Majesco Entertainment's CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Majesco Entertainment (COOL)

Majesco Entertainment (NASDAQ:COOL)

Q4 2010 Earnings Call

January 18, 2011 4:30 pm ET

Executives

Michael Vesey - Inerim Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Corporate Controller

Jesse Sutton - Chief Executive Officer and Director

Todd Greenwald -

Analysts

Jon deRoy Gruber

John Taylor - Arcadia

David Bench -

Edward Woo - Wedbush Securities Inc.

Sean McGowan - Needham & Company, LLC

Operator

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Company's Fiscal Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the call over to Todd Greenwald, Director of Investor Relations and Strategic Planning. Please go ahead.

Todd Greenwald

Thank you, and good afternoon. I'd like to welcome you to Majesco Entertainment's conference call. Before we get started, I'd like to remind you that the call is being recorded and the audio broadcast and replay of the teleconference will be available in the Investor Relations section on the company's website. As a reminder, this call may contain forward-looking statements, including statements regarding management's intention, hope, expectations, representations, plans or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results or actual future results to differ materially from the expectations set forth in the forward-looking statements. Factors that could cause actual results to differ materially are specified in the company's annual report on Form 10-K for the year ended October 31, 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. GAAP financial measures include expenses related to non-cash compensation, settlement of litigation, changes in the fair value of warrants, the closure of the California development studio, severance and a benefit from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income and diluted income per share have been adjusted to report non-GAAP financial measures that exclude these items. These non-GAAP measures are provided to enhance 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 a substitute or superior to GAAP results. 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 Mike Vesey, Interim Chief Financial Officer. I'd now like to turn the call over to Jesse.

Jesse Sutton

Thanks, Todd. I'll open the call with some highlights and the overview of our performance in the fourth quarter. Mike will follow with the financial review, and I'll conclude with an update on our product slate for the rest of the year. Then we would be happy to take your questions.

In Q4, we generated a much smaller operating loss compared to the same quarter a year ago as a result of the healthier gross margin and a more prudent marketing investment. I would also point out that as a result of our October fiscal year end, essentially, all of our key holiday releases fell into our Q1 results and are not be reflected in this Q4 report. Importantly, fiscal 2011 is off to a strong start, driven by the November launches of Zumba Fitness and Babysitting Mama as well as the continued reorders for the late October release of Crafting Mama.

We recently announced that Zumba Fitness has quickly surpassed the 500,000 unit mark, and we expect to see continued reorders of that product throughout the coming year. The Mama brand is alive and well and continues to grow. We recently shipped our 8 millionth unit in the Mama franchise and experienced successful recent launches of Crafting Mama on the DS and Babysitting Mama on the Wii. Crafting Mama was a creative extension of the Mama brand and, combined with Gardening Mama, proves that Mama resonates with consumers and players will follow her in her many adventures. This provides us significant potential to further grow the franchise into many new directions.

With the release of Babysitting Mama, we created a product that allows girls to play with the Mama in a unique and innovative way, using an interactive doll packaged in with the game. Designing and manufacturing the hundreds of thousands of plush toys was a big undertaking, but we shipped the product on time and to a warm reception at retail.

Finally, we'd note that essentially all of Mama's success to date has come on only two platforms: the Wii and DS. And while we have nothing to announce at this date, we are excited to bring Mama to a broader audience by taking advantage of all of the new mass market platforms. As new platforms like Kinect for Xbox 360 and Playstation Move penetrate the mass market and attract younger consumers, we believe this creates new opportunities for Mama.

Finally, as we announced last week, Mama is now on Facebook and has quickly attracted a large following of active users despite no significant marketing campaign having launched yet. This is a testament to her brand awareness and bodes well for future growth of the Mama franchise.

