PolarityTE Inc (PTE) 2011 Q3 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the Majesco Entertainment Company's fiscal third quarter 2011 earnings conference call. As a reminder, all participants will be in a listen only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) This conference is being recorded. At this time I'd like to turn the call over to Todd Greenwald, Director of Investor Relations and Strategic Planning. Mr Greenwald, the floor is yours, sir.

Thank you and good afternoon. I'd like to welcome you to Majesco Entertainment's conference call. Before we get started I'd like to remind you that the call is being recorded and the audio broadcast and replay of the teleconference will be available in the Investor Relations section on the Company's Web site.

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 cause actual results to differ materially are specified in the Company's annual report on Form 10-K for the year-ended October 31, 2010, 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 measures. GAAP financial measures include expenses related to non-cash compensation, changes in the fair value of warrants, severance costs and a benefit from the sale of certain state income tax benefits derived from net operating losses. Operating income, net income and diluted income per share have been adjusted to report non-GAAP financial measures that exclude these items. 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 or superior to GAAP results. Reconciliation between GAAP and non-GAAP financial measures is included in the press release issued earlier today.

With me on the call are Jesse Sutton, Chief Executive Officer and Mike Vesey, Chief Financial Officer. I'd now like to turn the call over to Jesse.

Thanks, Todd. I'll open the call with some highlights and an overview of our performance in the third quarter. Mike will follow with the financial review and I'll conclude with an update on our product slate for the upcoming holiday season. Then we would be happy to take your questions.

In Q3, we experienced a solid quarter despite what's normally seasonally -- a normally seasonally weak time of year for us. Zumba Fitness remains strong especially in Europe and was largely responsible for the strong growth seen in the quarter. Sales grew over 60% to $19.5 million and our gross margin expanded to 41%, up from 23% last year. This resulted in non-GAAP EPS of $0.03, up from a loss of $0.04 last year.

We continue to be delighted by the success of Zumba Fitness. Zumba Fitness has been industries number one fitness title for all of 2011 and is now one of the best selling fitness video games in history. Additionally, Zumba Fitness continues to be the Number 2 best selling retitle here in the US each month since launch for the tenth consecutive month since November 2010. Overseas, Zumba Fitness continues to top the charts, where it just finished a run of 10 consecutive weeks as the Number 1 title across chart tracks UK all formats chart. As an ongoing advertising has contributed to increased sales in France and Italy as well.

We are also pleased to see the results of our recent Nielsen survey which found Zumba Fitness to be one of gamers top 10 games to buy next. This speaks to the continued momentum and demand for the game coming nearly 12 months after its release in 2010. Zumba Fitness has sold more than 3 million copies worldwide and we are looking forward to new and exciting features in the upcoming sequel, Zumba Fitness II, coming to the Wii this holiday and another yet to be announced platform early next year.

We are also enthusiastic about our recent launch of BloodRayne Betrayal and we're thrilled when Sony chose this fan favorite title to be one of 4 games to be featured worldwide in Sony's play promotion this past August. Critics seem to agree as IGN rated this title a 9 out of 10 and Joystick concurred with a 4.5 out of 5. Initial sales look promising and we are excited to see continued support for that digital title.

Once again, we're very excited about our holiday release slate, which we think positions us well to have our biggest holiday yet. I will discuss our titles later on in the call. Now I'd like to pass the call to Mike Vesey, our Chief Financial Officer, to provide the financial review of our fiscal third quarter results. Mike?

Thank you, Jesse. First I'll recap our results for the quarter and close with some comments about our guidance for the year. As I discuss our financial performance compared to the prior year, I'll use non-GAAP results in both periods. Our non-GAAP results include adjustments for non-cash frequently occurring items. The most significant items in the quarter are approximately $1.3 million non-cash gain related to the revaluation of our warrant liability based on fluctuations in our stock price and approximately $400,000 in non-cash compensation expense. Please refer to our press release issued earlier today for a reconciliation of our GAAP and non-GAAP results. Now for the quarter.

Revenues for the three months ended July 31, 2011 were $19.5 million, an increase of 61% over the $12.2 million reported in the comparable quarter last year. Revenues from royalties and product sales to our European distribution partner accounted for approximately $5.3 million of the increase. As Zumba Fitness was a leading performer there. Domestically, we had two new product releases for the Nintendo DS during the quarter. Spy Kids All the Time in the World and Cake Mania Main Street. However, the majority of the sales were from our Zumba Fitness and Mama product lines.

