PolarityTE Inc (PTE) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Majesco Entertainment Company Fiscal First Quarter 2007 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Ms. Mary Magnani. Please, proceed.

Thank you. Thank you very much for joining us today as management provides an overview of Majesco's first quarter results. Before we get started, I'd like to provide the Safe Harbor statement. As a reminder, this conference 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 events of actual future results to differ materially from the expectations set forth in the forward-looking statements.

Factors that could cause actual results to differ materially are specified in the company's annual report on Form 10-K for the year ended October 31, 2006, and its other filings with the SEC. The company does not undertake and specifically disclaims any obligations 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 Interim Chief Executive Officer; John Gross, our Chief Financial Officer; and our new Executive Vice President of Operations, Gui Karyo. Jesse will handle the opening and the introduction. John will review the financials, and then Jesse will conclude with a summary and outlook.

I will now turn the call over to Jesse Sutton. Jesse?

Thank you, Mary. Good afternoon, and thank you all, for joining us today. For the first fiscal quarter of 2007, we reported net revenues of $14.5 million. As expected, and as we mentioned in our last call, due to our shift in strategy away from high-cost premium games, net revenues for the quarter were lower than 2006 first quarter net revenues of $21.6 million.

The first quarter of 2006 included $9 million of high-cost premium games, such as Aeon Flux, Infected, and Psychonauts, which was launched internationally during the quarter. In contrast, this past quarter, we launched games that have lower cost associated with them. And as a result, less [risk]. We intend for 2007 to be a year of implementation for Majesco. And we have hit the ground running in the first quarter.

We have made great strides in transition of our business away from big-budget video games, to a more balanced product portfolio comprised mainly of easy-to-play, affordable games for the mass market, which going forward we will refer to as our mass market strategy. In line with our revised vision, we have chosen to initially put the majority of our resources behind developing games for the Nintendo DS and Wii platforms in 2007.

In the first quarter, games developed for the mass market, including Cooking Mama, and the brain games Beta Wave and Gamma Wave, were the driving force behind our stance. In fact, during the first quarter of 2007, new release revenue was 47% of total net revenue with mass market revenue accounting for 99% of new releases, compared to 18% of new releases revenue in the first quarter of 2006.

We shifted our strategy with the intention first of focusing on what we believe to be where the highest growth segments. In conjunction with this, we turned our focus to reducing the risk associated with publishing costly games, reducing development and marketing requirements, while continuing to make compelling products. And we have done just that.

During the quarter, we reduced our operating loss from $2.1 million in the first quarter of 2006 to $182,000 in the first quarter of 2007. Our strategy for 2007 involves publishing products targeted at the mass market. We believe that the demographic for video games is growing, as is represented by the strong growth trend over the past several years in casual game playing online and on wireless devices. This is further supported by the significant success of the Nintendo platforms, particularly the Wii, which is placing emphasis on the fun game experiences and family-oriented content.

Consumers in all demographics have very little leisure time. And the time they do have is available in smaller chunks. Casual, easy-to-play games fit this busy lifestyle. This category of gaming is bringing new players to the market. For example, the female demographic is the fastest growing demographic according to the ESA.

One component of our growth strategy is to create products that bridge the online game experience to the console platforms by creating retail versions of popular online titles, such as Cake Mania for the Nintendo DS. With their mass market appeal and user-friendly functions, we believe that the Wii and DS are excellent vehicles to drive online game players to the console, and that the popularity of these brands will resonate with consumers at retail.

As we look forward to building a catalog of games in this category, we are placing an emphasis on fun, simple play dynamics that are appealing to customers of all ages and genders. We believe these types of games will eventually become a center of family entertainment.

And we see the trend of women's growing acceptance of and interest in video games as influencing purchase patterns, and therefore increasing adoption of video games as a family activity. As such, our strategy involves publishing products targeted at this market via a variety of platforms for the remainder of 2007. We look forward to announcing more titles in this category throughout the year.

Now, I'd like to turn the call over to John, so he can take you through the financial review. John?

