PolarityTE Inc (PTE) 2008 Q1 法說會逐字稿

Welcome to the Majesco Entertainment Company's first quarter 2008 earnings conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) For your information, this conference is being recorded.

At this time, I would like to turn the conference over to Mike Smargiassi of Brainerd Communicators. Mr. Smargiassi, you may begin.

Thank you and good afternoon. This is Mike Smargiassi of Brainerd Communicators. I would like to welcome you to Majesco Entertainment's conference call today. Before we get started I would like to remind you that this call is being recorded and the audio broadcast and replay of this teleconference will be available in the investor relations section on the Company's website. As a reminder, this call may contain forward-looking statements including statements regarding Management's intentions, hope, 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 31st, 2007 as well as 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 occurrences of anticipated or unanticipated events or circumstances after the date of such statements.

To facilitate a comparison between the reported periods, the Company has presented both GAAP and nonGAAP financial results. GAAP financial measures include settlement of litigation and related charges net, changes in the fair value of warrants and gains on the settlement of liabilities and other gains. Operating income, net income, and basic and diluted loss per share have been adjusted to report nonGAAP financial measures that exclude these charges and income related to gains on these settlements and warrants. These nonGAAP measures are provided to enhance investor's overall understanding of the Company's current financial performance and the Company's prospects for the future. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. Reconciliation between GAAP and nonGAAP financial measures is included in the press release issued earlier today.

On the call today we have Jesse Sutton, Chief Executive Officer, John Gross, Chief Financial Officer, and Gui Karyo, Executive Vice President of Operations. I would now like to turn the call over to Jesse.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. I'll open the call with some highlights and a strategic overview of our performance in the first quarter of 2008. Then, John will provide the financial review for the quarter, and I'll conclude with comments on some of the gains in our product portfolio. Following this we'll be happy to take your questions.

First quarter of 2008 marks a start of our second year executing against our mass market casual gains strategy. At the core of this as a continuing focus on producing intuitive and fun to play games that capitalize on the broad appeal and reach of the more casual game platforms, such as an Nintendo DS and Wii system. As evidenced by our performance, we feel this has maximized the value of our core strength, which includes identification, development and marketing of products for the family and mass market gamer. For the fourth quarter-- for the first quarter, we reported net revenue of $18.7 million, an increase of 28.8% from the prior year's quarter. Our domestic business was up 47.4%, driven by the performance of the Cooking Mama game. We improved our gross margins from 31.1% in the first quarter of 2007 to 40.2% this quarter, the result of a strong top line performance.

On a GAAP basis, we reported operating income of $2.4 million in the first quarter versus an operating loss of $182,000 in the first quarter of 2007. We reported net income of $2.7 million versus a net loss of $926,000 in the same period last year. Our financial performance is a clear indication that we are effectively executing our strategic and tactical plans. Moreover, we are extremely pleased that our strategy to deliver compelling mass market products and maintain tight financial discipline has yielded such robust returns, specifically during a very competitive holiday season.

During the first quarter, we released four titles overall, three titles for Nintendo's DS handheld and one title for Nintendo's Wii system. In January we announced our most successful franchise, Cooking Mama reached sales of 1.6 million units in the United States for both the DS and the Wii. Cooking Mama II, Dinner with Friends for DS was awarded Best Casual Game of 2007 by industry website oneup.com. And Cooking Mama cook off for the Wii has been nominated as Best Wii Game of 2007 by Games Industry News, two accolades we are very proud of. With the release of Cooking Mama II, Dinner with Friends for the DS in the first quarter and the Wii sequel set to launch later this year, we continue to broaden and build this franchise. A particular sign of the strength of this franchise is that the new Cooking Mama DS was priced at the higher $29.99 price point, a $10 retail premium over the original, and sales continue to be robust. During the quarter, we also every received solid performances from Left Brain Right Brain, Cake Mania and Zoo Hospital, all games developed for the DS handheld.

