Mad Catz Interactive's (MCZ) CEO Karen McGinnis on Q4 2016 Results - Earnings Call Transcript

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Mad Catz Interactive, Inc. (NYSEMKT:MCZ) Q4 2016 Earnings Conference Call June 2, 2016 5:00 PM ET


Norberto Aja - IR, JCIR

Karen McGinnis - President & CEO

David McKeon - CFO


Nick Meyers - Roth Capital Partners

Ed Woo - Ascendiant Capital

David Brigham - Brigham Investments

Edward Ericsson - Private Investor

Richard Ferber - Private Investor


Ladies and gentlemen, thank you for standing by. Welcome to the Mad Catz Interactive Fiscal 2016 Fourth Quarter and Full Year Conference Call.

During the presentation, all participants will be in a listen-only mode. Afterwards we'll conduct a question-and-answer session [Operator Instructions]. As a reminder this conference is being recorded Thursday, June 2, 2016.

I would now like to turn the conference over to Mr. Norberto Aja, Investors Relations. Please go ahead.

Norberto Aja

Thank you, operator, and good afternoon, everyone. Welcome to Mad Catz's fiscal 2016 fourth quarter and full year results conference call.

With me on the call today are Karen McGinnis, Mad Catz's President and Chief Executive Officer and David McKeon, Mad Catz's Chief Financial Officer. Karen will provide an overview of the results and the principal drivers behind them and afterwards, Dave will review the financial results in greater detail, before returning the call back to Karen for some closing remarks.

Before we begin, however, let me just take a few minutes to read the Safe Harbor language as 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 any new information, future events or developments except as required by applicable law.

You can identify these statements by the fact that they use words such as anticipate, estimate, expect, project, intend, should, plan, goal, believe and other words in terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause actual future results to differ materially are the following; continuing demand by consumers for video games and accessories, continued financial viability of our largest customers, the ability to maintain or renew the company's licenses; competitive developments affecting the company's current products; first-party price reductions; availability of capital under our credit facilities; ability to sell remaining Rock Band 4 inventory before wind-down period ends, the ability to successfully market both new and existing products, domestically as well as internationally, difficulties or delays in manufacturing, unanticipated product delays or downturn in the market or industry. 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 and webcast taking place on June 2, 2016, include 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 Karen McGinnis, President and Chief Executive Officer of Mad Catz. Please go ahead, Karen.

Karen McGinnis

Thank you, Norberto, and good afternoon, everyone.

We appreciate you joining us on the call today to review our fiscal 2016 fourth quarter and full year financial results. I’m going to start by discussing the activities that have taken place since our last call. Then Dave will review the financial results and I'll end the call by reviewing our fiscal 2017 objectives.

It’s been a very busy few months since our last call, but I’m pleased to say that we completed several objectives that we believe have established a foundation for a more successful fiscal 2017.

To start, we successfully executed our restructuring plans. As discussed in February, we completed a comprehensive evaluation of our organizational and cost structure and enacted a company-wide restructuring plan with an eye towards lowering operating cost, increasing efficiencies and better aligning our workforce with the needs of the business.

The restructuring plan has been fully executed and we expect the actions taken will generate net annualized savings of between $6 million and $7 million starting in the first quarter of fiscal 2017.

We took a careful look at the business to determine what functions were necessary to move the company forward and as a result, we have reduced global headcount from 219 employees in December 2015 to 133 employees currently.

We removed excess layers of management to make the organization more nimble. We merged our U.S. based creative marketing functions into our product development team in the U.K., consolidated European inventory and distribution into our U.K. operations, outsourced our customer service function and closed our Mad Catz branded eCommerce sites.

While undertaking these initiatives was not easy, I’m pleased to report that we're already seeing efficiencies as a result of being a leaner, more agile organization and have taken various additional actions to further increase efficiencies and lower operating costs.

For example, we voluntarily delisted from the Toronto Stock Exchange as the small trading volume did not justify its ongoing listing fees and legal expenses. We have also started to more effectively manage our marketing spend by focusing on targeted consumer marketing and significantly reducing and in some cases eliminating our sponsorship and presence at industry trade shows.

We're making decisions quickly, but thoughtfully and strategically and with a focus on both an immediate impact as well as our long-term health of the business and seeing positive results from our actions.

In addition to creating and implementing our restructuring plan, we also finalized an Exit Agreement with Harmonix relating to Rock Band 4. While fiscal 2016 was a strong year for topline revenue, as evidenced by a 55% increase in net sales, results fell considerably short of our profitability expectations.

We focused a substantial amount of our efforts across the organization this past year on executing the successful launch of Rock Band 4 in time for the 2015 holiday season, which negatively affected the development and launch timing of our other product lines. As a result, most of our other product categories experienced sales declines over the prior year.

In addition while the initial launch of Rock Band 4 was successful, end consumer demand was significantly lower than expected, resulting in aggressive pricing promotions and additional marketing expenses to help drive sales, much lower than expected profitability and higher than anticipated levels of inventory held by us and retailers after the holiday season.

Following the 2015 holiday season, Harmonix decided to take a different approach to holiday 2016, which included making changes to the hardware. After careful consideration, we informed Harmonix that Mad Catz would not invest additional development resources and tooling to design new hardware. As such, Harmonix decided to engage a new hardware partner, which they have the right to do based on the terms of our original contract.

That said, all of our current products will continue to work on Rock Band 4 including any future updates to the software. Our agreement with Harmonix has now been terminated and we're currently in a wind-down period that requires the sale of our remaining Rock Band 4 inventory by September 6.