Thanks, Jesse. And good afternoon, everyone. Net revenues for the quarter of 2007 were $14.5 million. As Jesse mentioned, this is a decrease from the $21.6 million reported for the same period in 2006, which included the $9 million of sales related to the higher-priced, big-budget games we sold during that quarter, like Aeon Flux, Infected, and the international distribution of Psychonauts. The decline was expected as we transition away from those games.

Looking in more detail at our revenue mix, our total net revenues were 47.5% generated from new releases, 29% from catalog sales, and 20% from Dance Dance Revolution, known as DDR, products which we acted as the manufacturer for a third-party publisher. During the first quarter, nearly all of our net revenues from sales of new releases were from products targeted at the mass market.

Last year during our first quarter, net revenues consisted of 51% from new releases and 38% from catalog business with the remainder from other products. Of the new releases, 18% was attributed to the sale of games targeted at the mass market. As for our geographic mix, 86% of our net revenues for the first quarter were domestic, and 14% were from international.

This compares to 81% from domestic and 19% from international in the same quarter of last year. The decrease in international sales was primarily driven by our shift away from the higher-priced, higher-cost games, such as Psychonauts. Cost of sales was $9.9 million which included $2.5 million of expenses related to the manufacture of DDR. This compared to $13.7 million in the first quarter of 2006. We don't anticipate having any significant revenues from the manufacture of DDR for the balance of this year.

Most significantly, we reduced development and licensing costs in the quarter as a percent of sales by 6.5 points, from 19% last year to 12.5% this year, reflecting the direct benefits of our new product focus on less capital-intensive games. Gross margins were 31% for the first quarter of this year, compared to 36% last year. The decline in margin was due to the low DDR margin, which represented 20% of our net revenue.

There was no DDR in the first quarter of 2006. Additionally, first quarter 2006 margins benefited from the sales of the aforementioned big-budget premium titles for which significant development costs had been written off in the fourth quarter of 2005, thereby benefiting 2006. For the year, we still expect significant improvement in our gross margins over last year, as the higher margin Wii and DS products are expected to be the majority of our revenues for the balance of the year.

We're excited to report that we reduced operating expenses by more than 50% to $4.7 million from $10.1 million in the first quarter of last year. Last year's expenses did include a $2.4-million charge for impairment. But the comparison is still extremely favorable, even without that. In fact, we effected decreases in each category of expense.

Product research and development costs for the quarter were $608,000, down from $768,000 in the same period of 2006. These are the fixed cost for our quality assurance, and the department which physically evaluates, tests, and oversees development. Our actual software development costs are outsourced development, and included in cost of sales.

Selling and marketing expenses decreased 62% to $1.7 million, from $4.5 million in 2006, as games published under our current strategy require less marketing spend. As a percent of sales, sales and marketing declined from 21% last year to 12% this year, again as a direct consequence of our shift in strategy. These selling and marketing costs include both a fixed cost, primarily related to employees, for the sales and marketing department as well as the variable and selling marketing costs.

G&A decreased $2.3 million in the first quarter of 2007 from $2.4 million in the same period of 2006. The G&A for the first quarter of 2007 includes $400,000 of charges related to stock-based compensation expense, compared to $135,000 in the first quarter of last year. As a side note, our fixed cash costs, which are included in both G&A and sales and marketing, run at about roughly $3.6 million to $4 million per quarter.

The operating loss was $182,000 for the first quarter versus an operating loss of $2.1 million for the same period last year, which again included impairment charges of $2.4 million related to the big-budget games. Interest expense and financing costs increased to $744,000, compared to $445,000 in last year's first quarter, as we utilized more expensive purchase order financing to manufacture of greater percentage of our products in an effort to free up cash with our factor.

The net loss for the first quarter of 2007 was $926,000 or $0.04 per share, compared to a net loss of $2.6 million or $0.12 per share for the same period last year. Turning to the balance sheet, cash and cash equivalents increased to $3.9 million, from $3.8 million at the end of fiscal 2006. We recognize we're not out of the woods yet.

