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Majesco Entertainment (NASDAQ:COOL)

Q2 2011 Earnings Call

June 13, 2011 4:30 pm ET

Executives

Jesse Sutton - Chief Executive Officer and Director

Michael Vesey - Chief Financial Officer

Todd Greenwald -

Analysts

Adam Krejcik - Roth Capital Partners, LLC

Matthew Spratford - Sidoti & Company, LLC

Jeffrey Osher

John Taylor - Arcadia

Unknown Analyst -

George Santana

Sean McGowan - Needham & Company, LLC

Operator

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Company's Fiscal Second Quarter 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded. At this time, I'd like to turn the call over to Todd Greenwald, Director of Investor Relations and Strategic Planning.

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 this 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 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. 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 up the call with some highlights and an overview of our performance in the second 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 Q2, we experienced another strong quarter driven by the continued strength of Zumba Fitness. Sales grew nearly 200% to $32 million, and our gross margin expanded to 43%, up from 29% last year and 41% last quarter. This resulted in non-GAAP EPS of $0.13, up from a loss of $0.03 last year. We are very pleased with the success of Zumba Fitness. Zumba Fitness continues to be the #2 best-selling lead title here in the U.S. each month since launch, for 7 consecutive months since its launch in November 2010.

In April, Zumba Fitness was relaunched in Europe where it is off to another fast start, consistently ranking in the top five best-selling video games across all platforms in the U.K.. The game has sold more than $2 million copies worldwide, and we are looking forward to new and exciting features in the upcoming sequel, Zumba Fitness 2, coming to the Wii this holiday and another yet-to-be-announced platform early next year.

We have also taken several exciting steps forward with our Digital business. I'm very happy to welcome aboard Jeff Anderson, our new Senior VP of Social and Mobile Games, along with the rest of his team at Quick Hit. Last week, we announced that we had acquired certain operating assets of Quick Hit, which is the developer and operator of QUICKHIT NFL Football, an online free to play NFL-licensed football game that utilizes a virtual goods revenue model. The most important part of that deal is bringing 12 talented new employees into Majesco where they will significantly strengthen and accelerate our new social gaming initiative.

Jeff has an impressive background not only as a CEO and Founder of Quick Hit but also as CEO of Turbine, a top publisher of online games including Dungeons & Dragons and Lord of the Rings. Before that, Jeff was an executive at EA where he managed the Ultima Online franchise. Jeff and his team will now manage our social games including Cooking Mama Friends' Café, Parking Wars 2, Bananagrams and future games currently in development.

We're also very close to launching our second major Facebook game, Parking Wars 2, which is in closed beta and will launch to the public later this summer. We believe this game is uniquely suited for social platform as it has a vast amount of viral hooks that should make gameplay fun and also help the game to grow quickly.

Our third Facebook game is yet to be announced, but is on track to release later this year and will be announced shortly. It is tied to a very significant brand, which we think will resonate well with the core demographic of Facebook users.

We're also rounding out our portfolio of digital games with several exciting titles like BloodRayne: Betrayal for Xbox LIVE and PlayStation Network, Greg Hastings Paintball 2 for PlayStation Network and a number of to be announced iPhone, iPad titles.

Last, but not least, we are very excited about our holiday release slate, which we think positions us well to have our biggest holiday yet. I will discuss our titles later on in the call.

Now, I'd like to pass the call over to Mike Vesey, our Chief Financial Officer, to provide the financial review of our fiscal second quarter results. Mike?

Michael Vesey

Thank you, Jesse. First, I'll recap our results for the quarter and close with some comments about our guidance for the year. As I discuss our financial performance compared to the prior year, I'll use non-GAAP results in both periods. As Todd mentioned, our non-GAAP results include adjustments for non-cash or infrequently incurring items, the most significant items in the current quarter are approximately $2.9 million of non-cash charges related to the revaluation of our warrant liability and about $400,000 in non-cash compensation expense. Please refer to our press release issued earlier today for a reconciliation of our GAAP and non-GAAP results.

