PolarityTE Inc (PTE) 2012 Q3 法說會逐字稿

Good afternoon, and welcome to the Majesco Entertainment Third Quarter Fiscal 2012 Financial Results Conference Call. All participants will be in a listen-only mode.

(Operator Instructions)

Please also note that today's event is being recorded. At this time, I would like to turn the conference call over to Ms. Stephanie Prince of LHA. Please go ahead, Ms. Prince.

Thank you, Jamie, and good afternoon everyone. Welcome to Majesco Entertainment's Third Quarter Fiscal 2012 Earnings Conference Call for the quarter ended July 31, 2012. With me on today's call are Jesse Sutton, Chief Executive Officer; Mike Vesey, Chief Financial Officer; and Jeff Anderson, SVP of Social and Mobile. Before we get started, I would like to remind you that the call is been recorded, and an audio broadcast and replay of the teleconference will be available in the Investor Relations section of the Company's website.

As a reminder, this call may contain forward-looking statements, including statements regarding 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, 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 earnings press release issued earlier this afternoon. I would now like to turn the call over to Jesse. Jesse?

Thanks, Stephanie. Today, I will start my remarks with some highlights and an overview of our performance in the third quarter. Mike will then review our financial results. I will then conclude with a recap of our products late for the fourth quarter and the holiday season, and then we'll open the call up for questions.

Our third quarter came in about as expected, as retail conditions for interactive entertainment remained challenging amid the typical summer seasonal slowness. Our Zumba fitness products continued their strong performance, ranking among the top interactive dance and fitness titles. Overall, the Zumba Fitness franchise has now sold over 8 million units, and maintained its standing as the second-largest fitness franchise in the entire video game industry. It is also the best-selling fitness franchise on Kinect. We reported revenue of $9.1 million, compared to $19.5 million in the third quarter last year. The year-over-year decrease is impacted by industry-wide decreases in retail sales attributable to the end of life cycle for several gaming platforms, including the Nintendo Wii and DS. As a result, non-GAAP earnings per share were a loss of $0.09, compared with non-GAAP income of $0.03 a year ago.

Looking ahead, we are very excited about our holiday release slate, beginning with the formal introduction of NBA Baller Beats tomorrow, and the launch of Mini Putt Park on Zynga.com last week. We are optimistic about the opportunities for growth in the dynamic interactive entertainment industry. I would now like to pass the call to Mike Vesey, our Chief Financial Officer, to provide a financial review of our third-quarter results. I will then discuss our holiday release schedule. Mike?

Thank you, Jesse. I will begin by re-capping our results for the third quarter, and close with some comments about our outlook for the full year of fiscal 2012. As is our custom, I will use non-GAAP results when discussing our financial results.

Revenue for the three months ended July 31 was $9.1 million, down from $19.5 million reported in the third quarter last year. The decrease was primarily due to decreased sales in the US attributable to the slow retail market for video games, the late life cycle for Nintendo Wii and DS platform, and some changes in timing of our Zumba Fitness releases in Europe over the year. International sales in the third quarter were $2 million, or 22% of revenue, compared to $5.3 million, or 27% of revenue, in the third quarter of fiscal 2011. The decrease reflects the change in timing of the release of our Zumba Fitness products in Europe. In 2011, we released Zumba Fitness for the Wii in our second fiscal quarter; however, its best-selling quarter was the third fiscal quarter of 2011. Comparably, in fiscal 2012, we released Zumba Fitness 2 in our first fiscal quarter for the holiday, with larger initial order quantities due to its track record. Total revenue from Zumba Fitness products accounted for approximately 79% of sales, compared to 80% in the same quarter a year ago.

Our gross margin was 38% in the third quarter, compared to 41% a year ago. The decrease was primarily due to the change in mix of revenues between our US and international operations. On a non-GAAP basis, operating expenses increased approximately $100,000 to $6.7 million, primarily due to higher selling and marketing expenses of $2.7 million, compared to $2.3 million in the year-ago third quarter. We spent approximately $500,000 on pre-launch activities for NBA Baller Beats during the quarter in 2012. Partially offsetting the higher selling and marketing expenses was the absence of charges to write off cancelled game projects in development. In the third quarter fiscal 2011, we recorded a charge of $150,000 for cancellations.

