Mike Smargiassi - Brainerd Communicators
Jesse Sutton - Chief Executive Officer & Director
John S. Gross - Chief Financial Officer & Executive Vice President
Gui Karyo - Executive Vice President, Operations
John Taylor – Arcadia Investment Corporation
Edward Woo - Wedbush Morgan Securities
[Todd Greenwalt– Signal Hill]
[Jason Harland – AdVal Partners]
John Taylor – Arcadia
Majesco Entertainment Co. (COOL) F2Q08 Earnings Call June 16, 2008 4:30 PM ET
Welcome to the Majesco Entertainment Co.’s second quarter 2008 earnings conference call. As a reminder all participants will be in a listen only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) For your information today’s conference is being recorded. At this time I would like to turn the conference call over to Mike Smargiassi of Brainerd Communicators.
Good afternoon. This is Mike Smargiassi of Brainerd Communicators. I would like to welcome you to Majesco Entertainment’s conference call today. Before we get started, I would like to remind you that this call is being recorded and the audio broadcast and replay of this teleconference will be available in the Investor Relations section on the company’s website. We apologize for the delay in the call. The company’s 10-Q has been filed and the press release will be issued shortly. The delay in issuing the press release is due to issues with the wire service and it’s due to anything the company has done.
As a reminder, this call may contain forward-looking statements including statements regarding management’s intentions, hopes, 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 our Form 10-K for the year ended October 31st, 2007 and other filings with the SEC.
The company does not undertake and specifically disclaims any obligation to release publicly the results of any revisions that may be made to any forward-looking statements to reflect occurrences of anticipated or unanticipated events or circumstances after the date of such statements.
To facilitate comparison between the reported periods the company has presented both GAAP and non-GAAP financial results. GAAP financial measures include settlement of litigation and related net charges and charges in the fair value of warrants. Operating income, net income and basic and diluted loss per share has been adjusted to report non-GAAP financial measures that exclude these charges and income related to gains on these settlements and warrants. 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 which should not be considered a substitute for or superior to GAAP results. Reconciliation between GAAP and non-GAAP financial measures is included the in the press release that will be issued today.
On the call today we have Jesse Sutton, Chief Executive Officer; John Gross, Chief Financial Officer; and Gui Karyo, Executive Vice President of Operations.
I would now like to turn the call over to Jesse Sutton.
Good afternoon everyone and thank you for joining us today. I’ll open the call with some highlights and a strategic overview of our performance in the second quarter of 2008. John will follow with the financial review of the quarter and I’ll conclude with comments on some of the games in our product portfolio. We will then be happy to take your questions.
During the second quarter of 2008 we continued to execute on our mass market family friendly strategy as the company further established itself as a leader in one of the fastest growing segments in the gaming market. We believe that publishing games that are easy to learn, fun to play and attract a light audience particularly when developed for the fastest growing console, Nintendo’s Wii and the most popular handheld system, Nintendo’s DS is a prudent and compelling approach to what has become an increasingly competitive operating landscape. As we reached our fiscal half year mark our financial performance further supports our decision to focus on this segment of the market. We are pleased to announce that our most successful franchise, Cooking Mama, has sold over 2 million units to date and continues to be a favorite among the family friendly mass market audience.
Wild Earth African Safari recently took home the 2008 Editor’s Choice Award from the Children’s Technology Review. Additionally Blast Works Build, Trade, Destroy which was developed for Nintendo’s Wii and shipped to retailers on June 10th received an A review from Electronic Gaming Monthly. We’re very proud of these accomplishments which highlight the quality and relevance of our products. With respect to our international agreement with CodeMasters we are pleased with our distribution reach throughout Europe and look forward to benefiting from these capabilities as our agreement commenced with the launch of Nanostray 2 in March. I would also note that our distribution agreement with [Idos] remains in place for the titles we have already launched or plan to launch including Cake Mania 2, the well received Blast Works Build, Trade, Destroy and catalog sales of earlier products. During the second quarter international sales comprised 11% of our revenue versus only 2% in 2007. Securing international publishing rights remains at the top of our list of priorities as we believe that non- US markets, particularly Europe and parts of Asia will play a critical role in diversifying our revenue stream while increasing our scope.