However, at the current level of revenues in our forecast, we believe we have sufficient capital resources from operations and existing financing arrangements to meet our requirements for the next 12 months. However, should we fail to achieve the revenues in the forecast, we would need to either reduce operating expenses and/or seek additional financing.

Receivables from our factor were $1.1 million, which represents gross revenue sold to the factor of $9.3 million, [less] allowances of $3.3 million, and advances from the factor of $4.9 million. This compares to $1.2 million at the end of the year which represents gross receivables sold to the factor of $14.4 million, less allowances of $4 million and advances of $9.1 million.

Inventory was $3.3 million at the end of the quarter, compared to $2.4 million at the end of the year. The increase is attributable primarily to the purchases of first quarter releases including Brain Boost Gamma and Beta Boost, and orders of Cooking Mama, all of which are anticipated to sell in subsequent quarters. Our focus is on making smart decisions selling mass market, easy-to-play games with lower cost and less risk and moving towards profitability.

Finally, I would like to note that on March 16, 2007, we were notified by NASDAQ as of March 15, 2007, the company did not comply with the ten consecutive business day $35 million market cap requirement for continued listing on the NASDAQ capital market. As a result, the company was granted a 30-calendar-day period to remedy the deficiency. And we intend to submit a plan to NASDAQ.

I will now turn the call back to Jesse. Jesse?

Thanks, John. Looking to the second quarter of 2007, the core of our lineup will include a variety of titles, primarily for the DS and Wii platforms and focused on the mass market. Our line up for the second quarter includes; tomorrow, we will launch Cooking Mama Cook Off for the Wii. Follow up to its award-winning Nintendo DS predecessor, Cooking Mama Cook Off is an entertaining blend of mashing, slicing, chopping, stirring that turns the Wii remote into the ultimate cooking tool. For more information, please visit www.cookingmamacookoff.com.

In April, we will launch Bust-A-Move Bash! for the Wii, an addictive, next-generation, bubble-bursting action based on the well-known Bust-A-Move franchise. Finally, also in April, we will launch Cake Mania, a fast-paced, cake-baking game for the Nintendo DS. The game is based on Sandlot Games' leading online games that has been downloaded 35 million times worldwide, and earned both the iParenting Media Award and the 2006 Casual Game of the Year Award from Yahoo! Games.

Moving forward, our ultimate strategic vision is to create quality, easy-to-play games, targeted at the mass market. We intend to publish products based on popular licenses and genres, as well as our own internally-created IP that can be leveraged across leading platforms and other digital entertainment [outlets].

Turning to our 2007 outlook, looking to the remainder of the year, the expectations we shared in our last call have not changed. We continue to expect net revenue for 2007 to come at approximately 10% to 15% below 2006 net revenue of $66.7 million. In addition in 2007, we anticipate 65% to 70% of our net revenue will be generated form new releases; 20% to 25% will be generated from sales of our catalog; and the balance will be from other digital entertainment products.

Before I conclude, I would like to review some management changes. We are very excited Gui Karyo has joined us as Executive Vice President of Operations. Gui was previously the President of Publishing and EVP of Operations at Marvel Entertainment, where he played a critical role in the restructuring there. Gui has been working with Majesco for the last six months as a consultant, and has been quite instrumental in helping us redefine our strategy and chart our course for the future. We are very excited to have him at Majesco.

On another note, I would like to thank my father, Morris Sutton, for his years of dedication to the company. His job at Majesco 20 years ago was positioned to begin this business by selling close-out video games, and has established himself as a leader in the industry. As we announced last month, he will take on a strategic consulting role, and will support the sales team by managing select key accounts, and utilizing an extensive network of entertainment industry contacts to bring revenue-generating opportunities to the company.

Finally, as noted last quarter, management is reviewing its focus on investor relations. As such, we have engaged Lippert/Heilshorn & Associates with the goal of communicating our strategic message and reinitiating investor outreach. LHA can be reached at 415 433-3777. In conclusion, during the quarter, we continued to make progress in transitioning our business. We have a strong team in place. And we're focused on developing fun, mass market games for DS and the Wii. And we will continue to be opportunistic with our product climate.

