PolarityTE Inc (PTE) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Majesco Entertainment third-quarter 2007 earnings conference call. My name is Millicent and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. As a reminder, today's call is being recorded for replay purposes.

I would now like to turn the call over to your host, Ms. Kirsten Chapman. Please go ahead, ma'am.

Thank you, Millicent. Thank you very much for joining us today as management will provide an overview of Majesco's third-quarter results. Before we get started, I will provide the Safe Harbor statements.

As a reminder, this call may contain forward-looking statements, including statements regarding management's intentions, hopes, expectations, representations, plans or predictions about the future. Such statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results or actual future results to differ materially from the expectations set forth in the forward-looking statements.

Factors that could cause actual results to differ materially are specified in the Company's annual report on Form 10-K for the year ended October 31, 2006, and its other filings with the SBC. The Company does not undertake and specifically disclaims any obligation to release publicly the results of any revisions that may be made to any forward-looking statements to reflect occurrences of anticipated or unanticipated events or circumstances after the date of such statements.

During the nine months ended July 31, 2007, the Company recorded a 2.5 million charge in connection with the expected settlement of a class-action litigation. In addition, during the nine months ended July 31, 2006, the Company recorded gains of 4.5 million relating to vendor settlements and 314,000 in 2007. To facilitate a comparison between these periods, the Company has presented both GAAP and non-GAAP financial results.

GAAP financial measures, including operating income, net income, diluted earnings per share, have been adjusted to report non-GAAP financial measures that exclude these charges and income related to gains on these settlements. 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 included in the press release issued earlier today.

On the call today we have Jesse Sutton, Majesco's interim Chief Executive Officer; John Gross, Chief Financial Officer; and Gui Karyo, Executive Vice President of Operations. Jesse will handle the opening introduction and John will review the financials and Jesse will conclude with a summary and outlook. Then, a question-and-answer session will be conducted. I will now turn the call over to Jesse Sutton. Jesse?

Thank you, Kirsten. Good afternoon, everyone, and thanks for joining us today. For our first fiscal quarter of 2007, we reported net revenue of $10 million. Revenue this quarter was driven by continued strong sales of Cooking Mama for the Wii and DS, good performance of our Brain games, and our first sales under our international distribution agreement.

This quarter, we are prepared for the holiday season. Although we released only one new title, we accomplished a number of activities that improve our position for growth and profitability. One initiative is to broaden our offerings targeting the mass market. This quarter, we announced exciting titles for the 2007 holiday season including Fish Tycoon and Zoo Hospital.

As you are aware, Cooking Mama has been an incredibly successful brand for Majesco. In fact, last month we announced we had sold over 500,000 units of Cooking Mama for the DS, and according to NPD (inaudible), it's the fifth most popular [third] party game for the Nintendo DS since its inception. As we continue to build the franchise, we expect Cooking Mama to be a cornerstone of our 2008 product portfolio. We're very excited to build on the success of the first version of the game, and we anticipate the sequel will be as strong as the original.

Another initiative has been to strengthen our international distribution, and as such, we signed an agreement with Eidos Interactive earlier this year. During the quarter, we shipped six [titles] internationally, and international sales accounted for 29% of total net sales. This is significantly higher than our historical split, primarily because this quarter marked the launch of this new arrangement.

To move toward profitability, we continue to make progress on maintaining or decreasing our ongoing expenses. John will cover this in detail in his remarks.

Let me take a minute to review our product strategy, which continues to be very focused on the mass market and casual video game player. As we have said on past conference calls, we're currently putting the majority of our resources into developing games for the mass market and are focused on games for the Nintendo Wii and DS platforms.

During the third quarter of 2007, revenue from new releases was 62% of total net revenue, including 11% from [retitles], 43% from DS and 8% from other platforms. In the third quarter of last year, revenue from new releases was 66% of total net revenue, including 51% from JAWS, 12% from DS, and 3% from other platforms. New release revenue includes revenue derived from titles released in the current quarter as well as from titles released in prior quarters during the same fiscal year which continue to be sold at their original launch price.

