PolarityTE Inc (PTE) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Majesco Entertainment Company Second Quarter 2007 Earnings Conference Call. My name is Tanya, and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(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, Miss Mary Magnani. Please proceed.

Thanks, Tanya. Thank you very much for joining us today as management will provide an overview of Majesco's second quarter results.

Before we get started, I will provide a 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 or actual future results to differ materially from the expectations set forth in the forward-looking statements.

Factors that could cause actual results to differ materially are specified in the Company's annual report on 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 obligation to release publicly the results of any revisions that may be made to any forward-looking statements to reflect the occurrences or anticipated -- of unanticipated events or circumstances after the date of such statements.

To supplement the Company's consolidated financial statements presented in accordance with GAAP, Majesco uses non-GAAP measures. Operating loss and net loss data are adjusted from results based on GAAP to exclude certain expenses and gains. These measurements should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute or superior to GAAP results. We have attached a reconciliation schedule between our GAAP results and our non-GAAP results to our earnings press release, which can be accessed on our website at www.majescoentertainment.com.

On our call today, we have Jesse Sutton, Majesco's Interim Chief Executive Officer; John Gross, our Chief Financial Officer; and Gui Karyo, our Executive Vice President of Operations. Jesse will be handling the opening and introductions, John will review the financials and Jesse will conclude with a summary.

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

Thank you, Mary. Good afternoon, and thank you for joining us today.

This has been an excellent quarter on many fronts. Our strategy is to further penetrate the mass market, to strengthen our international distribution, to remain opportunistic and leverage our relationships with licensed stores and developers and to continue to improve gross margins and reduce costs as we move towards profitability.

During our second quarter, we made progress in each of these categories. In the second fiscal quarter of 2007, we reported net revenues of $14.6 million, representing a 30% increase, compared to the same quarter last year.

Let's review our product strategy. We have made great strides to transition our business from big-budget video games to a more balanced product portfolio comprised mainly of easy-to-play, affordable games for the mass market, which we now refer to as our mass market strategy.

In line with that vision, we have chosen to initially put the majority of our resources into developing games for the Nintendo Wii and DS in 2007.

During the quarter, we introduced two Wii games and three DS games focused on the mass market audience. Our entrance into developing products for the Nintendo Wii helped to drive our strong results this quarter. Specifically, we introduced our inaugural Wii game, Cooking Mama: Cook Off, towards the end of the quarter, which was followed by Bust-a-Move Revolution, also for the Wii.

In addition, we also continued to develop appealing games for the rapidly growing DS market. DS games launched during the quarter included Cake Mania, Toon-Doku and F24 Stealth Fighter. In addition, Cooking Mama DS continues to perform well in our catalog.

During the second quarter of 2007, new release revenue was 84% of total net revenue. 55% was from Wii titles, and 28% was from DS and 1% from other.

And looking at our market, the Wii and DS have had a large impact on the video game industry and are influential in bringing more customers into the gaming marketplace.

We will continue to focus on developing games for the Nintendo Wii and DS, as both these platforms have been tremendously successful with the mass market audience, which is, of course, our target market.

Nintendo is currently estimating that it will sell 6 million Wii consoles worldwide in its fiscal year ended March 31, 2008, almost doubling the current installed base. We are very excited about the potential of the Wii platform and believe that the Wii product will drive growth this year and next. The supply of Wii hardware is increasing in the marketplace, which bodes well for our strategy and the Wii games we have planned for launch in the fourth quarter and beyond.

Nintendo's DS platform is continuing to experience incredible demand. Nintendo has stated that it plans to ship 23 million DS units worldwide in its fiscal 2008 year. We believe we are well positioned to grow on both these platforms as we continue to focus on identifying properties appropriate for the features and demographics of both these platforms. I will go over our game line-up for the third quarter and the remainder of the year later in the call.

During the quarter, we strengthened our international presence by signing a new international agreement with Eidos Interactive to distribute a number of titles to PAL territories. The partnership will predominately focus on DS titles, including Cake Mania, the New York Times Crossword, Mech Assault: Phantom War and Nancy Drew with the Deadly Secret of Olde World Park and several other unannounced Wii and DS titles.

This partnership with Eidos is a natural progression in our Company's evolution. It is also a fantastic opportunity to work with some of the best professionals in the industry, while benefiting from a proven international distribution network.

In partnership with Eidos, we expect to launch eight new titles internationally this year and have more than 15 other titles in the pipeline.

We have continued to be opportunistic by leveraging our strong industry relationships. For example, while we remain focused on developing titles for Nintendo's platforms, we have positioned ourselves to take advantage of interesting titles that are available via our network of industry relationships.