As a result, during the fourth quarter we recorded $4 million in inventory write-downs to reflect the expected net realizable value of our remaining Rock Band 4 inventory, $1 million in non-cancellable material authorizations with manufacturers and $1.8 million in price reductions with retailers.

Our current projection shows that we will be able to sell the remaining Rock Band 4 inventory at the March 31 net book value of $8.3 million. Although the overall Rock Band 4 program was incredibly disappointing for us, exiting the relationship with Harmonix at this time allows us to focus our efforts on the development and execution of our other exciting and profitable product launches.

This brings me to this third completed objective, finalizing our fiscal 2017 product roadmap and strategic plan. Through our researching efforts, we've retained our most qualified product development professionals on a team that we believe is one of the best and most innovative in the industry.

We have the capability to continue to innovate and enhance existing products as well as efficiently and successfully bring a broad range of new and innovative products to market.

While our product launches in fiscal 2016 were limited due to the focus on Rock Band 4, we continued our underlying development work and have a great lineup of products coming to market the fiscal year.

We're also rationalizing our overall SKU count to improve efficiencies and lower working capital requirements by sun setting those products that have been slow moving and releasing our new products in fewer color options.

Taking a platform by platform look at our plans let me begin with console gaming, which is centered on an exciting launch of audio products. We recently launched the Tritton Katana HD 7.1 DTS surround sound gaming headset, the first HDMI powered gaming headset and a 2016 CES Innovation Award Honoree.

The Tritton Katana is the first headset and an exciting and innovative line of new Tritton headset that we plan to have available in stores for the 2016 holiday season.

We'll be releasing more information about the new headsets in the next couple of weeks, but I'm pleased to report that reaction from U.S. and European retailers regarding the design, quality and price point for the entire new train audio range has been overwhelmingly positive.

We've already received notification from a large mass market retailer that they've selected seven SKUs including six Tritton headsets for the fall lineup in their U.S. stores.

We will also be showcasing two of those Tritton headsets on listening stations in 2,000 of those stores. This is an incredible accomplishment for the team and a testament to the potential of our Tritton brand as we've not sold any products to this retailer for in-store placement since 2014.

I’m confident the increased retail placement this holiday season will help us return to growth in our audio business and further establish Tritton as a leader in the gaming audio space.

Besides audio, we also developed specialty controllers for consoles. During the first quarter, we successfully launched our next generation of Fight 6 alongside the highly anticipated Street Fighter 5 video game for Playstation 4. We worked closely with CapCom and leaders in the fighting game community to deliver and unrivaled range of products designed to make gamers of all skill levels better fighters.

Because of our commitment to quality, Mad Catz remains the fight stick of choice for many professional gamers in the fighting game community, serving as a great reference point for many of the more casual gamers in that space.

Let's move on to PC gaming. Since launching our R.A.T line of gaming mice five years ago, we've been working hard on what comes next. This past holiday we started shipping the R.A.T Pro X and R.A.T Pro S gaming mice.

The R.A.T Pro X has a MSRP of $199 is the flagship product of our new R.A.T range. It is designed to be the world's most advanced gaming mouse with groundbreaking features, patent pending technology and a level of customization never before seen.

The R.A.T Pro S designed for e-sports combines the aggressive look of the R.A.T Pro S was featured E4 games demand, blistering speed, lightweight design and user customization option. In addition to R.A.T Pro S, retailers that are much more affordable at $69 price point, which we believe is the high volume price point for gaming mice.

We also recently started shipping the R.A.T 1 gaming mouse, which was a distinguished 2016 CES Innovation Award Honoree for Outstanding Design and Engineering. At an MSRP of only $29, the R.A.T 1 is the most affordable gaining mouse in our iconic R.A.T range and we believe it has the potential to be a high volume product for mass market retailers.

I’m pleased to say the large mouse market retailer that I mentioned previously, has also selected the R.A.T 1 for its in-store fall lineup. We look forward to announce the additional R.A.T gaming mice over the next few months and believe our newest R.A.T products across multiple price points will reintegrate sales growth in this category.

We're also very excited about the growth opportunities for our Saitek brand and slight simulation and beyond. In particular products such as our X-56 Rhino expand into a full market for Saitek to other stimulation games, such as space simulation as well as virtual reality.

I've mentioned previously, we have an agreement with Cloud Imperium games to create dedicated gaming hardware for the highly anticipated Star Citizen Space Simulation game and we expect those products to begin shipping before the holiday season.

While we had some supply issues in fiscal 2016 that limited our Saitek sales, we've successfully addressed these issues and shifted production to a new manufacturer for fiscal 2017. Although we're still trying to catch up to demand, supply is starting to improve.

Virtual reality is another exciting market opportunity for us and our product development team is researching and design product concept for this space. We’ll have more to say about our expectations to address this opportunity in the coming quarters.

This brings me to gaming on product devices, which we believe still represents a strong growth opportunity, but without the need for significant additional development resources given our current product range.

A few years ago, we started developing our range of games smart products, which are designed to bring a core gaming experience, one that you would expect from a console or TC gaming to smart devices.

Previously we announced that Mad Catz joined the design for Samsung program. As the program's first company to offer traditional video game controller hardware, we’ve developed a range of game smart mobile gaming products optimized for Samsung Smartphones and tablets, including our Mad Catz microcontroller Bluetooth wireless gaming controller, optimized for Samsung mobile devices as well as virtual reality gaming with VR, which is shipping now.

In summary, we're pleased with our progress over the past couple of months. We remain optimistic about the growth opportunities ahead of us and believe we’ll have price product offerings and overall infrastructure to achieve growth.

Our focus and our goal is to bring the market compelling product with the right design, features and price points that leverage the increasingly participated game play and improve and heighten the gamers’ experience.

