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Mad Catz Interactive, Inc. (NYSEMKT:MCZ)

F1Q 2012 Earnings Call

August 4, 2011 5:00 pm ET

Executives

Norberto Aja – Investor Relations, Jaffoni & Collins Inc.

Darren Richardson – President and Chief Executive Officer

Allyson Vanderford, Interim Chief Financial Officer

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fiscal 2012 First Quarter Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded Thursday, August 4, 2011.

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

Norberto Aja

Thank you, Operator. Good afternoon everyone and welcome to Mad Catz’s fiscal 2012 first quarter earnings conference call. With me on the call today are Darren Richardson, Mad Catz’s President and Chief Executive Officer; and Allyson Evans, Mad Catz’s Chief Financial Officer. Darren will provide an overview of the results and his perspectives on the industry environment and the company’s upcoming product set. Afterwards Allyson will review the financial results in greater detail before turning the call back to Darren for some closing remarks.

Before we begin, however, let me just take a few minutes to read the Safe Harbor language. Today’s discussions 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 their other words and terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause the 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, and 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, August 4, 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 CEO of Mad Catz. Darren?

Darren Richardson

Thank you, Norberto. Good afternoon everyone and thank you for joining us. The first quarter of fiscal 2012 prove to be a challenging period for Mad Catz. Aside from the first quarter, usually being our weakest quarter due to the seasonality inherent in our business, this time around, we also had to content with a number of circumstances that made it challenging first to perform at the level we anticipated. However, we expected results in fiscal 2012 to be back-loaded and we’ll review on the call this afternoon the reasons to remain confident and optimistic about our potential and our future.

Annual sales have grown to each of the last three fiscal years and so each of those year’s first quarter sales as a percentage of the annual sales has decreased quite significantly. However, given fixed expenses levels, the same trend is not the case for expenses, and as a result the first quarter’s results have not been indicative of the year as a whole and we believe this is to be the case again this year.

Fundamentally, the quarter was impacted by gross profit being $2 million lower than the prior year, while operating expenses were $2.1 million higher. Gross profit was impacted by the much lower than expected net sales arising from weaknesses in the overall videogame market, weak consumer demand in Europe and the termination of a third-party distribution agreement. These factors more than offset growth in our Tritton, Cyborg and Saitek product lines.

In addition, price protection, coop advertising accruals and sale discounts were approximately $1.1 million higher than the prior year, and although these amounts were significant on a quarterly basis, they are less significant when viewed on an annual basis. The increase in operating expense as a result of our continued investment in growth initiative, including additional spending on new product development, research and development, the strengthening and expansion of a distribution footprint and some non-cash acquisition related charges. The rise in new product development and research and development spending reflects our ongoing commitment towards innovation, the creation of intellectual property, and the development of differentiated products.

As I mentioned on the last call, the current economic outlook provides cause for concern. But we remained committed to making measured investments to generate future growth.

This time last year, we where facing a similar outlook and chose to continue investing in growth initiatives even though there was a negative impact on the seasonally smaller quarters. However, the launch of innovative products with strong appeal to passion to consumers drove growth for the year and we continue to see the benefits of those initiatives stand out as clear positives in the otherwise disappointing current quarter.

With that, I’d like to turn the call over to Allyson to provide some additional color on the results. Allyson?

Allyson Vanderford

Thanks, Darren. Let me begin with a brief review of the income statement. Net sales for the fiscal first quarter were $16.5 million down 17% from $19.9 million in the fiscal 2011 first quarter.

This decline was driven primarily by weak sales of video game products, weak European demand, and the termination of a third-party distribution agreement for headsets, which combined more than offset the sales growth of the company's Tritton, Cyborg and Saitek product line.

On a regional basis, fiscal 2012, first quarter North American net sales fell 11% to $9.6 million and represented 59% of quarterly net sales. European net sales fell 24% to $6 million and represented 38% of quarterly net sales. Finally, net sales to other geographies fell 41% to $0.5 million or 3% of quarterly net sales.

Gross profit fell 34% to $3.9 million from $5.9 million in the same quarter of the prior year. The primary drivers of this decrease were lower sales and increased price protection, coop advertising accruals and self discount.

Gross profit margin declined by 5.9% to 24% in the first quarter of fiscal 2012 largely due to the same issues driving the growth profit decrease.