Now for the quarter. Revenues for the three months ended April 30, 2011 were $32.1 million, an increase of 195% over $10.9 million reported in the comparable quarter last year. Sales were primarily driven by a continued reorders for Zumba Fitness titles that were released in November of 2010, as well as royalties on the release of the Wii version of the game in Europe where it's been a top-selling title and contributed approximately $3.2 million of royalty income and accessory sales.

New releases did not have a significant impact on revenues in either year as our release slate was concentrated around the holiday in our fiscal fourth and first quarters. Accordingly, sales of Zumba products accounted for approximately 75% of our domestic sales during the second quarter in fiscal 2011, and parts from our Mama franchise accounted for about 50% of sales in the same quarter of last year. Overall, revenues from our Mama line of products was down somewhat from the prior as pricing of our catalog products was lower, reflecting later stage present on the Wii and DS platforms.

Our gross margin for the quarter was 43%. This is up from 29% in the same period a year ago. Our current quarter's margins reflect the impact of our Zumba Fitness products, which carried higher price points when compared to our lineup from a year ago. The Wii and Kinect version of Zumba continue to sell at the original retail price of $39.99 and $49.99 for the Wii and Kinect version, respectively. Gross margin percentages were also favorably impacted by royalties from European licensing and distribution of Zumba. Also included in gross margin this quarter is a $600,000 charge for the write-down of inventory from last holiday. This is primarily due to the Babysitting Mama doll accessory.

Operating expenses include 3 notable increases from the prior year related to one, product research and development; two, advertising and marketing; and three, charges related to canceled games. First, research and development expenses for the quarter increased $1.3 million from the same period in the prior year. Approximately $800,000 of the increase is due to expenses related to our Social Games business and $500,000 is due to the Console Game business.

On the Social Game side, we entered this business through the use of outside developers to develop and operate 3 games for Facebook. These games are free to play and are expected to generate revenue through the sale of virtual goods. Since we're still optimizing the monetization characteristics of these games, we consider the games to be in the planning phase and expense all costs as incurred.

On June 3, we acquired the operating assets and 12-person workforce of Quick Hit. During the next fiscal year, we intend to transition these games to our facility in Foxborough and reduce our outside development costs.

Increased R&D expenses on the Console side of the business are due to additional producers in support of our expanded game line up. As some of you may know, we outsourced the development of all our console and handheld games to outside studios on a variable cost basis. However, we employ producers and quality assurance personnel to manage the development of these games.

The second item, sales and marketing expenses, increased approximately $1.1 million primarily due to media advertising of our Zumba products and volume-related selling expenses.

And finally, we recorded a charge of $1.3 million related to the cancellation of games in development. We conducted a slate review of all our products in development for the upcoming holiday and canceled games, for which we did not feel would meet our financial benchmarks and reallocated our resources to the games we felt had the highest potential for success. In aggregate, our total operating expenses increased $3.6 million over the prior year.

As a result of the increased sales and gross margins, non-GAAP net income for the quarter increased to $5.4 million compared to a loss of $1.2 million in the prior year. Non-GAAP diluted earnings per share for the quarter was $0.13 compared to a loss of $0.03 in the same period last year.

So in summary, we made a profitable second quarter, with close to 200% revenue growth and over $5 million or $0.13 per share of non-GAAP income after absorbing a $600,000 inventory write-down, $1.4 million in cost for canceled games and $800,000 in research and development cost related to our Social Games business.

Now a quick review of our year-to-date results. Revenues for the 6 months ended April 30, 2011 were $80.6 million, an increase of 100% over the $40.1 million reported in comparable period last year. Again, sales increased primarily due to the sales of our Zumba Fitness titles that were released in November 2010. Sales of Zumba products accounted for approximately 2/3 of our domestic sales during the 6-month period. Comparably, sales of our Mama line of products accounted for approximately half of our sales in the prior year. Our gross margin for the 6-month period was 41%. This is up from 29% in the same period a year ago. Again, the increase is primarily due to higher pricing of our Zumba products.