With that, I’d like to turn the call over to Dave to provide an overview of our fourth quarter and fiscal 2016 financial results. Dave.

David McKeon

Thanks Karen. Net sales for the fourth quarter were $17.1 million a 4% increase from the fourth quarter last year, while net sales for the full year were $134.1 million or 55% increase from the prior year.

The overall increase in net sales for the fourth quarter was driven primarily by sales of Street Fighter V products, which started shipping during the last half of February 2016. While the increase in net sales for the full year was driven primarily by sales of Rock Band 4 products, which started shipping during the last half of September 2015.

The sales of Rock Band 4 products, which are specifically designed for be Xbox One and Play Station 4, represented approximately $2 million of our net sales for the quarter and $72 million of our net sales for fiscal 2016 and were a significant driver of the growth in sales of products developed for next generation console.

Excluding sales of Rock Band 4 products, sales of products designed for the next generation console grew a 111% in the fourth quarter and 35% for the full year driven by strong sales of audio and fight sticks. Overall, sales of products designed for next generation consoles represented 62% of our fourth quarter sales and 70% of our full year sales.

We expect this category to remain a high percentage of our business as the installed base in Xbox One and Play Station 4 consoles continues to grow. The install base of the new consoles was now around $62 million, which represents only about 40% of the projected installed base of over $150 million by the end of 2018, highlighting the significant opportunity ahead for our console of products.

Over the past couple of years, we discontinued the majority of our products designed for legacy consoles and as a results, sales of these products were represented only 1% of fourth quarter and full year sales.

Similarly, sales in universal products, which represented 8% of net sales in the quarter and 7% of net sales for the year, continued to decline as the category includes products that worked universally on the legacy and new consoles.

Although we have some new products in this category, we believe the growth opportunity to lye more in products marketed for specific platforms.

As Karen mentioned earlier, we’re very excited about our Tritton Console Audio products that we will be releasing this year and expect it to be a strong growth category in fiscal 2017.

Outside of console gaming products, sales of products designed for the PC and MAC, which represented 25% of fourth quarter sales and 19% of our full year sales were down significantly compared with the prior year, due primarily to aggressive price competition in mice and keyboard, particularly in EMEA and in aging product line.

Additionally supply constrains in our Saitek flight simulation products had a negative impact on sales. Going forward, we expect to drive sales growth in this category on the back of improved supply and increased demand for our Saitek flight simulation products as well as the refresh of our R.A.T gaming mice this year.

As expected, we experience a decline in sales of products for smart devices, which represented less than 5% of our fourth quarter and full year sales, driven primarily by gaming controller sold to customer in the Asian Pacific region and our private label program last year.

However, these declines were offset partially by growth in sales of our mobile audio products and our Mad Catz branded controllers, particularly our C.T.R.L. R and C.T.R.L. I.

Looking at the results by geography, fourth quarter net sales in the Americas grew 57% to $8.8 million and represented 52% of total net sales in the fourth quarter, compared to 34% of year ago. For the full year, net sales in the Americas increased 215% to $87.8 million and represented 66% of total net sales compared to 32% a year ago.

The strength in the Americas particularly for the full year was driven by Rock Band 4, which was primarily launched in North America. Fourth quarter net sales in EMEA declined 30% to $6.4 million and represented 37% of total net sales in the quarter, compared to 55% a year ago.

For the full year, net sales in EMEA declined 17% to $38.4 million and represented 28% of total net sales for the year, compared to 64% in the prior year. Fourth quarter net sales in Asia Pacific increased 7% to $1.9 million and represented 11% of total net sales in the fourth quarter of both years.

For the full year net sales in Asia Pacific decreased 35% to $7.8 million and represented 6% of total net sales for the year compared to 14% in the prior year.

Overall, the strengthening of the dollar against the currencies of our foreign operations, had a negative impact on sales growth, as sales in local currencies are converted to fewer U.S. dollars than they were year ago.

Excluding the effect of changes in foreign currency rate, our net sales for the quarter would have increased 6% rather than 4% compared to the prior year and our net sales for the full year would have increased 61% rather than 55% compared to the prior year.

Looking forward in fiscal 2017, we expect net sales excluding Rock Band 4 to grow at double-digit growth rates, driven primarily by sales in Tritton audio products, Saitek stimulation products and our refreshed R.A.T range of the gaming mice.

Due to the $6.8 million of charges in the fourth quarter, specifically related to Rock Band 4 that Karen discussed previously, gross profit and gross margin for the fourth quarter was negative. For the full year despite a 55% increase in net sales, gross profit decreased 6% due to a decrease in gross margin to 16.7% compared to 27.7% last year.

The decrease in gross margin was due primarily to Rock Band 4, which generated a significantly lower gross margin than our other products due primarily to higher royalties, the $6.8 million Rock Band 4 charters taken in the fourth quarter, which reduced gross margin by 4.8% and increases in freight expense as a percentage of net sales.

These decreases in gross margin were offset partially by lower product returns and lower distribution cost as a percentage of net sales. We expect gross margin for fiscal year 2017 excluding Rock Band 4 sales to be between 27% and 30% although quarters with seasonally lower sales will generate a lower gross margin due to fixed distribution cost.

Total operating expenses in the fourth quarter were $8.4 million, up $2.2 million or 36% from the fourth quarter last year. The increase in operating expenses was driven by $3 million of restructuring charges, which primarily represented severances and benefits afforded to terminated employees, partially offset by restructuring related cost savings realized during Q4.

For the full year, operating expenses were $31.8 million, an increase of $6.3 million or 25% from the prior year. These increases were due primarily to the restructuring charges as well as increased marketing efforts related to Rock Band 4 including particularly cooperative advertising programs with retailers and other marketing expenses.

