PolarityTE Inc (PTE) 2009 Q2 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Company's second 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. Good afternoon, everyone. 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 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 cause actual results 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 any specifically disclaims any obligation to release publicly the result of any revision 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 non-GAAP financial results. GAAP financial measures include expenses related to noncash compensation, settlement of litigation and related charges net, changes in the fair value of warrants, the closure of the California studio and a benefit from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income and basic and diluted income per share have been adjusted to report non-GAAP financial measures that exclude these expenses, charges and income related to noncash 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 which should not be considered a substitute for or superior to GAAP results. Reconciliation between GAAP and non-GAAP financial measures are included in the press release issued earlier today. On the call, 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. Thank you for joining us today. I will open the call with some highlights from what was a terrific quarter and John will follow with the financial review and outlook. Gui, John and I will then be happy to take your questions.

We delivered another solid quarter as we continue to execute on our business plan and capitalize on the strength of the family friendly casual gaming market. Our financial performance highlights our position in a sweet spot of the market and our ability to utilize our expertise and relationships in development and distribution to expand our portfolio of titles. This market focus has allowed us to deliver a substantially improved financial performance and positions the company for future growth as we develop new franchises and broaden our revenue base.

Second quarter revenue was $20.5 million, an increase of 61% over last year. Driven by continued strength from Jillian Michael's Fitness Ultimatum and our Cookie Mama franchise as well as the launch of Gardening Mama, our first Mama brand extension. Which delivered a solid performance and demonstrated the value of leveraging the Mama brand.

In the first six months of fiscal 2009, revenue has increased almost 70% from the year-ago period. As a result of our impressive first half performance, an expectations for upcoming launches, we have increased our revenue guidance for fiscal 2009 to $80 million to $85 million. Our gross profit margin for the quarter was impacted by the weak performance of Major Minors majestic March without which margins would have been in line with. As expected, our bottom line profitability was impacted by our strategic marketing investments to support the growth of our franchises and for most promising titles. In the second quarter, this represented approximately $1 million in television and Internet advertising spending. In addition, there were several other items that impacted the bottom line which John will discuss in more detail shortly.

We delivered improved operating and net income on a non-GAAP basis and we remain focused on delivering profitable growth. Our entire management team is committed to driving our revenue performance to the bottom line and improving our overall profitability. During the second quarter, we shipped five new titles including two DS, two Wii and one iPhone. Releases in the quarter were highlighted by Gardening Mama which we consider to be an extremely important milestone in the evolution of the franchise as it demonstrates the potential to extend the brand beyond its core cooking focus. The Mama franchise which now includes five SKUs, has sold more than 4 million units and we continue to explore additional ways to further leverage the brand.

In May, we announced the extension of our relationship with Jillian Michaels for two new releases. Jillian Michaels Fitness Ultimatum 2010 for the Wii and Jillian Michaels Pocket Trainer 2010 for Nintendo DS. These titles are the follow-up to the 600,000 unit selling Wii fitness game we launched last October. Both titles are scheduled for release in the first quarter of fiscal 2010 which starts in November 2009. Ahead of the holiday sales periods.

We continue to develop our brand strategy with our new Go Play line for Wii. The first two brand titles Go Play Lumberjacks and Go Play Circus Star, just launched last week and we were also recently announced the My Hero brand, a series of aspirational DS games. This new brand will include My Hero Astronaut, My Hero Firefighter and My Hero Doctor with Astronaut and Firefighter launching first in August and Doctor following in the fall.

As discussed in previous calls, we're moving forward with our strategic investments in marketing for key product initiatives. These are targeted campaigns with modest budgets designed to support and accelerate the growth of our franchise and most promising titles such as Gardening Mama and the Go Play brand. We continue to believe this is a prudent investment that will create long-term value for the Company. I would note that due to the timing of campaigns, and the lag effect of advertising, our marketing expenses may not match revenue in a given quarter. For example, we booked a good portion of our Gardening Mama marketing expense toward the end of the second quarter. But would expect to see additional benefits in our third quarter results.

