PolarityTE Inc (PTE) 2012 Q2 法說會逐字稿

Good afternoon and welcome to the Majesco Entertainment second-quarter 2012 financial results conference call. All participants will be in listen only mode. (Operator Instructions). Please note this event is being recorded.

Right now I would like to turn the conference over to Todd Greenwald, Director of Investor Relations. Please go ahead, Mr. Greenwald, the floor is yours, sir.

Thank you, and good afternoon. I would like to welcome you to Majesco Entertainment's conference call. Before we get started, I would like to remind you that the call is being recorded and an audio broadcast and replay of the 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 thin the meeting 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, 2011, 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 the 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 would now like to turn the call over to Jesse.

Thanks, Todd. I will open the call with some highlights and an overview of our performance in the second quarter. Mike will follow with the financial review. And I will conclude with an update on our product slate for the rest of the year, after which we will be happy to take questions.

Despite facing a very challenging retail environment, we are pleased to report that Zumba Fitness continues to sell, and we delivered another profitable quarter in Q2. While we anticipate the current slowness for the industry at retail to continue through our next fiscal quarter, we are excited about our upcoming release slate and expect another strong holiday season from Majesco.

In the second quarter we reported revenue of $30.4 million, down 5% from last year. Keep in mind, according to NPD, the US software market declined roughly 30% over that same time period.

Our gross margin of 40% was up from 35% last quarter, and off slightly from 42% a year ago. Finally, we reported non-GAAP earnings per share of the $0.07 compared with $0.13 a year ago.

I'm happy to report that Zumba Fitness sales remain healthy and continue to drive our business. Zumba Fitness have now sold over 7 million units worldwide, driven by both new releases and continued catalog sales.

Zumba Fitness Rush was launched exclusively on the Kinect platform during the quarter and it is off to a good start. In April Zumba Fitness Rush was the number two best-selling Kinect title overall. In fact, Zumba Fitness is now the second-largest fitness franchise in the entire video game industry, as well as the best-selling fitness franchise on Kinect.

Also, Zumba Fitness Rush has been incredibly well received by the media, garnering several strong review scores, making it the best reviewed Zumba game to date. We are encouraged by this, and believes this bodes well for this fall's release of Zumba Core, which will be created by the same developer that did Zumba Fitness Rush.

Looking forward, we are very excited about our unique and innovative lineup of games slated for the holiday season. From NBA Baller Beats to Zumba Fittnes Core, from Double Dragon to Hello Kitty, and from Mini Putt Park on Facebook to two to three new mobile games for iPhone, iPad and iPad Touch, there is log to be excited about.

With that, I would like to pass the call to Mike Vesey, our Chief Financial Officer, to provide the financial review of our second quarter of 2012 results. Then I'll come back to talk about our pipeline for the rest of the year. Mike.

Thanks, Jesse. First, I will recap our results for the second quarter, then close with some comments about our outlook for 2012. As I discuss our financial performance compared to the prior year I will use non-GAAP results in both periods.

Revenues for the three months ended April 30, 2012 were $30.4 million, a decrease of 5% from the $32.1 million reported in the comparable quarter last year. The decrease was primarily due to the timing of the release of our Zumba Fitness products. I will review the timing of the major titles.

First, both the initial 2011 Zumba Wii title and the fiscal 2012 sequel were launched in our first fiscal quarter. However, we relaunched Zumba Fitness 2 with larger initial order quantities, resulting in a higher percentage of sales being reflected in the first fiscal quarter.

Second, the sequel to Zumba Fitness for the Microsoft Kinect, Zumba Rush, was released in the second fiscal quarter of 2012. Summa 1 for the Kinect was released in the first fiscal quarter of 2011.

Third, in Europe Zumba 2 for the Wii was launched in our first fiscal quarter of 2012 compared to the second fiscal quarter of 2011 for the Zumba 1 launches in Europe.

In the second quarter of 2012 international sales were $6.5 million or 21% of revenue. This includes licensing fees related to products in territories for which we license manufacturing rights to another publisher, and product sales for Zumba 2 on the Nintendo Wii and Zumba Rush on the Kinect which we sell under a distribution agreement in the United Kingdom and other English-speaking countries in Europe. Comparably, in the second quarter of fiscal 2011 international sales were $3.2 million or 10% of revenue.