Research and development expenses were comparable in the 2012 and 2011 third quarter, at approximately $1.9 million. In the current period, higher expenses for the development of social games generally offset lower internal costs of our other development activities. Overall, we spent approximately $1.1 million developing mobile social games this quarter. General and administrative expenses decreased by approximately $100,000 to $2.0 million in the third quarter of 2012. As a result, we reported a non-GAAP net loss of $3.2 million, compared to non-GAAP net income of $1.1 million in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.09, compared to income of $0.03 in the same period last year.

Now reviewing our year-to-date results. Revenue for the nine months ended July 31, 2012, was $105.7 million, a 6% increase compared to $102 million reported in the comparable period last year. The increase was primarily due to the release of Zumba Fitness 2 for the Wii and Zumba Fitness Rush on the Kinect Xbox 360, particularly in European market. International net revenue increased to $25.2 million, from $8.7 million in the same period a year ago. The increase reflects the positive impact of the Zumba releases, and the benefits of selling finished goods through a distribution agreement in certain markets in fiscal 2012, whereas in the prior year we licensed manufacturing rights to another publisher in all markets. Overall, sales of Zumba products accounted for approximately 79% of our sales during the nine-month period, compared with 70% a year ago.

Our gross margin for the nine-month period was 37%, down from 41% in the same period a year ago. The decrease was primarily due to lower gross margins on some of our new release titles in our first fiscal quarter, and higher license costs and promotional allowances to retailers on some of our Zumba Fitness products. Operating expenses were $31 million in the current nine-month period, an increase of $4.8 million from the prior year. Approximately three quarters of the increase was due to increased media, advertising and variable sales costs related to Zumba Fitness and other titles. The bulk of the remaining variance reflects higher research and development costs associated with the internal development of social and mobile games. To date we have spent $3.2 million putting us on track to invest approximately $4 million to $5 million during fiscal 2012 in our social and mobile initiative. As a result, non-GAAP net income for the nine-month period decreased to $7.1 million, compared to $13.9 million in the prior year. Non-GAAP diluted earnings per share for the nine months decreased to $0.17, compared to $0.35 in the same period last year.

Turning now to our balance sheet. We ended the third fiscal quarter with $27.3 million in cash and equivalents. An additional $2.9 million is available to us under our factoring agreement, giving us total cash and availability of roughly $30 million. The net cash provided by operating activities for the nine months ended July 31, 2012, was $15.1 million, compared to $16.6 million during the same period in the prior year. The decrease was primarily due to the timing of payments of licensees. As of July 31, we had approximately $7.7 million invested in capitalized software development and pre-paid royalties, with another $5.1 million committed to complete these games in progress. We ended the quarter with $6.1 million of inventory, compared to $4.6 million at the end of the third quarter of 2011. As in prior years, we expect to utilize a substantial portion of our cash balance to fund seasonal inventory and other working capital needs related to the holiday selling season. We have historically replenished this cash balance in our first and second fiscal quarters of the following fiscal year, as we collect receivables related to the holiday.

Now turning to our 2012 outlook. Given the impact of the end of life cycle of the Nintendo Wii and Nintendo DS on our catalog products, we expect to be at the lower end of our previously issued guidance of approximately $130 million to $140 million in net revenue, and $0.20 to $0.30 non-GAAP earnings-per-share for the fiscal year ended October 31, 2012. This compares to approximately $125 million in net revenue, and $0.28 in non-GAAP earnings per share in the prior year. As a reminder, our EPS range includes approximately $0.10 to $0.12 in expenses for our investment in our online games development.

In summary, our third quarter came in as expected given typical seasonal softness and the challenging retail environment. We also have incurred some pre-launch expenses related to NBA Baller Beats during the quarter, which is being rolled out tomorrow. We look forward to the launch of our holiday slate, especially the launch of NBA Baller Beats, and the upcoming launches of Zumba Fitness Core. Equally important is the progress we are making in reaching our longer-term goals in building our freemium games business, with the launch of Mini Putt Park in partnership with Zynga, and the release of our upcoming release of first two freemium titles for smartphones and iPad.

As a reminder, our business is seasonal, with the majority of our holiday sales typically being recorded in our first fiscal quarter, which begins on November 1. We will be releasing two significant titles in our fourth fiscal quarter of 2012 -- Zumba Fitness Core and NBA Baller Beats. However, since our year ends on October 31, we expect a significant portion of sales related to these products will be reflected in our first fiscal quarter of fiscal 2013, as retailers re-order during the holiday selling season. Jesse will now speak in further detail about the holiday releases. Jesse?