Our steadfast goal is to produce easy to pick up and play fun games that appeal to the largest possible audience. As such, this quarter we seized the opportunity to enhance our upcoming title Blast Works: Build, Fuse & Destroy for the Wii, a frenetic, geometric shooter that lets players build their own experience via intuitive ship and level editors, with exciting new features including a sharing of user-created content, like custom ships and levels with friends, via Wii's Connect24.

To incorporate these significant enhancements, we pushed the game release originally slated for the fourth quarter of 2007 to the first quarter of 2008. According to NPD, as of July 2007, the U.S. installed base for the Nintendo DS is more than 12 million units and the U.S. installed base for the Wii console is more than 3.5 million units. As of June, according to Nintendo, the worldwide installed base for the DS has surpassed 47 million units, while the Wii has surpassed 9 million units. This is a significant audience that we believe will continue to grow by leaps and bounds over the next several years.

As you are no doubt aware, most of the video game hardware manufacturers have focused on creating systems that were designed to play games targeted towards the hard-core gamer. Nintendo, however, had a much larger, more mass market audience in mind for its latest systems and created innovative video game systems that cater to fun and easy to pick up and play games. We applaud the success of their strategic initiatives and will continue to publish games specifically designed for the DS and Wii and targeted for a mass market audience. We're also looking forward to the launch of WiiWear, and as mentioned, plan to incorporate online features in Blast Works, as well as other upcoming titles.

Also, I am pleased to announce that last week we closed an equity financing for approximately $6 million. With these funds, we have the working capital to further build on our product lineup of mass market titles. The additional capital also provides valuable flexibility, stability and agility to reduce financing costs, fund growth and expand our intellectual property partnerships for 2008 and beyond. In addition, we expect to produce more games simultaneously, with the goal of creating a stronger, deeper product lineup from which to build a larger, more stable revenue base.

I will go over our game lineup for the fourth quarter and the holiday season after John reviews the financials. 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 revenue for the third quarter of 2007 was $10 million compared to $12.4 million in the third quarter of last year. The decline is attributable to the light release schedule during our third quarter this year and the tremendous success of the JAWS launch in last year's third quarter.

62% of our net revenue was from new releases and 38% from our catalog. 25% of net revenue was from sales of games for console systems, which included 15% contributed from the Wii. In the third quarter of last year, 59% of our revenue was from sales of games for console systems, principally for JAWS.

During the quarter, 74% of our net sales were from games for handheld systems, which included 66% contributed from games for the DS. This compares to 25% in the same quarter of last year, which included 12% from games developed for the DS.

In the quarter, 71% of our revenue was generated from domestic sales and 29% from international. This compares to 91% domestically and 9% internationally in the same quarter last year. As Jesse mentioned earlier, international revenues were higher than our historical average as this quarter was the commencement of our distribution agreement with Eidos Interactive, under which we shipped six titles. We expect the historical mix for the fourth quarter to return to these more historic levels.

Cost of sales was $7.1 million for the quarter, which compares to $8.2 million for the third quarter of 2006. We reduced development and licensing costs as a percentage of sales to 16% from 23%. Gross margin was 30% for the quarter compared to 33% for the same quarter last year. Last year's margins benefited from JAWS and this year's was impacted by the higher-than-typical mix of international sales, which had slightly higher-than-expected translation costs this quarter.

Turning to our operating expenses, product research and development costs for the quarter were $536,000, virtually the same as in the third quarter of 2006. These are the fixed costs of our quality assurance department, who principally evaluate, test and oversee the outsourced development of our product.

Selling and marketing expenses were $2 million compared to $2.2 million in the same quarter last year. These costs include both the fixed cost for the sales and marketing departments, as well as variable selling and marketing costs related to games launched during the quarter. Although sales and marketing expenses were higher as a percentage of sales, the variable selling and marketing costs did not increase. Rather, the increase was a reflection of the fixed costs being spread over lower revenue.

D&A decreased to $1.7 million in the third quarter of 2007 from $3.1 million in the same period last year, reflecting cost controls and lower legal expenses. Our total fixed costs for the fourth quarter, which include G&A, product research, and the fixed portion of selling and marketing, which relates primarily to employee costs, continued to be at the lower end of the range of $3 million to $3.5 million.

