PolarityTE Inc (PTE) 2009 Q1 法說會逐字稿

Welcome to the Majesco Entertainment Company's first quarter 2009 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). The conference is being recorded. At this time, I would like to turn the conference over to Mike Smargiassi of Brainerd Communicators. Mr. Smargiassi, the floor is yours, sir.

Thank you, Mike, and good afternoon. I would like to welcome to 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 of the Company's website. As a reminder, this call may contain forward-looking statements, including statements regarding managements' intention, 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 because actual result to differ materially are specified in the Company's annual report on Form 10-K for the year ended October 31, 2008, and other filings with the SEC. The Company does not undertake, and specifically disclaims, any obligation to release publicly the results of any revision that may be made to any forward-looking statements to reflect the 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 non-GAAP financial results. GAAP financial measures include expenses related to non-cash compensation, settlement of litigation, and related charges net, changes in the fair value of warrants, and net proceeds from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income, and basically diluted income per share has been adjusted to report non-GAAP financial measures, that exclude these expenses, charges, and income related to non-cash compensation, warrants, and income tax benefits.

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. 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 non-GAAP financial measures is included in the press release issued earlier.

On the call today we have Jesse Sutton, Chief Executive Officer; John Gross, Chief Financial Officer; 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 up the call with some highlights from what was a terrific first quarter, and John will follow with the financial review and outlook. Gui, John, and I will then be happy to take your questions.

In the first quarter we delivered record results, under the strategic plan we launched three years ago. Revenue was $32.8 million, an increase of 76% over last year, driven by strong sales across our product line. Sales were paced by fantastic performances from our Cooking Mama franchise, which generated strong sales across all four skus, and by Jillian Michaels' Fitness Ultimatum.

We remain focused on delivering profitable growth and continue to drive our revenue performance to the bottom line. Our non-GAAP operating income was $4.3 million, an improvement of $1.8 million, or 72%, from 2008, and non-GAAP net income was $3.7 million for the first quarter of 2009, an improvement of $1.4 million, or 60% better than 2008. As a result of this outstanding start to our year, we have increased guidance for fiscal 2009, and expect revenues for fiscal 2009 of $75 million to $80 million, an improvement of 17% to 25% versus the previous year.

Our performance in the quarter and over the past two years is a testament to the strength of our strategic plan and our ability to execute it. We are focused on the right market, have the right strategy, and have a proven management team. We have positioned Majesco within the family-friendly mass market, the fastest growing segment of our industry. For the most part this has meant a concentration on the Nintendo platforms, and we have clearly benefited from their success in designing products that provide innovative game play dynamics, that appeal to a broad range of consumers.

As we have delivered on this strategy, we have generated a substantially improved financial performance, returned to profitability, and positioned the Company for future growth. During the first quarter, which included the holiday shopping period, we shipped five new titles, including two DS, two Wii, and one PC. Our releases in the quarter included a number of proven brands, new DS releases were Left Brain Right Brain 2 and Wonder World Amusement Park, the first game from Majesco Entertainment. On the Wii, we had Cake Mania in the mix, and of course, Cooking Mama World Kitchen.

Our Cooking Mama franchise continues to deliver strong sales, with more than 3.7 million units sold to date, and we are proactively looking at opportunities to further capitalize on the power of this iconic brand. In this regard, we have announced Gardening Mama for the DS, which is expected to ship this month. Not only is Gardening Mama the first gardening game on the DS, but it matches the easy-to-pick-up and play format of the Cooking Mama series, that helped make that a best-selling franchise.

In February, we announced our new Go Play line for Wii. This is a new brand that unifies a series of energetic motion-based Wii games, designed to get families on their feet and playing together. The first two titles are Go Play Lumberjacks, which is slated to launch spring, along with Go Play Circus Star.

The third title, Go Play City Sports, is scheduled to release this fall. We are very excited about our Go Play brand, which provides retailers and consumers alike the clearly recognizable message of active and entertaining family experiences that include support for the Wii Balance Board accessory.

Our one new focus in 2009 is increased strategic investments in marketing for key product initiatives. We found last year that even our best-selling products could have performed better with greater market awareness. For example, in the first quarter, we executed a targeted campaign on a modest budget for the launch of Cooking Mama World Kitchen.

This campaign, which included a three-week run of television advertising, not only raised consumer awareness for the new skew, but also for the Cooking Mama franchise over all. In fact, first quarter 2009 sale of other Mama skus increased during the quarter, and specifically, our very first Cooking Mama skew generated more sales in the first quarter of 2009 than during its original release in 2006.

