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Majesco Entertainment (NASDAQ:COOL)

Q1 2011 Earnings Call

March 08, 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

John Taylor - Arcadia

Edward Woo - Wedbush Securities Inc.

Sean McGowan - Needham & Company, LLC

Operator

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Co.'s Fiscal First Quarter 2011 Earnings Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Todd Greenwald, Director of Investor Relations and Strategic Planning. Mr. Greenwald, the floor is yours, sir.

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, 2010, 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 the 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, changes in the fair value of warrants, severance costs 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. A reconciliation between GAAP and non-GAAP financial measures is included in the press release issued earlier today.

With me on the call are Jesse Sutton, Chief Executive Officer, and Mike Vesey, 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 an overview of our performance in the first quarter. Mike will follow with a 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 questions.

In Q1, we experienced our strongest quarter in the company's history, fueled by the robust performance of our Zumba Fitness title. Sales reached a record of $48 million, surpassing our own internal expectations. Our gross margin reached 40.5%, up from 29.8% last year. We achieved non-GAAP EPS of $0.20, up from $0.08 a year ago. Finally, we made our first entry into the social games business with our biggest brand, Cooking Mama. Mama has gotten off to a quick start with an audience of over 750,000 users and provides us with a good starting point as we begin to really build this business.

On our last call, we talked about Zumba's success at retail this past holiday season. We've now sold over 1 million units to date, and reorders continue to come in on a weekly basis as the sell-through remains strong.

We've been very encouraged not only by the very strong initial success seen with Zumba, but by the real legs it seems to have, with momentum continuing long after the holiday season has passed.

We saw very strong sell-through in January and February, and we're pleased to see that in January, Zumba was the number two best-selling game on the Wii and was the number five best-selling game overall according to NPD.

We have historically had just won significant franchise here at Majesco, Cooking Mama. And it has been -- and it continues to be a very valuable asset for the company. With Zumba, we believe we now have a bona fide second franchise in our library. In fact, we achieved this record quarter with Mama only accounting for about 30% of our business compared with over 50% a year ago.

Having franchises like these are invaluable to a company like Majesco. They provide a degree of predictability not seen with new IP, reducing risk and improving profitability. We believe that our strong Q1 results and our full year outlook reflect the enormous benefit we get from having this second franchise.

Having said that, we are not going to be satisfied with these two franchises. We have been hard at work, signing up new licenses and building up our pipeline of new products. We are in the process of introducing several new titles, many of which have the potential to be our next big franchise.

Finally, we are happy with the progress we've made in our digital initiatives. This is a business we are building right alongside our traditional retail business. In December, we made our first real entry into the social games business with Cooking Mama Friends Café on Facebook. And as I've said, we're happy to announce that we have over 750,000 active users, despite a very limited marketing campaign to date.

We have recently hired several experienced social game producers to really optimize the game play to enhance all the critical aspects of a Facebook game: customer acquisition, customer retention, engagement, virality and, obviously, monetization.

Let me also take this opportunity to congratulate Mike Vesey, who has just been officially named our CFO. Mike has been in that role since August on an interim basis, and our board made it official today. Mike has been with Majesco for over four years now and has proven to be a valuable asset to the company. We are confident in his ability to manage our finances and drive our goals of strengthening our balance sheet while continuing to invest in our product pipeline and strategic growth plans.

With that, I would now like to pass the call over to Mike, Majesco's Chief Financial Officer, to provide the financial review of our fiscal first quarter results.

Michael Vesey

Thank you, Jesse. I appreciate it. First, I'll recap our results for the quarter and close with some comments about our guidance for the year. Revenues for the three months ended January 31, 2011, were $48.5 million, an increase of 66% over the $29.2 million reported in the comparable quarter last year.

During the first quarter of fiscal 2011, we released two console titles, Babysitting Mama for the Nintendo Wii and Zumba Fitness on three console platforms, the Nintendo Wii, Microsoft Kinect for the Xbox 360 and the Sony Move on PlayStation 3.

We also saw holiday reorders for Crafting Mama for the Nintendo DS, which we released in the fourth quarter of our prior fiscal year. Comparably, in the same period during the prior year, we released two major titles, both for the Nintendo Wii and DS, Jillian Michaels' Fitness Ultimatum and Alvin and The Chipmunks: The Squeakquel. We also got contributions from the previously released Cooking Mama 3 DS in the prior year's holiday.