Finally, I would like to update you on our development studio in California. When we first launched the studio, our objectives were two-fold. First, to lower our cost per title and drive additional operating efficiencies as we achieved sufficient scale and second, to generate IP and the development of our own creative talent. Over the past several quarters, we've seen a significant change in the dynamics of the gaming industry. Specifically, in regards to the development market. The industry has seen a sizable increase in the amount of development capacity. And more importantly, in the quality of developers looking for projects. Given this change in the market place, we have taken an extensive look -- an objective look at our studio and made a decision to wind down its operations. We believe this is the best step at this time and will better position us to take advantage of the current opportunities in a development market.

As a result of this decision in the quarter, we recorded all of the expenses associated with the studio in research and development. Which accounted for the majority of the increases in second quarter R&D. In addition, we would expect a minor charge in the third quarter as we wrap up the studio's operations. Keep in mind, the studio represents a tiny portion of our overall portfolio so we will not see any effect on the planned product line. We remain committed to building our IP portfolio. We believe we have a solid IP line-up. With Boy and His Blob, My Hero, Foot's Twisted World and Go Play all internally controlled. Going forward, we will continue to look at opportunities to enhance our IP.

Several weeks ago, I attended the Electronic Entertainment Expo in Los Angeles. It was very encouraging to see the show return to a productive, well-attended conference, clearly, the industry is healthy and resilient despite the economy. It looks like this holiday season is going to be a banner one for the industry and in my opinion, our best ever. Majesco had a terrific show and our line-up was well received by both retail accounts and the media. The fact, I forgot to share that A Boy and his Blob was the runner-up for the best Wii platformer reward for enthusiast site IGN.

That said, I remain excited about the gaming industry and the future for our Company. Our focus on the casual gaming market places us in an industry segment that continues to see growth even in this difficult economic environment. We have delivered an impressive financial performance in the past two years and specifically in the first half of fiscal 2009. And our guidance puts us on pace to significantly outperform our peer group.

With our continuing success, and the recent changes in the industry, we are seeing an increasing number of new business opportunities which meet our financial criteria and fit within our core strategy. We remain focused on prudently managing our costs and are committed to delivering profitable growth as we execute on our business plan. We have a proven strategy, are executing operationally and have the right team in place to deliver additional growth and create value for our shareholders over the long-term. I would now like to pass the call to John Gross, Majesco's Chief Financial Officer, to provide the financial review of our fiscal 2009 second quarter. John?

We had another strong quarter. We're very pleased with our performance so far this year which reflects our focus on growth and long-term profitability. At the halfway point our 70% increase in revenues and non-GAAP income of $4.5 million support that claim and now for the details.

Our revenue in the quarter was up an impressive 61%. versus the year ago period driven by our Cooking Mama franchise and Jillian Michaels. Virtually all of our revenue for the quarter was domestic as we transitioned out of our previous distribution agreement in Europe. We expect our revenue in Europe to resume in Q3 as we implement alternative distribution arrangements. We've already shipped Night at the Museum in Q3 as our first product under arrangements. Wii revenues in the quarter were $10.7 million, triple the level of 2008, primarily a result of the Jillian Michaels product. While DS revenues were $9.3 million, a 3% increase over 2008 when Cooking Mama 2 was very strong.

Our gross margin in the second quarter was 32.7%, down from 34.7% in the year ago period. As Jesse mentioned earlier, this was primarily due to the weak performance of Major Minor. Look at the components of cost of sales, our product or manufacturing costs as a percent of sales declined by 710 basis points to 38%. This is a function of the heavy mix of Wii product with the higher wholesale selling price versus last year. Actual per unit costs were roughly flat with last year.

