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Executives

Christina Glorioso - Chief Marketing Officer

Jeffrey Anderson - Senior Vice President of Social Games

Jesse Sutton - Chief Executive Officer and Director

Michael Vesey - Chief Financial Officer

Todd Greenwald -

Analysts

Mark Gomes

Amit Dayal - Rodman & Renshaw, LLC, Research Division

Unknown Analyst

John Taylor

Majesco Entertainment (COOL) Q4 2011 Earnings Call January 17, 2012 4:30 PM ET

Operator

Hello. This is the Chorus Call operator, and welcome to the Majesco Entertainment Fourth Quarter 2011 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. And now I'd like to turn the conference over to Todd Greenwald, Director of Investor Relations and Strategic Planning. Please go ahead, Mr. Greenwald.

Todd Greenwald

Thank you, and good afternoon. I'd like to welcome you to Majesco Entertainment 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, 2011, 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 noncash 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 as 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 the call with an overview of our performance in the fiscal year and some highlights from the holiday season. Mike will follow with the financial review, and I'll conclude with an update on our product slate for the rest of the year. I'm also pleased to welcome our Senior Vice President and Chief Marketing Officer, Christina Glorioso, who will spend a few moments discussing a unique partnership we've established with Microsoft. I'd also like to introduce Jeff Anderson, our Senior VP of Social and Mobile Games, who will discuss our progress in that area, after which we will be happy to take your questions.

In 2011, we experienced a strong year fueled by the stellar performance of the industry's leading fitness and dance title, Zumba Fitness, as well as the release of 2 Cooking Mama titles. Sales grew over 65% to $125 million, and our gross margin expanded to 36%, up from 24% last year. This resulted in a non-GAAP EPS of $0.28, up from a loss of $0.04 last year. These results include a noncash charge of $2.7 million to reflect an impairment taken for a few titles released in Q1 2012 that did not meet our expectations.

We continued to be pleasantly surprised by the success of Zumba Fitness. Zumba Fitness finished the year as the industry's #1 fitness title across all platforms and is now one of the best-selling fitness video games in history. In North America, Zumba was the industry's #3 best-selling title on the Wii and the #12 best-selling title across all platforms. In the U.K., Zumba was the #1 title on the Wii and the #4 title across all platforms competing against the industry's biggest blockbuster hits and proven franchises.

In 2011, Zumba Fitness took the motion-based gaming world by storm. To date, over 6 million units have been sold worldwide, and the sequel is currently outselling the original. Furthermore, we believe the Zumba brand is still in the early stages of its growth curve. Today, there are more than 12 million Zumba enthusiasts taking classes weekly in over 110,000 locations across more than 125 countries. These numbers are up significantly from a year ago.

This holiday, we released Zumba Fitness 2 on the Wii, which repairs 1 million units on 1 platform faster than it did a year ago across 3 platforms. Additionally, Zumba Fitness 1 continues to sell well alongside Zumba 2 as it benefits from the brand's overall marketing campaign and its significance present -- significant presence at retail. Finally, there are more catalysts coming up for our Zumba franchise. Zumba Fitness Rush comes out in February exclusively on Kinect for Xbox 360, and we're very excited for its release. We will discuss this title in greater detail later on the call.

Finally, this holiday season saw a large release of slate from us with several titles that did well and should continue to see healthy reorders throughout 2012. We were happy to see Cooking Mama launch on the 3DS for the first time and believe that sales for that title will continue to grow with the expansion of that platform and database. Camping Mama launched on the DS and was once again a big hit with the Cooking Mama fan base. We were also pleased with the sales of Alvin & The Chipmunks: Chipwrecked, which launched on 3 platforms, including Kinect, and around hundreds of thousands of Alvin fans to sing and dance along with their favorite Chipmunks and Chipettes. That wraps up our fiscal 2011 and holiday season.

Now, I'd like to pass the call to Mike Vessey, our Chief Financial Officer, to provide a financial review of our fourth quarter and fiscal 2011 results, then I'll come back to talk about our pipeline for the rest of the year. Mike?

Michael Vesey

Thank you, Jesse. First, I'll recap our results for the quarter and fiscal year, then close with some comments about our outlook for 2012. As I discuss our financial performance compared to the prior year, I'll use non-GAAP results in both periods.