The release of Zumba Fitness, taking advantage of the motion-based controllers on all three console platforms, including the newly-released Kinect for the Microsoft Xbox 360 and Sony's Move for the PlayStation 3, was a major initiative for us and accounted for approximately 60% of our net revenues during the quarter. Correspondingly, our concentration of revenue for our Cooking Mama titles was reduced to approximately 30% for the quarter ended January 31, 2011, down from over 50% for the same quarter in the prior year.

Our gross margin for the quarter was 41%. This is up from 30% in the same period a year ago. Our current quarter's margins reflect the impact of our Zumba Fitness products, which carried comparatively higher price points when compared to our lineup from a year ago, particularly the Kinect version of the game, which was released during Microsoft's launch window for the platform and benefited from early life cycle pricing.

You'll see our operating expenses increased $5.4 million from the same quarter last year to $11.6 million. This is primarily due to $4.6 million of media advertising around our two main title launches, Zumba Fitness and Babysitting Mama. We targeted both of these titles with focused TV advertising support.

We also recorded a higher profit-based incentive compensation expense than in the prior year's quarter based on the company's financial performance. And we've added several key members to our production team to support the higher-quality console titles and social games we have in development.

You'll note that our interest and financing charges increased $0.2 million to $0.7 million when compared to the same quarter during the prior year. This is due to increased short-term advances under our factoring and purchase order financing arrangements to support the higher volume of holiday inventory purchases. These amounts are repaid when the related accounts receivable is collected or the inventory is received. We continue to have no long-term debt to service.

As a result, our net income increased 78% from $3.8 million in the first quarter of 2010 to $6.8 million in the same period in 2011, while our non-GAAP net income more than doubled from $2.9 million to $7.3 million. On a per share basis, our diluted net income per share for the quarter was $0.17 compared to $0.10 in the same period last year. On a non-GAAP basis, our diluted earnings per share for the quarter was $0.20 when compared to earnings per share of $0.08 for the same period last year.

So in summary, we increased our revenue 66% over the same quarter last year, largely due to the launch of two products utilizing the recent innovations in the motion-based controllers provided by the console hardware manufacturers. And two, we're able to achieve this without a proportional increase in our fixed operating costs, resulting in a significant bottom line drop-through and an increase of 150% in our non-GAAP net income.

Turning to our balance sheet. We closed our first fiscal quarter ended January 31, 2011, with $7.9 million in cash and equivalents and additional $8.6 million in advances available to us under our accounts receivable factoring agreement, leaving us with total cash and availability of roughly $17 million. As of January 31, we had approximately $3.5 million invested in capitalized software development and prepaid royalties, with another $5.5 million committed to complete these games. We had $7.3 million of inventory, most of which is related to our Zumba and Babysitting Mama products. These products are packaged with peripheral accessories that require a longer lead time to manufacture than video game software discs and cartridges.

Now for our 2011 outlook. Following a successful holiday season and stronger-than-expected sell-through for Zumba Fitness, we expect to achieve approximately $100 million to $110 million of net sales for the fiscal year, up from our prior guidance of $85 million to $90 million. This represents growth of 30% to 45% versus the prior year. We expect this to result in non-GAAP EPS in the range of $0.20 to $0.25, up from our prior guidance of $0.06 to $0.10.

I'd like to remind everyone of the seasonal nature of our business. We focus on easy-to-play games focused on the mass market. Therefore, our sales are typically concentrated on the holiday selling period. Our fiscal year ended October 31, therefore, our just-reported first fiscal quarter generally includes the majority of our holiday sales. While we have not yet finalized our release dates for our 2011 holiday lineup, we anticipate this pattern will recur during our next fiscal year.

Finally, I'd also point out that our forecasted earnings are impacted by our investments in our digital and social games business. We plan to launch a number of downloadable digital games this year on various platforms such as iPhone, iPad, Android, Xbox LIVE and PSN.

We're also investing in several social games utilizing the freemium revenue model and micro-transactions on the Facebook Platform.

As many of you are aware, there's a startup period required to build this business and establish optimized game play and monetization characteristics within the games. I would now like to turn the call back over to Jesse.