These increases were partially offset by cost savings realized during the fourth quarter from the restructuring activities. We expect operating expenses in fiscal 2017 on an absolute dollar basis to be more than $9 million lower than fiscal 2016 reflecting the one-time nature of the $3 million in restructuring charges and the expected net savings from the restructuring activities of between $6 million and $7 million.

For the fourth quarter of fiscal 2016, we generated an operating loss of $9.3 million, compared to an operating loss of $2.3 million last year. For the full year, we generated an operating loss of $9.4 million compared to an operating loss of $1.6 million last year.

Other income and expense, which primarily represents interest expense on our outstanding debt, foreign currency exchange gains and losses and changes in the fair value of our warrant liabilities, generated income of $285,000 in the fourth quarter this year, compared to income of $126,000 in the fourth quarter of last year.

For the full year, we generated other expense of $1.4 million compared to $789,000 last year. The increase in expense for the full year was due to higher interest expense, due primarily to the increase in the outstanding balances under our credit facilities, offset partially by an increase in the gain generated by the change in the fair value of our warrant liabilities due to decrease in our stock price.

During the fourth quarter, we recorded an income tax benefit of $1.7 million compared to $7.7 million in the prior year. For the year, we recorded tax expense of $837,000, compared to $7.2 million of income tax benefit in the prior year.

As we've mentioned previously, our income taxes and effective income tax rate fluctuates depending on which jurisdictions generate taxable income or losses. For entities that generate taxable losses, we may not always be able to record a tax benefit for those losses, if we cannot reasonably predict the ability to use the loss carry-forwards in the future.

The current year income tax expenses was a result of income tax expense being recorded on the profitability of entities for which we no longer have a valuation allowance recorded against a net operating loss carry-forwards, but no offsetting tax benefits being recorded for those entities that have taxable losses due to uncertainty and the ability to utilize those loss carry-forwards in the future.

The large tax benefit in the prior year was due to release of certain valuation allowances against our deferred tax assets, based on projections that showed it was more likely than not, we will be able to use the net operating loss carry-forwards in certain entities.

Overall, we generated a net loss in the fourth quarter of $7.3 million or $0.10 per share compared to net income of $5.6 million or $0.09 per share in the fourth quarter last year. For the full year, we generated a net loss of $11.6 million or $0.16 per share compared to net income of $4.7 million or $0.07 per share.

Moving on to our cash flow statement and balance sheet, net cash used in operating activities for the year was $6.3 million, which primarily reflects the net loss before noncash items and an increase in inventory of $7.7 million due primarily to sales of Rock Band 4 products being less than we had originally forecasted during the holiday season.

The decrease in operating cash flow was offset partially by a $13.1 million increase in accounts payable and accrued liabilities related to inventory purchases, accrued royalties, accrued severance and timing of payments.

Our DSOs were 65 days this quarter compared to 53 days in the fourth quarter a year ago and our inventory turns on the trailing four quarter basis improved to 5.7 times this quarter compared to 3.8 times last year.

As of March 31, 2016 we had a cash balance including restricted cash of $3.1 million and borrowings under our credit facilities of $16.1 million. As a result, we ended the quarter with a net position of bank loans less cash of $13 million, compared to $2.8 million a year ago and $17.7 million last quarter.

With that, I would now like to turn the call back to Karen, so that she can provide you with our objectives for fiscal 2017 as well as closing remarks after which we will open the call for questions. Karen?

Karen McGinnis

Thanks Dave. In fiscal 2017, our focus is on improving working capital, generating sales growth in our ongoing product lines, which exclude Rock Band 4 and achieving operating profitability.

To accomplish this, our global team is focused on the following strategic and operational objectives; one, designing innovative products for gamers and simulation enthusiasts. We purposely removed the word passionate and core from this objective to expand our target markets and product offerings to include all gamers.

Two, executing global launches of new products on time and on budget with appropriate assets, marketing plans and retail placements. As we all know, having amazing products is only valuable if we properly execute our product launches and our teams all over the globe are focused on making this happen.

Three, expanding retail placement of products, particularly in the U.S. and personally participate in the U.S. line reviews with major retailers and as mentioned earlier, I’m pleased that our strong product offering have already resulted in increased retail presence of our core products this holiday season.

Four, optimizing working capital and continuing a tight control of our discretionary expenses. As evident in our balance sheet, working capital is our biggest constraint right now and improving working capital will be key to successfully executing all of our other objectives.

Five, identifying opportunities for the expansion of products in adjacent and compactable categories, OEM opportunities and transactions where Mad Catz can leverage its global distribution capabilities. We've had success leveraging our capabilities in the past and we’re always open to evaluating similar opportunities.

I believe these five objectives will help us achieve our fiscal 2017 financial goals, further stabilize the company and allow Mad Catz to reach its full potential. Over the past few months, we’ve spend a lot of times meeting with employees, customers, partners and manufactures to discuss the changes resulting from our restructuring activities and our plans for fiscal 2017.

Again I’m pleased to say that the reactions, particularly regarding our new product launch in this year have been positive. That said, the next few months will remain challenging given we are in a seasonally slow part of the year and have working capital constraints.

However, our manufacturing partners continue to work with us so that we can effectively launch our product offerings this holiday season. We’re also working diligently to successfully convert our Rock Band 4 inventory to cash during the next three months.

And while we're pleased with the progress that we're making, we understand we have more to do and we’re working diligently to deliver our commitments for fiscal 2017. We look forward to providing our progress on these objectives in each of our quarterly earnings conference calls.