Revenues for the 3 months ended October 31, 2011, were $25.1 million, an increase of 8% over the $23.4 million reported in the comparable quarter last year. With several new releases in the quarter, including Hulk Hogan's Main Event and Motion Explosion! for the Microsoft Kinect, Camping Mama for the Nintendo DS and Pet Zombies on the Nintendo 3DS. Comparably, a year ago, our Q4 releases included Greg Hastings Paintball 2 for Xbox 360 and Wii, and My Baby 3 and Crafting Mama for the Nintendo DS. Sales for our Zumba Fitness products, first released in November 2011, accounted for approximately 58% of our sales in the quarter. I will note that no sales for our Zumba Fitness sequel titles are included in the fourth quarter results. The Zumba Fitness 2 for the Nintendo Wii had a street date of November 15, and will be included in our first quarter of 2012, and Zumba Rush for the Microsoft Kinect is scheduled for the release in our second quarter of 2012.

Our gross margin for the quarter was 17%, compared to 16% the same period a year ago. Gross margins included $2.7-million charges across the sales to write-down capitalized software, prepaid royalties for 3 of our titles released in the first quarter of 2012. We evaluate these balances quarterly on a title-by-title basis. In cases where projected cash flows for an individual title do not exceed net book value that we previously capitalized, we write the balance down to net realizable value.

Of the 10 titles that we released in Q1 of 2012, we concluded that the amount of capitalized software and royalties for 3D titles exceeded the estimated net realizable value. Accordingly, we wrote those balances down in October 31, 2011. This charge had a negative impact on our gross margins for the quarter of approximately 11 percentage points and a negative impact of approximately $0.07 per share on our non-GAAP earnings.

Operating expenses, including noncash -- excluding noncash compensation expenses, increased approximately $1.8 million to $6.8 million, primarily due to increased research and development expenses related to our social games business, increased selling and marketing expenses related to our new releases and increased bonus expenses related to our operating profits.

Research and development expenses include approximately $800,000 of salaries and subcontract expenses related to development of social and mobile games. We started this business in 2011, and accordingly had no such expenses in the fourth quarter of the prior year. Sales and marketing expenses increased approximately $500,000 due to advertising costs, primarily related to the release of Hulk Hogan's Main Event.

Non-GAAP net loss for the quarter, including the impairment charge was $2.7 million compared to a loss of $1.5 million in the prior year -- same quarter in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.07, compared to a loss per share of $0.04 in the same period in the prior year.

Now, we're giving the year-to-date results. Revenues for the year ended October 31, 2011, were $125.3 million, an increase of 66% or the $75.6 million reported in the prior year. Revenue increase primarily due to sales of our Zumba Fitness titles that were released in November of 2010. Our gross margin for the year was 36%. This is up from 24% in the same period a year ago. The increase is mainly due to relatively higher pricing on our Zumba Fitness products on the Nintendo Wii and Microsoft Kinect. These products continue to sell after original retail price of $39 and $49.99, respectively.

Operating expenses were $34.1 million, an increase of $13.6 million from the prior year. Approximately half of the increase is due to advertising and sales costs related to the higher revenues, and $2.5 million is the result of our investment in our social games business. The remainder is primarily due to higher profit-based bonus expenses. As a result, non-GAAP net income for the year increased to $11.1 million, compared to a loss of $1.3 million in the prior year. Non-GAAP diluted earnings per share for the year increased to $0.28, compared to a loss of $0.04 for the prior year.

Turning to our balance sheet. We closed our fourth fiscal quarter ended October 31, 2011, with $13.7 million in cash and equivalents, and an additional $6.4 million available to us under our accounts receivable factoring agreement, leaving us total cash availability of roughly $20 million. This compares to the prior year's cash and availability of approximately $11.5 million. As of October 31, we had approximately $12.6 million invested in capitalized software in prepaid royalties, with another $3.4 million committed to complete these games. The majority of this balance was for our games released in the first quarter of fiscal 2012 and our Zumba Rush title scheduled for release in the second quarter of 2012. We had $11.6 million of inventory on October 31, 2011, compared with $8.4 million at the same date the prior year.

Now for our 2012 outlook. We currently expect sales of approximately $125 million to $140 million for the fiscal year, compared to $125 million in fiscal 2011. We expect this to result in non-GAAP EPS in the range of $0.25 to $0.35, compared to $0.28 in fiscal 2011. Included in our guidance is a net investment of approximately $4.5 million to build our social and mobile games business during the year, impacting our earnings per share by approximately $0.10.