But it's not all about Mama. In addition to Mama, we work very hard to create and develop additional franchises to build our business around. In 2011, we believe we have found one of these in Zumba. Starting about 18 months ago, we did considerable research on the potential for a Zumba video game. We looked at the growth of the Zumba Fitness phenomenon, the opportunity in the dance fitness category for video games and the capabilities of several new motion-based platforms that were in development by Microsoft and Sony. Ultimately, we chose to make a big bet on Zumba. And today, we are very pleased that we did. Zumba has quickly sold over 500,000 units at retail, and reorders continue to come in. We successfully launched this across three different platforms, including two that were brand new for the industry, the Kinect and the Move. Additionally, I'd like to point out that we do control the worldwide rights to the Zumba Fitness game, and the Kinect version just launched in Europe through our licensing partner for that region, while the Wii and the Move versions launch there in February.

We continue to make progress with new properties and are very busy filling up our pipeline for fiscal year '11 as well as fiscal year '12. Our 2011 lineup will once again be targeted at the mass market and as such, be focused on the holiday selling season, resulting in much of our holiday slate falling in our Q1 2012 period.

We recently announced a new fitness-themed game in partnership with Harley Pasternak, an acclaimed celebrity trainer and fitness and nutrition specialist. Stay tuned as well for more to come on our strategic partnership with Martha Stewart, which gives us the exclusive worldwide rights to produce video games based on Martha's portfolio of award-winning lifestyle content.

We also have several titles underway for the new Nintendo 3DS, a platform we expect to significantly reinvigorate the handheld gaming market. Our digital initiative continues to ramp up as we most recently just introduced our first major title in the social gaming genre. We have much more in store for next year with many new titles and brands that we have not yet announced.

We also continue to control our costs to drive profitability. In 2010, we reduced our operating expenses by 30% in total, largely due to the closure of our internal development studio and reduction in staff earlier this year. We are committed to achieve, improve and sustain profitability.

Finally, I'd like to take this opportunity to welcome our newest hire, Christina Glorioso, to the team. Christina joined Majesco last month as our Chief Marketing Officer. Previously, she was the VP of Marketing for MTV Games, managing the marketing programs in the U.S. and Europe for the $1 billion Rock Band franchise. We are thrilled to add an executive of Christina's caliber to our team and are confident that she will make a significant contribution to our strategic plan. I'd now like to pass the call to Mike Vesey, Majesco's Interim Chief Financial Officer, to provide a financial review of our fiscal fourth quarter results. Mike?

Michael Vesey

Thank you, Jesse. I'll first recap our results for the quarter and close with some comments about our guidance for the year. Before I start, I'd like to remind everyone that our revenues and release slate is significantly concentrated during the holiday selling season. In the case of the just ended 2010 holiday season, two of our primary releases, Babysitting Mama and Zumba Fitness, were released in November 2010, which falls in the first quarter of our 2011 fiscal year. Additionally, Crafting Mama for the Nintendo DS was released during the last week of fiscal 2010 on October 26. As a result, the large majority of our holiday sales will be reported in our first fiscal quarter of 2011 ending on January 31, 2011. We'll be reporting these results in March.

As an overview, the fourth fiscal quarter of 2010 reflects a reduced non-GAAP net loss from $5.4 million in the fourth quarter of 2009 to $1.5 million in the current year on slightly lower revenues. The improved operating performance is attributable to a decrease in impairments of games in development and reduced selling and marketing expenses resulting from a shift from a direct distribution to a licensing model in our European operations. Revenues for the three months ended October 31, 2010, were $23.4 million compared to $23.9 million in the comparable quarter last year.

As I mentioned, during the fourth quarter of fiscal 2010, we released Crafting Mama along with five other titles: Greg Hastings Paintball 2, My Baby 3 & Friends, Flip's Twisted World, Swords and Dawn of Heroes. Comparably, in fiscal 2009, we released two primary holiday titles in our fourth fiscal quarter: Jillian Michaels' 2010 for Nintendo Wii and Cooking Mama 3 for the Nintendo DS as well as seven other titles. As you may remember, our release of Zumba Fitness for the Nintendo Wii was originally scheduled for our fiscal 2010 release. However, we pushed the release date out to our 2011 fiscal year when we added the Microsoft Kinect and Sony Move versions to coincide with the release dates of these hardware platforms. Sales of titles based on Mama accounted for approximately 40% of our revenues for the quarter ended October 31, 2010, compared to 41% in the same period last year.