Thanks, Mike. I will now provide some comments on our lineup for the rest of 2012. This year, our holiday lineup is our most diverse ever, reflecting the shifting landscape in our industry. We are launching several products around proven brands such as Zumba Fitness, Cooking Mama, Hello Kitty, targeting the large installed base and attractive price points of established platforms like the Nintendo Wii, which are in a late stage of their life cycles. This is complemented by innovative new products -- product launches -- designed to take advantage of new technologies and longer-term growth opportunities in motion-based gaming, digital download networks, and online social and mobile gaming on platforms such as iPhones and iPads. We are excited about the opportunities provided by the new platforms and innovations being introduced into the industry.

Tomorrow, NBA Baller Beats launches as 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 exclusively on Kinect for Xbox 360, will be on shelf in all major retailers. Baller Beats comes packaged with an official licensed NBA game day replica ball from Spalding, and will retail for $59.99. NBA Baller Beats gets players up and on their feet using a real basketball to develop real ball-handling skills by dribbling and performing skill moves to the beats of an eclectic soundtrack. Master cross-overs, 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, old-school classics from artists like Kanye West, LMFAO, Common, Janel Monet, Run DMC, Missy Elliott, Queen, and many more.

We are really excited about NBA Baller Beats based on feedback we have received all summer long from retailers, athletes, celebrities, the media, and consumers. The Seattle Times has called NBA Baller Beats the motion game of the year. Family Friendly Gaming has given it the Silver Award for best sports game of the year, and CRED, which measures social media influence, cited NBA Baller Beats as the second most buzzed about game at E3 this year. We had over 4 million views of our pre-launch videos on YouTube, and close to 700,000 Twitter followers, which is more than any other video game franchise or platform, and the game hasn't even launched yet.

Everywhere we have demoed Baller Beats, the reception has been overwhelmingly enthusiastic. This includes at E3, at summer youth camps in partnership with ProCamps basketball camps that offer kids from ages 7 to 18 the opportunity to get hands-on basketball instruction with some of the best players in the NBA and WNBA, throughout the tri-state -- New York tri-state area with the New York Knicks and Liberty fitness initiatives, and most recently, our MTV VMA after-party.

Deron Williams, 2012 Olympic gold medal winner, three-time NBA All-Star point guard, and the cover athlete for this game, and NBA legend, TNT commentator, and Baller Beats narrator Kenny Smith are out there supporting the introduction as well. Today, Darren will demo the game live on BET's number-one rated show 106 & Park. He also hosted a media day talking to reporters from Maxim, The Source, XXL, and TMZ, the Associated Press, and more. Kenny has done numerous interviews, including the New York Times, LA Times, ESPN radio, NBA TV, game trailers, machinima, and more. The game was also featured at preview events this past weekend at the Microsoft flagship store in Bellevue, Washington, and GameStop's New York flagship store. Needless to say, we are excited around the hype of this game's launch and its holiday sales potential.

Next up is the release of Zumba Fitness Core on both the Wii and Kinect for Xbox 360 on October 16. Core is breaking new ground in the fitness space as the first and only game designed to sculpt your abs and strengthen your core. The consumer-driven thematic is backed by research results from 28,000 women in our target demographic who confirm that abs are the number one part of their body that they would like to transform. We are excited to offer players a fun and effective alternative to crunches delivered within Zumba's signature dance fitness party workout.

Core also layers in a huge range of licensed music, across 33 different dance styles, the most styles of any Zumba game to date, and more than any other dance or fitness game on the market now. We have also added new fitness features, including goals, plus, and nutrition and lifestyle content, to ensure that Core is offering consumers the deepest, richest Zumba experience to date. At E3, Core earned an Xbox 360 Gold Award from Family-Friendly Gaming, and subsequent events since then have highlighted that both media and retail are embracing our Core content. From a strategic perspective, Zumba Fitness Core underlines our focus on growing our number one franchise in smart, marketable ways that offer competitive differentiation and real consumer value.