I will now review several metrics to help you in modeling our business going forward. We plan to release 2 sequels to Zumba Fitness during the fiscal year. Zumba Fitness 2 for the Wii, released in November 2011, and Zumba Fitness Rush for the Microsoft Kinect, in February 2012. Our revenues were approximately 70% Zumba, and 30% for Mama and our other titles in 2011. For 2012, we're planning for similar revenue distribution. Overall, we expect our gross margins to be comparable to the levels achieved in 2011. We expect higher advertising and marketing expenses reflecting advertising programs related to the launch of our Zumba Fitness sequels and our other new-product launches in the first quarter.

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 2012. Obviously, Zumba will play another big role for us in 2012. Zumba Fitness 2 has gotten off to a strong start in its first 2 months, selling over 1 million units thus far. Looking abroad to Europe, sales are quite strong there as well. Keep in mind as soon as the first holiday season for Zumba Fitness on the Wii in Europe, as the original title did not launch there until spring of 2011. This leaves us a very excited for the upcoming release of Zumba Fitness Rush. For this title, let me turn the call over to Christina Glorioso, our Chief Marketing Officer. Christina?

Christina Glorioso

Thanks, Jesse. Microsoft and Majesco have teamed up to bring an exclusive Zumba Kinect experience to fitness fans around the world. Zumba Fitness Rush will launch on February 13 exclusively on the Kinect or Xbox 360 platform. This game is the most technologically advanced fitness game to date, as well as the most feature-rich addition to the Zumba Fitness franchise.

Zumba Fitness Rush was designed from the ground up for Kinect, fully utilizing the platform’s full-body motion sensing capabilities and voice-recognition, as well as the HD graphics and online functionality of the Xbox live platform. In addition to the advanced technology, this game will also have a significant amount of exclusive content: 10 additional songs and routines; more venues; and new celebrity instructors. Also, an important digital component is built into Zumba Fitness Rush. There will be multiple pieces of premium downloadable content to come later this year for sale in the Xbox LIVE marketplace.

In collaboration with Microsoft, the game will be supported extensively around the world through a comprehensive marketing campaign, which will include television, print advertising, events, exposure through the Xbox LIVE marketplace, a social media push, messaging throughout the extensive Zumba instructor network and collaborative retail promotions.

The February launch of Rush is the company's largest integrated marketing program to date, and we're thrilled to have Microsoft's support around the world to bring this exceptional product to market. With that, let me turn the call back to Jesse.

Jesse Sutton

Thanks, Christina. Beyond these 2 exciting sequels, rest assured that we are working hard in our future SKU plan for Zumba. We have clearly invested in the Zumba brand and aim to continue to capitalize on that in the future. We are hard at work on another innovation for this coming holiday, and we'll have more to come on that on future calls.

While it's still a bit early for us to talk about the rest of 2012 product pipeline in detail, I would like to highlight a few partnerships we have signed recently that should result in several innovative, new and exciting video game properties.

We previously announced the partnership with Harley Pasternak, an acclaimed celebrity trainer and fitness and nutrition specialist, and are working to produce an interactive motion-based game based on Harley's 5-Factor Fitness program. Harley is the preeminent Hollywood trainer, responsible for some of the best celebrity bodies onstage and on-screen, including Katy Perry, Megan Fox, Lady Gaga, Robert Pattinson. Harley should also begin seeing increased awareness as a result of his new daytime show on ABC called The Revolution, which is cohosting with Tim Gunn and other top lifestyle experts. The show just premiered yesterday at 2 p.m., and we are very excited to be working closely with Harley.

We also recently announced the partnership with the NBA to develop an innovative motion-based game unlike any other traditional sports video game. While plans for this exciting new game yet are still highly confidential, we will be announcing more details shortly, so please stay tuned.

Finally, in the midst of everything else we accomplished this year, we are proud to have built a social mobile game business at the same time, making a highly strategic acquisition of Quick Hit Games, led by Jeff Anderson. I will now turn the call over for an update on this business. Jeff?

Jeffrey Anderson

Thank you, Jesse. We remain committed to our small but growing social and mobile games business. Last year, we released Cooking Mama Friends Café, Parking Wars 2 on Facebook and continue to operate QUICKHIT Football. Over this period, we've improved the titles retention, reality and monetization, all of which will benefit our 2012 launches.

It's clear that the social gaming space continues to be competitive with many successful companies. We feel that there’s still a good opportunity for innovative titles and overlooked genres. To that end, we plan to release Majesco's first internally developed Facebook title in the third quarter. This title will combine the learning from our previous games and deliver a fresh experience on Facebook. We'll talk more about this title in the near future.