Our gross margin for the quarter was 41%. This is up from 23% in the same period a year ago. Our current quarters margin reflect the impact of our Zumba Fitness products which carry comparatively higher price points when compared to our line up from a year ago, and continue to sell at the original retail prices where the Nintendo Wii and Microsoft Kinect is used.

Our operating expenses include two notable increases from the prior year related to product research and development and marketing. First, research and development expenses for the quarter increased $1.2 million from the same period in the prior year, primarily due to our investment in our social games business. We completed the acquisition of Quick Hit on June 3 to build our social games business. We are developing and operating premium games for play on Facebook and mobile devices with this group. During the period we incurred approximately $1 million of expenses related to our social and mobile games business.

Second, sales and marketing expenses increased approximately $700,000 due to volume related sales and marketing costs. As a result of the increased sales activity, non-GAAP net income for the quarter was approximately $1.1 million compared to a loss of $1.4 million in the same period last year. Non-GAAP diluted earnings per share for the quarter was $0.03 compared to a per share loss of $0.04 for the same period last year. Now reviewing our year-to-date results.

Revenues for the nine months ended July 31, 2011, were $100.2 million, an increase of 92% over the $52.3 million reported in the same period last year. Again, sales of our Zumba Fitness titles were the main driver of the increase. Our gross margin for the nine month period was 41%. This is up from 28% in the same period a year ago. The gross margins reflect continued sell-through of our Zumba Fitness products on Nintendo Wii and Microsoft Kinect at their original retail prices.

Operating expenses were $26.9 million, an increase of $11.5 million from the prior year. Approximately half of the increase is due to media and variable sales costs related to our higher revenues. $2 million was the result of the investment in our social games business. The remainder of the increase is due to higher profit based bonuses and general and administrative expenses. As a result, non-GAAP net income for the nine month period increased to $13.9 million, compared to $200,000 in the prior year. Non-GAAP diluted earnings per share for the nine month period increased to $0.35 compared to $0.01 for the same period last year.

Turning to our balance sheet. We closed our third fiscal quarter ended July 31, 2011, with $19.7 million in cash and equivalents and an additional $3.7 million in advances available to us under our accounts receivable factoring agreement, leaving us with total cash availability of roughly $23 million. As of July 31, we had approximately $9.4 million invested in capitalized software development and prepaid royalties, with another $9.3 million committed to complete the games under development. This is roughly double the amount from the prior year. We had $4.6 million of inventory, compared with $3.5 million in the third quarter of 2010. We expect to utilize our cash balance in the next fiscal quarter to build up our seasonal inventory for the upcoming holiday selling season.

Now for an update on our 2011 outlook. Based on our third quarter results, we are increasing our guidance for sales and non-GAAP earnings per share for the fiscal year ended October 31, 2011. We now expect net sales for the year to be between $120 million and $130 million and non-GAAP earnings per share in the range of $0.35 to $0.38. This is an increase over our previous guidance of sales of $110 million to $120 million and non-GAAP EPS of $0.30 to $0.35. Our guidance reflects increased advertising and marketing expenses of approximately $1.5 million to $2 million that we expect to incur in our fourth fiscal quarter of 2011 in support of our holiday product launches. The benefit of these expenditures are expected to be reflected in our results for the first quarter of fiscal 2012 as retailers reorder product during the holiday selling season.

It should be noted that due to our October 31 year-end date, the majority of sales for our holiday line up will be reflected in the first quarter of our next fiscal year. Additionally, our product mix in the fourth quarter is typically more heavily weighted to sales of our lower priced catalog products as our distributers order for the holiday season. Accordingly, our gross margins as a percent of net sales are generally lower in our fourth fiscal quarter. We expect our gross margins to return to historical levels in the first quarter of 2012, reflecting a higher percentage of our premium price products and new holiday release slate which Jesse will now provide an update to you on. I would like to now turn the call back over to Jesse.

Thanks, Mike. I will now provide some comments on our line up for the rest of 2011. Looking forward, we are very excited about the upcoming holiday season. This may be our biggest opportunity in the Company's history. We have a larger slate of titles than in years passed and more importantly, a much higher caliber of titles backed by far more significant brands than we've ever had in the past. Big brands like Zumba Fitness, and Cooking Mama, and Twister, well known celebrities like Hulk Hogan and Jillian Michaels and proven Hollywood licenses like Alvin and the Chipmunks and even Jaws should separate this holiday season from those of years past.

