PolarityTE Inc (PTE) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter and fiscal 2005 Majesco Entertainment Company earnings conference call. My name is Bill and I'll be your conference coordinator for today.

[Operator Instructions]

I would now like to turn the conference over to your host for today's presentation, Ms. Mary Magnani. Please proceed, ma'am.

Thank you very much for joining us today as Majesco will provide an overview of our fourth quarter and year-end financial results. Before we get started, I'll provide you with the Safe Harbor Statement.

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27 of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934, also as amended.

These forward-looking statements may be identified by reference to future periods, or by the use of forward-looking terminology such as may, will, intend, should, expect, anticipate, estimate or continue, or the negatives thereof or other comparable terminology.

The company's actual results could differ material from those anticipated in such forward-looking statements due to a variety of factors. These factors are discussed in the company's filings with the Securities & Exchange Commission. 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 the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

On our call today, we have Jesse Sutton, Majesco's President, John Gross, our Chief Financial Officer. Jesse will handle the opening introductions, John will review the financials, and Jesse will conclude with the summary and outlook.

Management will not be taking questions on the call today. I will now turn the call over to Jesse Sutton.

Thanks Mary, and welcome everyone to our earnings call. Today we will be reviewing our fourth quarter and year-end financial results and updating you on our strategies.

The second half of 2005 was very difficult for us. At the outset of last year, our goal was to become an active player in the front line console-game market. [Coming off the success] of blundering, we did our best to use the capital we raised to move [Selector School] by investing our money and time into developing and marketing premium console games as with Psychonauts, Advent Rising and others.

While we believe our efforts to produce quality products, Psychonauts in particular, has reaffirmed by the extremely positive reviews and ratings that we've seen worldwide, our premium titles severely underperformed at retail.

Since we last spoke in September, we have seen widespread weakness across the video game publishing industry as the sector enters the hardware transition. As a result of the general weakness in the sector, along with the rising costs of developing and marketing next-gen games, we have concluded that Majesco's current resources do not allow us to effectively compete in the big budget console-game marketplace.

Accordingly, we have revised our product strategy and decided to focus our current efforts primarily on the various hand-held systems rather than on next-gen consoles as well as leverage our position as a leading publisher of mass market value games.

Hand-held and value games typically require lower capital investment and shorter production cycles than games for home and next-generation home consoles. This renewed focus will allow us to introduce a wide array of products with a quick time to market for our customers as well as allow us greater overall flexibility to pursue new opportunities in the interactive entertainment market.

In conjunction with our shift in strategy, we evaluated our existing portfolio of premium console panels through the government and decided to sell off our rights to or cancel a number of these titles. In doing so, we were able to both raise capital and significantly reduce our financial obligations going forward.

The recent sale of the premium titles, The Dark Mist and Ghost Rider, as our first step towards refocusing our publishing efforts away from premium console titles and back towards hand-held and value where we have historically done our best. This sale completed after our fiscal year end not only brought in $8 million, but significantly decreased our monthly financial obligations we were making to the development and marketing of these panels.

The further decrease our financial obligations we've cancelled developments of other titles such as Taxi Driver, Demonic and other unannounced titles. Cancellation of these projects also substantially reduced our financial obligations going forward by in excess of $30 million.

Going forward, Majesco's focus will be to deliver quality console games that sell for under $20.00 to the market place and publish premium as well as value-titles for hand-held systems such as the Sony PS2 and the Nintendo DS and Nintendo Game Boy theme. This focus will be complimented by future TV Arcade power as well as being opportunistic in embracing emerging market trends.

We will try and maximize our potential by leveraging our strengths and 19 years of experience in the video game business. We have a long history in the value games area and external success here in the past. To date, most of our dialogue with investors has been focused on premium console games, Game Boy advanced video and digital [inaudible] peripherals.