The GAAP operating loss was $1.3 million compared to $332,000 in the third quarter of 2006. Non-GAAP operating loss for the third quarter was $1.4 million compared to a none-GAAP operating loss of $1.7 million in the third quarter of 2006.

Interest expense and financing costs decreased to $266,000 from $392,000 in last year's third quarter, and was almost 50% below last quarter as we realized the benefit of negotiating lower borrowing rates and other measures to reduce our financing costs.

The GAAP net loss was $1.5 million, or $0.06 per share, compared to $724,000, or $0.03 per share, in the third quarter of last year. Third-quarter 2007 non-GAAP net loss was $1.6 million, or $0.07 per share, compared to a third-quarter 2006 non-GAAP net loss of $2.1 million, or $0.10 per share.

For the nine months ended July 31, 2007, net revenue was $39.1 million compared to $45.2 million for the same period in 2006. The decrease in net revenues was primarily attributable to the Company's shift away from publishing higher-priced premium games in 2006 and a light release schedule in the third quarter of 2007. The GAAP operating loss was $2.3 million compared to $1.1 million in 2006. The non-GAAP operating loss for nine months was $147,000 compared to $5.6 million last year.

On a non-GAAP basis, we are essentially breakeven year-to-date and more than $5 million better than last year. This represents a significant improvement in our operating margins on lower sales and is evidence of our progress in moving toward profitability.

GAAP net loss was $3.8 million, or $0.16 per share, compared to a GAAP net loss of $2.5 million, or $0.11 per share, last year. The non-GAAP net loss was $1.6 million, or $0.07 per share, compared to a non-GAAP net loss of $7 million, or $0.31 per share, last year.

Turning to the balance sheet, on July 31st, 2007 we had cash and cash equivalents of $3.8 million. This does not reflect the $6 million mentioned earlier, which was raised in a private placement. The (inaudible) factor was $282,000, which represents gross receivables sold to the factor of $5.4 million, less allowances of $3.2 million net of advances from the factor of $2.5 million.

Inventory was $1.5 million at the end of the quarter, and turning to accounts payable and accrued expenses, we continue to manage down these liabilities, which were $8.8 million at the end of the quarter, including the $2.5 million accrual related to the expected settlement of our class-action litigation.

Turning to our 2007 outlook, we are revising our 2007 net revenue guidance. We now expect full-year net revenue to be approximately $50 million to $53 million, which is below the previous guidance of expected net revenues ranging from 10% to 15% below last year, or $56 million to $59 million. The primary reasons for this change are the shift of the Wii title Blast Works from the fourth quarter of 2007 into the first quarter of next year and lowered expectations for some of our fourth quarter titles.

For 2007, we anticipate 65% to 70% of our net revenue to be generated from new releases and 25% to 30% will be generated from sales of our catalogs, with the balance from other digital entertainment products. Although the Company experienced lower margins in the third quarter and shifted the Wii title release, based upon the current release schedule, management continues to expect 2007 fiscal year gross margins to improve over the 30% reported in 2006.

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

Thanks, John. Looking to the fourth quarter of 2007, we have a strong lineup consisting of six DS titles and one Xbox 360 title. Our scheduled releases include Operation: Vietnam for the DS, which shipped August 13 to the North American and international markets. It's a new squad-based action game that drops players into the war-torn jungles as they try to escape enemy territory.

Turn It Around, for the DS, which shipped August 21, challenges players to master the Touch Screen turn wheel in 24 arcade-style games. The Wild West for the DS, which was shipped on August 28, delivers Touch Screen shootout scenarios on the untamed frontier. Nancy Drew and The Deadly Secret of Ole World Park for the DS features the world's most recognizable teen sleuth and enables players to unravel an interactive mystery. Holly Hobby and friends for the DS features Holly Hobby offering a wholesome, positive play experience for today's young girls.