Turning to the status of our recently launched Majesco Studios in Santa Monica, we are quite pleased with the progress our team is making with the development of both Our House for the DS and Wonder World Amusement Park for the DS. Retaining the intellectual property rights of the games in our portfolio is another top priority for Majesco and was the catalyst for the creation of our studio and while we anticipate our studio will contribute only 10% to 15% of our portfolio in the coming years we continue to believe this will become a key source of value for our shareholders while remaining a low risk opportunity for the company.
In summary the quarter was in line with our expectations as we continue to execute the initiatives. We’ll continue to build and leverage our relationships with third party developers, develop an increase an internal portfolio of intellectual properties and we remain focused on developing and publishing games for the family friendly mass market audience. Finally we will pursue our strategic plan in a disciplined manner with the goal of moving toward profitability.
I would now like to pass the call to John Gross, Majesco’s Chief Financial Officer to provide the financial review for our fiscal second quarter of 2008.
John S. Gross
Before I cover the details of our second quarter’s financial performance I’d like to give you some highlights around three subjects, growth, profitability and liquidity. Looking at our six month results our total net revenues increased 8% to $31.4 million from $29.1 million which included $3 million of revenues from Dance Dance Revolution products. Our domestic business increased 11% against prior year results and our DS business almost double to $23.8 million. As for profitability we reported $1.5 million in non-GAAP net income for six months and we were just below break even for the three months on $12.8 million in revenues. Our year-to-date gross margins show modest improvement and our costs remain under control. Finally as to liquidity we had $8 million in cash at the end of Q2 and were cash flow positive for the first six months. We continue to make progress on the financial front. And now for the details.
For the second quarter we reported revenue of $12.8 million a decrease of 12% versus the same period in 2007. Our results which were in line with our expectations reflect the outstanding performance of last year of the Cooking Mama cook off for the Wii and Bust A Move for the Wii achieved upon the release in the second quarter. These products both had higher price points than our products this year. Our net revenue for the six months ended April 30th was $31.4 million an increase of 8% over the same period last year and further for that same period our gross margin was 38% versus 36.6% in 2007. During the second quarter we released six titles overall, four titles for Nintendo’s DS handheld, one title for the Wii and one title for Sony’s PSP. Our DS business increased 87% versus the second quarter of 2007 while our Wii business declined 60% as a result of the challenging comparison it faced with Cooking Mama’s performance last year. Net revenue for the second quarter of 2008 comprised 26.5% from sales of gains for console systems including 25% contributed from the Wii and 73.5% of net sales came from games for the handheld systems with 70.5% of which came from sales of games for the DS and 3% of sales from game for PSP. This compares to the second quarter of 2007 when 63% of the revenue was contributed from console systems including 55% from the Wii and 37% of revenue was generated from handheld systems including 33% from games developed for the DS. Last year’s Wii performance reflects the launch of the two Wii titles in the second quarter. The split between domestic and international revenues in the second quarter was 89% and 11% respectively. This compares to 98% domestic and 2% international in the same quarter last year. Our geographic revenue split for the quarter is more in line with our expectations for the year.
Our gross margins for the second quarter were 34.7% versus 42% during the same period one year ago. The lower margin is a result of Cooking Mama’s and Bam’s higher sales and gross margin last year and this year’s sales mix which had a higher percentage of international sales which return a lower margin than our domestic sales. Despite this our consolidated gross margin for six months exceeded 2007’s full year gross margin which reinforces our expectations of a modest increase in gross margins for the full year 2008.
Moving on our expenses remained under control. Our operating expenses include product research and development costs, both fixed and variable selling and marketing expenses and G&A. For the quarter these operating expenses in total were relatively flat versus last year. Total cash fixed costs for the quarter which includes G&A, product research and development and the fixed portion of selling and marketing which relates to employee costs were within our expectations of $3 million to $3.5 million.
In order to facilitate a comparison between reported periods we are providing both GAAP and non-GAAP financial results for operating income, net income and basic and diluted results per share. Our non-GAAP results exclude the impact of the settlement of litigation and other liabilities net and changes in the fair value of warrants. Our GAAP operating loss for the second quarter was $296,000 which included a $350,000 non-cash compensation charge versus an operating loss of $868,000 for the same period last year which included a non-cash compensation of $375,000 as well as a $2.5 million charge for shareholder litigation. Non-GAAP operating loss for the second quarter was $296,000 versus a non-GAAP operating income of $1.4 million in the same period last year.