Our gross margin for the quarter was 16.2%. This was up from the 3.4% in the same period a year ago but lower than we expected, mainly due to accelerated amortization on two specific titles. Our gross margin for the fourth quarter of 2010 was impacted by accelerated amortization of development costs for Swords for the Nintendo Wii and My Baby 3 & Friends for the Nintendo DS. Lower-than-planned reorder sales for these two titles resulted in an acceleration of the amortization of upfront development costs into the fourth quarter of fiscal 2010. Had reorder sales been stronger, a portion of these costs would have been deferred to the next fiscal year.

Our 2009 gross margins included a $2.5 million charge to earnings related to several Wii games that were in development for which market conditions had deteriorated. We incurred no such charges during the current quarter.

Our operating expenses declined 19% from the same quarter last year to $5.1 million. The reduction was largely the result of downsizing of our European office and implementation of a lower-cost licensing model there, as well as reduced charges for canceled game projects. As a result, our net loss decreased 66% from $4.5 million in the fourth quarter of 2009 to $1.5 million in the same period in 2010. Our non-GAAP net loss decreased to $1.5 million from $5.4 million during the same period a year ago.

You'll note our weighted average number of shares outstanding increased over the prior year from 33 million to 37.6 million shares, mostly due to a $9 million equity financing we completed in September of 2009. The net result is our basic and diluted net loss per share for the quarter was $0.04 compared to $0.14 in the same period last year. Our non-GAAP basic and diluted net loss per share for the quarter was $0.04 compared to a net non-GAAP loss of $0.16 in the same period last year. In summary, the key takeaways are: Number one, we reduced our non-GAAP net loss 72% from the prior year, primarily due to a more focused release slate, which resulted in lower impairments and a lower cost structure in Europe; number two, our gross margins were lower than planned due to the performance of two of our secondary titles; and number three, the majority of our holiday performance will be reflected in our first quarter fiscal 2011 results.

Moving on to the results for the full fiscal year ended October 31, 2010. For the 12 months ended October 31, 2010, the company's net revenues decreased 20% to $75.6 million. The decrease was due to a decline in sales of games for the Wii system. During fiscal 2009, we benefited from two extremely successful games released during a period of rapid growth for this platform, Jillian Michaels' Fitness Ultimatum and Cooking Mama World Kitchen. Comparatively, in fiscal 2010, while we did release a sequel to the Jillian Michaels game, it was not as successful as the first. And as discussed, our primary Wii titles for the 2010 holiday season, Babysitting Mama and Zumba Fitness, were both not launched until the first quarter of our fiscal 2011 year.

Sales based on our Mama titles accounted for about 44% of our revenue for the 12 months ended October 31, 2010, and 49% for the same period in the prior year. Gross margins were flat at 24.3% for the 12 months ended October 31, 2010, compared to 24.3% during the prior year. Our operating expenses declined 13% from last year to $20.5 million. The reductions were the result of several initiatives implemented at the beginning of the fiscal year to reduce our cost structure, namely, the downsizing of our European office and the implementation of a lower-cost licensing model there, the closure of our in-house development studio and reduced media advertising dollars spent as compared to the prior year to support the launch of our Go Play brand.