Fish Tycoon for the DS allows players to engage in a fish-breeding simulation, including real-time virtual aquariums and crossbreeding to sell in their stores. And Zoo Hospital for the DS lets players diagnose and treat more than 40 different types of animals at a world-famous zoo. Finally, Kengo: Legend of the Nine for the Xbox 360 challenges players to carve out their place in history as any of nine real samurai warriors in feudal Japan.

To date, we have announced the following titles for the first quarter of fiscal 2008. Blast Works: Build, Fuse & Destroy for the Wii is a frenetic, geometric shooter that lets players build their own experience via intuitive ship and level editors that offer endless possibilities. As mentioned, originally slated for the release in the fourth quarter of 2007, the release date has been shifted to allow for the addition of exciting new features, including the sharing of custom ship levels and high score with friends via Wii Connect24.

Cooking Mama 2, Dinner with Friends, for the DS is a sequel to the award-winning cooking game which includes 80 all-new recipes, a tasting mode, customization and wireless download play. Furu Furu park for the Wii is a collection of 30 arcade-style games to engage and entertain players of all skills and levels. Eco Creatures: Save the Forest for the DS is a unique eco-conscious, real-time strategy game in which players use the Touch Screens to control units of woodland creatures that will protect the naturally beautiful Mana Woods and recover polluted land.

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, we're very excited with the progress we've made and we believe we are gaining traction. We are positioning ourselves for profitability and growth in 2008. On the operational side, we continue to manage down our expenses and have substantially reduced our financing costs.

And our recent raise of $6 million of working capital gives our business greater stability and flexibility. With this capital infusion, we now have the ability to publish more games simultaneously, allowing us to create a stronger, deeper productline up from which to build a larger, more stable revenue base.

On the business side, we continue to build our foundation of catalog games targeted at the mass markets, while focusing on the fastest-growing platforms. We have secured the sequel to our strongest brand, Cooking Mama, and look forward to building on the success of the first version with new DS and new Wii releases in 2008. And we are in a strong position to capitalize on the growing market for casual games.

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

(OPERATOR INSTRUCTIONS) James Lin, MDB Capital.

Guys, can you talk a little bit about what the cause for the lower selling was? And do you see this as something that is going to continue moving forward, particularly as we get into the holiday season?

Sure thing. I don't think we said that there was lower sell-in per se. I think what we said is that for fourth quarter we had a change in expectations, both because of a move and because of an overall expectation.

You know, we are constantly looking at the marketplace, and there are several factors that affect both the sale of products that have been previously released as well as the products that we are launching. And every time we sit down and take a look at the sales opportunities in the marketplace, we revise our expectations.

We don't give product-by-product guidance, but I would say that there aren't any specific major factors that I see recurring or affecting our outlook as a whole.

Thanks. I'll follow up in a bit. Thanks.

Todd Greenwald, Nollenberger.

Thanks. I assume you can't give any more color as to which titles were disappointing that are leading to the revised outlook?

We don't give any title-by-title guidance. I would say that there are a number of factors that affected a variety of different titles that led to our revisions.

Okay. Is there anything you can say just with FY '07 drawing to a close right now, anything regarding your outlook for '08? I mean, you said you think it will grow and you think it will be profitable. Can you talk about maybe how many products you think you could develop next year as opposed to this year?

You know, what I would I would say first of all is the titles that we've announced for fourth quarter we are very excited about. I mean, there is no underscoring how valuable Cooking Mama is for us and what we've seen of it looks like a really great product. And the other products that Jesse mentioned for first quarter are -- we're really excited and feeling strongly behind each of them.

I can't give and we're not as a whole giving any guidance for next year, except to say that we are -- as we look forward, we are consistently confident in our strategy of looking at these easy-to-play, fast, fun, mass market titles.

Okay. And then on Cooking Mama, it seemed like for the first iteration, it seemed like you got a lot of support from both Nintendo and some of the retailers. Do you think that you will get that support again for Cooking Mama 2?

Without a doubt. Again, obviously we don't give title-by-title guidance, but the demo -- the downloadable demo for Cooking Mama 2 has been available on the Nintendo stations, I think, as of this month, just as the first version was. And everyone that we've shared it with seems to feel just as bullish as they did when this franchise launched.