Likewise, the company is excited about the industry's growth in mobile. Majesco has historically done very well in these titles in the handheld space, and we feel that this experience will translate very well in the mobile market, especially with smartphones and tablets. Key to our plan will be leveraging Quick Hit's understanding of the free-to-play business model. We feel that there's tremendous amount of untapped growth and potential in the premium market. And to that end, we plan to release about 4 mobile titles this fiscal year, with about half of our titles launch in the free-to-play business model.

Thank you for your time, and now I'd like to turn the call back to Jesse.

Jesse Sutton

Thanks, Jeff. In summary, we believe 2011 was a breakout year for Majesco and one which leaves us very well-positioned for future growth and profitability. We're excited about the rest of our release for 2012 and are primed to take advantage of all the new emerging platforms in this industry. That concludes our formal remarks. Operator, if you can review the Q&A instructions, please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will come from Nick Morrow of Sidoti & Company.

Unknown Analyst

I'm calling in for Joe. I'm going to be working with him on this for a little while. Just have a quick question about the Zumba Rush. With the Xbox and the Wii markets -- target markets, a little different, how do you think it's going to compare to how well the Zumba did on the Wii?

Jesse Sutton

Hi, Nick. This is Jesse. Well, I guess, with the way we're viewing it is we're very pleased with the current results of the second -- of the sequel to the initial Wii product that we launched last year. And Zumba Rush is going to -- we're expecting -- we're going to be investing a lot in the marketing of Zumba Rush on Kinect. And we think it has every chance to be a major successful platform, as the platform install base continues to grow, and Zumba becomes and even more important brand.

Unknown Analyst

Okay. Do you see yourself going forward, putting out more games with Microsoft than possibly for the Sony PlayStation?

Jesse Sutton

Well, we have announced that we're going to be continuing to support the Kinect platform. We think that the motion-based -- we think motion-based games are here to stay in the -- with the success that we've had so far on the platform, especially with fitness products, with technically all motion-based games, we will continue to support it. As far as the Move is concerned, the demographic that the Sony PlayStation has historically focused on has been more of the hardcore demographic, but we will continue to monitor that situation as we've had success on the Zumba Move platform -- SKU.

Unknown Analyst

Okay. And then lastly, with the -- because obviously, you can do more with the Kinect than with the Wii, how would the differences in costs, in terms of producing a Zumba game for the Kinect versus the Wii?

Jesse Sutton

There is a difference in cost. Kinect games usually cause the little more. It's not that significantly more. Really what you're dealing with is, dealing with the HD component of it, building a more beautiful graphical display that the 360 takes advantage of. But the overall costs -- and we’ve talked about this in the past, the overall costs could be anywhere between about $1 million to $1.5 million, potentially as high as $2 million.

Operator

The next question comes from Amit Dayal of Rodman & Renshaw.

Amit Dayal - Rodman & Renshaw, LLC, Research Division

I've missed the color you gave on the write-off. Is this an added exercise that basically comes up to be addressed in the fourth quarter? And then, in line with that, because we saw more titles in the position for the first quarter of 2012, how that might play out for the fiscal 2012 period?

Michael Vesey

Hi, Amid. It's Mike. We reviewed the capitalized software balances every quarter. As you know, we had a lot of our slate this year focused on the holiday season, just because of their mass [indiscernible] type products, and we feel it's better time to release them. So just by the nature of things, when we review our balances for our October year end, we have sales results in hand for the release of all the products. So we have a portfolio approach where we might release 10 products. We expect -- we want 3 to do very well. Maybe, we've got a bunch in the middle, maybe a couple don’t do so well. Because we have sales data in hand for those titles, we ended up taking a charge at October for the ones we knew. It didn't work out according to our original forecast. So it's done every quarter, but I think there was more on our fourth quarter because -- just because of that seasonality. Now, your second question is, what does that mean for 2012, because you have a lot of titles released in 2012. The other side of the statement I made before is, we already evaluated all our balances for the titles released in the first quarter, with sales data in hand, so we wouldn't expect that any of our titles released in first quarter for the holiday would incur any more impairment charges. So there’s not a higher risk in Q1, because we released a lot of titles. That was really taken care of in the fourth quarter of 2011.

Amit Dayal - Rodman & Renshaw, LLC, Research Division

That was really helpful. And then addition, some of these are getting advertisement-related costs going into the holiday season. Did we see some of that take place in the fourth quarter as well for you?