Our GAAP net loss for the second quarter of 2008 was $257,000 or $0.01 per share which included $136,000 non-cash gain in the fair value of the warrants issued compared to second quarter 2007 GAAP net loss of $1.3 million or $0.06 per share which again included the $2.5 million charge for the litigation and a $208,000 gain on the settlement of liabilities. Non-GAAP net loss for the second quarter of 2008 was $393,000 or $0.01 a share compared to non-GAAP net income of $957,000 or $0.04 per share for the same period last year. For the six months ended 2008 net revenue was $31.4 million compared to $29.1 million for the same period in 2007. The 8% increase is attributable to stronger first quarter revenue versus the first quarter last year.
2008 operating income for six months was $2.1 million versus an operating loss of $1.1 million in the six months ended April 30th, 2007 which included the $2.5 million charge for the shareholder litigation. The non-GAAP operating income for the period was $1.8 million versus $1.2 million in 2007. The GAAP net income for the six month period was $2.4 million or $0.09 per share versus a net loss of $2.3 million or $0.10 per share again including the $2.5 million shareholder litigation charge and a $239,000 gain on settlement of liabilities. Finally the non-GAAP net income for the first six months was $1.5 million versus break even for the same period in 2007. Financing costs decreased 80% to $97,000 from almost $467,000 in the second quarter of 2007. This is a direct result of the capital we raised last fall and lower factoring fees.
Turning to our balance sheet as of April 30th, we had $8.1 million in cash on the books. Receivables from our factor were $518,000 which represents gross receivables sold to the factor of $7.9 million plus allowances of $2.9 million and advances from the factor of $4.6 million. This compares to our fiscal year end due to factor of $1.5 million representing gross receivables sold to the factor of $7 million plus allowances of $3.1 million and advances from the factor of $5.1 million at October 31st, 2007. Inventory was $1.9 million at the end of the quarter flat versus the end of the first quarter of 2008 and $1.9 million less compared to our fiscal year end.
For the full year based on our current release schedule we are reconfirming our expectations for the fiscal year for net revenue to be in the range of $53 million to $58 million. We believe that our gross margins for the full year will show modest improvement over last year and we will be break even or better on an operating basis. As a result we believe it is prudent to keep our current guidance at this time and we will reevaluate when we report our third quarter results.
Once again we are very pleased with the progress we have made to date and remain on target to reach our goal of operating profitability. While we still have some work to do we are committed to operating Majesco with a focused and disciplined financial approach to our strategy.
I will now turn the call back to Jesse.
The first half of 2008 is clearly off to a strong start. As John mentioned we’re taking the appropriate steps towards profitability and maintaining our focus on the steps that are required to achieve our goals. With that said, the core of our 2008 line up will include a variety of titles for various platforms. These include Blast Works Build, Trade, Destroy for the Wii an innovative interpretation of a geometric shooter. Perhaps the most exciting feature though are ship and level editor which allow players to create their own personalized game experiences and then share their creations via WiiConnect24. The SRP is $39.99.
Wonder World Amusement Park our summer blockbuster for the Wii is a full 3D amusement park the world of boardwalk games, rides and prizes that players can explore with personalized avatars. This title brings a perennially popular family activity of rides and games to everyone’s living room in a way that only the Wii remote can. The SRP is $39.99. And finally Cooking Mama World Kitchen for the Wii, the sequel to the best selling Cooking Mama cook off game on Wii that has sold more than 430,000 units. It challenges players to use the Wii remote as the ultimate cooking utensil. The expected SRP is $49.99.
That concludes our formal remarks. Operator, if you could review the Q&A instructions.
(Operator Instructions) Our first question comes from John Taylor – Arcadia Investment Corporation.
John Taylor – Arcadia Investment Corporation
I’ve got a couple of questions, I wonder if you could tell us how much of the second quarter revenue came from catalog as opposed to shipments of new products, that’s the first question. And then the second one is, is there a way you could characterize the breadth of retail support you’re getting for your portfolio of new releases? Are all of the six top retailers supporting each of the new releases or do typically three or four? Can you just give us a sense of how broad the support is and well represented the big retailers are?