With respect to our international operations, we entered into a new distribution agreement with Codemaster, a British-based video game publisher and distributor with more the 22 years in business. Under our agreement, they'll obtain the exclusive international distribution rights for all of our upcoming titles, starting with Nanostray 2 for the DS, which is expected to launch in the third quarter. I would note that our distribution agreement with [IDO] remains in place for the titles they have already committed to launch and as such, we continue to work with them on titles such as Cake Mania and Blast Works, Build, Trade, Destroy, as well as the catalog sales of earlier products. During the first quarter, international sales comprised 1% of our sales versus 14% in 2007. This was primarily a result of a softer release schedule and the shifting of releases into the second quarter. We continue to focus on securing international rights for our new titles and further developing this important distribution channel and revenue stream.

In November, we announced the launch and commenced operations of Majesco Studios in Santa Monica, an internal development facility based in the Los Angeles area. While most of the effort and energy during the quarter was spent on building the internal infrastructure and staff, work has already begun on the first title, Our House, for the DS. This product, which compliments the previously announced Wii version marks a solid step forward in building our portfolio of intellectual property. We continue to believe this is a low risk opportunity for cultivating our own creative and technical library while also providing greater control over the development process with similar or reduced costs. At the same time, for the great majority of our product line, we continue to build and leverage our relationships with third party teams and opportunistically explore IP relationships for technology, properties and products that make tactical and economic sense.

In summary, the first quarter of 2008 was nothing short of an overwhelming success and as a direct result of our ability to execute on our vision of an operationally strong and creatively focused mass market video game Company. We strongly believe that our strategy to target the casual gaming market, prudently expand our product offerings and focus on the Nintendo platforms creates a strong foundation upon which we can further improve our financial performance while creating additional value for our shareholders over the long-term. I would like -- I would now like to pass the call to John Gross, Majesco's Chief Financial Officer, to provide the financial review of our fiscal first quarter of 2008. John?

Thanks, Jesse. Net revenue for the first quarter of 2008 was $18.7 million compared to $14.5 million reported for the same period last year. As Jesse noted, our domestic business had a terrific quarter, up 47% driven by the continued success of Cooking Mama and a strong holiday season. The increase is even more dramatic when you consider that last year's first quarter included almost $3 million of Dance Dance Revolution sales. In the first quarter of 2008, 22% of our net revenue was from sales of games for console systems which included 20% contributed from the Wii and 77% of our net sales were from games for handheld systems, virtually all of which was from games for the DS.

Comparatively, in the first quarter of 2007, 10% of our revenue was from sales of games for console systems, all of which came from PS2 and Xbox, while 63% of our net sales were from games for handheld systems, 51% of which came are from games for the DS. Our DS sales more than doubled over last year. Again, I would note that in the first quarter last year our results were impacted by Dance Dance Revolution known as DDR, which produced 20% of our revenue. For DDR we acted as the manufacturer for a third party publisher.

The geographic split of revenues showed 99% from domestic, this compares to 86% domestically and 14% internationally in the same quarter of last year. The change in revenue mix was primarily driven by the strong domestic sales performance which recorded a revenue increase of 47% and lower international sales as a result of several international titles shifting from the first quarter to the second quarter of 2008. I would note that we fully expect our geographic revenues to finish the year in line with our historic performance which for 2007 was 86% for domestic and 14% for international. Cost of sales was $11.2 million in the quarter which compares to $10 million in the first quarter of 2007. Last year's cost included the DDR product which has a higher per unit cost than our typical core products.

As a result of our strong performance during the quarter, our gross margin grew to 40.2% for the quarter compared to 31.1% for the same quarter of last year. The extraordinary jump in gross margin was driven by the holiday sales period and the strength of Cooking Mama 2 for the DS, which was introduced at a premium price point. The comparison to last year was also impacted again by DDR sales in the first quarter which had margins of approximately 10%. Our margin in the quarter also benefited from a higher percentage of domestic sales, which historically carry a higher margin than our international business. As we return to a more historical mix of domestic and international revenue, we continue to anticipate modest growth in our 2008 gross margins compared to the 33.9% we achieved in 2007.