Operating expenses were $19.9 million, an increase of $9 million from the prior year. Approximately half of the increase was due to increased marketing and distribution costs associated with our higher revenues, primarily Zumba. The remainder of the increase was a result of research development cost related to the additional producers for console games, the outsourcing of social games and increased profit-based bonus expenses recorded in our first fiscal quarter. As a result, non-GAAP net income for the 6-month period increased to $12.8 million compared to $1.7 million in the prior year. Non-GAAP diluted earnings per share for the period increased to $0.33 compared to $0.04 for the same period last year.

Turning to our balance sheet, we closed our -- our fiscal quarter ended April 30, 2011, with $18.5 million in cash and equivalents, and an additional $7.9 million in advances available to us under our accounts receivable factoring agreement, leaving us with total cash availability of roughly $26.4 million. As of April 30, we had approximately $5.6 million invested in capitalized software development and prepaid royalties, with another $10.4 million committed to complete these games. We have $7.6 million of inventory compared with $4.2 million in Q2 2010. Most of the inventory increase is related to our Zumba products. We continue to have no long-term debt to service.

We received approximately $1.7 million in proceeds from the exercise of warrants during the period and the issuance of approximately 950,000 shares of common stock. The majority of warrants are related to a pipe financing we did in 2007 and were exercised at a price of $2.04.

Now for our 2011 outlook. Following the successful first half of the year and stronger-than-expected sell-through for Zumba Fitness, we expect to achieve approximately $110 million to $120 million of sales for the fiscal year, up from our prior guidance of $100 million to $110 million. We expect this to result in non-GAAP net income of $12 million to $14 million and fully diluted earnings per share in the range of $0.30 to $0.35 based on an estimate of approximately 40 million fully diluted shares outstanding for the year. This is an increase from our prior guidance of $0.20 to $0.25 per fully diluted share.

Two items to note in our guidance. First, our fiscal year ends on October 31, and we plan to release a number of our holiday titles late in the fourth fiscal quarter of 2011. However, we also incur marketing expenses associated with the launch of the titles during the quarter, and we anticipate any reorder sales associated with them to occur in the first fiscal quarter of 2012.

Our forecasted earnings are also impacted by our investment in our Digital and Online Games business. Our Online Games business utilizes a premium revenue model and micro transactions on the Facebook platform. There's a startup period required to establish, optimize gameplay and monetization characteristics within the game before revenue is generated. Therefore, we have not planned significant revenue from this initiative in the current fiscal year in our guidance.

Additionally, there will be a transition period where we'll carry the cost of both our third-party developers in addition to our new Quick Hit employees as we transition the games over to our Foxborough office. I'll now 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. We just got back from E3 where we received some fantastic feedback on our release slate, including a Best of E3 Award from Electric Playground for BloodRayne: Betrayal and two, Favorite of E3 Award, from FamilyFriendlyVideoGames.com for our Take Shape for Xbox Kinect and Camping Mama: Outdoor Adventures for the DS.

In the past two months, we have announced a wide array of titles across all of the fastest-growing platforms: Kinect, 3DS, Facebook, Xbox, Xbox LIVE and more. As we've said in the past, we believe in brands and we'll be aligning many of our major releases with proven, recognizable brands. Underlining this commitment, we recently announced a major partnership with the National Basketball Association to bring an innovative, motion-based product to market that is unlike most traditional sports games. We'll be sharing details of this spring of 2012 release soon.

This holiday, we expect to launch many titles for the Kinect as well as the 3DS. Kinect for the Xbox 360 is off to an astonishing start, quickly ramping up to a 10 million unit install base, which we believe could be well over 20 million a year from now.