We believe these kinds of targeted campaigns are critical for supporting and accelerating the growth of key initiative titles, such as our Go Play brand. This type of strategic and targeted marketing campaign, focused on our most promising titles, is a prudent investment that creates long-term value for the Company, and in turn for our shareholders.

Our efforts to build our IP assets continue to move forward, as our studio delivered its first title in the quarter, Wonder World Amusement Park for the DS. We look forward to its second release, Our House, for DS, which will be released alongside the Wii version this fall. In addition, titles such as Boy and His Blob, and the Go Play line, will make 2009 our strongest year of internally controlled IP.

Finally, we are making strategic investments in developing games for the iPhone, Facebook, and other digital applications. While the investments in this area are currently small, with no immediate profit assumptions, we believe these are exciting markets that fit well with our core casual gaming focus. As such, we will continue to take an R&D approach, as we fine tune our strategy to capitalize on these emerging platforms in the future.

In summary, we had a record quarter and holiday sales period. We delivered exceptional results despite the difficult economic environment. We have increased our revenue and net income guidance for the year, which puts us on pace to significantly out-perform our peers. Management remains focused on executing our growth strategy, while keeping operating costs under control.

As I said earlier, we are making some strategic investments in marketing to support our current A titles, including the Cooking Mama franchise and our new Go Play brand, as well as investing in R&D to capitalize on emerging platforms. These investments are prudent and responsible investment in our future growth. We remain confident that we are focused on the right market, that we have the right strategy, and that our proven management team will continue to deliver profitable growth and build value for our shareholders.

I would now like to pass the call to John Gross, Majesco's Chief Financial Officer, to provide the financial review of our first quarter 2009. John?

Thanks, Jesse. We had an outstanding quarter across all metrics. As Jesse indicated, revenue in the quarter was up an impressive 76%, to $32.8 million versus the year ago period, driven by the terrific performance from our Cooking Mama franchise, which recently cleared 3.7 million units across its skus, and Jillian Michaels' Fitness Ultimatum, which recently hit the 500,000 unit mark. As a result of this strong performance, domestic revenues represented over 97% of worldwide revenues. Wii revenues in the quarter were $21 million, up almost si- fold over last year, while DS revenues were $11 million, a decrease of 22% over 2008's first quarter when we launched Cooking Mama 2 for the DS.

Our product costs as a percent of sales were lower than last year, as a function of the mix of Wii product, as well as its higher wholesale selling price. Software development and licensing costs were higher as a percent of sales than in 2008, due to higher costs on some of our A products. Our gross margin in the first quarter was 36%, off from the 40% in the year earlier period. The lower margin was primarily the result of slightly higher raw fees and development costs this year.

Or expenses remain under control as we continue to focus on cost controls and benefit from the operating structure we have built over the past several years. While total operating costs were up 60% on a 76% increase in sales, as a percent of sales, they were 400 basis points lower, when you exclude the settlement gains from last year. Variable selling and marketing expenses accounted for the vast majority of the dollar increase.

The most significant portion of the increase in sales and marketing was the cost of the holiday marketing program to support Cooking Mama. As Jesse noted earlier, we expect to see an increase in our selling and marketing expenses for the year, as we look to support some of our most promising titles and brands, including Cooking Mama and our new Go Play franchises, with targeted campaigns aimed at reaching our key demographics.

Our R&D expenses were higher than last year, principally as a result of our expenses for our studio. However, they were down as a percent of sales. G&A expenses were higher than prior year, principally as a result of higher incentive-based compensation. Our G&A line was down as a percent of sales, highlighting the operating leverage in our Business.

Total cash fixed costs for the quarter, which includes G&A, product research, and the fixed portion of selling and marketing related primarily to employee costs, remained within our expectations of $3 million to $3.5 million. This excludes the cost associated with our studio, and non-cash compensation. Interest and financing costs were significantly higher than last year, primarily as a result of higher factor fees on our higher sales.

We also incurred financing costs as a result of financing our development costs. In November 2008 the Company received proceeds of approximately $1.1 million from the sale of rights to approximately $14.2 million of New Jersey state income tax operating loss carry forwards, under the Technology Business Tax Certificate Program, administered by the New Jersey Economic Develop Authority. The amount represents utilization of approximately 34% of the $41 million of net operating loss carry forwards available to the Company in the state of New Jersey prior to the transfer. The amount has been recorded as an income tax benefit during the quarter ended January 31, 2009.