Our expenses remanded under control. Looking at our operating expenses, product research and development costs for the quarter grew to $900,000 versus $608,000 in 2007. This is comprised of the fixed cost of the quality assurance department that principally evaluates, tests and oversees the development of our products and our studio start up costs. The increase is primarily related to the studio cost which in subsequent periods will be allocated between operating expenses and development depending on the activities in the studio. Selling and marketing expenses were $2.3 million compared to $1.7 million in the first quarter of 2007, or 12.3% and 11.9% of revenue respectively. The increase was primarily a result of higher variable costs for sales, commissions, freight, and fulfillment cost on the increased volume of sales. Remember that total selling and marketing expenses include both fixed costs, primarily for employees, as well as variable selling and marketing costs associated with titles launched during the quarter.

G&A fell to $2.1 million from $2.2 million in the first quarter of 2007. The decrease reflects our ongoing cost control efforts as well as lower professional legal expenses. Our G&A includes $458,000 of stock-based compensation expense during the quarter compared to $400,000 in the first quarter of 2007. Our total cash fixed cost for the quarter which includes G&A, product research, and the fixed portion of selling and marketing which relates to employee costs primarily, was within our expectation of $3 million to $3.5 million.

In order to facilitate a comparison between reported periods, we are providing both GAAP and nonGAAP financial results for operating income, net income and basic and diluted results per share. Our nonGAAP results excluding the impact of the settlement-- our nonGAAP results excluding the impact of the settlement of litigation and changes in the fair value of warrants. Our GAAP operating income for the first quarter was $2.4 million, which included a $300,000 noncash gain related to the settlement, class action litigation, versus an operating loss of $182,000 for the same period last year. NonGAAP operating income for the first quarter was $2.1 million versus a nonGAAP operating loss of $213,000 in the same period last year.

Our GAAP net income for the first quarter was $2.7 million or $0.10 per share which included a $300,000 million-- a $300,000 noncash gain related to the settlement class action litigation as well as $0.5 million noncash gain in the fair value of warrants issued, compared to a GAAP net loss of $926,000 or $0.04 per share for the same period last year. NonGAAP net income for the first quarter of 2008 was $1.9 million or $0.07 per share compared to a nonGAAP net loss of $1 million or $0.04 per share for the same period last year. The significant improvements in these metrics are primarily due to our improved gross margin and ongoing efforts to manage and reduce expenses and our strong sales performance.

Financing costs decreased 70% to $200,000 from almost $750,000 in the first quarter in 2007 as we benefited from the availability of capital, making us less reliant on financing our product purchases. This is a direct result of the capital we raised last Fall.

Turning to our balance sheet, receivables from our factor were $1.8 million, which represents gross receivables sold to the factor of $11.6 million less allowances of $3 million and advances from the factor of $6.8 million. This compares to $1.1 million, which represents gross receivable sold to the factor of $9.3 million less allowances of $3.3 million and advances from the factor of $4.9 million in 2007. Inventory was $1.9 million at the end of the quarter compared to $3.8 million at the end of the year. The decrease is attributable primarily to the sell in of Cooking Mama in the holiday period. The increase in our capitalized development costs over last year is a function both-- of both the number of titles we have in development and the higher per game costs of the Wii as compared to the DS. Our working capital at the end of the quarter was $5.2 million compared to $2.8 million at the end of October.

We are reconfirming our guidance expectations for the year for net revenue to be in the range of $53 million to $58 million. We still have limited visibility into the publishing schedule for the fourth quarter and the release dates for some of our important titles. I would just remind everyone that our results are impacted by seasonality from the December holiday period and the variability based on release schedules. We believe that our gross margins for the year will show modest improvement over last year's 33.9%. We continue to believe that our motto will enable us to be cash break even or better at the operating level in the range of $55 million to $60 million. We believe it is prudent to keep our current guidance at this time and we will reevaluate it when we report our second quarter results.