I will now turn the call over to the operator for questions. Please note, we will not discuss any forward-looking information beyond what is included in our prepared remarks. Thank you. Operator?

Thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from John Taylor with Arcadia Investment Corporation. Please proceed.

Hi. I've got two questions, one real quick, so maybe it doesn't come under [that guidance] breaking rules here. Could you give us a sense of what your shipments are on Cooking Mama to date on the DS just to kind of put that into perspective for us? That's the real quick one. And then a bigger question, maybe for you, Jesse. Your sales and marketing costs are coming down.

You're about to release a bunch of new product on the market. A lot of it is sort of nontraditional and so on. Could you talk a little bit about your marketing outreach, how you can grasp behind Nintendo a little bit on this? And kind of, what vehicles you're using to get people's attention, what outreach methods you're using? And I'm assuming that we shouldn't see the sales and marketing line go up too much, because you just talked about managing that. So maybe could talk about those issues a little bit. Thanks.

John, just as a matter of fact, we don't typically disclose the unit sales on our products, but I'll turn over to Jesse to handle the second part of the question.

Sure. Regarding the marketing of some of the new release products we have coming out in the next quarters and in general, we've decided to take a marketing strategy where we'll place most of our promotion as a retail level. We find that games of this sort, of the nature of casual games that we have, more geared towards direct consumer contact with retail given from feedback from the retail is best used directly at the retail level.

Your next question comes from the line of John Gruber with Gruber & McBaine Capital. Please, proceed.

I didn't catch your mix product in the quarter of Nintendo DS and Wii and in the other. And then how do you expect that to be for the year?

Could you just repeat the question? We had a little trouble hearing you.

What didn't you hear? I'm sorry.

Now we hear you. We couldn't hear the question. Now we hear you perfectly.

Okay. The question was, in the quarter and for the full week, what's your Nintendo percentage on the handheld, the Wii, and other?

Are you talking about the quarter going forward?

The quarter just reported, and then the year -- the year we're looking at.

Right. Well, as we indicated for the year, we expect 65% to 70% of our net revenue will be generated from new releases, obviously with the majority of that coming from -- a great majority of that coming from the Wii and from the DS products. And for the quarter just completed, we gave the split of new releases and catalog as 47% came from new releases, 29% from catalog, and 20% from Dance Dance Revolution, with virtually all of the new release revenue coming from sales of mass market products, which again would principally be the DS.

[OPERATOR INSTRUCTIONS]

You have a follow-up question from John Taylor. Please, proceed.

I want to follow up on the listing notice from the [NAC] a little bit if I can. So you've got an option of getting some help on the IR side, which it sounds like you're going to do. And you jump right from a priority standpoint that taking precedence over the consumer outreach. And it seems to me that maybe the best way to sort of get people's attention is talking to consumers, and helping them sort of find product and so on. So, I wonder if you could maybe walk us through your thinking on the priority side, IR versus PR. Thank you.

Well, as far as our priorities are concerned, they are firmly and purely on the consumer side, in terms of our product and building the business accordingly. As far as investor relations is concerned, the reason that we incorporated this relationship with LHA was so that we could spend more time on the business and less time, from the executive standpoint dealing with the investor relations and only being directed alongside our investor relations firm. But our priorities are purely focused on initiating consumer contact and making sure we get the products through [inaudible] for the consumer.

Your next question comes from the line of [Eric Jacquier] from [SEC Capital]. Please proceed.

Yes, hi, gentlemen. I guess I'm just following up on JT's point. You mentioned that you have this 30-day period with this NASDAQ and you have a plan put in place. What is the plan that you have to avoid a delisting?

Eric, this is John. First of all, I'd like to note we just received the notice on Friday. And we are conferring with our counsel in terms of how to approach that. We will be putting together a plan. But at this point, it's premature to say what the specifics of that plan would be.

Your next question comes from the line of Todd Greenwall from Nollenberger Capital. Please, proceed.