Beyond dance fitness, we see market opportunity in offering players access. Access to the same workout and celebrity trainer that major celebrities use to get in shape for the big screen and red carpet. Harley Pasternak's Hollywood Workout lets players train with Harley himself, the fitness expert behind many of Hollywood's hottest bodies, including Lady Gaga, Megan Fox, Katy Perry, Jennifer Hudson, Robert Pattinson, Kanye West, and many more. What celebrities have learned, and we are making available to the general public, is that Harley's Five Factor fitness program requires just 25 minutes a day, five days a week. This easy, approachable workout, coupled with the Five Factor diet, is a highly effective program that can transform your body fast. This game launches next week on September 18, and Harley himself is hosting press and celebrities at his home studio to demo the game. You'll see Harley promoting the game on national TV news programs, daytime talk shows, and news magazines in the coming weeks.

We've realized success with our previous Hello Kitty hand-held game, and believe this strong brand has a strong opportunity on 3DS as that install base grows. Hello Kitty Picnic with Sanrio Friends features a pop icon and all the signature brand characters in fun touch screen activities centered around a picnic party. The game is set to launch in North America this holiday. We are also re-releasing some of our best-selling Cooking Mama titles in three separate two-for-one value packs, which make great gifts, attract new fans with a strong value proposition, and take advantage of the large install base of established Cooking Mama fans on the Nintendo DS and Wii.

In the digital download space, Double Dragon Neon is a solid brawler based on the top-selling classic, with a built in fan base, that launches September 11 on PlayStation network and Xbox Live Arcade. We've once again partnered with WayForward, the award-winning team known for bringing classic properties back to audiences in exciting new ways. We are thrilled that the WayForward team has put their signature spin on the father of all brawlers, Double Dragon, and believe this fresh take on an arcade throwback will attract players with an exciting mix of over-the-top combat, retro aesthetics, and memorable soundtrack.

We have stated in the past that our strategic focus for our console games is building new experiences around big brands. This holiday's lineup is a true reflection of our strategy, as we release games featuring Zumba, the NBA, Harley Pasternak, Hello Kitty, Cooking Mama, and Double Dragon. We are just as focused on being successful in the digital space, and we our launching a number of social and mobile games to further diversify our portfolio, and capitalize on these growing market segments. Mini Putt Park, are first internally developed social game, was released on Zynga.com just last week. Our strategic partnership with Zynga gives us access to Zynga's base of over 300 million monthly users, with marketing and promotional support. Mini Putt Park continues to be available on Facebook.

Next, we plan to release two mobile titles for iPhones, iPads and iPod Touches in time for the holiday season. First is Sci-Fi Heroes, our first internally designed mobile game, will be available in October. This free-to-play interstellar adventure lets players of all ages lead a team of heroes to victory over an evil galactic empire. With its exciting game play and engaging co-op fun, Sci-Fi Heroes is the perfect title to showcase our new social and mobile capabilities. Next, Legends of Loot takes players on an unlikely adventure through mysterious mazes, diabolical puzzles, and dangerous foes. We also expect for this dungeon-crawler role-playing game to also launch in October, delivering its unique style of combat to iOS and Android users everywhere.

In summary, we are very excited by our holiday releases, especially NBA Baller Beats and Zumba Fitness Core, and believe we'll see a strong return on the resources we've invested developing and bringing these titles to market. We look forward to reporting back to you on the 2012 holiday season. Operator, please open the call up for questions.

We will begin the question-and-answer session.

(Operator Instructions)

We will pause momentarily to assemble our roster. Ed Woo, Ascending Capital.

I had a question. You released Mini Putt Park last week. What is the initial reception on that game?

Thanks, Ed. On the phone with us is Jeff Anderson, our Senior VP of Mobile and Social Games. Jeff, you want to take that?

Yes, glad to. I think the initial feedback has been positive. We've already had some feedback running for a while now on Facebook. We've been gearing up for the formal hard launch of the product, obviously working in concert now with Zynga. Since it just came out at the end of last week, it's going to take us a little bit of time to work with them, to fully open up the marketing promotional opportunities, and let all the users into the product, and really kick it off in earnest. I would say so far at this point we've had very positive feedback.

Has there -- some of the issues going on with Zynga -- has there been any affect on your strategy on social mobile gaming?

Could you be a little bit more specific on what issues?

Sure. We obviously see the declines in Zynga's stock price. Some of the declines they had in players for their games -- has that impacted your view on the long-term opportunities in this market?

Jesse, did you want me to take that one?