The GAAP operating income for the first quarter was $3.7 million, which included a $100,000 charge in connection with the class action litigation, and a $400,000 non-cash compensation expense, compared to 2008 operating income of $2.4 million, which included a $300,000 gain, in connection with the class action litigation, and non-cash compensation expense of $400,000. Non-GAAP first quarter 2009 operating income was $4.9 million, compared to non-GAAP operating income of $2.5 million in 2008, a $1.8 million or 72% increase.

For the first quarter, GAAP net income was $4.2 million, or $0.15 a share, which included a $100,000 non-cash loss in the fair value of warrants issued, and a $1.1 million in net proceeds from the sale of the previously mentioned income tax operating loss carry forwards, compared to the first quarter of 2008, when GAAP net income was $2.7 million or $0.10 per share, which included a $500,000 non-cash gain in the fair value of the warrants. Non-GAAP net income was $3.7 million or $0.13 per share, compared to non-GAAP net income of $2.3 million, $0.08 per share in 2008, a $1.4 million increase, or 60%.

Turning to our balance sheet, as of January 31, we had $10.5 million in cash or cash equivalents, almost twice the level we had at year end. Our due from factor was $4.9 million, which represents gross receivables sold to the factor of $20.2 million, less allowances of $3.7 million, and advances from the factor of $11.6 million. This compares to our 2008 first quarter due to factor of $1.8 million, which represents gross receivables sold to the fact or of $11.6 million, less allowances of $3 million, and advances from the factor of $6.8 million at January 31, 2008.

Inventory was $2.2 million at the end of the quarter, versus $1.9 million a year ago, and a substantial decrease from the $5.6 million at the end of fiscal 2008. The decrease from year end was in line with our expectations, as we intentionally built inventory, primarily for Cooking Mama, in preparation for what we expected to be a strong holiday season. Almost all of the increase at the end of 2008 was for Cooking Mama, and was sold during the first quarter of 2008.

Our capitalized development costs and license fees were down slightly versus year end, but higher than previous quarters, reflecting the growth in the number of titles we are publishing, and the higher cost and longer development cycle of Wii titles. The vast majority of the capitalized cost pertained to titles not yet released at the end of the quarter. We simply had an outstanding quarter and holiday sales period. Our performance highlights the strength of our operating strategy, our disciplined approach to the Business, and our willingness to invest in the Business for long-term growth.

For fiscal 2009, we're increasing our guidance. We expect net revenue to be $75 million to $80 million, up from our previous guidance of $70 million. This represents a 17% to 25% revenue increase from fiscal 2008. We also expect earnings per share to be between $0.10 and $0.14 a share for the same period.

Our guidance reflects both the success of the first quarter, and the costs of investments we are making to support and extend the Cooking Mama franchise, and to build out our brand with the Go Play line. In the difficult to predict market environment, it would be premature to increase guidance further, until we get additional visibility at the end of the second quarter. We believe that our mix of international revenues for fiscal 2009 will increase slightly from the previous year.

Our guidance assumes the release of approximately 31 titles in 2009, with approximately 15 for the Wii, and 16 DS titles. As a reminder, our results are also impacted from seasonality from the December holiday period and variability based on release schedules. I will now turn the call back to Jesse. Jesse?

Thanks, John. I would like to come conclude with some comments on our remaining 2009 lineup, which includes a number of titles that we're very excited about.

Fiscal 2Q titles include Gardening Mama for the DS, starring Mama, from the multi-million selling Cooking Mama franchise, and is the first gardening game available on DS. Gardening Mama transforms the stylist into a universal gardening tool, that players will use to plant, nurture, and harvest flowers, fruits, and vegetables. A playable demo is currently available through May in the Nintendo download station at over 10,000 retail outlets nationwide.

Major Minor's Majestic March for the Wii, marks the return of the creative team behind the renowned PaRappa the Rapper franchise, legendary game designer and multi-media musician, Masaya Matsuura, and famed New York artist, Rodney Allen Greenblat. The game turns the Wii remote into a special baton the band leader Major Minor uses to keep tempo, recruit new band members, and pick up valuable items while marching through whimsical locations.

Looking at the rest of fiscal 2009, some of our announced titles include the Go Play product line, all of which will retail at $29.99. Go Play Lumberjacks for Wii is the first game in Majesco's recently announced Go Play line of motion-based family friendly Wii titles that lets players use the Wii remote and the Balance Board accessory to chop, climb, saw, and log roll to victory in five entertaining events.