The amortization of development and licensing costs increased 910 basis points versus last year due to an increase in the average cost per game for our Wii products and the heavier mix of Wii products this quarter. As we've indicated, we have increased the quality of some of our products but are still within the risk parameters we've been using for the past two to three years. The higher amortization cost as a percent of sales exceeded the benefit of the reduced product costs and resulted in the 200 basis point decline in gross margin versus last year. As an aside, if you've been following the Company for the past two years, you've witnessed significant volatility in quarterly profit and gross margin. The swings in margin have been extreme, as high as 43% and as low as in the high 20s. These swings are largely a function of promotional activity and the mix of product in a particular quarter and obviously the performance of the products themselves, especially at launch.

Our operating expenses remain under control, especially the fixed costs. As a percent of sales, total operating expenses which include the incremental marketing and all our variable selling and marketing expenses were up 55% in total but declined 140 basis points versus last year's second quarter. The increase in operating expenses was driven by five primary factors.

First, as a result of our 60% increase in volume, variable selling and marketing expenses accounted for a large portion of the dollar increase but were in line with previous quarters on a percentage of sales basis. Second, selling and marketing expenses were impacted by our strategic marketing campaigns which represented approximately $1 million in the second quarter and $2.3 million in the six months for television and Internet advertising supporting our key products. We plan to continue to selectively support some of our key initiatives in this way, always reevaluating the individual campaigns based on current market conditions. Third, with our decision to wind down our studio during the quarter, we recorded a $400,000 charge in research and development which represents all of the expenses associated with that operation for the quarter. Fourth, we continue to make some modest investments for the development of games for new platforms such as iPhone, Facebook and other digital applications. The costs of which are included in R&D. Finally, we canceled a couple of games -- titles in development which impacted our general and administrative costs by $300,000.

G&A expenses is a percent of sales continues to decrease significantly by 430 basis points in the quarter from 15.8% to 11.5% and 400 basis points for the first half of the year from 13.1% to 9.1%. These declines highlight the operating leverage we have built into the business over the past several years. 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 cost expense for the studio, noncash comp and any annual incentive compensation. As an aside, we continue to be vigilant in looking for opportunities to reduce costs. We have negotiated reductions in fees with some of our key vendors and service providers, in some case, those reductions ranging from 10% to 40%.

While it doesn't kick in until next year, we recently signed a new five-year lease for our headquarters which will result in our annual base rent being 20% below this year's base rent. We continue to move profit improvement process forward and will update you each quarter on any progress. We recognize the importance of being able to build a model with sustainable and growing profitability and believe that our cost management is a critical success factor towards that objective. The GAAP operating loss for the second quarter was $600,000 compared to 2008 operating loss of $300,000. Non-GAAP second quarter 2009 operating income was $500,000 compared to non-GAAP operating income of $200,000 in 2008. The GAAP operating loss for 2009 included a $300,000 charge in connection with the class action litigation and a $400,000 noncash compensation expense and a $400,000 charge for the entire expenses of the studio in the quarter. The 2008 operating loss for the quarter included a noncash compensation expense of $400,000 and a $100,000 expense of studio-related activities. Also impacting this quarter's profitability are the expenses associated with our marketing which occurred in the latter half of the quarter. We're hoping to get some additional lift from these programs in the third quarter.

Interest in financing costs were higher than last year, primarily the result of higher sales which generated higher factor fees. For the second quarter, the GAAP net loss was $1.7 million or $0.06 a share which included a $900,000 noncash loss in the fair value of warrants issued, compared to a second quarter 2008 GAAP net loss of $300,000 or $0.01 per share which included a $100,000 noncash gain in the fair value of the warrants. Non-GAAP net income was $300,000 or $0.01 a share compared to a non-GAAP net income of $54,000 or $0.00 per share in 2008.

For the six months, GAAP operating income increased 46% to $13.1 million. Compared to 2008 operating income of $2.1 million. 2009 results include a $400,000 charge in connection with the class action and $800,000 noncash compensation expense and $1 million in studio expenses. In 2008, there was a $300,000 gain in connection with the class action, a $700,000 noncash compensation expense and a $300,000 expense for the studio. Non-GAAP six month 2009 operating income increased 83% or $2.4 million to $5.3 million from $2.9 million in the year ago period. For the first six months, GAAP net income was $2.5 million or $0.09 per share which, in addition to the charges previously discussed, included a $1 million noncash loss in the fair value of warrants issued and a $1.1 million gain on the sale of income tax operating loss carry forwards compared to the first six months of 2008 GAAP net income of $2.6 million or $0.09 per share. Non-GAAP net income increased $2 million or 75% to $4.5 million or $0.16 per share compared to a non-GAAP net income of $2.6 million or $0.09 a share in 2008.