Before opening up to questions, I want to take this opportunity to thank our amazing team of employees who have been working incredibly hard on the objectives we successfully achieved during the fourth quarter as well as the ones that we've set for ourselves in fiscal 2017. I’m truly grateful for everyone’s dedication and passion.

I also want to thank our shareholders for their continued support. I hope today’s call has brought out vision for Mad Catz, integrator focus and also reaffirmed our deep commitment to creating value for and communicating with our shareholders.

I’ll now turn the call back to the operator, so we can answer any questions.

Question-and-Answer Session


Thank you. [Operator Instructions] And our first question is from the line of Dave King with Roth Capital Partners. Please go ahead.

Nick Meyers

Hello guys. This is Nick Meyers on for Dave King. How are you doing?

Karen McGinnis

Hi, Nick. How are you?

Nick Meyers

I’m doing wonderful. Thank you.

Karen McGinnis


Nick Meyers

Okay. First off, can you discuss in more detail the progress you’ve made with your restructuring activities and also what further opportunities you found to increase the expected savings from around $5 million to $6 million or $7 million?

Karen McGinnis

Yeah, like we talked about in the conference call, we've really looked at and I would say probably the best way to describe it, it really just sit back and said, if this is a start up organization, what should it look like? What functions make sense? Where did they make sense? Where can we get synergies like combining functions, both from just a logistics perspective and sometimes from a geography perspective? Where should we be using distribution instead of actual sales people on the street? And so, and then we just, over the past few years, the company had really grown. It was trying to scale and we were trying to scale it to be a much bigger company and so there were a lot of layers of management in the organization. So, we definitely removed excess layers of management to make the organization more nimble.

We did merge our U.S. based creative marketing services function into our product development team in the U.K. So, we eliminated those functions in the U.S. and hired a couple of people in the U.K. to supplement our existing NPD team over there.

We consolidated all of our European inventory and distribution into our U.K. operations. Previously we actually had a German distribution center as well and so we eliminated that. We decided to outsource globally our customer service function. We had already outsourced a significant portion of it outside of the U.S. and so we outsourced the U.S. function.

We also decided to go ahead and closed down our Mad Catz Branded eCommerce site. There is a lot of administration that goes along with that and quite frankly they weren’t very user friendly and so right now we are -- we’ve done a lot of work, but we’ll continue to look at it just our presence online, our own Mad Catz site and right now, we’re directing any eCommerce directly to Amazon globally.

And so that actually allowed us to save so many and made the page a little bit more user friendly. And then another example was just, we looked at the Toronto Stock Exchange and very, very little volume was traded on that, but yet we were spending many on listing fees every year. And so that was actually a pretty easy process to do that voluntary delisting from the Toronto Stock Exchange.

We’re also -- little things like reducing travel, some of the expenses just come when you reduce your headcount from 219 to 133. You're going to automatically get savings on things like travel and phone and those sort of things that are very employee related.

And then we’re also really looking at focusing our marketing spend and we’re focusing on things that really go directly to the consumer. I think I mentioned, we’ve got retail placement in a large mass market retailers and some of our marketing fund is actually going to be to have -- be able to have two of those SKUs on listening stations, just believe that that's a more effective way to spend the marketing than to participate in big booth at a trade show that no consumers can attend.

So those are some of the examples. We’re turning every rock and looking to see what's the most efficient way is that we can run the business, but still run it and be smart about it and just taking everything with just a fresh view.

Nick Meyers

Perfect. Thank you very much. That was a great color. I think you answered a lot of my questions regarding Harmonix, but how are you thinking about revenue in the next two quarters as the $8.3 million in Rock Band inventory winds down and similarly on margins since Rock Band is a lower margin product, how do you see margins trending in the first half versus the second half?

Karen McGinnis

Yes, so, and when we gave a lot -- we gave without giving number of guidance, we gave a lot of guidance. So we said, we expect revenue and really the way, you have to look at it because Rock Band is such an anomaly is, we had $72 million of Rock Band 4 inventory in fiscal 2016.

And fiscal 2017 we believe we'll sell the $8.3 million of products, but it will be at low margin. What we did is we had to write down our inventories to what we thought the net realizable value would be for that inventory. So those sales will be at neutral. It will have no margin.

So if you pull off the Rock Band 4, we believe that the rest of the business will actually grow double-digits and we believe that we'll generate gross margins from that between 27% and 30% and then if you look at operating expenses, 2016 compared to 2017, that we believe we'll get operating expense reduction of at least $9 million and that’s the $3 million of the severance cost that will naturally go away and then we are able to get $6 million to $7 million of additional operating expenses out of the business and so that's the easiest way to look at it.

Now Q1 is always a lower gross margin because you do have lower revenues seasonally in Q1 and so that's fixed distribution cost and so you'll see gross margin be lower in Q1, a little bit higher in Q2, but then definitely higher in Q3 for the holiday season.

Nick Meyers

Perfect. Appreciate it. And then finally one last question, can you discuss how you’re thinking about the gaming business at this point and how are your headsets trending in conjunction with what's happening in the industry?

Karen McGinnis

Yes, overall the gaming industry is an exciting industry right, like everywhere you read, I think people are excited about the growth opportunities in the industry. As more people play games and I was reading the other day, more people play games now than they watch movies or listen to music and so certainly it’s an exciting industry to be in.

I think for us and we talk like last year, we spent, when I look back on the last few years, we’ve got this incredible design capability and last year we spent so much time on Rock Band 4 really at the expense of the rest of the business and if you look back in the couple of years before that, we spent a lot of effort on the mobile gaming space, which we made some incredible products. We were just way too early and so I think we don’t need to spend any more development on that.

