Ladies and gentlemen, thank you for standing by. Welcome to the Mad Catz Interactive fiscal 2011 third quarter results conference call. During the presentation all participants will be in listen only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the 1 followed by the 4 on your telephone.
If at any time during the conference you need to reach an operator please press the star followed by the 0. As a reminder, this conference is being recorded Wednesday, February 9, 2011. I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead sir.
Thank you operator. Good afternoon everyone and welcome to Mad Catz’s fiscal 2011 third quarter conference call. With me on the call today are Darren Richardson, Mad Catz’s President and Chief Executive Officer, and Allyson Vanderford, Mad Catz’s Interim Chief Financial Officer. Darren will provide an overview of the results and the principal drivers behind them. Afterwards Allyson will review the financial results in greater detail.
To close Darren will then give his thoughts on the company’s operating goals and the outlook for the video games sector in the balance of calendar 2011. It will be at that point that we will open the call for Q&A. However, before we begin let me just take a few minutes to read the Safe Harbor language. 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 new information or future events or developments. You can identify these statements by the fact that they use the words such as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.
Among the factors that could cause actual 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, price protection taken in response to price cuts, the ability to successfully market both new and existing products domestically and internationally, difficulties or delays in manufacturing, delays in the company’s ability to obtain products from its manufacturers in China, market and general economic conditions.
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 - February 9, 2011 - and webcast includes 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 financial measure calculated and presented 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.
Thank you Norberto. Good afternoon everyone and thank you for joining us. On today’s call I’ll provide a brief overview of our financial operational achievements for the quarter and discuss the drivers behind some of our key financial metrics. Allyson will then review our financial performance in greater detail after which I’ll provide an update on both our product development pipeline as well as some thoughts on the industry and the company’s outlook for the balance of fiscal 2011.
Let me begin by saying that we’re very pleased with the all time record results for the quarter and year to date period. And I’d like to take a moment to thank the entire team at Mad Catz who successfully leveraged our core skill set in innovating, licensing, manufacturing, marketing and distribution. Since we began repositioning the company’s products approximately three years ago we have seen a steady improvement in our results.
In the third quarter of fiscal 2008 for example, the company had net sales of 34.3 million, earnings per share of 6 cents and EBITDA of $6.9 million. Three years later in the recently concluded third quarter of fiscal 2011 we’re pleased to report net sales of $93 million, diluted earnings per share of 15 cents and EBITDA of $16 million. This is a significant improvement and one we feel we can continue to build on going forward.
There are many factors driving the significant growth in our operating results but it really comes down the fact that we’re a much different company today than we were three years ago. From the products we make to where we sell them to who we partner with, Mad Catz has redirected our resources and product focus to bring to market higher value products and aligned ourselves with some of the industry’s best brands and titles while fine tuning our financial models to deliver growth, but more importantly, profitable growth.
Today we make cutting edge products that incorporate the latest technological features for the video game and office markets. Be it wireless, Bluetooth, DPI, ergonomics, touch screens, lasers or a host of other features, our products deliver levels of quality, design and innovation never before seen in the company’s history. This is evidenced by the various awards and numerous glowing trade reviews our products have garnered recently from CSIGN and a host of influential Web and consumer publications.
But the most important measure of our products’ success is the consumer demand they have generated. Our product portfolio is more diverse than ever before and our products are sold across the widest distribution footprint in the company’s history. We now have products for all three of the major consoles, both major handhelds as well as for the PC. And with the recent addition of Tritton, we have audio products that are in many cases compatible with platforms that fall outside the video game and PC markets.
In addition, as an indicator of the company’s growing distribution footprint, we’re now generating approximately 40% of our net sales outside North America. We’re also forming partnerships that are expanding the scope and reach of our business that perhaps we would not have been able to enter into before. By partnering with game developers on major game titles and franchises such as Call of Duty, Rock Band, Gears of War, Marvel versus Capcom and Street Fighter or with the highlight acclaimed hardware manufacturers such as Microsoft, Sony and Nintendo, we now have an impressive resume of successful relationships that serve us well today and help lay the foundation for tomorrow’s growth and expansion.
It’s the reality of this transformation, having the strongest portfolio of new products in Mad Catz’s history across all our brands, that drove the success of the quarter and that we expect will continue to drive our growth going forward. But we’re not only focused on growing the top line. We’re equally focused on pushing more of this growth down to our income statement. While gross margins for the quarter fell 4 percentage points to 28.4% due in part to the expected low margins on our Rock Band product line, the company generated a quarterly record $26.4 million in gross profit, an increase of 65%.