Jesse Sutton

Thanks, Mike. I will now provide some comments on our lineup for the rest of 2011. Keep in mind, we haven't yet announced the vast majority of our release slate for this year and for the 2011 holiday season. We plan to begin rolling out these product announcements over the next three months or so. However, know that we have a lot in store with many great, well-known brands coming towards the end of this year.

Looking back at our past successes, it is clear that brands are a crucial piece of the puzzle for us. We have had great success with brands like Cooking Mama, Jillian Michaels, Tetris, Alvin and The Chipmunks, Zumba and many more. We have already announced partnerships with Martha Stewart and fitness and nutrition expert Harley Pasternak and are now very far along in the process of signing up many new attractive, recognizable brands that we will pair with exciting, fun-to-play games on the many new platforms emerging this year on the Kinect, the Move, and the 3DS.

Having already established ourselves on the Kinect with a successful launch title there, we plan to have at least three more titles for that platform. We are also very excited about the prospects for the Nintendo 3DS, which comes out in just a few weeks, and we plan to support the 3DS with at least six titles over the balance of this fiscal year.

Finally, we expect to have at least three social games coming to Facebook this year. As we've already discussed, Cooking Mama Friends Café has gotten off to a great start and is really enabling us to learn about the best practices of launching and then supporting a game on this new platform.

It's critically important to not just sign up new users at launch but to deeply engage them, retain them, and then monetize them by enticing them with the compelling array of virtual goods to purchase. We are still in the early stages, where we are learning about all of these steps, and we have yet to spend any meaningful marketing dollars. Therefore, we are pleased to be approaching the 1 million monthly average user level at this point without any significant marketing campaign.

We also just announced Parking Wars 2, which is planned to hit Facebook this spring. Parking Wars 2 is based on the hit real-life TV series Parking Wars, now in its fourth season on A&E. The game picks up where the 2008 Facebook game of the same name left off, as players ticket those cars left at expired meters while avoiding getting parking tickets from their friends. This freemium game, supported by micro-transactions, lets players monitor and maintain their own street, keeping track of those parking on it while developing new properties to attract patrons and generate income.

We also have one still unannounced social game, which will be supported by a significant brand, which we think will match up very well with the demographics of Facebook game players. We believe that as the social game market begins to mature, brands will become more important than ever and will be critical for a game to climb above the clutter and get noticed. Fortunately, we have a long history of working with the best and biggest brands out there, especially those which cater to the adult woman demographic, which is so prevalent within Facebook games.

While our holiday slate has not yet been announced, we do have many great titles coming over the next six months or so. Monster Tale is coming out next week for the Nintendo DS and is already getting some great reviews from critics. Nintendo Power has dubbed it the next great DS game, while Game Informer have included it on their list of the top five most anticipated portable games for 2011. It is being developed by the key leads behind the critically acclaimed Henry Hatsworth and the Puzzling Adventure and mixes platform game play on the top screen with a deep pet-raising game on the touch screen to create a dynamic, one-of-a-kind adventure. Early reviews have been very positive, and we think this game will exemplify our commitment to quality here at Majesco.

Greg Hastings Paintball 2 is coming to the PlayStation Network later this quarter. This game has already been successful for us on other platforms, and we are now bringing it to the PlayStation 3 with a unique twist. It will be download-only title for PlayStation Network, furthering our digital strategy. It will come at an attractive price point for fans of the first-person shooters and, most importantly, will support the new PlayStation Move controller. This will be our second title to support Move and will be one of the few shooters to support the motion-based controller, which will enable precise targeting and online multiplayer battles with up to 14 friends.

Finally, everybody loves zombies, and later this fall, we plan to release Pet Zombies for Nintendo’s 3DS, which lets players reanimate their very own zombies with a range of customizations and then care for or torment their zombie pets as they play with them in the creepy 3D environments. This will likely be the first of many releases from us on the Nintendo 3DS.

In summary, we are very encouraged by our performance in Q1 and look forward to start revealing more to you about our exciting lineup for this year and next over the coming months. That concludes our formal remarks. Operator, if you can review the Q&A instructions, please.

Question-and-Answer Session

Operator

[Operator Instructions] The first question we have comes from Sean McGowan of Needham & Company.