In total sales for our Zumba Fitness products accounted for approximately 86% of sales compared to 75% in the same quarter in the prior year.

Our gross margin for the quarter was 40% compared to 42.5% in the same period a year ago. The decrease was primarily due to increased price promotions and licensing royalties on our products.

On a non-GAAP basis operating expenses increased approximately $1 million to $9 million, primarily due to increased selling and marketing expenses of $2.1 million related to a joint marketing program with Microsoft on the launch of Zumba Rush, partially offset by lower write-off on canceled game projects.

In the second quarter of fiscal 2011 we recorded a charge of $1.4 million to cancel game projects in development, most related to changing prospects for new gaming consoles and handheld devices, compared to only $200,000 of such charges in 2012.

Research and development expenses decreased to $1.7 million in the quarter down from $2 million for the comparable period in 2011 due to lower third-party development costs related to our online games business. This fluctuation is largely due to timing as we expect our online expenses to increase on a full-year basis.

General and administrative expenses increased approximately $300,000 to $2.3 million. As a result, we reported non-GAAP net income of $3 million compared to a non-GAAP net income of $5.4 million in the prior year.

Non-GAAP diluted net income per share for the quarter was $0.07 compared to $0.13 for the same period last year.

Now reviewing our year-to-date results. Revenue for the six months ended April 30, 2012 were $96.6 million, an increase of 20% over the $80.6 million reported in the comparable period last year. The increase was primarily due to increased European sales of our Zumba Fitness products.

International revenues increased to $23.2 million from $3.3 million in the same period a year ago. As I already discussed, two factors impacted our European results to date. One, our European Zumba sequel products were released earlier in our current fiscal year than in 2011. And, two, we sell finished goods through a distribution agreement in certain markets in fiscal 2012, where in the prior year we licensed manufacturing rights to another publisher in all markets.

Overall sales of Zumba products accounted for approximately 80% of our sales during the six-month period compared with 67% a year ago.

Our gross margin for the six-month period were 36%. This is down from 41% in the same period year ago. The decrease is primarily due to lower margins on our new release titles in our first fiscal quarter. Launches of new titles carry a higher risk of loss than sequel products, and several of our newly released titles in the first fiscal quarter did not perform as expected.

Operating expenses were $24 million, an increase of $4.7 million from the prior year. Approximately three-quarters of the increase was due to increased marketing costs associated with our Zumba Fitness releases, as well as higher sales commissions and other variable costs associated with increased sales volumes. The remainder of the increased expenses were the result of increased R&D costs associated with the internal development of online games.

As a result, non-GAAP net income for the six-month period decreased to $10.3 million compared to $12.8 million in the prior year.

Non-GAAP diluted earnings per share for the six monthd decreased to $0.25 compared to $0.33 in the same period last year.

Turning to our balance sheet. We closed our second fiscal quarter ended April 30, 2012 with $31.7 million in cash and equivalents. An additional $6 million in advance is available to us under our factoring agreement, leaving us with total cash and availability of roughly $37.7 million.

Our total net cash provided by operating activities for the six months ended April 30, 2012 was $19.5 million compared to $14.7 million during the same period in the prior year, reflecting strong holiday results in each year.

As of April 30, we had approximately $5.5 million invested in capitalized software development and prepaid royalties, with another $5.2 million committed to complete games in progress.

We have $5.5 million of inventory compared to $7.6 million in the second quarter of 2011.

Now for our 2012 outlook. We continue to expect sales of approximately $130 million to $140 million for the fiscal year compared to $125 million in fiscal 2011. We expect this to result in non-GAAP EPS in the range of $0.20 to $0.30, compared to $0.28 in the prior year. This range is $0.05 lower than our previous guidance, reflecting anticipated softness in the retail market during our third fiscal quarter.

We continue to expect to invest approximately $4 million to $5 million in our social and mobile games business during the year, which impacts our earnings per share by approximately $0.10 to $0.12.

So, in summary, we reported another profitable quarter after increasing our marketing spending by approximately $2 million over the prior year and incurring expenses of approximately $1 million in building our online game business.