At the same time, total operating expense increases were contained to under 26% and abling us to post record quarterly operating income, net income, earnings per share and EBITDA. We’re also very pleased with our results on a year to date basis. Though we started the year off slower than we would have liked, the fiscal second quarter results were good and allowed us to more than offset any weakness from Q1 while providing us with a good foundation for Q3 results.
As a result, we posted a record net sales, gross profit, earnings, EPS and EBITDA for the first nine months of the fiscal year and have positioned the company to finish fiscal 2011 with the best results in our history. In summary, this strategy is working. We’ve dramatically increased our average selling price, improved our overall product quality, broadened our distribution footprint, focused on aligning ourselves with the best in the industry and leveraged our operations. With that, let me turn the call over to Allyson Vanderford, our interim CFO, to review our financial results for the quarter. Allyson.
Thank you Dan. Let me begin with a brief review of the income statement. Net sales for the fiscal 2011 third quarter were $93 million, up 91% from $48.8 million in the fiscal 2010 third quarter. The increase in net sales was primarily driven by strong sales of Rock Band 3 products, the continued rapid growth in Tritton audio products and our line of Call of Duty accessories.
Additional increases came from our Cyborg line of gaming mice and the third party distribution of Turtle Beach products in Europe. As Darren mentioned, this set an all time record for quarterly revenue and trailing 12-month revenue, which reached $176.5 million. Looking at our sales in greater detail, North America net sales more than doubled, growing 130% to $56.4 million in the fiscal 2011 third quarter and representing 61% of quarterly net sales.
This compares with 50% of sales in the prior year period. European net sales rose 53% to $35.1 million in the fiscal 2011 third quarter and represented 38% of quarterly net sales compared to 48% of quarterly net sales in the prior period. Europe has lagged North America due primarily to lower sell in of Tritton, Rock Band and Call of Duty products, partially offset by the success of our sales of third party products.
While modest on a dollar basis, net sales to other geographies increased 14% to $1.4 million or 1% of quarterly net sales in the fiscal 2011 third quarter. This group is primarily the result of increased sales of racing wheels and Cyborg products partially offset by lower sales of (Slide) products. Overall, we are beginning to see some new products gaining traction in this market. Gross profit margin fell to 28.4% from 32.7% in the third quarter of fiscal 2010 largely due to a shift in our sales mix towards Rock Band 3 related products, which carry a lower margin.
Also contributing to the decrease in gross margin is the fluctuation of foreign exchange rates compared to the prior period. Gross profit dollars grew 56% to $26.4 million from $15.9 million in the same quarter of the prior year. Given these results and our performance in the first nine months of the fiscal year during which our gross margin was 28.5%, we remain comfortable with our full year target for gross margins in the high 20% to the low 30% range.
Total operating expenses for the third quarter of fiscal 2011 rose 26% to $10.4 million representing 11% of net sales and driving an operating profit of $16 million in the quarter. This compares favorably to $8.3 million of operating expenses in the comparable prior year period, which represented 17% of net sales and generated operating income of $7.6 million. These results are in line with our expectations as we continue to make strategic investments in marketing and R&D to aid our product development efforts.
With respect to the increases in our R&D, the major driver there was increased spending to expand our new product pipeline. Foreign exchange loss for the third quarter of fiscal 2011 totaled $0.7 million or 1 cent per share compared to a foreign exchange gain of $0.1 million a year ago. The loss was largely the result of an approximate 2% depreciation of both the euro and the British pound versus the Hong Kong dollar during the quarter.
After income tax expense of $4.6 million versus $1.6 million in the prior year period, net income for the fiscal third quarter ended December 31, 2010 was $9.7 million or 15 cents per diluted share compared to net income of $5.6 million or 9 cents per diluted share in the third quarter last year. EBITDA, a widely used measure to monitor financial performance, increased 83% to $16 million in the fiscal 2011 third quarter from $8.7 million in the comparable prior year period.
This brings our training 12-month EBITDA to a record $21 million. Moving on to our balance sheet, as we announced back in October, we amended our asset backed revolving credit facility to expand available liquidity in preparation for the holidays. Though we borrowed over $45 million at one point, as of December 31, 2010 we reported borrowings under the revolving credit facility of $25.8 million and a net position of bank loan less cash of $15.9 million.