Michael Vesey

Yes, we had an increase in our marketing costs in the first quarter -- I mean, the fourth quarter of 2011 for sure. Amit, we'll really be continuing those programs through the first quarter because of the -- we like to advertise around the initial release of a product.

Amit Dayal - Rodman & Renshaw, LLC, Research Division

Okay. Then this is the last question. How much are we expecting in relation to the guidance -- the revenue guidance for fiscal 2012 period, coming from social games, et cetera?

Michael Vesey

Yes. We're not planning for substantial revenues in our guidance for our social games. What we're really doing is we're planning for the expenses in a very moderate level of revenue. So we think there'll be a net loss or net investment of $4.5 million, without planning for big revenue upside, to the extent we do develop successful games. We would think the majority of the revenue would be in end of the year or 2013, anyway.

Operator

Our next question comes from John Taylor of Arcadia Investment Corp.

John Taylor

I got a couple of questions, too. Could you review for us, please, the -- what the international split was in the last fiscal year? And then, you guys had licensed out, as I recall, a number of properties to somebody else to published in Europe. So are you capturing all that? And kind of maybe give us an update on where the product line stands relative to your own capturing full distribution revenue from that. That's my first question.

Michael Vesey

Yes. Hi, John. This is Mike. So first addressing 2011. So 2011, yes, we were -- had a licensing agreement with 505 Games and about 12% of our revenue came from the international side of the business. Now when we distribute titles, it's really a year-by-year, a title-by-title arrangement. So for our next fiscal year, and our Zumba sequels for the English-speaking countries in Europe, we're going to be selling into the same partner, but through more of a distribution arrangement where we'll have the goods manufactured and sell to them at a wholesale price. So next year, we, we’re – we’re projecting our sales from international markets will be more 20% or a little more of our overall revenues.

John Taylor

Okay, great. And then you guys, in the last year, have been really disciplined in watching your operating expense. And it sounds like you got a couple of investments going on now, what with the social and mobile effort you've got and the marketing to support Zumba on 360. So I'm wondering if you could give us a sense of sort of what the difference is in operating run rate that you're thinking about for fiscal '12, as opposed to what you booked in 2011. Or if you want to use a baseline in 2010 that will be okay too.

Michael Vesey

Yes, sure. I think the best way to look at it is probably just 2011 for a baseline. So our selling and marketing expenses in 2011, they were about $16 million. We expect that to increase next year due to the Zumba launches. We expect the increase to be in the 20% range on that number. And we'll monitor it as we go through the year but we will definitely have an uptick in the first quarter and going into Q2 with our – the release of the Kinect product, and then monitor what we need to go – do going forward from there.

John Taylor

Okay. And the R&D increase is – is that a net difference of about $2 million? Did you say $2.5 million goes to $4.5 million?

Michael Vesey

Of the R&D?

John Taylor

Yes. On the -- actually, no. The investment in social and mobil.

Michael Vesey

Yes. Social, mobil. So it will be about $4.5 million in that spend. We did, probably $2 million, $2.5 million this year.

John Taylor

Okay. All right. So the combination of those 2 is going to capture most of the OpEx increase?

Michael Vesey

Yes.

John Taylor

Okay. And then, let's see, do you guys have the Cooking properties, the Mama properties, for mobile and social?

Jesse Sutton

No, we don't have their likes in -- to that in mobile and social. However, we continue to work with the creator of the brand to bring that brand to all the different platforms. So there's nothing to talk about today as far as mobile and social. As you know, we already launched the Cooking Mamas game on Facebook so there’s -- they have 3 there. And as we have more information to discuss with that brand, we'll bring it to the investor community.

John Taylor

Okay. All right, good. And then, it seems like in 2000 -- holiday of 2010, fitness and dance were both really vital subcategories, particularly for Wii. And then in 2011, it seems like dance kind of pulled ahead of fitness, and people were more interested in that. Is -- I wonder if you agree with that. If you're concerned about that? Or whether you think the Kinect title can actually reverse that for some reason?

Jesse Sutton

I think that's a good question, John. You know, honestly, I think that if you really have to take that on a title-by-title basis, as much as you look at the category as a whole. Some of the dance category is really completely dominated by 2 brands. And the fitness category is probably a little more crowded than it is today, and led by Zumba. And so I think that as more products come out in the fitness category -- as fitness becomes more of an accepted experience on the Kinect, which I strongly believe will happen over the course of the next 12 to 18 months, I think the fitness category has a long way to go before it slows down.