We have increased our revenues year-to-date by over -- by approximately 20%, and reported net cash from operating activities of $19.5 million, leaving us with a strong balance sheet with $31.7 million in cash and equivalents at the end of the period.

While we expect retail sales in the third fiscal quarter to be lower than the same quarter last year, we look forward to the launch of NBA Baller Beats and Zumba Core in our fourth fiscal quarter.

I will now turn the call back over to Jesse.

Thanks, Mike. I will now provide some comments on our lineup for the rest of the year. As we have said before, our 2012 holiday lineup is going to be much more focused than in years past. We are preparing a smaller release slate, but one that is more concentrated on fewer, bigger and higher-quality titles. In short, we are putting an enormous amount of effort and resources behind NBA Baller Beats and Zumba Fitness Core.

This September we will debut NBA Baller Beats, the first ever full-body motion-based NBA licensed video game that lets you perform like a pro using a real basketball. This fun, high-energy and first of its kind participative basketball video game will be available in stores exclusively on Kinect for Xbox 360 in just a few short months.

Already the Seattle Times has called NBA Baller Beats the motion game of the year, while Family Friendly Gaming has given it the silver award for best sports game of the year. NBA Baller Beats gets players on their feet using a real basketball to master ballhandling skills by dribbling and performing moves to the beats of a slamming soundtrack. Master crossovers, pump fakes, behind the back, around the world and more as you bounce the ball to the beat of 30 licensed tracks that span across decades and genres, including hip-hop, rock, and old-school classics.

The game soundtrack features today's greatest artists like Kanye West, LMFAO, Common, Janelle Monae, as well as classic favorites like Young MC, Run DMC, Onyx and many more.

We just got back from the E3 Expo in Los Angeles where NBA Baller Beats was fully playable for all attendees, and the response was incredible. Three-time NBA all-star point guard, Deron Williams, the actual cover athlete for the game, was there in our booth showing off his skills, playing the game, as well as NBA legend and TNT commentator Kenny Smith, and NFL Super Bowl champion Michael Strahanm which was a real thrill.

CRED, which measures social media influence, ran a report on E3 of it greatest influencers, and NBA Baller Beats was the number one video game and number three of the top outreachers.

When the game hits retail shelves this September it will come packaged with an officially licensed NBA game day replica ball from Spalding, and it will retail for $59.99. We are very excited and encourage you to learn more about the game by going to NBABallerBeats.com.

We are continuing to evolve our leading Zumba Fitness franchise with a unique schematic that fills a market opportunity. With 7 million units sold worldwide, Zumba Fitness is now ranked as the number two best-selling fitness game franchise of all time, second only to Wii Fit, which sold over 20 million copies and pioneered the category.

Launching this October, Zumba Fitness Core features choreography specifically designed to deliver tight and toned abs, as well as an effective total body workout. We know from research that the number one area women want to transform is their abs. And Zumba Fitness Core is the first and only video game to implement this consumer-driven feature.

The core focus is in addition to content fans have asked for, more licensed tracks, new dance styles, and additional fitness features designed to maximize your total body at-home workout. To quote Jeffrey Perlman, Chief Marketing Officer of Zumba Fitness, the days of crunches are over. Zumba Fitness Core takes a new approach. Participants are standing up, rocking out to amazing music and getting the most effective ab sculpting workout in the market. Zumba Core was also recently on display at E3 where it won the Gold award for best Xbox 360 award from Family Friendly Gaming. Zumba Fitness Core will launch this fall on both the Wii and Kinect.

In addition to these two big tent pole titles, we will also have fun and compelling content such as Harley Pasternak's Hollywood Workout, Hello Kitty Picnic and three different Cooking Mama combo packs for the DS and Wii.

Harley Pasternak's Hollywood Workout provides players with a direct access to Harley Pasternak himself, the trainer behind many of Hollywood's hottest bodies, including Lady Gaga, Megan Fox, Katy Perry, Jennifer Hudson, Robert Pattinson and Kanye West and many, many more.

The secret is Harley's 5-Factor Fitness program that requires just 25 minutes a day, five days a week. Run, jump, squat and work out in stylish A-list environments, including a beach front condo, downtown L.A. loft, and a Hollywood Hills home.