Sean McGowan - Needham & Company, LLC

I have a couple of questions about elements of both the revenue and the expenses in this quarter that would be repeatable. You mentioned that you had over $4 million of marketing expenses in the quarter that if you didn't have a big slate, you wouldn't have spent that money. But what about some of the other expenses like G&A and R&D? Those also showed a pretty big increase. So how much of that is fixed and how much is variable?

Michael Vesey

Yes, Sean, it's Mike. A significant portion of it is due to the way our bonus plan works. A bonus pool is established based on when we earn money. So our bonus for each department level was accrued in this quarter, so that will not recur. The only recurring addition to our fixed expense would be a few hundred thousand dollars we added in our development group. We brought on Chris Gray, and he brought on a couple of other people with different skill sets, producers from other large video companies.

Sean McGowan - Needham & Company, LLC

Okay. Is all of that non-cash compensation recognized in G&A?

Michael Vesey

Yes, non-cash comp in G&A.

Sean McGowan - Needham & Company, LLC

Okay. So there's none of that in product R&D?

Michael Vesey

No. But the incentive bonus expense is in each department.

Sean McGowan - Needham & Company, LLC

Okay. So if we look at G&A in percentage terms, had a pretty big increase. We shouldn't expect a run rate of $3 million, right? Per quarter, I mean.

Michael Vesey

That's right. It'll be somewhat lower. Yes, the G&A expense will be the same run rate we had in the three prior quarters of last year.

Sean McGowan - Needham & Company, LLC

Okay, and that's helpful. Second, there's some moving parts here on the gross margin as well. So can you give us a sense of how much variability we should see in product costs as a percentage of sales over the next couple of quarters?

Michael Vesey

Yes. I think you'll see the margins -- our margins were 40% this quarter.

Sean McGowan - Needham & Company, LLC

Right.

Michael Vesey

I think the normal price cycle will happen. So Zumba has a couple of price stages it will go through during the year before we either have another game to replace it or it just kind of levels off. So I think you'll see the cost per units stay the same, but the price per units will come down. So the product manufacturing costs will go up slightly. So if we have 40% margins in the first quarter, I think by the fourth quarter of this year we’ll be down more, closer to our norms in the 30% range.

Sean McGowan - Needham & Company, LLC

That's helpful. And then the last question I had was -- had to do with the platform mix, and obviously, because of Zumba and Babysitting, you've got this big Wii and Xbox surge, but the DS declined pretty sharply. Now how much of that is sort of engineered on your part? You knew where you had a bigger payoff and other resources and you deliberately kind of de-emphasized the DS or versus how much of that is indicative of a decline in the popularity of the DS?

Jesse Sutton

This is Jesse. So what I would tell you is that the couple of points as it relates to the DS. So the DS market has, as you know, gotten very crowded, and a lot of anticipation for the next system, I believe, had an impact on the overall sale for that platform. That being said, we were focused in putting out DS games that we knew would bring us the most return, primarily Mama-based games. So we put out Crafting Mama in the late fourth quarter, which really sold well into the first quarter. That continues to sell. The focus, really, has been on emerging platforms and taking advantage on the older platforms with brands.

Sean McGowan - Needham & Company, LLC

So it sounds like what you're saying, then, it's not like you tried as many titles on the DS and they just didn't sell as well. You were moving to other platforms, and we should expect to see some more of that, right?

Jesse Sutton

Correct.

Operator

The next question we have comes from Ed Woo of Wedbush Securities.

Edward Woo - Wedbush Securities Inc.

I was just wondering if you could provide a little bit more details about your Cooking Mama Facebook game, whether you would be willing to share any financial details on that.

Jesse Sutton

We are not prepared to share financial details on that, and I can tell you that it isn't meaningful enough to share at this point. What I can tell you is, as I said earlier, is that we're in the process of learning the Facebook Platform. And the intention and the way that we intend on building Facebook games is by putting out a game and putting with very minimal marketing dollars behind it in order to learn, generate some user base, learn about our retention capability, learn about the balance of the game play, learn about how it's monetizing, tweak it as often as need be, and when we feel that the product is truly ready and prepared for a large marketing launch, we'll do just that, and then we hope that it would result in a big success. But it really has a lot to do -- right now, we're still in the process of analyzing all the metrics that come in relative to everything I've talked about earlier, and we intend on continuing that probably for the next four to six weeks. And then you’ll see, probably, a significant marketing launch on our end that would hopefully generate a lot of interested users and significant retention, hopefully, realizing monetization.