This compares to borrowings of $23.3 million and a net position of bank loan less cash of $17.4 million as of December 31, 2009 or a $1.5 million improvement in net bank loan less cash. As of January 30, 2011 the line has reverted back to $30 million. Inventory of $32.5 million is up 30% from $25 million last year. This is largely due to the higher average selling price of our products as well as the increased inventory needed to meet the growth in sales.
We feel these are appropriate inventory levels. Inventory turns on a trailing four quarter basis were 4.1 times, up modestly from 3.5 times in the prior year period. Accounts receivable of $51.2 million were up $22.9 million from last year due largely to the 91% sales increase. Our gross DSO were 93 days compared to 83 days in the year ago period. Finally, I wanted to briefly comment on our upcoming debt repayment.
As most of you are aware, we financed the November 2007 acquisition of Winkler Atlantic Holdings Limited, the private holding company that owns Saitek via a $14.5 million convertible note payable. This note has a maturity of March 2019 but requires the partial repayment of interest beginning in June 2009. As such, there is a payment of approximately $2.4 million due at the end of the current quarter and we foresee no problem in making this payment or meeting any of our other commitments.
In summary, we expect significant improvements in our fiscal 2011 year end balance sheet including a positive cash position net of bank borrowings and look to use this added financial flexibility to further grow the business and drive sales, earnings and free cash flow while enhancing shareholder value. We are extremely pleased with our record breaking results and customer response to our products and we remain very confident in our strategy and new product pipeline. I’d now like to turn the call back to Darren for some closing remarks. Darren.
Thanks Allyson. Although consumers continue to be challenged, we have overcome the environment through our product planning and business model improvements and remain very positive about the future. As we mentioned on our last call, while we’re pleased with the fiscal third quarter results, we’re also mindful that it will not be until we collect the cash from the current fiscal fourth quarter that we’ll see those results flow through the balance sheet.
Before we move into the Q&A session I wanted to briefly touch upon a few items which deserve some added attention. So let me begin with Tritton - since we acquired Tritton its performance has greatly exceeded our expectations. Going back to May 2010 Tritton has contributed over $20 million to our revenues compared to $8 million in the 12 months prior to the acquisition. We’re very excited about the potential of this brand and know there is significant upside ahead as we leverage our global distribution platform.
Regarding our partnership with game developers, our track record is second to none and we’ve enjoyed great success as have our partners across every partnership we have entered. Be it Triarc/Activision and Call of Duty, Epic Games and Gears of War, Capcom and Street Fighter or Harmonics and Rock Band, we have demonstrated that Mad Catz can bring highly successful products to market that will benefit both sides and add considerable retail visibility and support to the game franchise itself.
As long as studios continue to create great games we’re confident we will be able to continue this track record of partnering with game developers and publishers to work together to enhance the overall playing experience for consumers. Regarding our Cyborg and Eclipse lines, we continue to roll out the critically acclaimed line of Cyborg programming mice including the Cyborg Rat 9 wireless gaming mouse.
Consumer response has been overwhelmingly positive and we look forward to the leverage we can achieve from the long shelf life of these PC products. Looking ahead, we remain very optimistic and continue to center our strategy around the Mad Catz casual gaming brand and look to complement that with Saitek simulation products, the Cyborg pro gaming brand, the Eclipse home and office consumer electronics brand and the Tritton gaming audio headsets brand.
We continue to roll out a diversified pipeline of exciting products and look to leverage the added strength of our business in the balance sheet on the back of the great holiday quarter. We’re confident in our positioning for the fourth quarter of fiscal 2011 and fiscal 2012 as a whole. That concludes my prepared remarks for today and I’d like to turn it over to questions. Thanks operator.
Question and Answer Session
Thank you. Ladies and gentlemen, if you’d like to register a question please press the 1 followed by the 4 now. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone please lift your handset before entering your request. Once again ladies and gentlemen, to register for a question please press the 1 followed by the 4 now. One moment please for our first question. And our first question comes from the line of Ronald Ryder with RLR Partners. Please proceed with your question.