Hi there. I just wonder if you could comment on margins you see on the Wii and the DS maybe versus the rest of your business. And then as a follow up, also just wondering the title you have on the DS coming out, Cake Mania, wondering whether there's potential for that to eventually be brought over onto the Wii the same way you're doing with Cooking Mama. Thanks.

This is Gui Karyo speaking. There's absolutely an opportunity to move any titles that we have over from DS to the Wii, if we can make a compelling game out of it. I have to say if you were to take Cooking Mama as an example, the nature of the game play is so perfect for the Wii just as it was for the DS, that it made great sense. And not speaking specifically about Cake Mania, but speaking about almost all the titles that we are publishing over the course of the next year or so, we look at each of them and say which platforms can we make quality, compelling games on. And then we plan to put them in the schedule.

In terms of your question on margins, as I mentioned earlier, the margins for both the Wii and the DS are substantially higher than what our margins were on average last year with Wii being even stronger than the DS.

You have a follow-up question from the line of John Taylor. Please, proceed.

Hi again. So Jesse, I wonder if you could expand a little bit on your comment about point of purchase. Exactly what things are going on? What are we going to see when we go into the store? What kind of exposure might we get to Cooking Mama, and in particular on the Wii? And what's lined up for the DS products? What's my experience in the store going to look like? Thanks.

I'm going to let Gui elaborate a little bit on that. He's been really focused on that over the last month or two.

And it's an excellent question. We are fortunate in that the types of products that we focus on producing really connect with the mass market buyer, so that a lot of what it has really to accomplish, to be successful with, and just putting them into place where a general consumer can have access to them. And our options of retail are broad. We do everything from advertising with our retailers to point of purchase display, modulars, end caps, backend rebates, instant rebates.

The opportunity to retail, particularly for our core sweet spot, consumers, mass market purchasers who are looking for affordable, quality, casual gaming titles. I can't per se speak about programs that we have outlined for any of the titles specifically. I can say that we feel as though everyone who's going to want some Cooking Mama, and those who are going to view it as a new experience on the Wii, are going to see it in all the places that you can imagine, and that the titles that we have coming out throughout the second quarter are supported by a great deal of retailer specific promotions.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of [Jason Shorts] with Goldman Sachs -- I'm sorry--with [J Goldman].

How you guys doing? Just curious, in terms of expectations for Cooking Mama on the Wii, do you guys have higher or lower expectations relative to how it did on the DS?

We're very excited about the launch of Cooking Mama on the Wii, especially given the success that Cooking Mama for DS has had. With that said, we're not giving quarterly guidance or product guidance at this time.

Okay. Thank you.

You have a follow-up question from the line of John Taylor.

Hi there. We're not getting a chance to put in a follow-up question here. So back to the point of purchase, so my understanding was that Cooking Mama was going to be in some of the demo stations for the Wii. Is that true? And if so, is that deployed nationwide in all the chains? Or could you talk about that a little bit?

There are interactive kiosks for the Wii. But there will be demonstrations of Cooking Mama on the video stations.

So is that part of a loop?

Yes, it is part of a loop.

Okay. Great. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line of Joe Stauff with CRT Capital. Please, proceed.

Hi, guys. Can you remind me -- I'm sorry I didn't hear you -- when is Cooking Mama to be released? And then two, strategically, in terms of your catalog sales, have you instead tried to pursue just selling some of that IP?

Okay. [Inaudible] with Cooking Mama is being released tomorrow, is its official launch date. There'll be a retailer near you, [or it might]. As far as the catalog is concerned, catalog of products is generally a list of products that combines product that we have brought out previously over the last year or so that continues to sell at retail today. It's not the kind of IP that we would consider going out and selling [inaudible].

That ends our Q&A session. I would now like to turn it over to Jesse Sutton for closing remarks.

I want to thank everybody again for joining us today. I'd like to reiterate that we're excited about our mass market game strategy and DS and Wii products and development. We look forward to speaking with you when we finalize our second quarter results. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.