PolarityTE Inc (PTE) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to the Majesco entertainment third-quarter fiscal 2013 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Stephanie Prince of LHA. Please go ahead, Ms. Prince.

Thank you Denise, and good afternoon, everyone. Welcome to Majesco Entertainment's third-quarter fiscal 2013 earnings conference call for the quarter ended July 31, 2013. With me on today's call are Jesse Sutton, Chief Executive Officer, and Mike Vesey, Chief Financial Officer. Before we get started, I would like to remind you that this call is being recorded and an audio broadcast and replay of the teleconference will be available in the investor relations section of the Company's website after the conclusion of this call.

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 fiscal year ended October 31, 2012, 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 the anticipated or unanticipated events or circumstances, after the date of such statements.

In addition, in order to facilitate a comparison between the reported periods, the Company has presented both GAAP and non-GAAP financial measures. GAAP financial measures are -- include expenses related to non-cash compensation, changes in the fair value of warrants, severance costs, and the benefits 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 Sutton. Jesse?

Thanks, Stephanie. Today, I'll start with some opening comments before turning the call over to Mike, who will review our financial results. As is our custom, I'll conclude with some comments on our product releases for the upcoming holiday season, before opening the call up for questions. 2013 has been a transition year in the gaming industry, which is reflected in our third quarter and year-to-date financial results. As we've said before, through our over 25 year operating history, we have become adept at managing through these industry transitions, which occur roughly every six to eight years. Throughout this year, we have been working to put the right pieces in place for renewed growth in 2014.

Our strong balance sheet, with $18.8 million in cash and no debt, and the strategic realignment that reduced our fixed costs earlier in the year have been carrying us through the cycle and enabling us to invest in growth opportunities. I will go through our holiday release slate in more detail after Mike's comments, but we believe that the right strategy for this holiday season. A smaller slate of high profile branded games, based on characters created by well-known companies such as Disney. Kicking off the start of the holiday season in late November is the release of Microsoft's Xbox One and Sony's PlayStation 4 consoles The entire gaming industry has been waiting for these next-generation consoles, and we're supporting the Xbox One with the release of Zumba Fitness World Party.

Breaking through with an innovative game play experience helped us find a new audience for our lead Zumba franchise in the mobile market. In July, we launched Zumba Dance, the first-ever motion based fitness app for mobile tablets. This interactive fitness game reached the top of the iPad fitness rankings, and has generated good revenue. We're continuing to explore other ways to market Zumba Dance and build its base of users.

We're also building out our mobile portfolio with Agent P Doofendash which will launch on iOS and Android this October. The app focuses on Perry the Platypus, the break-out star from Disney's number one animated hit, Phineas and Ferb. The game invites you to play as Agent P and his fellow agents as they battle Dr. Doofenshmirtz, stop his evil plot, and save the town of Danville. Players will experience unique game play every time they play, and can challenge friends for the top secret agent score. We also expect to launch one additional mobile title by fiscal year end. As a reminder, our mobile gaming strategy will be focused around free to play games.

Since our last earnings call, we have announced two important strategic initiatives, which will help us return to growth in fiscal 2014. The first is our entry into online social and casino gaming, through our 50% interest with GMS Entertainment. GMS expects to close on the acquisition of the assets and operations of Orid Media and its subsidiary Pariplay Limited, during our fourth fiscal quarter. Pariplay has a core expertise in three areas, real money iGaming, real money iLottery, and social gaming. For more details about Pariplay, go to Pariplayltd.com, and to see their social slots game, Crazy Cash Slots, go to Facebook, and download the game now. Pariplay also offers the option as a white label partner for online gaming. As an Isle of Man gaming licensee, Pariplay can build an online gaming site for anyone and handle all of the operations from A to Z. This iGaming, iLottery social gaming segment of the market is growing rapidly, and looking ahead, additional jurisdictions are expected to legalize real money online gaming and online lottery, which will fuel further market expansion.