Edward Woo - Wedbush Securities Inc.

And then now going back to the Zumba franchise, do you still think that Zumba will be similar to your Mama franchise, where maybe if you get a game out a year? Or do you see it as maybe not an annual franchise?

Jesse Sutton

I think that's a good question, and I think there's more for us to talk about with the investment community about Zumba. But we're not prepared to discuss it just yet. Obviously, it is a product that we believe -- and a brand that is fantastic, one that continues to grow, and it's reached all its consumers around the world. And our partners within the Zumba Fitness group have been fantastic, and we're going to continue to work with them to bring new Zumba game experiences to lots of consumers in the coming years.

Edward Woo - Wedbush Securities Inc.

And as a reminder, your right is worldwide rights for the Zumba game?

Jesse Sutton

Correct.

Edward Woo - Wedbush Securities Inc.

Is it beyond one game, or is it just one game?

Jesse Sutton

Like I said, we're working with the Zumba Fitness group right now to bring more Zumba game experiences to the coming years.

Operator

The next question we have comes from John Taylor of Arcadia Investment Corp.

John Taylor - Arcadia

I've got a couple of questions, too, if I may. Let's see. You mentioned that the promotional spend in the quarter was, I think, $4.6 million. Do you happen to have what the number was, same quarter last year?

Michael Vesey

Yes, I do. If you have another question, you can ask it.

John Taylor - Arcadia

Okay. Jesse, I'm looking at the 19 SKUs that you've got, and granted, we've got some that are freemium-designed and are going to be a slow burn until they go and that sort of thing. But I'm just wondering if you might talk a little bit about lessons learned and a pipeline full of things just to generate revenue as opposed to generating profit. How do you -- sort of your new orientation on that.

Jesse Sutton

Okay. First and foremost, we're going to be focused primarily in the area of brands. If you look at the history of the company, what's predictably and consistently made money and been successful on a product-by-product basis, brands have always led the way. And I think if we learned anything over the course of the last year is that we've been trying to build a strategy, we really have learned that having a brand partner significantly enhances your ability to bring a successful product to market, given our ability to market it and develop it appropriately, and that significantly reduces risk on the product. And even though we might not own the content per se, having long-term rights to these things, probably just as valuable.

John Taylor - Arcadia

Okay. So what you have in the pipeline, the 19 SKUs and maybe -- I don't know if you’ve got some things that you still got in your back pocket or not, but are those all SKUs that you feel fit within that strategy? Or are there some things that still kind of have to flow out that relate to the old strategy?

Jesse Sutton

I would say that they all primarily fit that strategy, with the exception of a couple, and I would say also, if we wanted to term -- to build innovative products that might not be brand-oriented, we would do it on a platform like the 3DS, where it's a new platform where new innovative products are likely to get well-received early in the product life cycle.

John Taylor - Arcadia

Okay. Let's see. Do you have that promotional number handy?

Michael Vesey

I do, John. It's about $500,000 first quarter of last year.

John Taylor - Arcadia

Okay, so we got an increment of about $4 million. And then in last year's gross profit margin, did you have much in the way of closeouts that kind of depressed it? Or was the whole delta between last year and this year in terms of gross margins a pickup due to mix from the full price stop?

Jesse Sutton

That was mostly the pickup. Last year, we had a 30% gross margin, and -- which was our norm. And we had Cooking Mama 3 as a relatively new release in there, so I wouldn't say it was dominated by closeouts at all.

John Taylor - Arcadia

Okay. And then so you've got, what, $48 million booked, you've got a guidance of $100 million to $110 million. Can you give us a sense, a rough sense of kind of how you expect the rest of the revenue to be allocated by the year? Is the bulk of it going to come in the April quarter and then the next two quarters kind of split the remainder halfway? Or how do you think about that?

Jesse Sutton

Well, we don't usually give guidance on a quarterly basis, John. But I can tell you historically that the two middle quarters have historically been weaker quarters in our industry, and we generally follow the industry trend unless we have a unique product that is doing extremely well or a launch to talk about at that particular time. And the fourth quarter generates a higher revenue level for us historically. So I would say that, that's sort of the pattern, although with the success of Zumba, that leaves open the opportunity that we might see a shift in that given its continued sell-through numbers right now.