Total operating expenses for the first fiscal quarter of 2012 rose 31% to $8.9 million and represented 54% of net sales. The main driver of this increase is our continued investment in growth initiatives including additional spending on new products development, strengthening and expanding our distribution footprint and some non-cash acquisition related charges.

As a result, the company recorded an operating loss of $4.9 million in the quarter, this compares to operating expenses of $6.8 million and an operating loss of $0.8 million in the prior year period.

Foreign exchange gains for the first quarter of fiscal 2012 and was less than $0.1 million compared to a loss of approximately $0.2 million in the prior year quarter.

The company also recorded a $1 million benefit related to the revaluation of a liability associated with the warrants issued in the April 2011 private placement. This is a non-cash item that will be evaluated on a quarterly basis and will fluctuate based on a number of factors, but predominantly based on changes in the company’s stock price.

After this benefit, and an income tax benefit of $0.6 million net loss for the first quarter of fiscal 2012 was $3.5 million or $0.06 per diluted share. This compares to an income tax benefit of $0.1 million and a net loss of $1.4 million or $0.02 per diluted share in the first quarter of last year.

Adjusted EBITDA in the quarter fell to a loss of $4.1 million compared to a loss of $0.3 millions in the first quarter of fiscal 2011.

Moving on to the balance sheet, as of June 30 inventory was $28.7 million up 20% from $23.9 million last year, primarily related to higher audio, PC and Rock Band products. Inventory turns on a trailing four quarter basis were 4.5 times compared to 3.6 times in the prior year four quarter period.

Accounts receivable of $9.9 million was found significantly from $14.4 million in the prior year quarter, primarily reflecting lower sales, the timing of these sales and higher sales related reserves.

Our growth DSOs were 89 days compared to 81 days a year ago. Accounts payable of $11.2 million was down significantly from $14.9 million in the prior year quarter, primarily reflecting collections being used to pay down factories more quickly. Our [GPO] were 79 days compared to 97 days a year ago. Based on these moments net working capital of $27.4 million is that from $23.4 million in the prior year quarter.

Finally, as a reminder, during the quarter, we completed several actions, which we believe significantly improved the company's financial position.

In late April, we closed on the $12.2 million private placement financing including approximately 6.35 million shares of common stock and warrants to purchase approximately 2.54 million additional shares of common stock exercisable at $2.56 per share.

Combined with available cash on hand, we were able to use these funds to repay all principal and interests related to the $14.5 million convertible loan notes incurred when the company purchased the Saitek group of companies in November 2007.

These two actions will allow the company to reduce its annual interest expense by approximately $1.1 million and retire $10.2 million common shares that had been included in our fully diluted earnings per share calculation.

We reported borrowings under the revolving credit facility of $14.8 million and an acquisition of bank loan less cash of $12.8 million. This compares to borrowings of $16.5 million and an acquisition of bank loan less cash of $10.6 million as of June 30, 2010.

In summary while the start to fiscal 2012 has been challenging actions to improve our balance sheet and financial position give us the needed flexibility to improve our business. We believe we are well positioned to take advantage of a number of new opportunity and drive continued growth going forward.

I’d now like to turn the call back to Darren for some closing remarks. Darren?

Darren Richardson

Thanks Allyson. Looking forward to the second quarter, we’re seeing sales rebound but it is too early to predict whether that rebound will hold for the full quarter. On our last call we indicated that we expected this year to be back loaded and continue to believe that to be the case.

We have a strong new product pipeline in development for the holiday season and ultimately the year will come down to our ability to bring compelling products to market on a timely basis and the level of consumer confidence during the holiday season.

In conclusion we continue to believe very strongly in our five core brands, Mad Catz, our console and casual video gaming brand, which we look to further expand in to game publishing, Tritton, our gaming audio brand, which we look to grow organically via partnerships such as our current agreement with Microsoft and Epic Games.

Cyborg, our hardcore gaming brand that we will continue to use as a platform to launch innovative and cutting edge products, Saitek our flat simulation brand that commands significant market share that we intend to leverage to include games and Eclipse our PC input device and multimedia brand where we’re creating products that address changes in the usage model for PC peripherals towards mobility and lifestyle focus.

While the economy remains challenging, we remain committed to our strategy of delivering quality products that enhance the entertainment experience. We believe that overtime this approach will drive financial growth and enhance shareholder value.

At this point, we’d like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions at this time.

Darren Richardson

Okay. Thank you all for joining us in the call today. We look forward to updating you on our progress as we host our second quarter 2012 call a little bit later on the year. Thank you.

Operator

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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