And so now this year, we’re really just focused on what I believe we should be focused on which is just the core. I think what we didn’t capitalize very well on the last couple of years was the console. We only released a few products and that worked on the next generation consoles, outside of Rock Band 4 and we definitely have great fight sticks, but we didn’t have that many audio products.

And so the team has done a great job. There is a new line of audio products. In the next couple of weeks, you’ll see a press release on that and a link to the website. The design is incredibly cool and retailers, everybody that's seen it is incredibly excited about it.

And I think it's one of the keys as to why we got the retail placements in the mass retailer. And so I’m excited about, just kind of getting back to the core of what we should be focused on.

The same with our R.A.T line of gaming mice. They're phenomenal mice. They’re just a little bit stale. And we haven't done a lot of refreshes to them and so you’ll see some announcements over the next few months in time for the holiday season. Beside the R.A.T Pro X and R.A.T Pro S and R.A.T 1, just a revitalization of the whole R.A.T line and so I am excited about that as well.

Nick Meyers


Karen McGinnis

And then Saitek though is, Saitek is a little bit different and that has a different consumer and we’ve just -- we have a great relationship with that community because we’ve developed really, realistic and quality products for safe simulation -- for flight simulation that they’ll now transfer around to space simulation and that's really just making sure that we have the right supply and that we can keep making the right products and keep up with demand there.

Nick Meyers

Perfect. Well, thank you so much for answering my questions and good luck next year.

Karen McGinnis

Thank you.


Thank you. Our next question is from the line of Ed Woo with Ascendiant Capital. Please go ahead.

Ed Woo

Yeah, thanks for taking my question. Going back to the restructuring, are you essentially completed so that everything is pretty much done or do you have any more wind down in this quarter?

Karen McGinnis

No, all the restructuring activities with the vast majority of them were headcount reductions. All of those notifications and everything were completed by March 31. We had a handful of people who've continued to transition, but even those positions are now gone.

Ed Woo


Karen McGinnis

We actually have a little bit of savings and you probably saw it when Dave was going over the numbers because our operating expenses year-over-year, we actually had a little bit of savings. So we had the $3 million in restructuring in the fourth quarter, but then we had a little bit of savings coming off as well.

Ed Woo

Great. Then going back to, you talked about some of the product opportunities going forward and I know you basically talked about virtual reality and you said there is more to come, but there is also discussions, have discussed that they're coming out with a new console for the NF speculation from the media is that market often Sony maybe coming up with kind of refresh 0.5 of the PS4 as well as the 3 Xbox One.

Where do you guys see yourself positioning for those and do you see significant investments needed to produce new products for those or do you think this is going to be refreshes.

Karen McGinnis

Yeah, I don’t and those are the things that we'll look at. We look at our product roadmaps and what we need to do. For audio, for consoles my guess is that won’t require a lot a difference and then I’m guessing that Play Station 4, whatever they do will continue that with 3 millimeter Jack, work for the audio headset.

And our development team always stays right on top of all those things, but I’m not expecting a huge development. I think we've a lot of opportunity in what we're doing right now.

Virtual reality is one of those things that I think we all have to make sure we keep our eye open, but what I don’t want to do is do what we did with mobile gaming and be so far ahead of the game that we spent a huge investment in that and made a lot of projects for that without the market being there yet.

And so -- and we’re already in that game. So, we talk about our design for Samsung mobile controller, does work with Gear VR and so we’re already there. We understand and I’m monitoring that and I just want to make sure that we’re prudent in how we spend our development resources.

Ed Woo

Great. That sounds great. Now the last question I wanted to discuss is just international versus domestic. Are all the products that you talked about, are they really more of a global launch or are you more focused either on domestic or Europe or are you going to target broad I guess releases for your products?

Karen McGinnis

Yeah, no, all of our products are international products. So it's like Tritton particularly is probably a stronger brand for us actually in Europe then it is in U.S. and it was one of the reasons that we're really focused on improving our retail presence in the U.S. because I want to try back some of that market share.

But Tritton definitely is a global launch both in the U.S. and Europe and some of in Asia. Asia a smaller part of our business and then the same with the mice R.A.T refresh, that will be global and Saitek. So it's in global as well.

Ed Woo

Great. Well, thank you for answering my questions and I definitely wish you guys good luck.

Karen McGinnis

Yes thanks Ed.

David McKeon



Thank you. Our next question is from the line of David Brigham with Brigham Investments. Please go ahead.

David Brigham

Hello. I was looking at the proxy statement. I think it was for last year and the audit fee seemed awfully high in the neighborhood of $800,000 just for the audit and perhaps other audit fees might have brought it up to $1 million or something. Am I correct, are you spending that much on audit fees and so forth?

Karen McGinnis

Yes, and as you know, my background is finance. So I turned out as a CFO of the company and actually reduced the audit fees when I first came on Board by over $100,000 in some of the way and the way that we interacted with the auditors and to see efficiencies that we kicked out of the audit.

The challenge with Mad Catz and that challenge that we have is we're in nine different countries and so with that kind of complexity both from the audit perspective and we also have statutory audits in several of those countries.

And we are complex and so we use -- we use one of the big four accounting firms. So we use KPMG. They've been the auditor for a long time and then we also used KPMG for our tax compliance and again when you are in nine different countries and you have to file tax returns in all those different countries and then in the U.S. not only the countries, but in your state tax filings, it just becomes complex.

And so I believe just having that has been my background that KPMG has been really good. They haven’t raised, like I said the first year I came, we lowered them by over $100,000 and then they've kept them flat since then, unless there was something that came out of the ordinary, but yes it’s a cost of having a complex legal structure.