This holiday we expect to launch many titles for the Kinect as well as the 3DS. Kinect for the XBOX 360 is off to an astonishing start quickly ramping up to a 12 million unit install base, which we believe could be well over 20 million in the next six to 12 months. As more and more casual gamers migrate to a new motion based gaming platforms like the Kinect, the Move and the Wii, we believe this will create more opportunity for us given our demographic focus on family and casual gamers.

We are supporting the Kinect this year with several big titles. Hulk Hogan's Main Event, which is the first motion based wrestling game on the Kinect, and lets players train with icon Hulk Hogan as they build their own wrestling personalities and learn the art of showmanship to win over the crowd. I've personally met with Hulk a couple times over these past few months and we are really excited about this significant support of this title along with this fan base and TNA.

Twister Mania is a contagiously fun, interactive party game which challenges players to stretch and shrink their body into hundreds of different shapes, animals, and symbols. It's laugh out loud fun. The game is designed exclusively for Kinect, and leverages full body motion mechanics. One reporter mentioned Kinect and Twister Mania are like peanut butter and jelly, they go so well together. This game allows up to 8 players in team based pairs, so it's a social party game that is fun with family and friends, kids, and adults. Everyone really.

Alvin and the Chipmunks Shipwrecked is an endearing title we are launching on Kinect, Wii, and DS. This will launch in front of the blockbuster movie being released in December by Fox. Who doesn't love to dance to munktastic songs and the set list is amazing, including 30 songs like beat it, play that funky music and we are the chipmunks.

Motion Explosion is a fun, family friendly experience that puts your motor skills to the test with activities that keep your entire body moving as fast as your mind can trigger your next move. And finally, we will also continue to market and support the original Zumba Fitness for Kinect, which should continue to sell well this holiday as that install base grows.

While Nintendo 3DS got off to a somewhat slower start, we are very encouraged by Nintendo's quick action to reduce the hardwares price and believe in its long term viability. We have announced six new titles for the 3DS this year and are most excited about Cooking Mama 4 Kitchen Magic, as well as Jaws Ultimate Predator, Pet Zombies, the Hidden, Nano Assault and Face Racers Photo Finish. Much like Cooking Mama's original 2006 debut earlier in the DS's life cycle which continued to sell well even five years later, we believe that Cooking Mama 4 can establish itself now on the 3DS and experience a similarly long sale for many years to come.

While we aren't leaving our core Mama fans behind, conversely we plan to widen the current audience with Camping Mama Outdoor Adventures for the Nintendo DS, which just came out today. In addition to Mama, we're featuring Papa as well as a daughter and a son. Would be campers can choose to play as either the son or daughter with Mama and Papa offering guidance on outdoor activities like rock climbing, caving, rowing, and tree climbing as they navigate new environments that span forests, mountains and seas.

Finally, following the huge success of Zumba Fitness on Wii, we will continue to build this solid franchise with Zumba Fitness II, coming this holiday for Wii. Rebuilt from the ground up with a brand new development team, the sequel features beautiful new 3D avatar renderings as well as contagious new music including both the traditional rhythmic Zumba beats fans love to select, new license tracks from today's hottest artists including Pitbull and Nicole Scherzinger. Of course, there is exciting new choreography, more than double the number of dance styles and dynamic new arenas. Part of the reason for the significant success is that this is a dance and a fitness title, so you will see new features like the calorie counter and custom work out feature for the fitness enthusiasts. The Zumba brand remains in rapid growth mode and we're very happy to have partnered with the preeminent leader in the dance fitness world.

We are also demonstrating our commitment to digital and social games. This quarter we released Parking Wars II for Facebook and we are entering our first season with Quick Hit's NFL online games. We are very excited about where these projects are in their life cycle. Parking Wars II is in early beta, while Quick Hit is entering its second NFL season and we'll have more to discuss in our 2011 year-end call next quarter.

I'm very proud of our holiday line up. I think we are putting our best foot forward and the games really look great. In summary, we are very encouraged by our performance so far this year and look forward to executing on our holiday release slate while also investing in the growth of our social gaming initiatives. That concludes our formal remarks. Operator, if you could review the Q&A instructions, please?

(Operator Instructions) The first question we have comes from Adam Krejcik of ROTH Capital Partners.