The fiscal 2010 net loss was $1.0 million, a significant improvement compared to a net loss of $7.2 million in the same period last year. The company's diluted net loss per share for the 12 months ended October 31, 2010, was $0.03 compared to $0.24 in the prior year. The comparability of these amounts was significantly impacted by the change in value of warrants, which was a part of our 2007 equity financing, and the benefit from the sale of New Jersey tax benefits. Therefore, we provide non-GAAP earnings per share in our press release. The non-GAAP net loss was $1.3 million compared to $4.4 million in the prior year. The company's non-GAAP diluted net loss per share for the 12 months ended October 31, 2010, was $0.04 compared to a net loss of $0.15 in the comparable 2009 period.

Now turning to our balance sheet. As we prepared for the holiday season, we closed the year with $8 million in cash and equivalents on October 31, 2010, and additional $1.7 million available to us under our factoring arrangement. As expected, during the fourth quarter, we utilized a significant amount of our cash and available liquidity to purchase inventory related to our holiday releases. Accordingly, you'll see our inventory, advance payments for inventory and inventory financing balance all reflect seasonal increases over the prior quarter. The inventory and advance payments are also somewhat higher than the same period in the prior year, reflecting higher purchase costs for the doll and belt accessories included in our Babysitting Mama and Zumba products released in Q1 of 2011. Typically, we carry higher inventory accounts receivable balances through our first fiscal quarter.

We have approximately $4.9 million invested in capitalized software and prepaid royalties as of October 31, 2010, with another $4.1 million committed to complete those games. The majority of this investment is related to our key holiday releases, including Babysitting Mama and Zumba Fitness, as well as several other titles for release later in 2011. Now for our 2011 outlook. Following a successful holiday season and especially strong sales for Zumba Fitness, we expect to achieve profitable growth in fiscal 2011. Looking forward, our lineup will again be focused on the mass market and holiday selling season. Accordingly, a significant portion of our 2011 holiday sales may again flow into our fiscal 2012 results.

The company's guidance assumes the release of approximately 19 SKUs in fiscal 2011, including six for the Nintendo 3DS, four for Kinect for the Xbox 360, three for Wii and three for the Nintendo DS, as well as our entry into social games. We currently expect to achieve approximately $85 million to $90 million of sales for the fiscal year, up from $76 million in fiscal 2010. We expect this to result in non-GAAP EPS in the range of $0.06 to $0.10. I would like to turn the call back over to Jesse at this point.

Jesse Sutton

Thanks, Mike. With the 2010 holiday now behind us, I'd like to also take a moment to recap our holiday experience. First, the industry got a nice jolt of energy from the robust launches of new motion control devices from Microsoft and Sony. Both Kinect for the Xbox 360 and the PlayStation 3 Move got off to very good starts, and we are optimistic about their potential moving forward. We are very excited about these new initiatives, and we feel they reflect a common sense within the industry consistent with our strategic focus that the great opportunity ahead continues to be offering quality entertainment experiences to the broadening gaming demographic. And whether it's new control schemes, new digital platforms or new hardware platforms, we believe the common 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 impacting all sectors, great software will gain great traction.

Majesco supported all motion platforms, including Wii, Kinect for Xbox 360 and PlayStation Move with our exhilarating Zumba Fitness product, and we believe this support is paying off. We expect to have even more products launching in 2011, which will support all of these new platforms as well as the brand-new Nintendo 3DS, which launches in North America in March.

In addition to Zumba Fitness, both Babysitting Mama and Crafting Mama experienced successful launches with hundreds of thousands of units sold and should be valuable additions to the Mama franchise and to our overall catalog. As a franchise, Mama has now sold over 8 million units across eight titles in the past five years. We are also excited to announce that Mama has just launched on Facebook with the exciting new app, COOKING MAMA FRIENDS' CAFÉ. The game is free. It's free to play with the freemium model and is an exciting new opportunity to broaden awareness for the Mama brand while introducing a viable new revenue stream for the company. While the game is free to play, we will monetize the game play by selling virtual goods. Despite currently being in beta mode and with almost no marketing support as of yet, COOKING MAMA FRIENDS' CAFÉ for Facebook already has over 250,000 active users. COOKING MAMA FRIENDS' CAFÉ's game play and art style are highly innovative and differentiated from other games on Facebook. The experience features immersive mechanics and an overall aesthetic similar to those in the Cooking Mama console and handheld games.