David Brigham

So you’re basically a $50 million, $60 million company and you're paying a $1 million just to have the auditors bless you, is that what you're saying?

Karen McGinnis

Well we're $134 million company this year, but if we take out Rock Band, then you’re correct.

David Brigham

Well, I can’t believe that...

Karen McGinnis

The alternatives that can go with non-international firms, but then you end up having to partner those more regional firms or U.S. based firms have to partner with other international partners to be able to do their global sites and just from being a public company and the fiduciary responsibilities that go as being a public company having accurate financial statements, I do believe that the big four are the way to go when you have our complexity in our geographic…

David Brigham

Are you seeing -- are you seeing large proposed adjustments from the auditors or do they have a growing confidence in your own numbers that you produce?

Karen McGinnis

No absolutely. We have really strong internal controls. We’ve got really, really strong finance teams. You got a CEO with a finance background at the CTA that come from much larger global international companies. So are you a partner at a firm?

David Brigham

In the distant past, but I obviously looked at it.

Karen McGinnis

When I came on Board a few years ago, until I dug into the complexity and how the audit fees are actually dispersed.

David Brigham

Obviously, you looked at the question and obviously I need to trust your judgment there, but it's part of the point that it’s awfully difficult for a company of your size to be public. It’s almost prohibited, but you’re locked in. You can't afford to go private and you really can’t afford to stay public.

So here we are and I feel like I need to direct the letter to the SEC to come up with some way that smaller companies like yourself can comply without paying upwards of million dollars a year to do so, but that's something else. Good luck, thanks for the help.

Karen McGinnis

Thank you very much David.

David McKeon

Thank you.


Thank you. Our next question is from the line of Edward Ericsson, a Private Investor. Please go ahead.

Edward Ericsson

Yes, hi Karen.

Karen McGinnis


Edward Ericsson

How you're all doing?

Karen McGinnis

Good. How are you?

Edward Ericsson

Good, good. I have a four part questions, they're all short and sweet.

Karen McGinnis


Edward Ericsson

While the news that Tritton's that you’re going to be coming out with the suite, are they all going to have the new technologies that's HDMI that everybody seems to be well, most people are raving about that it's so clear that the headsets now are so clear and responsive. Second question is on the…

Karen McGinnis

Right. Let's go one at a time, so I don't forget when we get there.

Edward Ericsson

Okay. I am ready. Okay. Well, you have the HDMI?

Karen McGinnis

Yeah so HDMI, as we say before, we were the first one. We had the first HDMI headset and as you said, the sound clarity is spectacular. In our full line of Tritton audio products, including the new design, it will depend on what price points to the very lowest price point won't have the HDMI, but when you get to the mid and higher levels, then it well.

Edward Ericsson

Excellent. Question on the inventory on the selling off of the remaining $8 million, have we already taken all the hits and write-offs on that and will the sales add to our cash flow?

Karen McGinnis

Right, so to be compliant with U.S. GAAP, what we have to do is look at projections, look at what prices we think we can sell it and where we think we can sell it and that's where we got to the net realizable value of $8.3 million.

If something changes that changes those projections, then we will, one thing about an estimate in our projection, we're going to be wrong. And so we’ll either be slightly better or we could be slightly worse. It’s really going to depend on what happens between now and September 6.

But U.S. GAAP requires us to make our best estimate of the net realizable value of that inventory and we spent a lot of time and have a lot of support for why we believe that that's recoverable. And I think that’s our best estimate.

Edward Ericsson

Okay. Any inventory you have to destroy as they going to be any reimbursement from Harmonix?

Karen McGinnis


Edward Ericsson

Okay. Do you have the date for the Star Citizen controllers?

Karen McGinnis

Yeah, the Star Citizen so that's more around the Star Citizen date and they will actually be doing a lot of the marketing for the hardware that we're doing that's licensed Star Citizen and so that’s going to be closer out to the holiday, but I don't know the exact date.

Edward Ericsson

Is Samsung going to be helping to market our product?

Karen McGinnis

I think we have it on like some of the Samsung websites. They're not proactively marketing our products except for to say that we're part of their design for Samsung program. And we work very closely with them to get that criteria so that we could be part of the design for Samsung and those controllers having the different buttons on there that work specifically with the Samsung product devices.

Edward Ericsson

Okay. And last question, maybe the most important our lenders on Board would all the stuff we're doing?

Karen McGinnis

Yeah we've been -- we've been very blessed. We changed our lending facilities last year leading up to Rock Band 4. We went away from Wells Fargo and went with New Star who now has been purchased by Sterling Bank and FGI for Europe, to be able to facilitate that launch of Rock Band and get the rate facility.

Certainly we didn't meet the projections that we thought we were going to meet, but they've been incredibly great to work with and so we're very pleased with that partnership.

Edward Ericsson

Okay. So we're pretty much obvious about moving forward.

Karen McGinnis

Yeah so far.

Edward Ericsson

Thank you very much. That’s all I want to know. Have a good evening.

Karen McGinnis

Yeah. Thank you.

David McKeon



Thank you [Operator Instructions]. Our next question is from the line of Richard Ferber with private investor. Please go ahead.

Richard Ferber

Yes, good afternoon, Karen and David and thank you for taking my call. It's great to finally talk to the two of you.

Karen McGinnis

Sure, it was Richard right?

Richard Ferber

Yeah my name is Richard.

David McKeon

Hi Richard.

Richard Ferber

Yeah, I’m a shareholder of the company and I came up with a few questions that I thought that maybe I could speak maybe for all of shareholders. So here's my first -- this is more of a general question, would you say that most of the bad news is behind us now?