John Taylor

Okay, last question, a follow-up on that. So are you aware of some kind of a strategic push by Microsoft to make sure that people think of Kinect and fitness in the same thought?

Jesse Sutton

Well, I think it's no secret that in their presentations of it, they've shown fitness as an important component of the userability of the platform. So I would say from everything’s that’s been out there in the public. Yes, I never [indiscernible] but I can talk about that, but I can tell you anything alongside that though.

Operator

And our next question comes from Mark Gomes of Pipeline Data.

Mark Gomes

It appears, based on your commentary, that the Zumba franchise is off to a much stronger start that what scholastically [ph] a multiple of units is back. So looking at your guidance calling for even 70/30 split as you put in last year, how do you reconcile between the much faster stock for Zumba and the split in your guidance?

Michael Vesey

I think a few things come into play with that. One is that the platform itself, the Wii platform, is a little year older, so we take that into consideration as to what the year will look like. We try to take as reasonable approach as possible as it relates to that, like we felt like we did last year with our approach to Zumba 1. And the Kinect, the Kinect SKU hasn't launched yet. Until we get some real initial feedback to how well that does, it’s hard to really get too bullish on it until we really get some feedback. It's just the way we historically manage now our forecast for these things.

Mark Gomes

All right. So it sounds like a bit of conservatism in there?

Michael Vesey

Yes, reasonable.

Mark Gomes

Yes. Can you repeat what you said earlier about the relationship beyond the 505 in Europe? It sounds like -- is it safe to say that you're going to be increasing your revenue per units? And if so, is there a measured increase in the gross margin there?

Michael Vesey

The revenue per unit will be higher. We'll be selling a finish good ended a higher price. The profit per unit will be slightly higher, but not -- can measure with the revenue. [indiscernible] royalty based on a percentage of the net profit [indiscernible] selling a product with the cost of sales. And the overall percentage margins are actually be a little bit lower, right, because before they're just getting commission until we know cost. So all in all, it's more profitable on a per unit basis. And because of the revenue dynamic, they are slightly lower percentage margin than the prior year.

Mark Gomes

Okay, fair enough. Looking at any channel feedback. Is there any cost for conservatism based on any feedback you received in the channel for the Zumba titles that are in the marketplace today?

Jesse Sutton

I would say that for us, we try to be as reasonable with our forecasting, and there's obviously a lot to be played out for the rest of this year. And as we get through each quarter, which we've done last year, we'll bring everybody up to speed as to where things are at by the end of the first quarter. Usually our first quarter our earnings call’s in the middle of March. We usually bring people up to speed. We'll have a lot to talk about then with regards to the launch of the Kinect, which will be out for about a month at that point. And we'll have a lot more field there to discuss with this equal of Zumba 2.

Mark Gomes

Understood. But my question was more around the sales channel feedback to the games today.

Jesse Sutton

I mean, the reviews and the sales channel feedback has been good. I mean, we have, as we said earlier, the first -- the sequel has outsold the first one at the same amount of time to date that it's been on the market. So that's good. But again, it's – tally [ph] the future is always pretty difficult. But again, it's been positive.

Jeffrey Anderson

I think the other thing to notice. We have sales channel information on the Wii product, which is going to be released obviously in hand. What we don't have is any new data from the Kinect. It’s the second year -- the second holiday that the hardware was sold. We don't know what impact that the holiday is, necessarily on the installed base and the software pickup or on that. So I think from the standpoint of the Kinect title, we just don't have information and anything we know about release of Wii is absolutely incorporated into our forecast.

Jesse Sutton

And then, one thing we do know is that Microsoft had a fantastic holiday as it relates to Kinect hardware sales and how that translates into future software sales remains to be seen.

Mark Gomes

Good. That's very helpful. One more question and I'll sign off here. Looking at Zumba 1, you continue to see a resurgence in sales there. What kind of impact will that have on your gross margins given the way that you amortize the development cost?

Jesse Sutton

Yes. I think that the reality is the majority of the development cost of that Zumba 1 title were amortized off in our first quarter of last year. So the margins for Zumba 1 that we saw now will be somewhat softer in the second 3 quarters of last year, barring any movement in price. As you know, we kept the Kinect and the Wii product at full retail since launch. So you want to see how that goes through the rest of the year.

Operator

[Operator Instructions] And there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over the management for any closing remark.

Jesse Sutton

I want to thank everybody for joining our call today, and we look forward to updating everyone on our first quarter call in March, where we have a lot of exciting things to discuss.

Operator

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

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