Moving beyond the holiday, let me discuss some of the exciting new areas for the industry, which we think Majesco is well positioned to capitalize on. In addition to the recent introductions of the Kinect and the PlayStation Move, we are also extremely excited about the new 3DS handheld system from Nintendo, which is expected to launch in North America this March. We believe this will be another huge hit for Nintendo, building on the success of the original DS, which has now sold over 135 million units of hardware worldwide. While our growth of the DS sales have been somewhat sluggish as of late, we believe the 3DS will usher a robust upgrade cycle and be a meaningful catalyst for the handheld market, which should be beneficial to Majesco as well. In 2011, we will be supporting the 3DS with our biggest and best brands as well as some new IPs, which will take full advantage of the 3D screen, camera and accelerometer controls. Just today, we announced two new titles in development for the 3DS: Pet Zombies in 3D and Face Kart: Photo Finish.

Finally, we'd point out that we have many new digital initiatives underway. We are aggressively targeting all of the new emerging digital platforms, from Xbox LIVE in PlayStation Network to Facebook and iPhone. We expect to build this digital business substantially in 2011 and 2012 alongside our traditional publishing model. We released several titles in Xbox LIVE, Wii Virtual Console, DSiWare and iPhone 2010. As noted earlier, we have just released Cooking Mama, our biggest brand, on Facebook and have several other social games in development. Expect to hear much more about these initiatives in the coming months.

In summary, the October quarter was somewhat weaker than we expected due to lower-than-expected orders and reorders for a few of our non-holiday titles. However, the January quarter is off to a strong start following a successful holiday season. Zumba Fitness appears to be another significant franchise for Majesco and should see continued reorders throughout the year. We are excited about the rest of our release slate for 2011 and are primed to take advantage of all of the new emerging platforms in this industry.

That concludes our formal remarks. Operator, if you can review the Q&A instructions, please.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Sean McGowan of Needham.

Sean McGowan - Needham & Company, LLC

Couple of questions about the outlook. Looking at the change in revenue that you're forecasting, I would think that you would get more leverage from that kind of revenue growth given the amount of reduction that you've seen in your operating expenses. Can you talk about whether or not there are changes going on at the gross margin level or at other costs that might offset some of that leverage?

Michael Vesey

Yes, sure. I think the gross margins next year we're projecting to be improved over the current year mainly from the launch of Zumba. It's maintaining a good price point with very little discounting, so the gross margins are higher there. But as you've probably seen, we run a couple of TV advertising campaigns for both the Babysitting Mama and the Zumba line. So I think our advertising expenses will be higher next year. So some of the higher gross margin dollars are getting invested in advertising. And then we also are making a -- as we ramp up our game development, we're making an investment in our development capabilities. About a quarter ago, we announced we brought Chris Gray on out on the West Coast to enhance our development capabilities, and we're establishing a little bit of a presence on the West Coast that will have a slight increase in our product research and development costs out there.

Sean McGowan - Needham & Company, LLC

Now regarding the first quarter, which you say is off to a pretty strong start, would you expect that quarter to show increased sales and earnings per share as compared to first quarter of 2010?

Jesse Sutton

We're not commenting on the first quarter with specific numbers at this time, but I would say that we're very happy with the results as is. And they were definitely, being that the first quarter represents probably the most important quarter for us historically, that will probably be the same thing here.

Operator

And the next question is from Jon Gruber of Gruber & McBaine.

Jon deRoy Gruber

Question on the Mama franchise. It was down $12 million last year, according to my calculation. It was 49% to 44%. How do you expect it to do this year?