Go Play Circus Star for Wii is the second game in Majesco's recently announced Go Play line, that includes a full collection of all-time favorite circus attractions. Featuring support for the Wii Balance Board accessory, the game lets players wow the crowd with death defying stunts, animal tricks, and slight of hand, in 15 different events in the Greatest Show on Earth.

Go Play City Sports for the Wii is the third game in Majesco's new Go Play lineup, that recreates the experience of playing sports in a vast urban playground, where manhole covers double as home plate. This all new sports compilation allows players to complete against the best neighborhood athletes in six classic games, including stickball, kickball, handball, roof top hockey, shootout soccer, and jump rope. Events include support for the Wii Balance Board as well.

Our House Party for the Wii turns the Wii remote into the ultimate home renovating tool, that lets up to four players compete party style to build their own personalized trophy home that they can then share with friends, via Wii Connect 24. And A Boy and His Blob for the Wii is a rebirth of the NES classic that expands upon the original platform adventure, and features ground-breaking hand-drawn and painted animation technology. By feeding the Blob jelly beans, players can activate his special abilities to transform him into tools that help the pair solve puzzles, defeat monsters and escape danger. That concludes our formal remarks. Operator, if you could review the q and a instructions, please ?

Yes, sir. (Operator instructions). The first question we have comes from John Taylor of Arcadia. Please go ahead, sir.

Hi, I have got a couple of questions, mostly related I think to marginal profitability. So revenues were up pretty nicely in the quarter, obviously, and it looks like the royalty cost ate a good chunk of that, which resulted in gross margin. So the makeshift went in favor of Wii, which should have raised it, but it actually went down, so I'm wondering if there was some closeout revenue in there that might have dragged it down, A, so was there kind of a mix thing in terms of relevant of current versus kind of older titles in there? And second, was there anything in the timing of accrual of licensing costs that might have depressed the margin in the quarter? Thanks.

John, it's John. The answer to the first part is that, no, it was not driven by any substantial amount of closeouts. It was truly a factor of higher royalties on more the A titles that we produced. And then your second question was about the basis of accruing the amortization cost, and the answer to that is no, there was nothing unusual in that from any other period.

So let me ask it this way, was the royalty percentage higher because of a timing thing, where you kind of had to deal with costs at the beginning that maybe over the long haul might come down on titles? Anything like that? Or is the royalty rate that you are reporting one that we ought to assume is going to hold steady going forward?

Hi, JT, it's Jesse.

Hey.

I would say the latter is a fair assumption, and that we don't get into individual product details on this, just because from a competitive analysis we try to stay away from that.

Okay. But, all right. And then the other question had to do with fixed versus variable, or elective marketing costs. So you are talking about investing in establishing brands and so on, I wonder if you could break out for us, of the sales and marketing numbers that you reported and that you are going to report going forward this year, how much of that number might be kind of fixed, and how much might reflect the investment in establishing brands or go-to-market costs that are volume driven?

There are two pieces to the answer. Number one is the vast majority of the sales and marketing costs, or the large majority of the sales and marketing costs in the quarter, were the variable costs, both because of volume for selling costs, as well as the marketing that we described. The other piece of the equation, John, would be that if you use an aggregate, our $3 million to $3.5 million of fixed costs a quarter, I think that's a fair benchmark.

But that's the core split between, isn't that R&D, G&A, and sales and marketing?

Right. But the sales and marketing, which is $4 million this quarter, right?

Yes.

What I'm saying is the majority of that were variable costs.

Okay. Okay. Very good. Thank you.

(Operator instructions). The next question we have comes from Ed Woo of Wedbush. Please go ahead.

Congratulations, guys. I just had a question about whether you saw any changes in the retail environment from the end of the quarter to what it is now, and what do you think the outlook is going into this upcoming year? Thank you.

This is Gui. I'll take that. When you say the end of the quarter, you mean the end of our first quarter until now, so between January and today?

Yes, in the last two months, whether you saw any noticeable changes?

I would say that the only trends that I would point to stretch back into holiday of last year, and that obviously the economy has had an affect on retail sales and that affect is greater competition to get to market and greater price pressure. Fortunately, because of the way our product line is positioned, I think it was less impacted than perhaps some other sectors of the video game market, and I would say that that has remained true through first quarter to today.

