Don't Count Out Majesco Entertainment

| About: Majesco Entertainment (COOL)

The recent sell off of Majesco Entertainment (NASDAQ:COOL) shares after the recent earnings report show investors are either finally taking profits, or they don't have the patience to see what 2012 holds for the stock. I listened to and read the conference call and remain bullish in shares of this company, which I own in my portfolio.

Two weeks ago I published the article "Majesco Entertainment Has Ample Room To Continue Its Run." In the article I discussed the future events that will lead shares higher. One of the top eight reasons I gave for buying shares was three straight quarter earnings beats. Alas, the next earnings per share of $-.07 failed to meet analyst's expectations of $.04. The earnings loss was due in part to several write downs of games that are believed to be losses for the year.

Majesco executives call for revenue of $125 to $140 million, which would be a slight improvement on 2011. The earnings per share are expected to be around $0.25 to $0.35. The range of earnings per share show only modest improvement from 2011, which is what most likely scared long term investors into selling their stock. The conference call had a few negatives, with the earnings miss and conservative forecast.

After reading past all the negatives, I actually became more bullish on this company, of which I have owned shares for just over a month, for these reasons:

  1. "Zumba Fitness 2" - Fiscal 2011 includes no reported sales of "Zumba Fitness 2." This is one of the biggest things for investors or potential investors to consider.
  2. Social Gaming - The company reported a $2.5 million investment in social gaming, which was part of the reason for the loss for the quarter. Majesco has recognized that it needs to improve on its social and mobile gaming platforms to change with the gaming industry. For 2012, around $0.10 per share will be used towards investment in social and media games, which could be part of the reason for the conservative earnings guidance. Majesco will launch its first internally developed game for Facebook in the third quarter of 2012. The fiscal year will see four mobile games and a few social online games launched as well.
  3. Cash Position - As of October 31st, the company reported a cash position of $13.7 million. This represents about $0.35 in cash per share. The company also shows $6.4 million in accounts receivable, or almost $20 million total cash and receivables, compared to $11.5 million at the end of fiscal 2010.
  4. "Zumba Fitness Rush" - I discuss the game in detail further below but must say that this game has hit written all over it. The Kinect platform for Microsoft's (NASDAQ:MSFT) XBOX 360 has been well received, and a motion game like Zumba should sell well in a competitive environment. The first "Zumba Fitness" game sold over 1.2 million copies to date for the XBOX platform.
  5. New Deal With Harley Pasternak - Now if you're like me and have no idea who Harley Pasternak is, I'll explain. Mr. Pasternak is a consultant to celebrities when it comes to fitness and nutrition. He has worked with Katy Perry, Megan Fox, Robert Pattinson, and Lady Gaga. He currently stars as one of the members of "The Revolution" daytime television show on ABC with Tyler Gunn and Ty Pennington. The show has been averaging over a million viewers per day. The deal will likely include a fitness game with Pasternak's name for Majesco. Majesco has successfully produced games with the Zumba name and also a few gamed under the Jillian Michaels brand name as well.
  6. Partnership with NBA - Also announced during the conference call was a new deal with the National Basketball Association. A motion based game, which Majesco says will be "unlike any traditional sports video game" will be launched in the future. Keep your eyes and ears open for details on this one, as the NBA video game market is not owned by Electronic Arts (ERTS) and Majesco could take share from Take Two Interactive's (NASDAQ:TTWO) NBA 2K brand.
  7. International Sales - The strength of the Zumba Fitness brand has been fully demonstrated in countries like the United States. Overseas, Majesco partners with 505 games and is paid a license fee for each copy of the game sold. The undisclosed fee will be higher for 2012, according to Majesco. The strength of "Zumba Fitness Rush" overseas will mean more money coming back to Majesco than previous game launches. For 2011, international revenue represented 12% of total revenue for Majesco. Twenty percent is estimated from international sales for 2012 fiscal earnings.

So when the entire conference call is broken into positives and negatives, it seems investors panicked a little too quickly on shares of Majesco Entertainment. I did not plan on selling shares after earnings, as I want to see what the above mentioned key events hold for the company and its shares.

For the fiscal year Majesco Entertainment reported sales of $125, which was a 65% increase from 2010. Gross margins increased to 36% (up from 24% a year ago). For the year, Majesco Entertainment earned $0.28 a share, which was an significant increase over the loss of $0.04 the company earned last year per share.

The strength of the "Zumba Fitness" brand was shown off during the conference call. "Zumba Fitness" was the number three best selling game on the Nintendo Wii for all of 2011. The game was also the number twelve best selling game across all platforms. Overseas, specifically in England, the game continues to have success. For 2011, the "Zumba Fitness" game was the number one bestselling Nintendo Wii game and was the fourth bestselling video game in the country for all platforms.

The first game in the "Zumba Fitness" franchise has sold over six million copies at the time of the conference call. The CEO said during the call that the game is in the early stages of growth as there are over 12 million active Zumba participants who take part in weekly classes throughout the United States. "Zumba Fitness" games accounted for approximately 70% of Majesco's revenue, with the other 30% coming from "Cooking Mama" and other games owned by the company. For 2012, the company has projected a similar revenue split. As a shareholder, I am excited about the Zumba Fitness brand, but would also love to see another hit game or franchise from Majesco Entertainment to strengthen the brand and earnings.

As I have mentioned before, Majesco Entertainment will release "Zumba Fitness Rush" on February 13 for the XBOX 360. The "Zumba Rush" game will be available exclusively on the Kinect platform for the XBOX 360. "Zumba Rush" will feature ten additional songs and routines, which were not included in the "Zumba Fitness 2" game. Also, more venues and new celebrity instructors will be available in the game.

The biggest new feature of the game is the digital component. Similar to Activision's (NASDAQ:ATVI) "Call of Duty" map packs or song packs offered in "Guitar Hero" and "Rock Band" games, "Zumba Fitness Rush" will offer downloadable content. This content will most likely be new dance routines or songs. Whether consumers will pay for the content is an unknown at this point, but given the success of add-ons in other games, it's worth a shot on Majesco's end. Advertising will take place by Majesco and Microsoft to promote the exclusive game through print, television, special events, social media, and an extensive Zumba fitness instructor network.

I believe the earnings guidance from the company is conservative. The first and second quarters will be strong indicators as the first will include revenue from Zumba Fitness 2 and the latter will have some sales of Zumba Fitness Rush priced into earnings. My predicted earnings per share are $0.40 for fiscal 2012. In an earlier article I said shares could hit the $10 mark soon due to increased earnings or a possible buyout. Here I will set a price target of $5 by the end of the second quarter of 2012 so we can check back in after earnings to see how the pick fared.

Disclosure: I am long COOL, ATVI.