We're also looking forward to the return of pop icon Hello Kitty, as she will make her Nintendo 3DS debut in Hello Kitty Picnic with Sanrio Friends. Filled with loads of fun, fun activities, and super cute collectibles, Hello Kitty Picnic with Sanrio Friends is set to launch in North America this holiday season.

Finally, we will be re-releasing some of our best-selling Cooking Mama titles in a 2-for-1 value pack, which should make great gifts and take advantage of the large installed base of Nintendo DS and Wii.

Our Cooking Mama franchise has grown from one genre-defining game on the Nintendo DS into a 13 million unit sale triumph across multiple platforms. And these Mama combo packs combine these classic experiences to offer new fans Mama's best content at an unbeatable price.

Finally, our online games business continues to advance forward. Mini Putt Park, our first internally developed social game, is now out in an open beta on Facebook, and we are getting ready to launch that on a larger scale very soon.

Next, we plan to release at least three to four mobile titles this fiscal year, with at least half of our titles launching with the free-to-play business model. In fact, we just announced today the first two of these mobile titles would be coming later this summer to iPhones, iPads, and iPod Touches everywhere.

Sci-Fi Heroes is our first internally designed mobile game and will be available later this summer. It is a free-to-play interstellar adventure that gives players of all ages the chance to lead a team of combat specialists to victory over a galactic evil empire. With its exciting and innovative game play and incredibly co-op fun, Sci-Fi Heroes is a perfect title to show what Majesco's new mobile and social offerings strive for.

We also just announced Legends of Loot, which takes players on an unlikely quest through mysterious mazes, diabolical puzzles and dangerous traps. This dungeon crawler RPG will launch in the App Store later this summer.

And, lastly, we are continuing to bring great classic content to Xbox LIVE and PlayStation Network, as this summer we will launch Double Dragon Neon on those downloadable platforms. We have once again partnered with WayForward, the award-winning team known for bringing favorite franchise favorites, including BloodRayne - Betrayal, back to audiences in exciting new ways. And we are thrilled for the developer to put a signature spin on the father of all brawlers, Double Dragon.

In summary, we are pleased to have delivered significant revenue growth in the first half of our fiscal year with healthy profits and a positive cash flow, all while investing in building an online business so we are well-positioned in the both the social and mobile spaces.

We are very excited about the potential for both NBA Baller Beats and Zumba Fitness Core and look forward to sharing more details about the games with you in the coming months.

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

(Operator Instructions). Edward Woo, Ascendiant Capital.

It was good to see you guys out at E3 last week. I was just curious heading out of E3, we didn't get some of the price cuts on some of the consoles, and we didn't get information on the possible new 360 or PS3. What do you think is the health of the industry right now, and you think that is going to affect sales heading into this holidays?

I think if you had to -- well, let me back up. First of all, as far as price cuts on any of the existing platforms, I think those are the kinds of things you'll usually hear a little more closer to the holiday season.

As far as the overall industry is concerned and the lack of new next gen consoles, I think, for PlayStation and Xbox that haven't been announced, I think what you're seeing this year is real high-quality products being brought to market. Obviously, some of the biggest franchises are coming to market this year. And I think the focus is going to be on -- for Microsoft is going to be on those kinds of franchises, as well as the Kinect, and hopefully games like Baller Beats and Zumba.

I think for the Wii, the Wii still continues to sell in the market, and I think what you could imagine would happen this year as Nintendo launches the Wii U, which is a platform that we are very excited about, that the promotional opportunities on the Wii will be many, and that should accelerate sales at holiday time for the top products that sell on Wii.

So we think that will be very helpful to us, as well as the similar kinds of promotions on the DS and 3DS platforms. So we think that will be very helpful to us.

So this year will be a year that we think will be a good transition year for the industry. But a year that also creates opportunity for really innovative, exciting products.

Great. Have you guys made any significant investment in some of the new consoles, either the Wii U or consoles to be announced?

No, historically Majesco has been developing games on all platforms throughout its history. So as you can imagine, we are looking at the new platforms whenever we get the opportunity to.

Great, well, good luck.

John Taylor, Arcadia Investment.