Now we want to take a few minutes to provide you with a little more insider strategy for [guiding] video games as well as for hand-helds. [Inaudible] advantage of these [inaudible] value products are as follows, lower development costs compared to current and next-gen console systems, minimal marketing investment, less time to market, mass market appeal, attractive impulse buy, retail price points. These products are typically developed for the Game Boy advance for DS, but are not limited to these platforms. They generally provide us with approximately 30 to 40% margin. Development costs for our value products usually fall between $50,000 to $500,000. Dramatically lower than the 5 to $50 million of development costs related to a next-generation front-line game.

In regards to titles for Nintendo DS and Sony PS2 and Nintendo Game Boy [advance] we believe the advantages to focusing on these platforms are as follows, relatively low development costs, less than current and next-gen console systems, a growing installed base, enabling the sweet spot of new hand-held platforms that will be over the next two to four years.

The installed base for Sony's PS2 is approximately six million in the U.S. and growing. Nintendo recently announced that the installed base for the DS has reached 13 million worldwide and that Nintendo DS was the fastest selling video-game machine, ever, in Japan. We expect this success to carry over to the U.S. market.

And last but not least, there is still a huge North American installed base of over 30 million Game Boy games owners. This is still a very active user base and Nintendo continues to support the system with actual software and has kept the line fresh with new looks and models.

According to MPV, we have been among the top-five publishers in the hand-held market in each of the last two years. We are having great success with Game Boy Advance products and we believe we can build on that externally to create exciting products at all price points for the DS and PS2.

In addition, we plan on exploring initiatives in the digital download, casual online and mobile entertainment market. These are emerging market segments where the value to entry are relatively low, which may become more significant in the future.

So why a shift in strategy? Well, we believe that the intensely competitive next-gen console market will be won by large publishers with significant budgets to develop and market their games properly and the ability to spread the associated risk over a larger product portfolio. At this time, Majesco does not have the resources to effectively compete in this market.

The history of Majesco points to an innovative and nimble company with great reselling relationships. These core strengths are what we will focus on in 2006. In addition, our experience with [IMs] such as Game Boy Advance video line and our TV Arcade line has proven that we can successfully bring new and innovative products from conception to market in a relatively short time frame.

What will this mean for Majesco in the future? We have been publishing value products for many years, so we have never really gotten out of the business. Further, as we continue our transition away from premium console games, we will be able to focus our resources on bringing innovative value in hand-held products to the market.

For now, this means a lower revenue rate than we would have expected if we continued pursuing the strategy of the company of front-line next-gen console publishers. However, on the positive side, it also dramatically lowers our costs specifically in development and marketing costs.

Additionally, we believe this strategy is prudent. As we enter the heart of the console transition, the competition for consumer's discretionary spending grows. Our [inaudible] focus will allow us to leverage our strengths and better navigate through the ongoing transition.

I will discuss our future outlook in more detail after John reviews our financials. Now I would like to turn the call over to John Gross, our Chief Financial Officer, to provide a quarterly and year-end financial results. John?

Thank you, Jesse. First, I'd like to remind you that the results we'll be discussing are unaudited. Before I review some of the detail of our results, I thought it would be helpful to give an overview of recent events. The results we are reporting today were dramatically impacted by our recent decision to change our strategy and shift our product focus away from capital intensive, premium console-games in order to focus on publishing less costly hand-held and value products.

This is not to say the results aren't largely a reflection of the performance of many of the company's products during the year. This decision just served to increase the magnitude of the operating loss.

The strategy shift impacted several areas of our financial statements, including reducing capitalized development costs on our balance sheet and contributing over $26 million towards our loss for the year. The effect on our income statement was three-fold. We recorded a slight loss on the sale of Ghost Rider in The Darkness, we wrote off $9 million in costs for titles that were cancelled, and we recorded losses on titles to be published in 2006, where we do not expect the revenues to fully cover the costs. All of these charges fall under "Other Expenses".

As Jesse indicated earlier, during the second half of the year, we had several premium console games that severely underperformed, and as a result the marketing and development costs were not covered by the revenue we received or expected to receive. In addition, our financial resources were constrained by the need to provide price protection to our retail customers to help them with slow moving inventory and our own ongoing costs of being in development.