Yes, hi. Good afternoon guys. A couple questions for you. I guess first on BloodRayne, can you go over the economics of that model? I guess the margin structure and how that might affect margins in Q4 and Q1 here, thanks and then I have a couple follow-ups.

Yes, sure, Adam, this is Mike. So, it's a downloadable title sellable for points on both the Sony network and the Microsoft network. The retail equivalent to the customer is about a $15 title. We get 2/3 of that, so we get $10. The incremental cost to us is basically zero. Beyond that, up front development costs for a game we don't give specific game information, but for a downloadable game like that is anywhere from $200,000 to $700,000 typically.

Okay, great, and then switching to the balance sheet, you mentioned capitalized costs have gone up to about $9.4 million. Are those -- is that kind of evenly spread among the titles you've announced or is that also some royalties and license fees for some titles that are in the pipeline? I guess any more clarity on that capitalized software development line?

Yes, the majority of it is for titles that we'll release this holiday. I'll extend the holiday for us a little bit through February for our second Zumba release that we anticipate doing later in the year, but 80% of the balance are for games that will be released by February of next year.

Okay, great. And then switching over to digital, any update in terms of the Quick Hit integration with Jeff Anderson, when we should expect some of the first titles that they are working on to release? And then I think you mentioned last time you hadn't acquired the rights to that NFL game, but it sounds like now you are going to be operating that and is that generating revenues, positive cash flow? Any details on that would be great.

Sure. Thanks, Adam. It's Jesse. So far its been a great transition with the Quick Hit folks. Jeff Anderson, who has come on board to be our Senior VP of social and mobile, has been great at helping us learn how that free to play business model works and has been taking our current products, as well as the products that are in development under his teams guidance, and really tweaking them to make them maximally efficient monetization wise as they come out and as we continue to tweak the current ones, so we are continuing to learn. There's a lot more that we'll discuss at our year-end conference call as it relates to this. The NFL season just started and this is when the real business begins for the Quick Hit NFL game. We are extremely excited about it and like I said, by the time we speak next, the season will be most of the way through and we'll have some good feedback on that.

Okay, so just to clarify, you are the publisher of that game now?

Yes.

Okay, got it. Thanks.

(Operator Instructions) We do have a question from [Shawn McCoy] of the Wall Street Resource. Please go ahead.

Hi, congrats guys on the quarter. That's very impressive third quarter performance from your Company.

Thank you.

Thank you.

I just wanted to touch base. Zumba seems to really have -- it's really taken its stride. Not only the game, but the workout and its becoming extremely addicting. My sister is actually a Zumba instructor and she said it's a work out where you just burn a ton of calories and you actually have fun doing it. I'm just really amazed with the growth here. Can you guys talk about the growth going on in Europe?

Sure. We've been pretty amazed at how well it sold in Europe and it hasn't even had -- the Wii version hasn't had a holiday yet. This is going to be its first holiday, so we're really excited about it. It's been the number one title out there for a while and the Zumba brand itself, Zumba Fitness is a global brand that speaks to over 10 million people weekly and is continuing to grow. We feel that we are -- in our partnership we've been a great partner for Zumba in that we've helped build their brand and they've helped in broadening the awareness of our products within the entire community within such a great way.

Yes, launching that in the third quarter really helped you guys out with the sales and actually turning a profit. So, one other question regarding Quick Hit and Facebook, I understand you guys have about 90,000 fans. How are you guys planning on growing that fan base and the infrastructure they brought on board with the acquisition, how many employees did you guys bring on board and how is that affecting your overall growth of the social gaming industry, and are they helping out in any other manners?

So, the Quick Hit team is responsible for all of our products essentially, the oversight of the development of including the Quick Hit NFL. Like I said before, the NFL game -- the season's just started so now is when we anticipate to have significant revenues there that we can report back in January to let you know. We are very pleased with it. It's a standalone -- it was primarily a standalone online game and only recently was brought over to Facebook, so that it can take advantage of the Facebook audience and that's still a work in progress. We really haven't marketed it yet too intensely on Facebook.

Well, congratulations guys. Keep up the good work and I'm really excited to watch future developments for the Company.

Thanks.

Thank you.

At this time we're showing no further questions. I'll go ahead and hand the conference back over to management for any closing remarks.

We want to thank everybody for coming on to our third quarter conference call and we look forward to discussing our year-end results and our holiday update in January. Thanks again.

We thank you to management for your time. The conference has now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you.