Jeff, why don't you take it, again.

Sure. I would say that obviously we have a very enthusiastic viewpoint at how the continual evolution of the digital market goes; that we're bullish on where both social and mobile continue to grow. It's a key part of our strategy as we move forward to add those portfolio products into our market. I think that we see that even Zynga has particular challenges or opportunities, it really is independent for us. We're focused on what Majesco does, and the products we're delivering across as many product platforms and opportunities as possible, so I don't think that we see ourselves intimately tied to Zynga in that way.

It's Mike. I think the one thing I would add that is Zynga, as a billion-dollar-a-year revenue business that they built there, so we still see it as a viable market for us. More importantly, we see the freemium business model becoming pervasive in other areas, right? It's bleeded over to IOS; it's bleeding into mid-core and core games. We look at it as more of a long-term build in building, getting some expertise in freemium games, and which we think is an important part of being a casual game player over time.

I guess I will close it off by saying Zynga's been a great partner thus far, and has really worked together with us, continues to work together with us to bring the best product to market, based on all of their analytical research and history that they've had in the freemium space, which we think will have great benefits to us, as -- to bring in expertise into the Company that we didn't have, given their infrastructure and history, and we're excited about not only using it for this game, but bringing it to all of our other freemium experiences.

Great. The other question I have is -- we're going, or getting close to window where you should be launching this holiday. Have you seen any major change in terms of how Nintendo is doing the Wii or the 3DS and DS heading to this holiday?

Yes. I think that with the impending launch of the Wii U coming out this holiday, Nintendo's -- I think Nintendo's focus will be to do this -- which was focus on building their new platform, or getting the initial launch of the new platform to be successful, while maintaining and building the Wii platforms as a platform that focuses more on the mass-market, and will be at much more mass-market price points, both at the hardware and the retail level -- hardware and software level.

We should still see continued support of the Wii through this holiday?

Absolutely.

Great.

There's still a tremendous install base out there.

Great, and thanks, good luck.

Thank you.

Sean McGowan, Needham and Company.

Hi, I have a couple, if I can. Could you talk about generally what your expectations are on the success of Zumba Core relative to some of the prior versions? Are you expecting it to do as well, not as well, better, et cetera, without getting too specific?

I think that -- that's a good question, Sean. I think that the way that we go about forecasting for -- knowing that we have franchises like we have historically with Cooking Mama and now with Zumba -- is basically we will look at the overall market and we will say where is the market for say on that individual platform. Right now I would say we're being pretty conservative in our forecast given the market transitions and the platform transitions, and we are hopeful that there's a good transition between the Wii as the largest install-base motion-sensing device opposed to the Microsoft Kinect, which is the second-largest and more current motion-sensing device.

No comment on whether you actually expect it to sell more or as much as previous versions?

We don't usually comment on individual products, but other than to say that we think that we are going to take a conservative approach given the marketplace.

Okay. Looking at Baller Beats, I think when we saw the product at IDE3, we talked generally about the possibility of follow-on ideas for the form factor of the technology. Have you done any further work on that? Either other activities, other sports, et cetera, or other versions for basketball?

I would tell you that we are very excited about the technology that we developed for the Baller Beats game and that we are actively looking at bringing that kind of technology to other genres or categories. It's a little bit challenging, it's something that we talk about all the time here, but it is an area of opportunity that we think we should continue to explore, and will.

Okay. Maybe, Mike, if you can, could you give us a little bit more color on the nature of the capitalized R&D, as well as kind of where the bets are being placed on software development going into the holiday season? We've had a couple of years now where some guesses that or bets had to be kind of written down, and we didn't have that in this quarter like we did last year in this quarter, but could you give us more color on what's in there now and what's coming up?

Yes. There's a couple of shifts. I would say if we compare it to last year, we had a pretty big bet on the launch of the 3DS's new platform. What we really found was we're better off putting that money towards the games, okay? Now the difference in the accounting between the mobile games and the 3DS games was console and hand-held games, we would capitalize the cost until a game's released. If it wasn't successful in the holiday, a lot of times we'd have a write-off or a charge in the period it was released. But that risk goes away with the mobile games, because we expense them as incurred. To the extent -- we've probably taken, I would say 33% of our capital pool in the prior year was themed towards the 3DS. This year that was re-allocated to social mobile that we expensed as incurred. That's one element.