Jesse Sutton

From a percentage standpoint, I think we probably remain relatively consistent into this year as far as forecasting is concerned. The continued success of Zumba and other products might impact that over the course of the year. But from a forecasting perspective, I think that's a fair general point.

Jon deRoy Gruber

Well then, if that's the case, if it's the same percentages, then it’ll go up in dollars or if even it’s flat in dollars, with Zumba being such a big number, I don't know how the heck you get $75 million to $80 million, $85 million to $90 million, which is lower than you were a year ago, $94.5 million a year ago. I mean you got huge jump in Zumba this year. That means that everything else is down a lot.

Jesse Sutton

Actually, really, what it does is essentially, if you look at the 2009 numbers, where Jillian Michaels was a major and impactful player at that time, I would say that you can definitely make a corollary between the success that Jillian had in 2009 and the success that we're seeing now with Zumba, these are [ph] more platformed Zumba. And we'll see how they continue to sell. We're optimistic about it, and we'll give you more information as the first quarter earnings call comes up in March.

Jon deRoy Gruber

If that's the case, why wouldn't it be over '09 then, your guidance, instead of under?

Michael Vesey

I think there's a wide range of possibilities in terms of the reorder tail on Zumba. So obviously, we made some estimates that weigh into that. And as the year goes on, we may find out that the actuality is different than our estimates. In terms of a split this year, the original question was about the Mama line. And when you look at the Mama line this year, we have the addition of Babysitting Mama. So we expect to get some reasonable growth from that, which we did not have the prior year we released like that. And we're looking for Zumba to contribute significantly in the first quarter, but there's probably a wide range of estimates we can make for the reorders for the rest of the year.

Jon deRoy Gruber

Zumba, your wholesale price you get is how much?

Jesse Sutton

Well, the retail price points on the Zumba, there's three different platforms: there’s the Wii, the PS3 and the Kinect. The Wii and the PS3 are $39.99 retail, and the Kinect is $49.99 retail.

Operator

The next question is from Ed Woo of Wedbush.

Edward Woo - Wedbush Securities Inc.

How would you characterize the retail environment right now? I know we had a very strong sales on Kinect, but it seemed that Wii and DS were down a lot year-over-year.

Jesse Sutton

I think if you had the right products in both platforms, you still did pretty well. I mean, the Wii on Zumba is a very successful product for us. Babysitting Mama is a successful product for us on the Wii, and Crafting Mama is doing really well for us on the DS. As a whole, I think we've seen that the DS and the Wii have consistently been really good holiday sellers as opposed to throughout the year. And I think this year's launch of the 3DS will not only have a major impact on the 3DS, but I think Nintendo will reinvigorate the DS market as well with promotions and what have you. There's still going to be a very large installed base, and they're going to continue to make important titles like Pokémon Black and White and many others throughout the course of the year to help install some energy in that platform. So I think retail is -- there is a change going on. There's the shift happening in the industry. And I think that the shift that's happening is benefiting us in many ways, primarily the most exciting launches coming up are ones that focus on demographics that we focus on today.

Edward Woo - Wedbush Securities Inc.

What do you think about the market opportunity for Zumba outside of the U.S. ? Do you think it could be as big as the regular market is?

Jesse Sutton

Well, we have launched the Kinect version in Europe, and it's successful and is a top 10 Kinect title in the U.K. , which is the leading market in Europe for the Kinect platform. And we'll be launching the Wii and PS3 versions in February. And Zumba has a very big following in Europe, so we're hoping that it continues to add to the momentum we built here.

Operator

[Operator Instructions] The next question is from John Taylor of Arcadia Investment Corp.