I’ll answer that second question first. We’ve actually gotten very broad support for a variety of titles released not just in the past six months but even in the last quarter and more than one of them has been placed in at least the top five of our top six accounts. That being said it does vary from title to title as you well know. Certain retailers do better with certain types of titles, certain types of genres than others and we’re happy to say that Wild Earth for example got full distribution across all of our top five accounts.
John it was a little bit more than a 60/04 split, new release to catalog.
Our next question comes from Edward Woo - Wedbush Morgan Securities.
Edward Woo - Wedbush Morgan Securities
I had a question, everybody seems to know that the Wii hardware is in very short supply. What about the mass for DS hardware?
The feedback we’ve gotten and our research and our discussions with Nintendo as well there seems to be enough supply of the DS right now and they’re expecting to maintain that throughout the holiday, hopefully.
Edward Woo - Wedbush Morgan Securities
Opportunities for more casual titles on the 360 or PS3, do you see opportunities coming up in the near term or are you still focusing on just the Wii and the DS?
There’s definitely evidence, particularly on the 360 that the audience for casual games is growing there. Particularly if you look at the performance of some of the XDLA titles there’s definitely a consumer fan base for the kind of the games that we make and as we always do are opportunistically looking for product opportunity there and we also keep our eye out on the PS3 and [inaudible] delivered system [PSN], I would say that we that we’ve seen less evidence of an interesting argument to build products for the PS3 just yet but we continue to watch.
Our next question comes from Todd Greenwalt – Signal Hill.
Todd Greenwalt – Signal Hill
Just wondering if you could give us an update on the DS marketplace, just given your focus there. I just wondered if you’re seeing any kind of a slowdown, how tough it is for you to get your products to send out there, get shelf space, and then just given the huge influx of titles being published there, I’m just wondering are you facing any challenges from Nintendo as far as getting your titles reviewed, approved, manufactured on time and the volumes that you’re hoping for?
Todd, there are a few questions you had there and I guess all three of us here, John, Gui and myself will share the load of it. As far as Nintendo managing the process and continuing to put our games through or our competitor’s games through the way they’ve historically been doing it, that hasn’t changed and we don’t anticipate that changing that dynamic. The ability to get products on shelves really remains not much different than it was over the last six months or so and a lot of that is going to be a result of the kind of game you bring to the marketplace relative to that individual retailer and ultimately they’ll make the decision as to which products to put on which shelves. We’ve actually had much more success getting products as broadly placed than we’ve had following the last couple of years.
To re-emphasize the point that Jesse was making in terms of placement, I would say that the largest glut of release of products not just for the DS but for the Wii was really around holiday of last year. While there still is a healthy amount of product coming out from both platforms I would say that competitively we have not seen anything that has precluded us from getting a good product for the type of demographics that we go after, released and placed broadly. In terms of delivery time we have not seen particularly over the late winter and spring any signs that the Nintendo manufacturing or approval process is being held up by volume.
Your last question was about the trend n the margins and I think it’s holding up reasonably well, up slightly.
Todd Greenwalt – Signal Hill
Separate question, just wondering if you’re thinking about any other platforms any time in the near future whether it’s PC or online or even mobile or something like WiiWear? Any thought son that?
That’s a great question. We announced I think last week [Forcherd] for the PC. We have been looking very actively at XDLA products, WiiWear products. We even have a couple of other what we think are innovative games on the docket that fall into a variety of different categories. For us the important three questions really are do we have a game idea that we think is really compelling to that mass market family demographic that we are after? Is the platform for it right and do we see the long term and short term returns on making the investment bringing that game to that platform?
Our next question comes from Jason Harland – AdVal Partners.
Jason Harland – AdVal Partners
Couple questions, I wanted to focus on the Jillian Michaels game you guys just announced. First question is are you tying it all with The Biggest Loser, does NBC Biggest Loser, is that going to be branded on the title? And secondly do you see perhaps advertising on the Biggest Loser show or using some kind of product placement on that?