That leaves us with what's left. With what's left, the Zynga launch is a big piece of the remaining pool, and we think that's a pretty safe bet because it's a sequel. We always said that sequels have the -- a lower risk of any type of impairment like that, and our more speculative plays this year are really three items -- it's the Hello Kitty, the Harley Pasternak, and the Baller Beats are the kind of new entrants into the market. Each one of those is within our normal threshold of keeping our investments between $700,000 to $2 million on any particular product. We think -- we don't think it's a portfolio approach, we don't think all three of those are going to end up being charges or anything like that.

Right, otherwise you wouldn't be doing them. Last question, just circling back to Edward's earlier question. Do you have any specific plans in place right now to do a particular title with Zynga? When I say with Zynga, like on Zynga.com, or is it just at this point more of an open-ended relationship?

Jeff, you want to help describe our relationship with Zynga?

You mean the Mini Putt Park project?

Right. Are the plans for any particular titles, rather than just a general working relationship?

Well, that's obviously the focus right now, is how we build that up, and we're excited about the opportunity there. Beyond that, we haven't made any other announcement of products that we might be working with them on.

Okay. Thank you.

(Operator Instructions)

John Taylor, Arcadia Investment.

Hi, I want to kind of go with Sean's question, maybe from a different angle, in terms of capitalized software development costs and license fees. It sounds like you had about a $0.5 million increase in sales and marketing. I assume that was, correct me if I'm wrong, but I assume that was promotional spending or whatever related to E3, because you guys had pretty big presence and a lot of NBA guys in there, what not.

I'm kind of wondering about how the timing, the pacing of sales and marketing spending is going, and kind of what kind of a bet you've got on sort of pre-paid royalties or royalty guarantees or something, because you've got a lot of famous humans involved in the lineup this year, and you're setting expectations kind of, it sounds like conservatively. Could you talk a little bit about sort of the intersection of what's capitalized, and what your promotional spending -- both for the sponsorship tie-ins, and the demand creation might look like in Q, and then sort of going over into the holiday period? I hope that question made sense.

Yes, for sure. Managing the risk on any up-front pre-paid royalties -- the way we looked at it is, we wanted to keep all-in the amount of risk within our normal threshold of $700,000 to $2 million, so what that means is when we enter into a lot of these talent agreements, we want to keep the up-front or the minimum guarantees underneath, when you add them all up, underneath that minimum commitment.

Then they earn whatever their revenue share is as we sell the products. We kind of favor a variable cost model over heavily front-loaded model. Since it's not a sequel, it's a first-time product. Total risk is within our normal parameters. Then what we intend to do is, once they see how the product gains traction, we'll try and make determinations whether it should get more marketing support, or what level of marketing support it should get going forward, is kind of the way we're looking at that. Is that helpful, or--?

Yes. I guess, to really sort of to bring it home, how are you thinking about -- you've sort of given us a pretty good range of how to guess at what revenues going to look like for Q4. I'm wondering, and you've already sort of front-loaded in a way some of the promotional expense -- it's probably PR, I don't know -- but in the E3 quarter, you're going to have some during Q4 and then you're going to have some more in Q1, and so is your sales and marketing number, is that line likely to kind of increase, do you think, faster than revenues in Q4, and maybe you get some of that back in Q1, or vice versa? I mean, how are you thinking about the pacing that way?

Yes, okay, I see what you're getting at. In Q4, there will be an up-tick in marketing, but what we try and do is match as much as we can with the holiday sales period. The increase in marketing in Q4, it might be $0.5 million to $1 million more than what we incurred during this quarter, but not many millions more. Then, as we move into our first quarter next year, we would spend more as we see sales develop. That's what I was getting to before.

Yes, because I think part of the concern here is that with all the sort of end-of-life-cycle hardware systems out there, and maybe people paying attention to other things, the demand-creation costs could go up as you try to stay -- not just you, but everybody in the industry -- tries to stay relative and top-of-mind, right?

Right, correct.

Okay, thank you.

(Operator Instructions)

Gentlemen, at this time I am showing no questions. That concludes our question-and-answer session. I'd like to turn the conference call back over to Management for any closing remarks.

I want to thank everybody for coming on the call today. We look forward to speaking to everyone at our year-end call in January, as well as give everyone an update on the holiday season. Have a great day.

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.