Hi, I have got a couple of questions as well. Let's do them one at a time maybe. So was there any significant impact on the gross margin percentage due to the shift from royalty-bearing to direct sales in Europe?

Not significant on the overall. It is a higher revenue and a higher profit per unit with a slightly different profit margin, but on the overall numbers it didn't have a material impact.

Okay, great. And then as you're looking at the revenue guidance for the year, I wonder if you can give us a sense of what you bake in as a percent or range or something specifically for the Wii?

Yes, the -- it is not going to be materially different than our numbers to date. So roughly to date we are getting 60% of our revenues from the Wii. If you look at our fourth quarter there'll be two big impacts on that. One is going to be a pretty big Wii product with Zumba Core. And the other one we hope to be a pretty big Kinect product with Baller Beats. But we are not projecting beyond mid-line success in our guidance on either of those, so the percentages will be roughly what they are now. If either one of them breaks out beyond what we anticipate then that would move the needle on the percentages.

Okay, so at this point you are still thinking of Zumba as being mostly a Wii or higher -- more than 50% on Wii rather than Kinect?

Yes, for at least one more season we think -- you know, the Kinect hasn't shown that it is -- based on currency how it is going to overtake the Wii volume.

Right, right. Yes, different user base there. And then -- okay, in terms of your development budget I wonder if you -- remind me or maybe you haven't said, but how much are you carving out for the free-to-play mobile and social type games this year, what the step up is in dollars?

Yes, we are going to spend a total between $4 million and $5 million developing those games. Some of them we are do in-house in our studio up in Foxboro, Massachusetts. We have about 15 to 17 people there. And some of the mobile games we are doing with outside contractors. So it is an average of a little over $1 million per quarter.

Okay, great. Okay, thank you.

Darren Aftahi, Northland Securities.

Thanks for taking my question. Just two things. One, could you go over timing on launch of games again? You kine of rattled off about international and domestic launches of Zumba platform on platform? And then in terms of your mobile games, are you beta testing these in any sort of foreign app stores before they get launched on domestic, or what is the thinking there? Thanks.

Sure. So as far as the launch -- the holiday launches, we talked about NBA Baller Beats which launches in September; Zumba Core, which launches in October; Harley Pasternak, which launches around October. And then Hello Kitty and the Cooking Mama franchises we just talked about them being holiday launches or holiday products.

As far as digital is concerned and how we go about beta testing them, we will be doing some beta testing on that, but what we intend on doing is, given that we will have a few products in the market by the time we do our Q3 conference call, we anticipate that part of the conference call will be -- will include Jeff Anderson, our Senior VP of Mobile and Social, and he will be taking questions to answer it accordingly.

Great, thanks.

Adam Krejcik, ROTH Capital Partners.

Thanks for taking my call. I was also following up on your mobile strategy. And just for these games you are launching in Q4, just maybe you can give us an idea of are those in-house or outsourced, what development time look like?

And then beyond that, what is your strategy in terms of how you guys feel like you're going to position yourself to be competitive and to have advantaged in a market that is growing fast, but already pretty competitive, that being rising customer acquisition costs?

Sure. And I think as I was just talking about with Darren, once we have a few games out in the market, we can really lay out to the investment community our overall strategy and how we go about acquiring customers and trying to keep those costs as far down as possible, while maximizing our revenue from them.

Right now most of the -- all our Facebook product is completely created internally, and our mobile games are being developed a combination of internal and external.

Okay. And specifically for like Sci-Fi Heroes and Legends of Loot, those were about externally developed?

Those were both externally developed, but managed by our internal production team.

And what is the development time look like for those types of titles right now?

Development time is usually anywhere between probably four and six months.

And are you planning to launch these on Android as well, assuming they are successful, you get traction?

Well, we have built all of our games to be brought onto alternative platforms. The goal is to make them successful on the platforms we initially launch them on and then bring them over to the other platforms as well.

All right, great, thanks a lot.

(Operator Instructions). Well, it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

We want to thank everybody for coming on our Q2 2012 conference call -- earnings call. We look forward to speaking to everyone again after, hopefully, a lovely summer. We will see everybody again in September.

And we thank you, sir, and to the rest of the management for your time. The conference call is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you.