Turning to our balance sheet, as of April 30, we had $10.3 million in cash or cash equivalents. Our Do 2 factor was $746,000 which represents gross receivables sold to the factor of $15.7 million plus allowances of $2 million and advances from the factor of $14.5 million. This compares to 2008 fiscal year end of $5.5 million in cash or cash equivalents. At the 2008 year end, the Do 2 factor was $983,000 which represents gross receivables sold to the factor of 11.7 plus allowances of $3.1 million and advances from the factor of $9.6 million. Our capitalized development cost and license fees were up 26% versus year end reflecting the growth in the number of titles we're publishing and the higher costs and longer development cycle of Wii titles. The vast majority of capitalized costs pertain to titles not yet released at the end of the second quarter.

As we look forward to fiscal 2009, we're increasing our revenue guidance based upon the success of our products to date and our line-up for the balance of the year. We expect net revenue to be $80 to $85 million, up from our previous guidance of $75 to $80 million. We also expect to generate non-GAAP earnings per share of between $0.10 and $0.14 for the full fiscal year. Our guidance reflects the success of the first half and the investments that we're making to support and extend the Mama franchise and to build out the Go Play line. Guidance assumes the release of approximately 33 titles in 2009 with approximately 18 DS and 14 Wii titles. As a reminder, our results are also impacted by seasonality from the December holiday period and variability based on release schedules.

Finally, this afternoon, we filed a universal shelf registration statement with the SEC. As Jesse noted earlier, we're seeing a number of new business opportunities which meet our financial criteria and core strategy that could potentially accelerate our growth expectations. We believe this is a prudent step which provides the Company with the flexibility to relatively quickly access the capital markets if and when we so choose. I will now turn the call back to Jesse. Jesse?

Thanks, John. I would like to conclude with some comments on our remaining 2009 line-up which includes a number of titles we're excited about. Fiscal Q3 titles include Night of the Museum Battle of the Smithsonian for Wii, DS, 360 and PC follows the story line of 20th Century Fox's highly successful recent theatrical release of the same name which debuted in theatres May 22. Featuring the voice and likeness of the film star, Ben Stiller, the game brings the movie experience directly into the home with all of the excitement and humor from the feature film. Go Play Lumberjacks for Wii is the first game in our new Go Play line of motion-based family friendly Wii titles that lets players use the Wii remote to chop, climb, saw and log roll to victory in five entertaining events that include support for the Wii balance board accessory. Go Play Circus Star for Wii is the second game for our Go Play line that includes a full collection of all-time favorite circus attractions featuring support for the Wii balance board accessories, the game lets players wow the crowd with death defying stunts, animal tricks and sleight of hand in 15 different events. Both Go Play products are available now around the country for $29.99 each.

Looking at our fiscal fourth quarter, some of our announced titles include Go Play City Sports for Wii is the third game in Majesco Entertainment's new Go Play line. This compilation of urban sports lets players compete against the best neighborhood athletes in six classic games including stickball, kick ball, handball, rooftop hockey, shoot-out soccer and jump rope. The game also features four player game play and support for the Wii balance board accessory. Our House Party for the Wii turns the Wii remote into the ultimate home renovation tool that lets up to four players compete party style to build their own personalized trophy home that they can then share with their friends via Wii Connect 24. A Boy and his Blob for Wii is a rebirth of the NES classic that expands upon the original platform adventure and features ground-breaking hand-drawn and painted animation technologies by feeding the blob jellybeans, players can activate its special abilities to transform it into tools that help the parents solve puzzles, defeat monsters and escape danger.