In conclusion I'm very pleased with our performance this quarter and the potential it shows for our model. We still have work to do but remain committed to our focused and disciplined financial approach to the business. I'll now turn the call back to Jesse. Jesse?

Thanks, John. 2008 is clearly off to a solid start and reflects our dedication to and the execution of our business strategy. We are building on the financial and operating progress of 2007. We are growing our number of titles and putting our balance sheet to good use by dramatically decreasing our financing costs and launching our new studio in Los Angeles to develop our proprietory library of intellectual property. Our core focus remains the identification, development and publishing of mass market games that are innovative, intuitive and fun to play.

With that said, the core of our 2008 line up will include a variety of titles for various platforms. These include, Blast Works, Build, Trade, Destroy for the Wii. It's an innovative interpretation of a geometric shooter. Perhaps the most exciting feature, our ship and level editors which allow players to create their own personalized game experiences and then share their creations via Wii connect 24. Expected SRP is $39.99.

Wonderworld Amusement Park, our summertime block buster for the Wii. It's a 3D amusement park of board walk games, rides and prizes that players can explore with personalized avatars. This title really brings a perennially popular family activity of variety of games to everyone's living room in a way only the Wii controller can. The expected SRP on that is $39.99.

And finally Cooking Mama World Kitchen for the Wii. It's a sequel to the best-selling Cooking Mama cook off game on Wii that have sold more than 380,000 units to date, and challenges players to use the Wii remote as the ultimate cooking utensil. Expected SRP is $49.99. That concludes our formal remarks. Operator if you could review the Q&A instructions.

(OPERATOR INSTRUCTIONS) Our first question comes from John Taylor from Arcadia Investment. Please go ahead with your question or comment.

Hi, nice quarter. I got a couple of-- bunch of questions here so let me ask a few of them and then I will get back in the queue. So please let me ping you again if I can. The -- you talked about the fixed cash expenses a little bit, John. I wonder -- and then Jesse you talked about a-- you called out a couple of titles. Can you talk a little about the titles you're most likely to put a little bit more umph behind in terms of marketing spend and maybe characterize what the difference is between sort of a normal launch and then kind of a, I'm going to characterize it as a preferred launch, you can call it what you want. What's that delta, really?

Sure, John. With us today is Gui Karyo, our EVP of Operations, and I'll let him take a shot at your question.

Sure and I have to emphasize that there's a little bit difference from title-to-title. I would say that the biggest title for the spring/summer arena will be Wonderworld, certainly, which we're very excited about. It's a beautiful game that really hits all cylinders of our strategy. It's perfectly targeting that mass marketing consumer. It's easy to pick up and play. It's a wonderful amount of fun at a great price. And of course, Cooking Mama 2 Wii World Kitchen is just a fabulous upgrade from the last Wii product, again hitting all the cylinders. And then I-- Jesse spoke briefly about Blast Works, which is't quite I think the-- as important to us as let's say Cooking Mama 2 is, but is perhaps one of the most innovative games brought to the Wii with some very very interesting technology, which we think will pervade our line in the long term. So that is also getting some solid support to us.

Now we don't speak specifically about how much marketing goes to one title or to another. But what we do do is the same things that many of our other publishers do. We very much lean on PR to help the word of mouth spread. We do all sorts of consumer advertising of various sorts of one another. I mean we do not have the kind of-- or invest in the kind of advertising budgets that some other publishers do. But quite honestly, the best opportunity to merchandise and sell the kinds of products that we sell, we continue to believe has to do with presence at retail and working with our retail partners for promotions on site. And I would say that with each one of these titles, we've gotten very good feed back from the retailers and buyers that we've presented them to and we have real reasons to feel very positive about our ability to promote these, not just at retail but in the media in general.