As more and more casual gamers migrate to new, motion-based gaming platforms like Kinect and Move and the Wii, we believe this will create more opportunity for us given our demographic focus on family and casual gamers. We are supporting the Kinect this year with several big titles: Hulk Hogan's Main Event, which is the first motion-based wrestling game on the Kinect and lets players train with icon, Hulk Hogan, as they build their own wrestling personalities and learn the art of showmanship to win over the crowd.

Take Shape is a contagiously fun interactive party game, which challenges players to stretch and shrink their body into hundreds of different shapes, animals and symbols. The game is designed exclusively for the Kinect and leverages full body motion mechanics with a social multiplayer experience that brings family and friends together to play.

Mind 'n Motion is a fun, family-friendly experience that puts your motor skills to the test with activities that keep your entire body moving as fast as your mind can trigger your next move.

Finally, we will also continue to market and support Zumba Fitness for Kinect, which should continue to sell well as that install base grows.

While our Nintendo 3DS is off to a somewhat slower start, we believe in its long-term viability, which will be most evident with some of the big first party brands that Nintendo is known for, released later this year. We have announced 6 new titles for the 3DS this year and are most excited about Cooking Mama 4: Kitchen Magic, as well as Jaws: Ultimate Predator, Pet Zombies, The Hidden, Nano Assault, and Face Racers: Photo Finish [Face Kart: Photo Finish]. Much like Cooking Mama's original 2006 debut early in the DS's life cycle, which continue to sell well even 5 years later, we believe that Cooking Mama 4 can establish itself now on the 3DS and experience a similarly long tail for many years to come.

But we aren't leaving our core Mama fans behind. Conversely, we plan to widen the current audience with Camping Mama: Outdoor Adventures for the Nintendo DS. In addition to Mama, we are introducing Papa, as well as a daughter and a son. Would-be campers can choose to play as either the son or daughter with Mama and Papa offering guidance on outdoor activities like rock climbing, spelunking, rowing and tree climbing as they navigate new environments that span forests, mountains and seas.

Finally, following the huge success of Zumba Fitness on Wii, we will continue to build this solid franchise with Zumba Fitness 2 coming this holiday for the Wii. Rebuilt from the ground up with a brand-new development team, the sequel features contagious new music, exciting new choreography, more than double the number of dance styles and dynamic new arenas. The Zumba brand remains in a rapid growth mode, and we are very happy to have partnered with the preeminent leader in the dance fitness world.

In addition to our 3 Facebook games coming this year, we also have other downloadable games launching soon on Xbox LIVE, PlayStation Network and the App Store. Next month, we are reintroducing fan favorite, Rayne, in BloodRayne: Betrayal for XBLA and PSN. The game is receiving a great deal of media attention coming out of last week's show, including the Best of E3 Award from Electric Playground. Its depth of play, stylized presentation and solid mechanics promise to deliver a high-quality title to online players around the world.

In summary, we are very encouraged by our performance so far this year and look forward to executing on our second half release slate, while also investing in the growth of our social gaming initiative. That concludes our formal remarks. Operator, if you can review the Q&A instructions, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Sean McGowan at Needham.

Sean McGowan - Needham & Company, LLC

A couple of things regarding firstly, the impairment charge for canceled games, would it be fair to say, correct me if I'm wrong, that maybe you raised the bar a little bit so that some titles that maybe wouldn't have canceled before at this stage haven’t canceled or would these have been canceled anyway?

Jesse Sutton

I think it's fair to say. I think as we grow as a company, the threshold for success grows. And if we have products that we are creating are not going to meet that threshold, we're going to focus on the ones that can.

Sean McGowan - Needham & Company, LLC

Would you remind us of some of the basic terms of the warrant, like how many are still outstanding? Are they all exercised low at the same price and what's the expiration?

Michael Vesey

There's about $1.4 million of shares issuable under the warrants from the pipe transaction remaining. They expire in September of 2012, and they're about $2.04. That's...

Sean McGowan - Needham & Company, LLC

So all from that one issue, there's nothing left over from anything else?