Looking at our fiscal first quarter 2010 which includes the holiday sales period, Jillian Michaels' Fitness Ultimatum 2010 for the Wii and Jillian Michaels pocket trainer 2010 for DS feature the celebrity fitness trainer, life coach and star of the popular television series, The Biggest Loser as she leads players through high intensity, one on one workouts while providing direct feedback and motivation to help players reach their personal fitness goals.

That concludes our formal remarks. Operator, if you could review the Q&A instructions please?

(Operator Instructions). The first question comes from Mr. Sean McGowan of Needham & Co. Please go ahead.

All right, guys, I have two questions. The first of which is could you comment on what feedback you're getting from retail regarding the sell-through of some of the key titles during the quarter, especially the recent ones? And second, John, if you could comment why with the increase in revenue guidance there isn't more of an increase in non-GAAP earnings guidance? Thank you.

With regards to the sell through, it is very rare that we comment on the sell through of individual titles unless they pass specific milestones. What I will say it is has been a solid spring for us. We're looking forward to having a healthy spring and fall release. And that Mama in particular, Gardening Mama in particular has sold above our initial expectations not just in and through which emphasizes the power of the Mama brand extension.

Great. Thank you.

And Sean, to your latter question, not included in the GAAP adjustments is our -- our marketing investments which, as we indicated, the first time around, we're being -- I don't want to say it is cautious but we're being somewhat conservative in terms of our expectations for those and letting them play out. Just as with the Go Play at this end of the second quarter, we have additional marketing investments planned for the balance of the year and are taking a similar approach with those.

Okay. Thanks.

The next question we have comes from John Taylor of Arcadia. Please go ahead, sir.

Hey. I've got a couple of questions as well. I wonder if you could talk a little bit about what the closure of California means in terms of your cash product development budget for the year and next year. Is there any -- kind of material difference between what you now expect and what you expected when you had that in-house? That's the first part. I guess the second part is of the charges that you're reporting, how many of those are going to end up being paid in cash as opposed to product write-downs noncash charges? The third part of the question is are there assets that are -- were developed or started or whatever by that studio that can be transferred or do they basically have to be all started over again? So, that's the first question. And I got another one after that. Thanks.

Okay. I'll answer the first part and I'll let Gui talk to the second part. Not necessarily -- it was multiple questions in there. In terms of the costs of the studio, all of the costs that we reported this quarter and will report next quarter will be cash, whether it be for salaries, severance, or rent. We had a termination provision in the lease which allowed us to terminate it early. And pay a fee which was much less than continuing to rent the property. So that's one part of your question. In terms of the cash effect going forward, there's not really an effect of that because when we originally launched the studio as I think we mentioned, we really viewed it as a swap out of projects be they internal or external. So from a cash requirement point of view, I wouldn't view that as -- as a bad thing. I'm trying to remember if there was another piece of the first part of your question. Did I get everything?

Well, yes, actually, you just kind of touched on it. So, the cash budget may not have changed. I wonder if any of the assets can be used or whether they have to start over.

Sir, this is Gui. I can answer that. There are assets of a couple of projects that are in production that will either be finished or be transferred. So a good portion of what we've been working on is just being sort of realotted in a sense. Exactly what that ends up being, we won't know until we've completed the development cycle on a couple of these things but it is not lost so much as transferred.

Just to be clear on that, we have expensed the cost of the studio so to the extent we do end up using those, that would only be a benefit to the Company.

Okay, good. And then my second question had to do with the strategic things you're looking at. So you're filing shelf registration. I wonder if you could talk about, kind of how you're prioritizing things. What's on your wish list. Are you looking to get some technology maybe to get into a new segment? I'm thinking potentially mobile. You don't need to say specifically but are you thinking new segments where you're going to have to buy your way in to critical mass maybe or sort of -- to speed up the learning curve. Might it be on the on the other hand, a new IP, a property or something that you might be looking at. Or would you be more likely to do something to bolster what you might call the traditional publishing business where you've got both feet right now?

Right.