I'll also add something that we didn't talk about it probably because it's launching in just a few weeks. Wild Earth: African Safari is a phenomenally fun game that gets whole family involved in a trek across Africa photographing wild animals and getting involved in very interesting minigames for what we think is an outstanding retail price of $29.99.

Okay. And then John, let me ask you a couple, if I can. Looks like you reversed the settlement from Q4 in Q1. I wonder if you could give us the background on that? And also kind of a share count question. The settlement amount which is going be done in shares, is that included in the full dilution calculation yet?

Okay, let me take the first question, first. As we've said in the statements both at year end and now, the-- as the price of the stock moves from quarter-to-quarter, we'll continued to either recognize a charge if the price of the stock goes up, or a cash gain if the price goes down. And that's dependant upon the stock price at the end of each quarter relative to where it was at the end of the year. So in this particular case, the stock price declined from the end of the year, we therefore recognized a noncash gain as we did on the warrants as well for the financing.

Okay. So those are-- okay those are reported as two separate lines, then?

Right.

Okay, got it,

The warrant-- the litigation I believe is above operating income and the warrants-- well they're both separate lines on the financials, the warrants is below.

Okay, so it's called litigation but it really has to do with the stock price?

It all has to do with the volatility in the stock price.

Okay, great. All right and then full dilution count does that include those shares for settlement?

No.

Not yet?

No.

Okay, great. I'll let somebody else try and then I'll come back. Thanks.

(OPERATOR INSTRUCTIONS) And our next question comes from Edward Woo from Wedbush Morgan. Please go ahead with your question or comment.

Sure, congratulations, great quarter. I had a question. How will you categorize a retailer's view on video games? It seems like obviously consumer environment is weighing on a lot of retailers, but at the same time, video games seem to be doing pretty well?

Ed, this is Jesse. I think historically as you're familiar with, the cycles that our category has had over time, historically we've seen that video games have been pretty call it recession resistant at least people looking for that escape. We believe from a-- where we are positioned I think that we are especially well positioned for that relative to our mass market strategy and a lot of often times focused on the value price. And I think in the near future, specifically, I think people are going to be looking for. As far as retail sentiment in general, I-- there's definitely a level of excitement over the Wii and the DS platforms specifically. They've definitely generated more shelf space over the last quarter and I'm looking to develop more shelf space for their products at retail going forward given the success that the-- the phenomenal success they've had.

Great, and then the other question I have is, as you guys are getting more familiar with the DS and power of the Wii, has there been any change in development costs of your games?

Do you want to take that?

Sure. Not significantly. I would say that one of the things that I think most publishers and developers would say about the Wii and DS is that the ease of development on them in and of itself makes it a very attractive and interesting platform to work on. Now -- I mean there's increase in cost year-to-year as there is in any industry just through the nature of inflation. But I can't say that we've seen any significant increase in our development costs and we continue to maintain the same kind of risk reward profile and investment in project-to-project that we have had for the past couple of years.

Great. Thanks a lot.

And our next question comes from John Taylor from Arcadia Investment.

Hi. Okay. Got a couple of other ones. John, you mentioned, I think in your remarks something about the internal-- the titles being done internally versus externally. And you said that you kind of hope to have similar or maybe slightly higher margins or something. I'm wondering if you would expand on that a little bit because it seems like if you're going to go through all the effort of doing it in house and putting on those costs, you'd be hoping, in most cases if not all, a superior margin. I wonder if you could talk about that and maybe in a best case scenario what the delta might look like?

I'll let Gui talk about the difference in development first, and then I'll comment on the financial aspect of it.

I think we've always said similar or greater but I think it's important to understand that the real long-term value to share holders in internal development is the asset creation. And I think that over the course of time there are two things that happen that make that asset creation so valuable. The first is, that kind of creative group that both intellectual property, the creative property that you see, the characters on the screens, the graphics that are so powerful and they build technical intellectual property. The engines that are the frame work that renders and makes the game. Over the course of time one would anticipate that both of those things reduce the cost, meaning that you're able to reuse them, you're able to use the technical ID and renew the creative ID, and they improve your returns. They make things that are more and more attractive over the longer course of time. So I would say that our -- while we do intend and expect to get financial benefits in the form of greater savings, I think really, the reason you go through all this effort is for the long-term value creation it brings to shareholders.