Michael Vesey

Very small. I mean, there's a couple of very small issuances to consultants and things like that. But that's 98% of it.

Sean McGowan - Needham & Company, LLC

And is the accounting treatment on that, do you assume exercise and then you assume repurchase of up to a certain amount of that? Is that how it works?

Michael Vesey

Yes, you're talking about an EPS calculation, right?

Sean McGowan - Needham & Company, LLC

Yes.

Michael Vesey

So yes, we would assume that we get the proceeds $2.04 for each share to buy back in the market. So if the stock price was at $4.08 we'd be able to essentially buy half back after the exercise.

Sean McGowan - Needham & Company, LLC

But as far as I know there are volume constraints on that or total percentages. At this point, can basically all of it be assumed to be used for repurchase? Also does it end up on housekeeping, it doesn't affect non-GAAP, it just -- I just want to know what number to be looking for.

Michael Vesey

Yes.

Sean McGowan - Needham & Company, LLC

One of the variable selling expenses, are they pretty constant as a percentage of sales or does that number even fluctuate and what is that?

Michael Vesey

The pure variable, I use about 5% for that, but it's pushing us to -- brokers work at different retailers, and it's also the fulfillment and handling costs that go along with the volume. On top of that, you have the media, which is -- where it's variable. It's more a decision-based variable cost, not a volume-based variable cost.

Sean McGowan - Needham & Company, LLC

And my last question, could you just remind me, because I couldn't catch it on the call, what was the percentage of domestic sales from Zumba for the 6 months? I got 75% for 3 months. But what was it for the 6 months?

Michael Vesey

It was about 2/3.

Operator

Next question comes from John Taylor at Arcadia Investment Corp.

John Taylor - Arcadia

I got a couple of questions. The first one is, Jesse, could you give us a sense of what it looks like, the investment is going to look like in ramping up the digital stuff you're doing. You sort of talked about on general terms, but how much maybe dilution are you thinking is going to hit the numbers this year since you're not recognizing revenue? That's the first one. And the second one is if you x out the royalty contribution from the Zumba sales in Europe, I wonder what the product gross margin looked like and was there anything going on with those numbers?

Jesse Sutton

I'll take the first part, and I'll let Mike take you through the European royalties. To the investment of around $2 million, $2.5 million investment, that's been included in our guidance, for social games.

John Taylor - Arcadia

Okay, that's all cost and essentially no revenue to offset?

Jesse Sutton

Correct. It's investment into next year.

Michael Vesey

On the European contribution, the total revenue from Europe was about $3 million. And there's really 2 pieces in that. We sell the belt accessory over there, and we also collect a royalty. The net amount in gross margin related to that is between $1 million and $1.5 million for the quarter.

John Taylor - Arcadia

Why wouldn't that be a larger number given the large margin on the royalty piece? Was the mix of accessories quite a bit higher, in royalties, say?

Michael Vesey

Yes, the accessories has revenue and cost of sales, right? So it's pretty much -- we're selling that with a small markup, but it's not where we’re making money.

John Taylor - Arcadia

Right. So if you take that out of the gross margin compared to the U.S. publishing, anything going on there other than the mix towards Zumba?

Michael Vesey

No, it's mainly the Zumba numbers that are driving the margins.

Jesse Sutton

Yes, which is selling price driven mostly.

Michael Vesey

Yes, that's the one thing that we point out there is that the Kinect is still carrying a early console late cycle price as compared to the Wii of $49.99.

Operator

The next question comes from Adam Krejcik at Roth Capital.

Adam Krejcik - Roth Capital Partners, LLC

Just some questions on the acquisition of Quick Hit here. I guess kind of bigger picture, when Jeff starts and his team starts working on development, some of the stuff that's not already in progress, is the strategy to focus more on the casual games that you guys are kind of known for? Or will they get into some more hardcore MMO, RPG type of stuff that they did at Turbine and EA?

Jesse Sutton

No, we're staying strictly on the casual side. That's what we know, it's what he's been doing for the last few years at Quick Hit. And that's what we feel where the future is for us.