I think -- I think you pointed out a bunch of areas that are interesting. I would say that the key focus here is on creating and building content. And that goes for internally -- internal IP as well as licensed IP. And bringing that kind of value to the Company. That is where I would say the main focus of it would be. Would be related to. Obviously that's a broad -- that's a broad brush I paint but that's sort of the main focus.

So would something like -- a team and again, I'm not looking for any specific direction here. But I mean anything really specific but a team doing say iPhone games to expand on that platform, okay, maybe you do unique IP for the iPhone. Would that come under that or are you thinking more sort of in a general sense of IP that you can deploy across current platforms, casual platforms, Nintendo and wherever else?

JT, this is John. Just to be clear, right now, we don't have any specific plans per se. This -- the purpose of filing the shelf was to facilitate the future raising of money and to provide us the flexibility to do it more expeditiously. So it is not as though we're sitting here with a list of 30 projects we're going to go run out and do. That's basically where we are and I don't think our strategy has changed. We remain focused on building the business the way we have for the last two to three years.

Okay. Thank you.

The next question we have comes from Ed Woo of Wedbush Morgan Securities. Mr. Woo, please go ahead, sir.

Congratulations on a great quarter. Your Mama game obviously did very well. Have you publicly disclosed any other Mama games that you will be releasing? And also, on the Gardening Mama, is that U.S. rights only?

We have not disclosed, as of yet, the upcoming products in the Mama line. We will. As soon as we are prepared to. And yes, our Gardening Mama relationship much like our Cooking Mama relationship is for North American, Latin American, South American territories.

Thank you. Last question I have is, we've been getting some recent U.S. sell through information for hardware on the DS and the Wii. There is some concern out there about the Wii sales slowing. What is your outlook for the holiday season for the DS and the Wii?

For our products on DS and Wii?

For the hardware and install base growth.

We don't really comment or project on Nintendo's expectations for their hardware sales. I would refer you to their comments on it. What I will say is we're extremely bullish about the size and the attach rates for the demographics we're going after on these platforms. And we are comfortably confident that the portfolio that we're bringing out is going to continue to attract new consumers and return consumer to the Majesco Entertainment line through this holiday.

I would just add to that after, I said this earlier, after having spent a couple of weeks ago at E3, it really does seem like this holiday will be an exciting one for the industry and specifically on the Wii and DS.

Great. Well, thanks a lot. Good luck.

The next question we have comes from Todd Greenwald of Signal Hill. Please go ahead, sir.

Hey, guys. Just a couple of follow-up questions. Gui, given your success and your excitement about the Wii and DS market and the holiday season, I'm just curious about your guidance. Given growth rates the past two quarters of 76%, 71%, even when you raise guidance, you're basically assuming the second half sees a revenue decline year over year. I'm wondering if you can sort of explain the reasoning behind that? Is that a function of your release rate or the retail environment or is that just conservatism? And then I have a follow-up about the fitness genre.

This is Gui. As is true for many publishing portfolios, the revenue expectations from quarter to quarter really very much reliant on the release slate. As you look at our release slate in first and second quarter this year, we had some real heavy hitters, not just Mama Wii Grow Kitchen and Jillian's but Gardening Mama. Going through this -- third quarter and into our fourth quarter, we have some products that we're very excited about but we don't have the necessarily sure hit expectations that you could attach to what are our largest franchises. What I would say is we've taken a rationally conservative approach to our expectations looking for us to do reasonably well but not necessarily outlining what may be a breakout hit.

Okay. And then on the fitness genre, a year ago, it was pretty wide open for Jillian. Now it looks like you're going to be launching in a more competitive environment. It seems like every publisher out there has at least one key title in that category. Do you see retail doing anything there to raise awareness of the category? Are they going to do special end caps or a separate area? And then also, how do you see your titles standing out there? Is it by price? Is it by Jillian's name recognition? If you could just elaborate on that a little bit.