John Taylor - Arcadia

Yes, that's why I'm asking because it seems like that might help you break that pattern a little bit.

Jesse Sutton

Yes.

John Taylor - Arcadia

Okay. And looking at the Facebook usage of Cooking Mama. The monthly average looks like it's sort of leveled out, but the engagement on a daily basis has been up and down, but lately, it's kind of been up. Is there an explanation for that? Is that just kind of random? What do you think is causing people more recently to maybe re-engage in that game?

Jesse Sutton

Honestly, we really are attending to that game on a daily basis. I mean, the beauty about creating social games on Facebook is the ability to analyze every single metric that results from the game play experience that the customer is having. And it's our responsibility to learn from those metrics and then respond appropriately with what we hope would be the solutions to any issue that might be out there and that would develop or build retention and, ultimately, monetization. And I think we're getting a little bit better at it, but I think we're still a ways away. Like I said, we're at least four to six weeks away from any meaningful marketing dollars going into that. And to be candid, we were not expecting it to be at the AMU point it is now. We expected a much smaller figure that we can sort of play around with on the development side, so we can learn as much as we can. We have a much bigger group than we expected, purely from a viral response.

John Taylor - Arcadia

Okay. And last question, so when you do get to the point of promoting this, I'm wondering kind of what vehicles are most likely are going to be used and kind of what the size of that budget might look like?

Jesse Sutton

I won't discuss the size of the budgets for competitive reasons, but I will say that it's -- primarily and initially, it will work -- we'll spend money directly on Facebook. And the other beautiful thing about creating games on Facebook is you really have a lot of knowledge of who you're marketing to. So we'll market directly to those customers who are either familiar with Cooking Mama, are playing cooking games, primarily adult women that are spending money on social games right now. And so that will be our target demographic. And the beauty is that we can really, really target them very specifically on that platform.

Operator

[Operator Instructions] The next question we have comes from Sean McGowan of Needham & Company.

Sean McGowan - Needham & Company, LLC

A couple of follow-ups. I wanted to tack on to JT's question about the timing. Because if I read correctly, you're launching Zumba in Europe in this quarter, correct?

Jesse Sutton

Yes, in late March.

Sean McGowan - Needham & Company, LLC

Any reason to think it's not going to go well?

Jesse Sutton

Sean, I think we're enthusiastic about it, and we're hoping it goes really well. The bulk of Zumba users are definitely in the United States, and this is definitely its strongest demographic, and we are definitely enthusiastic about the European...

Sean McGowan - Needham & Company, LLC

Okay, I got it. I guess it gets to one of my other questions. In your guidance, do you feel like you're being conservative or leaving a lot of room for potential upside if these things run?

Jesse Sutton

I think if it runs -- I think at this point, we have larger expectations for it than we had the last time we spoke further down the road. But we've experienced something similar, not -- no way near as big, but something similar in the Jillian Michaels experience before this fitness product on the platform that really jumped out of the box and did incredibly well. So we're trying to be responsible in our expectations. It's exciting that the Zumba brand continues to bypass those expectations, but we're trying to maintain our sense of expectations to reality.

Sean McGowan - Needham & Company, LLC

And then my last question is, Mike, regarding taxes, should we be looking for anything out of the ordinary in the coming quarters, sort of this nominal up or down amount that you’ve typically had?

Michael Vesey

No. In terms of the money we got from the sale of our New Jersey losses were ineligible this year because we made money two years ago. So the only thing that you'll see on our tax line is we pay -- most of our income is sheltered by net operating loss carry-forwards, but we do pay an alt min [alternative minimum] tax, which is sent.

Sean McGowan - Needham & Company, LLC

That alt min tax, is that a function of the level of profits, or is that just sort of a semi-fixed number that you throw out there every quarter?

Michael Vesey

We're only allowed to use the NOLs to shelter 90% of our losses, and the remaining 10% is subject to a 20% alt min tax. So that comes to a 2%.

Sean McGowan - Needham & Company, LLC

All right. So that's a fair way to look at it as 2%? Okay.

Operator

At this time, we will conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Jesse Sutton

We want to thank everybody for being on today's call, and we look forward to talking to everyone again on our second quarter call in June. Have a great day.

Operator

And we thank you, gentlemen, for your time. The conference call has now concluded. We thank you all for attending. At this time, you may disconnect your lines. Thank you.

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