Adam Krejcik - Roth Capital Partners, LLC

Got it. And just to clarify, the acquisition doesn't include the rights to the NFL Football Game. Is that right?

Jesse Sutton

Yes, while we acquired the select assets of Quick Hit, we did not acquire rights for the NFL branded football game as disclosed. We entered into a license agreement with the owner of the game code with an option to purchase that at a later date. However, at this time, we have not determined our plans with regard to proceeding with the NFL or the game.

Adam Krejcik - Roth Capital Partners, LLC

And any kind of sense you can give us for maybe if not revenues, registered users or monthly active users or any data points there.

Jesse Sutton

I'd say it's too early to get into it at this point. But what I would tell you, Adam, is that on the next call, we'll get more detailed information to talk about.

Adam Krejcik - Roth Capital Partners, LLC

Okay, and then for 2012, I know it's still a ways out, but any kind of internal goals or things you’ve said about digital social games as a percentage of your overall revenue, where you'd be happy or should we wait for a few more quarters still?

Jesse Sutton

I would stay tuned. I think the goal for us is to demonstrate some real success in that area by really growing our average user base monthly or daily on all of our games, and really start building monetization. Once we're demonstrating, then we could talk about the run rate that we're building to and the growth potential.

Operator

[Operator Instructions] Our next question comes from George Santana at Ascendiant..

George Santana

Just looking at the guidance that you have for the fiscal full year, could you speak perhaps to some of the other costs that we should perhaps integrate into our models, the seasonality, the integration costs, maybe any investments in support of the new product launches. And driving that question is it seems like your guidance on non-GAAP EPS of $0.30 to $0.35, but you've already earned $0.33 in the 6 months.

Michael Vesey

Taking a step back, generally speaking, our first and fourth fiscal quarters account for a lot of our sales. Since we do family-friendly games, we tend to time those near the holiday, and that's where a lot of our sales are, with the first quarter being by far the strongest. So in the mid quarters, we really have our catalog sales, and we don't have a lot of planned new releases. And so when you look at the rest of this year and you look at the next quarter, third fiscal quarter, it's a quarter with maybe a couple of small releases, but not a lot of major new releases. It's really preparing for the holidays. Then when you look at the fourth fiscal quarter, start to sell in our holiday release slate, which, George, I think you saw at E3. We usually start shipping that in the last 2 weeks in October, so we’ll have some sales in the fourth quarter but we'll also have some marketing costs associated with the release of that. And the ideas is that we get the reorders in November and December to fall on to our first fiscal quarter. So when you look at the rest of our year, you will see a slow third quarter, increased sales in the fourth quarter as we begin to ship in for the holiday, but also increased marketing expenses in hopes of positioning ourselves for the first fiscal quarter of next year, which includes the holiday. The other thing to keep in mind, as Jesse mentioned, is we have some investments in the social games in the next two quarters of the year also that we expect.

Operator

Your next question comes from Matt Spratford at Sidoti.

Matthew Spratford - Sidoti & Company, LLC

Just a couple of quick ones for you. Just in terms of demand quarter-over-quarter, sequentially, I was just curious maybe if you could speak to that a little bit, particularly for Zumba.

Jesse Sutton

I think demand has continued. I think it’s stayed in line with what I'll call the overall demands for the industry. Obviously, holiday is the hottest time for our industry, but it's maintained its position in the top 10, up until now and continued to sell. In Europe, it's only recently been launched from the Wii, which has been the leading platform for it, given the install base, of course, of the platform. And since it's been launched, it's been the top 5 video game in the U.K., being number one a couple of weeks and has just continued to sell well there. We are excited about it. We have cautious optimism going into the summer days as far as the continued sales of it, but obviously very pleased with it.

Matthew Spratford - Sidoti & Company, LLC

So you said it's probably around comparable to about this time last quarter? Could that be a fair assessment?