As such, we seized the chance to publish Kengo -- Legend of the 9 for the Xbox 360, which we announced in May. This title will sell at a mass market retail price of $39.99, below the full price for a typical 360 title, which is $59.99.

Also, we continue to make progress on increasing our operating efficiency. During the quarter, we decreased our fixed costs and financing cost, as well as improved our gross margins.

John will expand more on this part -- on this in his part of the call.

Before I turn the call over to John, I want to quickly review the status of our class-action lawsuit. During the quarter, we have made progress and have reached a tentative understanding of settlement terms. We believe the settlement as consummated will have no effect on the Company's ongoing operations.

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

Thanks, Jesse. And good afternoon, everyone.

Net revenue for the quarter -- second quarter of 2007 was $14.6 million, increasing 30% over the $11.2 million reported in the second quarter of last year. 84% of the net revenue for the quarter was from new releases and 16% from our catalog business. 62% of the net revenue was from sales of games for console systems, which included 55% contributed from the Wii. 37% of the net sales were from games for handheld systems, which included 33% contributed from games developed for the DS.

Virtually all of our net revenues were domestic, as we were transitioning our international business to Eidos. This compares to 90% domestic and 10% international in the same quarter last year.

As Jesse mentioned earlier, we signed a new international distribution agreement with Eidos Interactive. This agreement will impact our net revenue beginning in the third quarter, when we expect to ship our first seven titles internationally.

Our cost of sales was $8.5 million for the quarter. This compares to $7.7 million in the second quarter of 2006 on lower revenues. We reduced development and licensing costs as a percentage of sales to 15% from 19%. Product costs, the actual cost of the hard goods, were 43% of sales, compared to 49% last year.

As anticipated, we experienced a significant increase in gross margins compared to the second quarter of 2006 and the first quarter of this year. Driven by the launch of two Wii titles, our margins in the second quarter increased to 42%, up from 31% in the same quarter of last year and 31% for the first quarter of this year.

Wii products will typically have higher gross margins than our DS products, largely due to their higher selling price.

For the year as a whole, we continue to expect an improvement in our gross margins over last year as the higher margin Wii and DS products are expected to be the dominant source of our revenues. That said, we do not have any Wii titles scheduled for our third fiscal quarter.

Turning to our operating expenses, product research and development costs for the quarter were $543,000, reduced from $629,000 in the same period of 2006. These are the fixed costs of the quality assurance department, who principally evaluates, tests and oversee the outsourced development of our products.

Selling and marketing expenses remained flat at $1.9 million and, as a percent of sales, declined from 17% to 13% of sales. These costs include both the fixed cost, primarily for employees, for the sales and marketing department, as well as variable selling and marketing costs related to games launched during the quarter.

G&A decreased to $2.1 million in the second quarter of 2007 from $2.6 million in the same period of 2006, reflecting cost controls and lower professional fees and legal expenses. The G&A for the second quarter of 2007 includes $375,000 of charges related to stock-based compensation expense, compared to $364,000 in the same quarter -- in the second quarter of last year.

Our total fixed costs for the quarter, which are split between G&A and sales and marketing, were at the lower end of the range of $3.5 million to $4 million.

During the second quarter of 2007, we recorded a $2.5 million charge in connection with our class-action litigation.

In addition, during the second quarter of 2006, we recorded gains of $3.1 million related to vendor settlements.

To facilitate a comparison to other periods, we have presented certain non-GAAP financial results. GAAP financial measures, including operating income, net income and earnings per share, have been adjusted to report non-GAAP financial measures that exclude charges related to the class-action litigation and income related to settlement of certain vendor liabilities. These non-GAAP measures are provided to enhance investors' overall understanding of the Company's current financial performance and the Company's prospects for the future. A reconciliation between GAAP and non-GAAP financial measures are in the press release issued earlier today.

The GAAP operating loss was $868,000, compared to the second quarter 2006 GAAP operating income of $1.4 million. Non-GAAP second quarter 2007 operating income was $1.4 million, compared to a non-GAAP operating loss of $1.7 million in the second quarter last year.

The interest expense and financing cost decreased to $467,000 this quarter, compared to $541,000 in last year's second quarter and down more than 40% from the first quarter of 2007, as we realized the benefit of negotiating lower borrowing rates and other measures to reduce our overall financing cost.

The second quarter 2007 GAAP net loss was $1.7 million, or $0.06 per share, compared to second quarter 2006 GAAP net income of $839,000, or $0.04 per share.

Second quarter 2007 non-GAAP net income was $1 million, or $0.04 per share, compared to a second quarter non-GAAP net loss of $2.3 million, or $0.10 per share.