Sure, I'll take that, Todd. I mean, if you look at -- without a question, the category has broadened. And it is we're excited about the fact that as a result of that, even though there is a lot more competition, it has created a lot more awareness for the category. We do expect retailers to expand those categories within their retail space. Especially in the fourth quarter. That being said, we also feel very excited about the fact that the -- the most recognized celebrity on that genre is being published by Majesco and that's Jillian Michaels. I think that's where we feel confident about that product. Gui?

Yes, I would put an emphasis there on the idea that the market is growing. A year ago when we were greenlighting Jillian Michaels, the question was will adult women buy a product for the Wii specifically for themselves? And I think we were all pleasantly surprised that the answer was not just yet but a very emphatic yes. And our expectation as a result of the competition is not just that there are more choices out there for that audience but also that the audience is growing week by week, day by day and we're very excited about the opportunity to have Jillian essentially launch her brand again against a much larger installed base of adult women who believe that fitness and the Wii are things that go together for them in their home.

So what I would say is that we believe that the platform itself has definitely proven itself to retail so that will you see a lot more retail support for the idea of fitness on the Wii against adult women through the holiday season. That will be compounded with a variety of different products approaching that demographic. And that ours will be among the best of them in that, as Jesse pointed out, we have attached with Jillian. If any of you are unfamiliar with the Jillian brand at this point, I recommend that you go take a look simply at her mailing list online which is a very large vehement audience of fans who, week by week, month by month, live by her word on fitness. And our belief is that she will promote the brand just as strongly as she did last year and that that will translate into a wonderful sequel launch.

Okay. Great. Fantastic.

(Operator Instructions). And our next question comes from John Gruber of Gruber, McBaine. Please go ahead, sir.

Good afternoon. My question is on gross margins. We've -- we've declined a few quarters in a row. What is the goal for gross margins let's say next fiscal year and then how does Gardening Mamas gros margins compare to that sort of goal and then I have a follow-up.

John, this is John Gross. I would say our goal would be to try to sustain them at the level they were at last year, acknowledging though that we're investing in higher quality product, we would conceivably make a trade-off on that to have the opportunity for a larger success. In terms of the particular quarter, again, I would point to the performance of Major Minor as the particular reason for this quarter. As we've said all along, on a quarter to quarter basis, there continues to be tremendous volatility. And second part of the question pertained to?

You didn't answer. What gross margin -- how does that compare to the Gardening Mama. You said Gardening Mama was above expectations. So, answer that then I have a follow-on, please.

On the margins of Gardening Mama?

Volume.

Yes.

We talked earlier -- this is Jesse, John. We talked earlier on the call with regard to the marketing cost that we put behind Gardening Mama and how that impacts the profitability for that title. The goal is to set up a scenario where our product that we believe have opportunities to break out like Go Play and the Mamas will ultimately translate into bottom line profits in the long run.

Just to follow up on Jesse's comment, John, one of the things we've talked about is that -- while it doesn't show up on gross margin, the marketing investment in Gardening Mama took place in the second half of April and obviously -- and continued beyond that and obviously our expectation or our hope would be that the benefit of that campaign would follow through into the third quarter. So, in terms of bottom line margin, our expectation would be that we would see that benefit or higher bottom line margin for the product in the third quarter.

Yes, there was an earlier question which is why I was -- why aren't earnings being raised? Your answer would say they should be raised if you've got the marketing early for Gardening Mama. Therefore, we should reap the benefits in the second half on the earnings side. So why didn't you raise your earnings estimates given you raised your revenue estimates?

Because, as we sit here, we're -- just a little more than a month after that and we have a couple of other campaigns similar to that that we're making on other products such as Go Play which launched in the third quarter and again, we've taken what we believe is a more cautious approach in terms of recognizing that until we actually see it.

Okay. And Go Play, what percent of revenues could that be in the second half?

We don't usually comment on individual products with percentages of revenue without an extremely -- most of them or a good portion of the number like Cooking Mama at the end of the day.

I can't hear a word you're saying, Jesse. Mumbling.

We don't usually comment on individual products ahead of time being a portion of our -- what portion they would be of our expected sales number. Our investment, marketing investment into those products speaks to the -- what we believe is the large potential of those breaking out in that brand, that overarching brand being a very important -- a very important part of our portfolio. Okay. Thank you.