I can't say that there is anything that has happened since the close of this quarter that we could cite specifically that would imply a change of conditions. I would say that our guidance has been pretty consistent with what we expect to happen through the rest of the year.

Great. Then the other question I have is, do you have any comments on whether the availability of Wii's and Balance Boards, specifically, on how that outlook would obviously affect your outlook?

Sure. I will take that one again. I would say the install base on both the Wii and the Balance Board is already large enough that there is a receptive audience for the product that we're putting out there in the marketplace. I don't see the availability of either of those affecting our product launches as much as they did, let's say two years ago.

I do believe absolutely believe that, particularly with some products that focus on Balance Board inclusion as a material part of their product line, that that will in some ways be affected by availability. With our Go Play line, for example, Balance Board capability is built in to all of those products, and although one might be concerned that the Balance Board availability would affect that, because the game is really focused on fun family game play, that is really at the center of all successful products on the Wii, we're really not concerned.

Thank you, and good luck in the future.

Thank you.

Your next question we have comes from Todd Greenwald or Signal Hill. Please go ahead.

Hi. Great quarter. Just a quick question on the DS market panel, your DS sales were down about 20% in Q1, and then if I do the math right on your guidance going forward, it looks like you are expecting '09 DS sales to decline about 20% or 25%, is that just a sign that the DS software market is maturing, is that due to price erosion, is that products mix, anything else going on there?

This is Gui again. Primarily it has to do with product mix.

Even though it seems like your mix is pretty balanced, 15 [sidles versus] 16, is that - - ?

Yes, but remember that, like with every publisher, product mix is more than just number per platform. It is your expectations for those games, what categories they fall in for you. We have a very, very strong Wii lineup this year, and we also have a DS lineup that we're very proud of. It is not, for a variety of reasons through the green light process, it is no quite as strong as the Wii lineup.

I imagine that over the course of the next 18 to 24 months, that will balance out, as we continue to round out our product portfolio. We continue to believe and have ample sales proof that the DS (inaudible - microphone inaccessible) target market we're going after, and we continue to look for product categories that fit both our demographic interest and our risk profile.

Okay. So partially it's helped comp with Cooking Mama 2 on the DS last year?

Yes, of course.

All right. And also looking out to Q4 '09, I just see that there's no other Jillian Michaels' title in there? Is there potential that could get announced at some point? Does that require a real extension to the license? Or should we not expect that at all?

Well, I think that as we have shown in our strategy with Mama, that the plan is always to take advantage of the previous successes, and so as you can imagine, we plan the same for Jillian, but we have nothing to announce at this time.

Okay. Great. Thanks, guys.

Your next question we have comes from John Taylor of Arcadia.

Hi, I have three more little things for you, I guess. I wonder if you could talk about your effort to develop games for the iPhone and maybe scale it possibly, in terms of percent of R&D budget or numbers skus over some time frame, something like that, any way you can give us a sense of how important this is to you maybe? This is Gui again.

Let's say that we believe the iPhone is a very interesting platform to investigate. We like all of the characteristics of it from the demographic, to the kinds of game play innovation, to the success Apple has had at bringing an interface to allow the mass market to get digital technology in a way that has been difficult in the past, which is one of the reasons why we have invested in it. I don't think we can comment specifically on how much, except to say it is not a significant investment. I am happy to say that the number of titles is three, and that that may change up or down over the course of time, depending on opportunities in front of us, and what we think is interesting on the iPhone itself.

Do you guys have the iPhone rights to the Mama or the Jillian properties?

No, we do not.

Okay. All right. And then the other one is within your guidance of 75, 80, I guess, can you give us a sense of what kind of contribution international might make to that?

I would say that we expect it to be up from last year, and probably a little below what the more historical ones, but up from last year.

As a percent of total you mean?

Both in total dollars and as a percent of sales.

Okay. So do you think that the total dollars - - okay. So you'll see growth in international at this point, I guess [here in the year]?

Yes.

Okay. And then with Sony's recent focus on the PSP trying to bring out some colors for girls and so on, any thoughts about maybe trying to draft them into that segment?

I think we're going to pay close attention to the success of that launch, and see how it goes there. We are exploring that, but we are going to follow the success of it, as opposed to get ahead of it at this point.

Okay. Great, thank you.

Gentlemen there appear to be no further questions at this time.

Okay. Well thanks again for joining us today. We look forward to speaking to you again at our second quarter 2009 earnings call in June. Have a great day .

Thank you for participating in the Majesco Entertainment Company's conference call. This concludes today's event.