This series of events led us to evaluate our remaining game line-up. We then determined given market conditions, the ongoing costs of developing some of the products we had in the works surpassed the probable revenue that would come in. We then proceeded to sell some of the games we had in development which brought in cash and lowered our monthly obligations.

We also had some titles which we ultimately decided to cancel. The decision to cancel games was made as part of our change in strategy, as Jesse mentioned. Lastly, we had a few games which were late in the stages of development and therefore made sense for us to keep and publish ourselves. However, we recorded a charge for the excess of the costs above the expected revenue. All of these actions resulted in write-down of $26.3 million of development costs of which $20 million was in the fourth quarter. Which is the principal change from the guidance of a 40 to $45 million operating loss for the year that we provided in September.

Although these decisions caused us to incur substantial non-cash charges we have avoided more than $30 million of future cash outlays for development, license fees and marketing for which we would have been obligated to pay had we completed all of the products we had in development. Not only will our decision to change our focus relieve us from the aforementioned obligations, but we believe it will have an ongoing impact on software development costs, marketing spending and general and administrative expenses.

For 2006, we expect an amortization of capitalized software costs will be substantially lower due to our shift in focus to value and hand-held games, which require significantly lower development expenditures over shorter time periods.

Our selling and marketing and general and administrative expenses in 2005 were in line with our previous business plans. Going forward marketing will be dramatically lower as the products we plan to sell do not require a large amount of marketing support and media expenditures. As we mentioned in our press release we have implemented cost saving measures including a head count reduction in excess of 20% of our staff.

The restructuring was intended to align our overhead to support our revised plan. Now I will briefly review some of the specifics of our unaudited results. The company reported net revenue of $4.6 million for the 2005 fourth fiscal quarter compared to $45.3 million reported for the same period in 2004 and $59.7 million for the 2005 fiscal year as compared to $121 million in fiscal 2004.

Operating loss was $34.4 million for the 2005 quarter versus an operating income of $5.6 million for the same period one year ago. For the year the company reported an operating loss of $70.2 million versus an operating income of $12.1 million in fiscal 2004. I will now turn the call back over to Jesse. Jesse?

Thank you, John. Attending to our outlook, as you have heard the many other video game publishers, this is a very unsettling time in the industry. At Majesco, it will be just though the practice of getting back to what we do best.

That said, while we will not be providing specific guidance on today's call we do want to provide you with some idea of the size of our business going forward. We believe our net revenues for fiscal 2006 should come in roughly below 2005. Our product mix will be heavily weighted on the value Game Boy Advance and DS. Some DS products at the $30.00 price point rounded out with a few PSP titles in the $40.00 price point range.

Included in our 2006 line-up are the following titles-- Inspected for the PSP, Age of Empires for the DS, Majesco's Three-in-One Sports Pack for the Game Boy Advance, Super Black Bass Fishing for the DS, [Megochance] for the DS, Bust-A-Move for the PS2, [Yoda Year] for the DS and the PSP and [Mega Assault] for the DS.

The first half of the year still includes the release of our remaining front-line console games, including Aeon Flux between the [inaudible], which is scheduled to release in the third quarter of 2006.

[Inaudible] the industry and will be unsettled for the next few quarters as consumers migrate from current generation consoles to the next-gen. The bright side to a transition period is that the playing field tends to be lowered, as we believe consumers become more value oriented, creating opportunities for publishers like Majesco that can offer a wider array of value digital entertainment products.

We are moving forward with a strategy that allows us to be flexible and adjust to the changing market place. Our plan revolves around reducing our capital requirements and leveraging our strength and experience, while remaining opportunistic in embracing new opportunities.

We will remain focused on navigating through this hardware transition while producing high-quality value products and continuing to innovate and embrace new opportunities in the digital entertainment space.

We believe this will be better--this will better enable Majesco to be competitive, while at the same time substantially reducing the capital requirements. As I said before, we understand the challenges of this industry; however, we are passionate about what we do and are committed to succeeding in this business.

We thank you all for joining us today. Goodbye.

Thank you very much, sir. And thank you, ladies and gentlemen, for your participation in today's conference call. This concludes the presentation and you may now disconnect. Have a good day.