For the six months ended April 30, 2007, net revenue was $29.1 million, compared to $32.8 million for the same period in 2006. The decline is attributable to the shift in strategy away from big-budget games.

2007 GAAP operating loss was $1.5 million, compared to an operating loss of $761,000 for last year. The non-GAAP operating income was $1.2 million, compared to a non-GAAP operating loss of $3.9 million last year, a change of over $5 million. The GAAP net loss was $2.3 million or $0.10 per share, compared to a GAAP net loss of $1.7 million, or $0.08 per share last year.

And finally, non-GAAP net income was breakeven, compared to a non-GAAP net loss of $4.8 million, or $0.22 per share last year.

Turning quickly to the balance sheet, our cash -- we had cash of $4.2 million. Receivables from the factor were $2.2 million, which represents gross receivables sold to the factor of $11.9 million, less allowances of $2.9 million and advances from the factor of $6.8 million.

Inventory was 2.8 million at the end of the quarter.

Turning to accounts payable and accrued expenses, we continue to manage down these liabilities, which were $11.5 million at the end of the quarter, but this includes a $2.5 million accrual related to the litigation, and an additional $1.6 million in legal fees related to the litigation.

Of the $1.6 million in legal expenses, $1.2 million are included in receivables from our D&O carrier. Our actual trade payables were $2.3 million, down 45% from October 31st and down from over 7 million last year at this time.

One final note on the balance sheet, while our shareholders equity is just under $0.5 million, this does not include the benefit of the conversion of two items, the $2.5 million class-action charge and the balance of our $200,000 liability to [Pius] Studios, which are currently classified as liabilities and expected to be paid in stock. They will be converted to shareholders equity when the shares are issued.

Turning to our 2007 outlook, looking to the second half of the year, our expectations remain constant. We continue to expect net revenue for all of 2007 to come in approximately 10% to 15% below 2006 net revenue of $66.7 million with improved gross margins.

As you can see by our game release schedule that Jesse will soon review with you, most of our releases for the balance of the year are in the fourth quarter.

In addition, for 2007 we anticipate 65% to 70% of our net revenue to be generated from new releases, and 20% to 25% will be generated from sales of our catalog, with the balance from other digital entertainment products.

Again, we are very pleased with the results we are reporting today and with the progress we have made over the past year with our shift in strategy. The results we reported today demonstrated that our strategy is working.

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

Thanks, John. Looking to the third quarter of 2007, as we ramp up during the holiday season, our line-up includes a DS title focused on the mass market, as well as a variety of international releases.

Our anticipated line-up for the third quarter includes the New York Times Crossword for the DS, launched on May 22. This game features more than 1,000 real crossword puzzles direct from the New York Times archives and the unique ability to write in answers with the stylus or use the TouchScreen keyboard to enter letters.

Titles that will be released internationally during our third quarter are as follows. All of these titles have been previously released in North America. Guilty Gear for the DS and PSP, and the following DS titles -- Mech Assault, Super Black Bass Fishing, Dino Master, Nacho Libre and F24.

For the fourth quarter of 2007, our anticipated line-up of announced titles includes Operation: Vietnam, a new squad-based action game for the DS that drops players into the war-torn jungles as they try to escape enemy territory. This title will be launched simultaneously in the domestic and international markets.

The Wild West for the DS will deliver TouchScreen shootout scenarios on the untamed frontier.

And Turn It Around for the DS challenges players to master the TouchScreen turn wheel in 24 arcade-style games.

Kengo -- Legend of the 9 for the Xbox 360, places players in feudal Japan on a mission to become the best samurai warrior in the land.

And Nancy Drew and the Deadly Secret of Olde World Park for the DS features the world's most recognizable teen sleuth and enables players to unravel an interactive mystery. As you may be aware, Nancy Drew, the movie from Warner Brothers, will open in theaters tomorrow.

Holly Hobbie and Friends for the DS features Holly Hobbie, offering a wholesome, positive play experience for today's young girls.

And in addition, we anticipate publishing one Wii title and one DS title planned for the fourth quarter that have yet to be announced.

We continue to execute on our ultimate strategic vision, which is to create quality, easy-to-play games targeted at the mass market. We intend to capitalize on trends by publishing products based on popular licenses and genres.

In conclusion, this quarter we executed on plan, launching our first Wii titles, introducing three DS titles, formalizing a new international distribution agreement and increasing revenue and gross margin. Therefore, we are reaffirming guidance.

I will now turn the call over to the Operator for questions. Operator?

(OPERATOR INSTRUCTIONS)

Your first question comes from the line of John Taylor of Arcadia. Please proceed.