So we have every expectation, as Jesse said, that this is going to be as strong as the first version, and we are pretty happy with how it is coming out.

Okay. Do you think we should expect similar pricing to the first version?

No, actually we are going to be launching this version at $29.99 because it has some significant improvements over the original version.

Great. Thank you.

John Taylor, Arcadia Investment Corp.

Hi. So you've given us some guidance for the fourth quarter. I'm wondering do you expect to be able to report a profit from operations in the fourth quarter specifically.

John, it's John Gross. Again, what we've said is that certainly through the nine months on a non-GAAP basis we approach profitability. And when we look at the margins for the year in the aggregate, we expect to be up over where we were last year. And I think that is about as far as we've gone as giving any specific guidance, but we have given a range of revenues, etc.

Okay. And so is there any reason to believe that the cost control focus that you've had on fixed operating costs, etc. is going to change much in Q4, so maybe that number can remain fairly stable?

Yes, there is no reason to believe anything would change in the fixed costs, and the improvements that we've made on the financing side aren't going to go away.

Okay, good. And to go back in history, I think when you said original guidance, you did not have international included in that, and then you got this relationship going with Eidos and now that is going to start to contribute. Yet the revenue forecast is down for the year. So I'm wondering of the delta between what you originally expected, can you give us a sense of how much of the gap was created by the pushout of the title that goes into Q1 and how much is being created by lower expectations for the rest of the product line you still expect to ship?

Just to clarify that -- and I think we commented on this in the last couple of quarters -- we've addressed it as a whole and I think we answered the exact or a very similar question, as I said, in the second or third quarter about international. So we've never -- I thought we clarified that international was not additive to that forecast, but the guidance that we gave was always included -- included that, at least in the last two quarters that we talked about it.

Okay. So if you scratch the international piece of that question, maybe talk about how much of the delta there is the push versus the shortfall in load-in?

You mean in terms of the two factors?

Yes.

I don't think we'd choose to do that just because we'd start approaching product-by-product stuff.

Okay. Let me focus on this then. Can you give us -- did you disclose what your accounts receivable reserve was? I don't know that I saw that in the balance sheet. And what percent that is of last six months', 12 months' revenue kind of thing -- or nine months?

What we said was in terms of the total receivables, that I think we said the total receivable was 5 -- 5 something -- 5.4. The total allowances were 3.2 Does that answer your question?

And those are accounts receivable allowances instead of inventory --?

Nothing to do with inventory -- that is --.

-- evaluation reserves? Okay. So you've got a gross then roughly of 8.6 kind of thing?

No, the gross was 5.4 --

Oh, I see. Okay.

The allowance obviously relate to sales made this quarter and previously.

Right, okay.

Not just against sales made this quarter.

Perfect.

And if you want, I'm happy to follow up with you when the Q is filed and you'll see the detail on the components of the reserve.

Okay, good. And then of the 2.5 million charge to take care of the legal thing, can you give us an update on sort of where that stands, how much of that 2.5 is expected to be paid in stock. If stock, how many shares that is likely to represent and how much in cash kind of thing?

Yes. The $2.5 million is the amount of the stock, okay? That is the amount of the stock. So that is above and beyond our D&O policy. And in terms of other comments about the litigation, as I'm sure you'd understand, we can't really comment on it in terms of anything beyond what we've already disclosed in the public filing.

Okay. So just to clarify that, then you don't have final signatures on final documents on this -- this is still kind of an estimate.

I think we would say that we're comfortable that our insurance will cover the litigation and that, while we can't guarantee it, we are comfortable with that estimate.

Okay, last question then. So if this is a stock settlement kind of thing, when do those shares hit the full dilution calculation?

Again, John, at this point, we can't go into any more details on that than we've already disclosed.

Okay, thank you.

That would conclude our question-and-answer session. At this time, I'd like to turn the program back to our speakers for any additional or closing comments.

Thanks again for joining us today. We look forward to further penetrating the mass market with the titles that we planned for the remainder of 2007 and through 2008. We will speak to you in January after we finalize our fourth-quarter and year-end results. Thank you very much.

Thank you, everyone, for your participation on today's conference and you may disconnect at this time.