Karen McGinnis

I'm hoping so yes. Yeah we've taken Rock Band 4, but I also thought that was a great opportunity last year at this time and all the data head shows that consumer demand for Rock Band 4 should have been much greater than it ended up being. But that was a disappointment. It was an incredible disappointment actually for Mad Catz and we ended up taking and some large write-offs in Q4 because of it,

And because we spend so much time on Rock Band 4 that we talked about a lot of our other product categories saw decline because we didn’t release a bunch of new product.

So I hope what we articulated in the conference call is, we've got a lot of great things happening this year and so -- but if you look at our balance sheet, we have negative working capital and so that puts a lot of constraint on being able to achieve the objectives that you want to achieve because you need to make sure that you’ve got supply moving, you need to make sure that you can do everything that you want to do.

And so yeah, we believe that we’re doing all the right things, but it’s a challenging environment no doubt.

Richard Ferber

Okay. Nice. Last year the buzz before Christmas was Rock Band. What would you say is the buzz this year? Is it Star Citizen or is it just a combination of many items? In other words what I am asking is, is there really one higher item like Star Citizen that could get this company rolling?

Karen McGinnis

I think our best results this year, so Star Citizen is exciting, Space Simulation is a whole new genre that's exciting, but it’s going to be small compared to -- that’s one product, it's one licensed product that rest of our Saitek Flight 6 will also do really well. There is other space simulation games as well.

I really think it’s going to be our new Tritton line. I think we’re incredibly excited, the mass market retailer that we got in to not be in that retailers since 2014.

And for that to go and to the line reviews and have them select not just overall will try one of your skews, but to let seven skews. Six of those are Tritton headsets and they were very excited about what we’re doing with the new design.

Some of them are current products but they selected a range in different price points and then they’re also doing the new R.A.T 1 mouse and so I think in some of our other retailers, they're also really excited about the new design and so even in retailers that we're already in, I think we'll be able to expand by a skew or so.

And so I think it’s going to be the Tritton audio that will be a nice surprise that will help us get that double-digit growth outside of if you exclude Rock Band 4. And then the R.A.T refresh, if you look at our financial results, you can see that our PC and MAC or our mice and keyboards actually continue to decline the last couple of years and it’s not because are not great products, they're just stale.

And so we’re doing some things to those that I think will not require huge development efforts to climb a little bit, but that actually bring that up to things that are -- that consumers will be quite excited about.

Richard Ferber

Okay. There is only one question I have on the balance sheet and that is actually the most important item to me is the cash. Now I know the previous caller asked this, but let me phrase the question a little differently.

Will we really have access to cash going forward so that we could fund these future product developments and marketing because I’m little worried when we say capital constraints, working capital constraints, are we -- are we on good footing with our lenders?

Karen McGinnis

Yes we're in incredibly good relationship with our lenders, but you have to remember those are asset based lending facilities. So both facilities, both the U.S. and the European ones, so they lend based on available inventory and they lend based on available accounts receivables. And there is different calculations that go to that. And so that's the amount of money. So we borrow to full capacity most of the time on this facilities.

Richard Ferber

Okay. Now, are we in any -- have we -- has the company violated any covenants? So we don’t have any problems there?

Karen McGinnis

Sorry. No we’re not in violation of any other covenants. We only have financial covenants in the U.S. facility with Sterling, but no, we're in compliance with those covenants.

Richard Ferber

Okay. And I have one last question, as I’m sitting here, I’m looking at my computer, I’m looking at prices of stocks, it’s about $0.15 a share right now, but on low volume.

My question is this, the lack of insider ownership in Mad Catz is concerningly notwithstanding new talents, the rest of the port only has less than 100,000 shares. Can shareholders expect any insider purchases in the coming months so that you can relay to us that you have confidence in the company?

Karen McGinnis

I could tell you that I have confidence in the company. I think insider purchases, there is a lot of dynamics that go into that. It’s a personal decision for one, but also we can’t do insider purchases or trades when we have material non-public information.

And so there have been lots of times during negotiations with front vendor, new product launches or things that we’re doing or establishing our restructuring plan that would have prohibited.

And so, there has been a lot of time that there haven’t been opportunities for insiders to buy, but to say whether you can expect it, I think that's going to be a personal decision for the people that are insiders and assuming that they actually have the ability be able to do that under the trading policy.

Richard Ferber

Okay. And actually I have one last question, I noticed on the website that you have some career positions that you’re looking, how are those positions working at, have you filled those positions?

Karen McGinnis

Well they’re open, that means we haven’t filled them yet. And so during the restructuring like I said, I think one of the things that we did is we moved our U.S. based creative marketing services teams. So people that did like packaging and A-Plus content, video, those sort of things, we moved that whole department and consolidated into our MPD Group.

And so then we need to be able to supplement that with a couple of new hires. The net-net is actually a pretty substantial savings because we had quite a few people in the U.S. based operations.

And so you’ll see those and then with any restructuring occasionally you’ll have someone that leaves on their own and you need to go ahead and replace those positions or normal attrition even.

Richard Ferber

Okay. Well really that’s all I have to say, I wish you the best. I’m confident that we have two CFOs actually working because I have more, I have a lot of confidence in two you. I wish the both of you the best of luck.

Karen McGinnis

Thank you.

David McKeon

Thank you.

Richard Ferber



Thank you. And there are no further questions. Ms. McGinnis, I’ll turn the call back to you for your closing comments.

Karen McGinnis

Thank you, operator and thank you all for joining us on the call today. We look forward to updating you on the progress when we host our fiscal first quarter 2017 call in early August. In the mean time, if you have any questions, please contact our Investor Relations firm, which is JCIR at 212-835-8500. Thank you.


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

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