Hi. Good work on a couple of fronts there. I have got two questions. One is on international, and the other is on the legal settlement. I wonder if you could give us the details of the legal settlement thing. I mean, it sounds like you have got an agreement in principle, and I don't know whether that's a totally done deal or not. So I am a little confused as to why you didn't announce specific details of the settlement while taking the charge. It seems like we might have a mismatch in timing there.

But I am curious, since you have D&O insurance and so on, can you give us the gross amount of the settlement and kind of how much insurance is covering and give us maybe some of that detail? So that's the first question.

And the second one is, when you guys did your guidance last time, I don't recall that you had the international distribution thing in place, and now you have got that in place. Were you thinking of that when you gave us guidance before, or is there a possibility that that is going to be additive on top of what you have told us you expect to do? Thanks.

Thanks, John. Well, the settlement is not complete. We have reached an understanding with the class-action plaintiff that calls for a payment of 2.5 million worth of our stock and an additional payment in cash, which will come from our insurance carrier. We cannot comment further at this time, but we will provide more information when as we anticipate the settlement is finalized.

As far as your international question is concerned, nothing has changed relative to our overall expectations, and we anticipated these products being sold internationally from one form of distribution partner or another. And as of now, I am not changing anything related to that.

Okay, okay. So does -- is there anything meaningful that has to happen on the class-action settlement that, I mean, what do you have -- you have got agreement in principle. Are you waiting for the ink to dry? What formality has to be completed in order for this to be put to bed?

Again, John, as we've said, you would understand with any pending litigation we really can't comment further at this time. And when we have further information that we can share, we will do that when the settlement is finalized.

But you can understand my confusion that you are accruing something for something that is not done yet.

Okay, well, as provided by the accounting pronouncements, we evaluated the facts and the circumstances which have changed since the last quarter and determined that it was appropriate to recognize the expense at this time.

Okay. Okay, good. All right, I will let somebody else ask a question. Maybe I will come back. Thanks.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Todd Greenwald of Nollenberger. Please proceed.

Thanks. Hi, guys. I had a question on Cooking Mama, just what your reaction has been so far to the sell through there? Maybe comment on just the channel inventory that is out there, any reorders that you've gotten so far?

We don't give any specific product information. What we can say about both Cooking Mama Wii and Cooking Mama DS is that they continue to be strong products for us, and we've been very pleased with their performance.

Okay. One other question then. Are you starting now to develop more games internally? I saw one of your recent press releases alluded to a new internal development studio within the Company called Aquaria?

Well, what you are referring to specifically is the production of --

Fish Tycoon?

Fish Tycoon, which was done by a couple of guys in-house. We continue to look at opportunities to help build out and increase our capacity for not just QAing games, but building games. But at the moment, this was just sort of a project that made sense with the resources we currently have.

Okay. Thanks.

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

Okay. So in looking at the cost structure and what you reported in second quarter, it looks like you did a pretty good job holding those numbers down. I am wondering if as you get into the second half of the year with the bulk of your product line shipping, whether we should expect to see sales and marketing head up meaningfully, either as a percent of sales or in absolute dollars, or whether you're at a level here where you think you can kind of sustain it without seeing much increase?

John, I will let Gui comment on the sales and marketing strategy piece of it.

But in terms of what we are looking at in the second half of the year, we continue to believe that our revenues will come in 10% to 15% below last year. We believe that our gross margins for the year will be up above last year and will be built around the product portfolio that Jesse described.

We expect our fixed-cost structure -- as I've said, our fixed costs are running between $3.5 million and $4 million, and if anything, we are working on continually working on reducing that.

And I'll let Gui talk about our sales and marketing strategy.

The majority of our marketing strategy is presence at retail and a variety of programs that we run, either with retailers or, for example, with Nintendo in their video stations and their download stations.

So for the rest of the year, we do expect that marketing as a percent of sales will continue to remain steady. We don't see any dramatic increases.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS)

Your next question comes from the line of Jon Gruber of Gruber. Please proceed.

Hi. A question on the next Wii title. You say you will have no new Wii titles this quarter. When will you have your next Wii titles?

The next Wii title will be launching in October. I don't think we've made a formal announcement about what it is going to be yet, but we are excited with it.

There are no further questions at this time.

Thanks again for joining us today.

As a result of the hard work, we are driving our mass market strategy while reducing cost. The market is responding to our games because of their fun, casual nature. We look forward to further penetrating the mass market with the titles that we have planned for the remainder of 2007 and through 2008.

We look forward to speaking to you in September after we finalize our third quarter results then. Have a good day.

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