John Taylor - Arcadia

Seems like one of the things which has gotten in the way of profitability in the past is either green lighting games or get killed before they ship or the secondary titles that don't come through. So I wonder if you can talk a little bit about what you're doing to eliminate the losers and allow some of the profits from the good things flowing through. Let me just give you my list here if I can. The second thing is I wonder if you could give us any kind of attempt at quantifying what the market spend is going to be. I think this is a little bit of a difference from what you've done in the last couple of years when you've really been watching your operating expenses closely. So maybe give us a sense of what you're willing to bet on the winners. The third one is what's going to be the full dilution count for a profitable quarter and for the year? What are you assuming there? And then the last question, I guess, is on the licensing deal for Zumba internationally and whatever else, is that a per-unit thing you're getting a percentage? Could you give us a sense of kind of how we can try to guesstimate what that is based on how the thing sells in Europe?

Jesse Sutton

I'll answer the first question and, Mike, you can take the next two. So as far as what we're doing better to make sure we essentially make less mistakes and give us more opportunities for the big hits, there's a few things. First of all, and I'd like to point out specifically, with the hiring of Chris Gray, who was at Electronic Arts and brings a lot of those processes that he learned there here, along with his production staff that he's built that's based in San Francisco and probably here as well, and we've put in a very rigorous green light tracking process that not only looks at a product early on to determine whether it's going to be green-lit but very closely watches the development process from an expectation standpoint and makes sure that we're doing everything we can to make sure the product itself lives up to what our expectations are for it to be and if it doesn't, to cut the cord really quickly. And on the other side of the coin, with Christina Glorioso coming on and what we've been doing for the last year, we've been really focused on research, doing lots of research whether it's research on demographics itself, whether it's research on brands, whether it's research on kinds of game play mechanics and for that matter, whether it's even research on packaging, which Zumba, for example, is the perfect example of, as well as Babysitting Mama. We have really taken a very focused approach towards learning as much as we can about the product, the marketplace, the demographic and everything that comes with the products that we’re potentially determining, and before we determine to green light it, while it's in development process and prior to its launch. These are things that we're spending a lot more time on and that we have a lot more expertise in the company than we historically have. So those are just a couple of things that we're doing.

John Taylor - Arcadia

Have you cut anything out since you've got Gloria and the new guy from EA on?

Jesse Sutton

Have we cut anything out?

John Taylor - Arcadia

Yes. In other words, there was stuff in the pipeline prior to their arrival. Have you eliminated any of that?

Jesse Sutton

What I would say is that things that were not necessarily green-lit yet were maybe more quickly removed than they might have been beforehand. But no specific examples to point out.

Michael Vesey

Yes, I’ll address the marketing spend first. So the year that just passed with our reduced marketing or advertising plans from the year before, we spent about 11% of our net revenues in marketing. We think we're going to have a higher number next year as we discussed. Want to point out it’ll be concentrated in titles that have at least a proven acceptance with consumers as opposed to the marketing we did a couple years ago, which was for trying to establish our own brands. But that could increase to as much as 15% for the year next year of net revenues, with first quarter being skewed towards the first quarter as we did our holiday and launch advertising. So it could be a couple points higher than that in the first quarter but expect it to settle right around 15% for the year. In terms of our share count outstanding, the first quarter, you'll see about 37.5 million shares outstanding, and it'll be a little over 38 million for the year for the share calculation.

John Taylor - Arcadia

Does your guidance include some of the things you intimated? Like, does it include all the 3DS? Does it include Martha Stewart if and when something gets announced? Does it include the Harley Pasternak stuff? So in other words, does it include titles that don't have names yet or launch date?

Jesse Sutton

Yes, it absolutely does. It doesn't include to-be-determined product. It includes all the products that we know that we're in the process of developing and marketing and publishing this year.

Operator

Your next question is from the David Bench of Trinidad Capital.

David Bench -

Can you talk for a minute about your expectations in Europe on a percentage basis for the year? Obviously, you're launching Zumba there. Is there anything else that you're looking to do in Europe? Also, it looks like based on your schedule here, that you have nothing for the 3DS launch. Is that true? Are you waiting for the fourth quarter? And if so, why did you decide to go that route?