Hi guys. Congratulations on just a super, super quarter. In your comments Darren you spoke about some of the new products. Clearly Tritton has been a great surprise and has been very, very well highly received in the consumer reports and everything. Is that the - the one thing you didn’t address that to me seems very, very potentially exciting and could be huge for the company is the Microsoft agreement to provide the headsets both licensed and Tritton headset speakers for the X-Box 360.
Am I - to me that seems like the most exciting of all the new products out there. Am I overemphasizing that? Could that bring audio as a category as much to be 40% of revenues in fiscal 2012? And maybe you can just talk a little bit more about what that prospect is.
Yes. Thanks a lot Ron. We’re really excited about that announcement because that’s an exclusive deal, it’s multiyear. It’ll be the first wireless high end headset for the Microsoft X-Box 360 and it’s going to be cobranded with Tritton and X-Box as well. So I think that’s a very, very meaningful announcement and that’s going to be an important product line within the whole Tritton growth story.
But I think this year for Tritton we’ve got very high expectations. We haven’t broken those out and we don’t intend to sort of break out what the sort of go forward is on that. But I think the potential is very high. When you look at the quarter even if you back out Tritton and you back out Rock Band, both made very significant contributions for the quarter.
We still recorded a growth quarter and that really speaks to the strength of the business on a whole bunch of different fronts from a successful Call of Duty program, successful ongoing roll out of the Cyborg Rat and just a host of different products across the whole spectrum that are really coming together to get some great results. So we’re pretty excited about what the upcoming year is as well.
I had one other question. The accruals for bonuses, did you do all the accruals here in the third quarter or are you going to wait until year end before you set what those accrual rates are considering that the growth rates were much higher than originally anticipated?
The bulk of bonus accruals are in the third quarter. There will probably be some bits and pieces that flow through into the fourth quarter but the bulk of bonuses are built into that nine weeks coming after the third quarter.
Great. Thank you.
Ladies and gentlemen, as a reminder to register for a question please press the 1 followed by the 4. Our next question comes from the line of Stan Trilling of Credit Suisse. Please proceed with your question.
Hi gentlemen. I’m new to the company. We’ve watched it for years and I want to congratulate on what is an amazing quarter. The question I have is what I remember is the old Mad Catz and I’d like to know more about the new Mad Catz from the standpoint what percentage of your business is still coming from the old, low margin controllers and things like that?
Each year it’s been a diminishing percentage. And in fact, if you look at the way the business has kind of transformed over the years, we’ve actually been doing two things. One is reducing a lot of our SKUs to eliminate some of those low margin products. The second thing is increasing our global platform and that has offset some of that demise in some of those low margin products.
You’re still seeing it in some areas. For example, we had a good chunk of fairly low margin, low price PC products operating in some European markets and we’re sort of backing out of a lot of that business as well. And so in the PC numbers if you look at the percentages, you’ll see that there has been some decline there but the decline is mainly on that more commodity end of the business.
So we’re kind of going through a transformation but these days the bulk of the business is built around more of these higher value add premium products that really just have a lot more consumer appeal.
Okay. Could you be a little more specific and guide us what do you think that the commodity type business will look like the end of next year? What percentage of the overall business?
Yeah. It’s still there but it’s not a particularly large percentage of the business. Off the top of my head I couldn’t even give you a number today to be perfectly honest. But it is a smaller percentage of overall business. If you just look at the growth from three years ago to where we are today, the bulk of that growth has been in higher value add products. So without doing math I would say it’s well under 50% of the total business.
My one last question is this industry still looks like an industry where there is major potential for roll ups. And I don’t know if you agree or disagree but if I’m right, is there a decent pipeline right now?
You know what, we continue to look at all sorts of options. I mean we’re focused on building the business to get to kind of like $300-500 million worth of sales over the next couple of years. We’re not content with where we are. We think there is a lot more opportunity. And so part of that is going to be organic and part of it is going to be ongoing acquisitions very similar to the Tritton acquisition and those kinds of things that we’ve been doing over the last couple of years.
Thank you very much and again congratulations.
Okay. Thanks a lot Stan.
And Mr. Richardson there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.
Okay. I’d like to thank everyone first of all for just participating on the call. And as always, I want to acknowledge all of the hard work that has been done by the talented team here at Mad Catz to make the company everything that it can be. And I think these results certainly are testament to the work that’s been done. Thanks a lot. Thanks to the investors for their ongoing support and we look forward to updating you on our progress when we get to the end of Q4.
Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.
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