And John, if I understood the second part of the question, in the first quarter, none of the studio costs were in development. It's not that we expect the margin to go down because of the development in the-- taking place in the studio. The margin movement has more, over the course of the year, has more to do with the price points of our product in particular quarters, and the gross margin of the individual products, the mix, if you will.

Okay. And let me-- yes. let me take a different stab at it. So if you've got title A and you're going to do it internally as opposed to externally, maybe talk about what the break point might be? Or at what point it's a similar margin and what kind of volume you would have to do on that particular title? I understand the long-term thing you're talking about and (inaudible) for that. But in terms of leverage on the title number A, right, to build the engine and get everything going. Where's your next break point to say pick up five points of margin or however you might characterize that?

I think -- I sort of-- I think we understand your question. John, I think that one thing I wanted to just add to this point that was made earlier was that the percentage of products coming out overall relative to the the total product portfolio is slow enough where any real growth on margin is not going be recognized unless the title has a break out hit. We don't forecast for break out hits. But overall from a portfolio perspective at least in the, probably in the first couple of years, you're not looking at a material margin difference.

Okay, I think that answers it. then. Okay and then on the international side, so you had something going with SCI, IDOS right, you're still doing that. I'm wondering I guess at the end of the day, as I recall, let me go back in history. As I recall you guys said guidance and then you came out with an international relationship and did not change guidance and now you're kind of switching international horses in mid-stream, if you will. Is -- did you anticipate this new guy when you were setting original guidance or should we be thinking maybe there might be some upside to this?

Well whenever we develop our forecast for all of our products that we have international rights for, we assume distribution for those products throughout year. Who that distribution partner might be or whether or not we would be going direct potentially those would be things we take into consideration from day one. Whether or not we would have a distribution partner or a particular strategy picked out at that time.

Okay. All right and then last question. So, it sounds like you're going to wait and see what 's going on in Q2 before you make any adjustments related to guidance? You've gotten off to a pretty good start this year. So I guess my question is, what, what variables do you think are most important to monitor here? Because it seems to me that the-- a lot of what was shipped last year, last holiday not just for you guys but for the industry as a whole has cleared itself out. It seems like the retail channel is pretty clean. So I'm wondering what, what you're waiting to see? Is it the demand, reorders for something new that might come out in the second quarter, or for catalog? Or what is are the key things you're watching there?

I think you pointed out on several of those-- on several of the things. Alongside that I would add simply the volatility of how products move from quarter-to-quarter potentially. We don't anticipate that. But the nature our business as you know historically has that in play. We have a strong title that comes out in the second half of our year which is the Cooking Mama brand, which we-- which obviously is something that it's very early on from the development cycle of it. But, until we get a little more visibility on that along with some visibility on some of our bigger products as they get launched in the second quarter, it's -- we'll -- we're comfortable where we are now.

Okay. Good. Let me sneak one more in if I can. Are you-- are any of your titles-- or which of your titles are in the Nintendo demo stations planned for either early summer or fall at this point?

Nintendo hasn't confirmed any of the titles that are within the demonstration for the next two sets. So I'm not going speak for them about it.

So even for a graduation timeframe you don't have any confirmations?

No we do not.

No one does.

Okay, very good. Thank you.

And in showing no additional questions, I would now like to turn the conference call back over to Management for any final comments.

I want to thank everybody again for joining us today. And we look forward to updating you on our-- end of our second fiscal quarter of 2008. Have a great day.

Thank you, all, very much, for participating in the Majesco Entertainment Company conference call. This concludes today's event. You may now disconnect your lines.