Jesse Sutton

I'll take the second one first. Mike, if you want, you take the first one. So in terms of the 3DS platform, David, we feel like building a little bit of an install base will be helpful for the products that we're coming out with. It's nice to have launch titles, but the development process on the 3DS is a lot more rigorous than it is on the DS and requires real -- it's a brand-new platform. 3DS gaming mechanics is going to be very new to everyone, and we're going to make sure that when we do it, we do it right. So the goal is put products out as the -- likely sell into the holiday season when we always see the biggest movement for our products on retail and acceptance there as well and as the install base grows for the platform as well. Mike?

Michael Vesey

Addressing the amount of European business we have included in our guidance, I guess, was the question. As you know, we just entered into a licensing type of business model there, and we did enter into an agreement to distribute our holiday titles from this holiday season with Zumba being the front-runner there. The revenue included in our guidance is probably a nominal number, say, 1% of revenues or less. We didn't really plan for a lot of upside there yet. As we work through our slate for the rest of the year and sign those up to licensing opportunities, perhaps we'll have updates there. But it's not a significant part of our revenue in our current plan.

David Bench -

And can that scale at any point if Zumba does what it did in the States or was doing actually in the States and get much higher number than 1%? Or are you really just netted out pretty low on that?

Michael Vesey

I mean, it has the potential to do that. We don't have any -- until it gets released and we see what the traction is going to be, we don't have anything to really base, say, a statement on upside on.

Jesse Sutton

Yes, I mean, the leading platform right now for us for Zumba is the Wii. The Kinect is not lagging too far behind. The Kinect’s the only platform that launched so far in Europe, and the Wii is yet to launch. So as we get more data and we have more information, we'll be able to give you more accuracy relative to the European business.

David Bench -

And then on the holiday season, holiday releases, it looks like based on the guidance you're giving, that you're really pushing everything into 2012 with the exception of a couple 3DS games here. Can you talk to that a little bit in terms of is there a possibility for more to kind of shift forward into October? Or are you just assuming a lot in November again in 2012 or 2011, '12?

Jesse Sutton

The answer is a little bit of both. First, we haven't announced all our titles that will be released during the fiscal year yet. Even though, we're working on titles and we're determining what the release date will be, some of which will probably be in fiscal 2011. Until we come up with a final range of dates and a final name and concept for the game, we don't release them to the public. So we'll be filling out this chart as we go throughout the year. We think a lot of the games we're working on for the holiday will flow into 2012 as they did this year. Perhaps some of them will be released late in the Q4, and we'll have to update that later.

Operator

Your next question is from George Strum [ph] of Morgan Stanley.

Unidentified Analyst

Just wondering in your projections for this year, what are you looking at in Zumba as far as sales are concerned? And also, what comes down up to the -- what gross do you make on every Zumba that you sell, gross revenues?

Jesse Sutton

We don't talk about specific gross revenues per product, gross profits on revenues per product. And as far as the overall expectation is concerned, we put it in as part of the rest of the portfolio. We don't break out products. What I could say is that as we hit certain milestones like we have already, having sold over 500,000 units, the next milestone, as we hit 1 million units, you could expect to hear that information from us. So as material information develops here, we'll make sure that the market is aware of it.

Unidentified Analyst

I want you to know I called Best Buy and Walmart and Target, and they were all out of it. So I had to go on to Amazon, and I actually paid $61. And it just got delivered today because I'm going to have my grandchildren take a look at it. I think I got ripped off. That's for the Wii.

Jesse Sutton

Well, I can tell you, we are doing everything we can to make sure everybody is fully stocked, and we're happy to tell you things are moving along very well, so.

Operator

This concludes the question and answer session. I would like to turn the conference back over to Jesse Sutton for any closing remarks.

Jesse Sutton

I want to thank everybody for coming on this call today. Happy New Year to everyone. Looking forward to talking to everyone again on our first quarter earnings call in March. Have a great day.

Operator

Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.

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