Jesse Sutton

Probably a little. I would say, we don't really comment this closely, it’s early in the quarter, but I would just say it's continuing to sell along with the rest of the industry products in terms of where its placement is in the top 10.

Matthew Spratford - Sidoti & Company, LLC

And then just in terms of the margins, more specifically on Zumba, how long do you expect that premium? Is it basically until you launch Zumba 2 in the holidays?

Jesse Sutton

I think you'll see we're always doing promotions and doing things along those lines to maintain the excitement at retail and to continue its presence at the retail level. The plan is to continue it through that time, correct.

Matthew Spratford - Sidoti & Company, LLC

And just in terms of R&D costs, I know you said they're up a little bit. Would you consider this to be a good baseline level for that?

Jesse Sutton

R&D as it relates to?

Unknown Analyst -

Just quarterly. I was just curious if it's a good run rate going forward. Obviously, there’s a little seasonality, but just more as a baseline.

Jesse Sutton

Yes, absolutely.

Matthew Spratford - Sidoti & Company, LLC

Just last one, on the impairment costs, would this be safe to say, this is probably your big impairment for the year? And then, it will kind of taper off from here?

Jesse Sutton

Yes, I'd like to think so.

Operator

Our next question comes from Jeff Osher at Harvest Capital.

Jeffrey Osher

Mike, just a couple of housekeeping questions. What percentage of the share jump sequentially of 10-plus percent was related to just treasury method dilution based on the stock price going up versus something else?

Michael Vesey

There's 2 pieces of it; one is the warrant that exercised, went in as direct shares, right. And the rest of it was just due to the calculation, the change in the treasury stock calculation because of the increase in share price. But I guess another way to look at it is even if those warrants weren't exercised, their shares would have been counted in there anyway. So I would say most of it is due to the change in share price with some impact from the actual exercise on the warrants itself.

Jeffrey Osher

It's pretty small on the warrants, right? That was $750,000 or $800,000 or something like that?

Michael Vesey

Yes.

Jeffrey Osher

And then what -- ballpark, what's the rate you're paying on the factoring? I mean, is it as simple as just saying about $955,000 year to date of financing expense divided by the average amount due from factor?

Michael Vesey

Yes, there's really 2 pieces of it. We factor most of our accounts receivable, which means we essentially sell it to the factor, and there's security interest in it. And when that transaction takes place, we pay about 0.5% on the sale itself. And then, when we take advances, we pay a 1.5 points over LIBOR.

Unknown Analyst -

So it's now plus 1.5 points. Last question, the provision for price protection and allowances, was the fact that was flat year-over-year through the first 6 months of sales really strong up 100%, is that just a function of the mix of Zumba and the lack of need for price protection for the Zumba brand?

Jesse Sutton

Yes absolutely. We haven't had to lower the price on that. And a lot of titles at this point in their cycle, we would have taken at least one price drop. But on the Wii and the Kinect, we have not taken it yet.

Unknown Analyst -

Great. And then last question, maybe one for Jesse on the strategic side, does it make sense, Jesse, again, and I know there's been brain damage for years with the factor and the balance sheet and with the warrants having been exercised, I think this is usually just with seasonality close to your cash peak. Does it make sense to look at optionality with the stock having had a pretty strong move to solidify the balance sheet even further?

Jesse Sutton

I would say that having an effective shelf in place, it's an important tool to use as it allows the company to quickly access the markets when needed or when market conditions are optimal. And we're pleased to have this tool in place and available to us as we execute on our plans. But I'll now certainly talk about -- I mean, as far as I was concerned, the factor itself is given the typical nature of the business, the seasonal nature of the business, rather, we do a lot of our buying in the holiday or close to holiday and usually the factor plays an important role in managing that process appropriately. Allowing…

Unknown Analyst -

I get it.

Operator

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

Jesse Sutton

We want to thank everybody for attending this second quarter call, and we look forward to speaking to you again at the end of our third quarter in September. Have a great day.

Operator

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

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