that was done by Acacia on products like M.O.J.O. because the nature of products there is a whole portfolio of different technology licenses that you require to be able to do at a product like that. And that was just simply one of a basket of different technology licenses required to do that sort of device.

Elliot Gerstenhaber - Private Investor

Oh, I see, okay. All right, well, enjoyed talking to you, you had correctly predicted how tough 2014 was going to be and I hope you’re equally accurate with being profitable in 2015.

Darren Richardson

We’re excited about 2015. We’ve got a lot of good things happening now is all going to come to execution and making sure it does happen.

Operator

And our next question comes from the line of Edward Ericson (ph). Please proceed with your questions.

Unidentified Analyst

Hi, Darren and Karen. Two quick questions before you would mention execution, when is the Racing Wheel going to be released and do you think that’s going to be, is that a potential block bluster? And second question is there any concern about Beats being purchased by Apple as a competitor to Tritton without increase the competition between Tritton and Beats? Thank you.

Darren Richardson

Okay, the first one on the Racing Wheel, I think that’s fairly imminent as we’ve been doing a lot of promotion with Microsoft and Forza, and Turn 10 the guys who actually developed Forza, so we’ve had great joint displays at the Indy 500 where we ran I think about eight racing stations for the entire week. Next weekend, we’re going to be at the LeMons 24 hour and so we’ve got a lot of great promotions going there and working through the automotive press as well as a video game press and that product is shipping now. As to the potential of product, I think it’s really going to be later this year once the installed base of Xbox One gets out there and it’s an expensive product because it’s beautifully built product. And I think you think about the prospect of paying $500 for an Xbox One, plus a couple of games, a $400 steering wheel is a pretty ask after that but by the time we get to holiday I think we’ll start to get some momentum going. Flight Simulation is about a $15 million business for us, Racing Simulation we think is a bigger business for that and so the plan is to build out our Racing Simulation business in the same way that we’ve built out a Flight Simulation business in a modular approach that once you get the base units, you can then actually build and expand that entire product line based on that. So that’s over the next two to three years, we expect that to be a meaningful part of the business.

Operator

Our next question comes from the line of Stan Trilling with Credit Suisse; please proceed with your question.

Stan Trilling - Credit Suisse

One quick question is, was it that many, that long ago, maybe two years ago when you still had a target for the company being a $300 - $500 million company and correct me if I’m wrong. Is that still a doable target within my lifetime?

Darren Richardson

Well, luckily you’re a young man, Stan, so.

Stan Trilling - Credit Suisse

Thank you for being blind and deaf.

Darren Richardson

People have called me worse. The reality is for us to achieve scale to be able to get the leverage on the infrastructure you need to be as a public company we need to get to $300 to $500 million, so everything we’re doing is about building out the infrastructure, the product development, putting teams on the ground in Asia Pacific and all of those things to be able to actually get the company up to $300 to $500 million. And it hasn’t been about trimming back to the bone to try and trim within, how do make a good looking $90 million company because that’s never going to be successful in the long run. But we’re absolutely there, the new consoles launched or transitioned behind us is definitely a positive. If you look at the last console transition, we bounced back strongly and grew up to about a 185 million in the three or four years after that console transition by, on console products. Today we’ve got a much-much stronger portfolio, PC products and the work that we’ve done in the early stages of mobile products I think also positions us well, and it’s very hard to put a number on what the mobile business could be. But the mobile business has ensured to blow up to be really big, providing all of the dominoes fall in the right direction, and right now, each quarter we try to report the benchmarks, that are kind of, milestones that are coming along that you can see that opportunity really starting to open up. The worldwide developers’ conference, this week in San Francisco with the Metal Operating System API that really speeds up the way you can do games on Apple devices, is really exiting for that vision. You’re also seeing things like Turbo Studios you know which startups based with a lot of console industry veterans and game industry veterans who’re focused on doing AAA console style games on mobile, and so this is an opportunity that’s, you know it’s evolving, the jury’s out as to how big it will be, but for my money if you see companies like Apple, Google, Amazon, really starting to invest in this space and build out the infrastructure of this space, I believe it’s going to be an opportunity for us, and those three things together I think create the foundation that at least gives us a runway where we can see getting to that $300 million to $500 million.

Stan Trilling - Credit Suisse

Now that we have a runway, let’s talk about the liftoff. At a $185 million, if I remember correctly, your profit, your gross margins a touch north of 30%, am I correct about that.

Darren Richardson

Correct, yes.

Stan Trilling - Credit Suisse

32 to be more precise.

Darren Richardson

Yes, I can’t remember, but it’s certainly in around that low 30s.

Stan Trilling - Credit Suisse

At 300 million, because of the unit scale what type of gross margins could you be having at 300 million?

Darren Richardson

You start to improve profit margin simply because a lot of those infrastructure elements and distribution centers and all those [Indiscernible] they’re frankly killing our margin right now because we have scale working against and negative leverage on that, all starts actually play to a benefit, and then the other big thing is you know as a public company you have a good chunk of change tied up in just all of the compliance and regulatory things that you have to be able to deal with for that, which as a $100 million company is a meaningful percentage of sales, once you get up there the incremental cost is quite negligible so it suddenly becomes a rounding error, so that’s where we need to get to. And so it’s, we have to get there to make the business make sense as a public vehicle.

Operator

And Mr. Richardson, there are no further question at this time. We’ll turn the call back to you for your closing remarks.

Darren Richardson

Okay. Well, thank you everyone for joining us on the call we look forward to updating you on our progress when we host our fiscal first quarter 2015 call in not too distant future. Thank you.

Operator

And ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. Ask that you please disconnect your lines.

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Source: Mad Catz Interactive's (MCZ) CEO Darren Richardson on Q4 2014 Results - Earnings Call Transcript

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