The Jillian Michaels license to be clear it is a Jillian Michaels license, not a Biggest Loser license so there really isn’t going to be any direct or material tie in. Jillian Michaels herself as you are probably aware or maybe not is one of the top selling fitness gurus on videos and books in the marketplace right now. While there’s obviously a great value to the fact that she’s got this placement on Biggest Loser and the fact that the launch of this game will be about the same time as the launch of the latest season of Biggest Loser what we’re really focusing on is that core audience of women who are active in their own health and who have a Wii or are interested in having a Wii and putting those two things together. W know from Jillian that she’s personally very interested in this project, is actively involved in the development and I have every reason to believe that she’ll be actively involved in the PR and the fact that there’s a happy coincidence that she’s also going to be promoting the Biggest Loser’s latest season when this comes out is just something that we appreciate.
Our next question comes from John Taylor – Arcadia.
John Taylor – Arcadia
I have one follow up question to somebody else’s and I want to pursue this retail thing a little bit more. On the PC thing you’re talking about branching off into that platform were you guys thinking that that’s likely to be a go-to-market with box strategy, publishing strategy or a more direct digital download one?
We do not intend to get back into the PC box distribution business. With the product orchard that we announced we’ve already begun to test some various distributors who would be responsible for the box product distribution. We are far more interested in the online distribution business as a place where we can continue to reach out to that demographic that we’ve had so much success with on other platforms.
John Taylor – Arcadia
I’m sorry, I didn’t hear you. So you said you’re less interested in box or more?
Less interested in box, more interested in digital distribution.
John Taylor – Arcadia
Follow up on the retail thing, on the one hand you’ve got an audience which overlaps pretty directly with the Nintendo audience and you look at the share split between first party and third party and the performance of an average Nintendo title versus the performance of an average third party title on Wii or DS either one for that matter, it seems like retailers are likely at some point to start leaning more towards Nintendo and maybe a little away from third party simply because that’s where all the sales are, that’s point number one, I’m setting up for a question here. Point number two is shelf space is pretty bogarted to some extent by Nintendo long life products so there’s not a turn of slots out there and that sort of thing, if that’s part of the landscape what does that imply about your need to increase promotional spending or retailer demand on you to put more support behind new product releases in order to get the shelf space for them?
Don, that’s a good question. This is not a new dynamic, not a new trend that’s just developing regarding Nintendo’s market share and the strength of the brands that they own, that’s historically been the case. The third party publishers that have been able to identify what those consumers who are playing games on these platforms want, are the ones that have shown success throughout the history of Nintendo’s platform. That being said, it’s very promising, we’re learning that there’s retailers today because of the growth and the family friendly marketplace, the family friendly audience, there’s a lot of growth to their individual placement, or their individual retail space that they’re going to be offering to the public throughout the rest of this year. You’ll start seeing more space at all the retailers like Best Buy, Wal-Mart, etc. that are offering more space to the family friendly audience. They’re not necessarily taking space away from other video game platforms but other areas of entertainment that haven’t been doing as well and that bodes well for us and all of us that are in this Nintendo space.
John Taylor – Arcadia
So at this point you’re not seeing any pressure on you to sort of abandon the discipline, the cost containment discipline that you’ve been carrying here for the last several quarters? You don’t feel like the market is going to kind of force your hand on the sales and marketing spend?
Let me just rephrase a little bit. I know it is very alluring to look at the dominance of the Nintendo direct first party software and try to build a sort of model of pressures on the business off of that. But, the truth is video games historically and continues to be a very competitive entertainment business. So, I don’t think that the fundamentals have changed just because Nintendo happens to be particularly strong not just at building its console but at building games that hits demographic well. I would say that for those reasons we are under the same pressures we were under a year ago, the same pressures that Majesco has been under for many years which is that at the end of the day, what appears to be successful in the marketplace are products that are well designed to target their demographic and distributed as broadly as possible. We continue to seem to have a good feel for the kinds of family friendly games that will work on these platforms and we continue to have really strong relationships with the retailers that distribute to them. I think there will always be pressure to find various ways either with increased spending on research and development, or increased spending on marketing, or advertising, different ways to try to better ensure that your bet and bringing products to market is the strongest one possible. But, that does not change the fact that we run the company with a very strong fiscal discipline and I don’t think that there’s any particular trend in the marketplace that’s going to change that.
At this point there are no more questions.
Thanks again for joining us today. We look forward to speaking with you in September when we intend to report our third quarter results.
Thank you all very much for participating in the Majesco Entertainment Company’s conference call. This concludes today’s event.
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