The next question we have comes from [Ahmed Korsin] of BWS Financial. Please go ahead.

Hi. I'm trying to understand what your strategy intention is. You ended the quarter with $10 million in cash. You generate profit and then you're filing a $20 million shelf offering which is basically a third of your market cap. So -- and your games cost upwards of about $1.5 million to develop. So, what is the strategy you're intending to pursue with such a large shelf offering?

Let me just say that one of the -- dynamics that's resulted in the industry relative to us as we've been successful on the platforms and the demographic that we have been successful at, we've had a lot of opportunities to come to us and that continues to come to us. Both on a wholly owned intellectual property opportunity as well as some major licensing opportunities. Second being significant benefit to the Company. And create major value. As we are inundated with these opportunities way more than we have been in the past, we felt it was important to have the flexibility to access the capital markets in a way that we could take advantage of those things quickly and efficiently and not lose those opportunities. That's all it is about.

And to the other part of your question in terms of where we are at the end of the quarter, historically, if you will, our leanest times, absent particular product successes are the quarters that we're heading into. So the expectation would be if the balance of the year behaves as the other years have from a working capital point of view, that our working capital requirements are going to go up relative to what they've been. And again, it is hard to predict the success of individual products but, for example, we did make the investment in Gardening Mama marketing. We have a couple of other investments such as those planned. And if we experience what we did last year, we'll be doing marketing at the -- in the fourth quarter, preholiday and we conceivably would be building inventory at that time as well. So I think evaluating or extrapolating the current cash position is probably not a solid thing to do at this point.

What I'm trying to understand is your business model is for games with low cost. You take a look at your Boy and his Blob title. You bought Pennies on the Dollar and you developed it. With the acquisition model that you're suggesting, it almost seems like you're deviating from that. And you could have an extended period for return on investment. That's what I'm trying to understand is what kind of return on investment goal or objective are you going to have? Or objective are you going to have?

This is Gui. As we stated from the start it is not that we have a specific plan. I will say that overall, our strategy remains the same. A relatively conservative return on investment per project, we'll stay focused on the mass market. I think that's what Jesse and John both refer to is our interest in having enough flexibility that adds opportunities to come up that allow us to put more, better, more interesting product to market or provide the Company with additional flexibility in terms of no cash on hand. We're interested in pursuing them. But as we said, this, as it stands right now, isn't a specific plan. It is the opportunity for a plan if it makes sense for us and for our shareholders.

And let me just add that we don't anticipate changing our strategy in any way sort of matter relative to our development costs threshold or our marketing expenses threshold. I would say that if you go through the past couple of years, it is easy to tell that the quality and robustness of our products have only gotten better over the course of that time. And that that's what we intend on continuing doing. And naturally what this is for is to allow us the flexibility to do that.

Okay. Thank you, guys.

No problem.

The next question we have comes from John Taylor of Arcadia. Please go ahead.

Hi, two more. John, within the guidance of 80 to 85, how much roughly comes from International and assume, because you're in transition there, what would be sort of a normalized percentage of total, in a typical year?

The second part of the question is we've typically been running I think 10% to 15% or so. Obviously, with the transition that we spoke about, the first half of the year being what it was, on an annual basis, you probably see something like half that. For this year. But going forward, we would certainly expect to return to more normal levels after this fiscal year.

Maybe enlighten this ignorant guy on whether Jillian is being broadcast in Europe anywhere?

No. No show.

That was my dumb question of the day, I hope. Let's see. In the past, you've benefited from presence in some of the Nintendo demo stations at this point. Are you aware of any plans to be able to highlight your products there this fall?

Nothing has been announced. We'll certainly announce it as soon as we're able.

Okay, great. Thank you.

Gentlemen, it appears that we have no further questions at this time.

Thank you, everybody. We appreciate you joining us on this call, and we look forward to speaking to you again in our third quarter 2009 earnings call in September. Have a great summer.

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