The second initiative is our entry into digital independent games, with the formation of a new division, Midnight City Games. We're leveraging our established game development expertise and relationships with the indie development community to build a platform for independent game publishing that will offer a wide range of services and support, including everything from first party relations to quality assurance and promotion. This will enable the development teams to concentrate all of their energy on building their games. These games are slated for digital distribution on popular platforms such as Steam, XBLA, TSN, as well as iOS and Android and Nintendo digital platforms, too. We have hired to key executives to run the division. We expect to launch our first titles in early 2014.

In summary, we believe that the actions we've taken during this transition year, reducing our fixed costs in January, focusing on the release of high-profile branded games, investing in online casino and social gaming, and establishing our newly-formed indie publishing label, Midnight City, are the right moves to position Majesco for renewed growth in 2014. I'd now like to pass the call to Mike Vesey, our Chief Financial Officer, to provide a financial review of our third quarter, and discuss the outlook for the balance of the fiscal year. Mike?

Thank you, Jesse. I will begin by recapping our results for the third quarter and first nine months of fiscal 2013, before closing with some comments about our balance sheet and liquidity position through the end of the fiscal year. As is our custom, I will use non-GAAP results when discussing our financial operations.

Revenue for the three months ended July 31 was $4 million, a 56% decline from the $9.1 million reported in the third quarter of last year. This decrease was primarily due to declines in sales of our Zumba fitness products, we released our third Zumba fitness title in October 2012, and sales have been less than the previous Zumba fitness products. We believe that this is partially due to lower software sales for console games overall, which reflect the late stage of the console cycle. This is particularly true for the Nintendo Wii, which was a dominant platform for our original Zumba fitness products.

To give some data points on our sources of revenue on the quarter, net revenues in the European market decreased to approximately $400,000 from $2 million, during the same period year ago. Overall, Zumba sales accounted for 66% of our net revenues during the three months ended July 31, 2013, compared to 79% in the prior-year period. The gross margin was 31% for the third quarter, compared to 38% for the comparable period last year. The decrease primarily reflects lower average selling prices as a result of increased promotions and price reductions on our catalog products. On a non-GAAP basis, operating expenses decreased approximately 33% from $6.7 million to $4.5 million this year. This was primarily due to lower advertising and marketing expenses, the closure of our social game studio, and other expense reductions that were implemented in January of this year, to right size the Company for our smaller game slate and console transition.

Prior-year results reflect approximately $500,000 of pre-launch marketing activities related to NBA Baller Beats, and media advertising related to the media launch of the Zumba Fitness Rush, which we did not incur in the 2013 quarter. Included in the third-quarter expenses is approximately $800,000 for our mobile games business. Comparably, we incurred expenses of approximately $1.1 million during the same period last year, for the development of social and mobile games. We continue to plan to incur a total of approximately $4.1 million in expenses related to mobile games during fiscal 2013. We reported a non-GAAP net loss of $3.3 million for the third fiscal quarter of 2013, compared to a non-GAAP net loss of $3.2 million during the same quarter in the prior year. Non-GAAP diluted net loss per share for the quarter was $0.08, compared to a $0.09 net loss in last year's third quarter.

For the first nine months of fiscal 2013, net revenues were $37.2 million, a 65% decline from the $105.7 million in the year-ago period. The decrease was primarily due to lower sales of our Zumba fitness products and lower revenues from Kinect and 3DS games, affecting the scaled-down slate of new releases for these platforms. The decline in Zumba sales was due to timing of our newly-released titles when compared to the last year, as well as lower demand for our latest Zumba fitness sequel. Gross margin was 31% compared to 37% in the prior year. The non-GAAP net loss was $6.3 million, or $0.15 per fully diluted share in 2013, compared to non-GAAP net income of $7.1 million or $0.17 per share in 2012.

Nine months net revenues in the European market also reflect year-on-year differences in Zumba release timing, declining sales on the Nintendo Wii platform, and a higher percentage of sales being derived through licensing rather than product sales. As a result, total revenue declined from $25.2 million to $8 million in Europe. Overall, Zumba sales accounted for 66% of our net revenues during the nine month period, compared to 79% in the prior year.

Now turning to our balance sheet, we ended the quarter with $18.8 million in cash and equivalents, and another $1.4 million available to us under our accounts receivable factoring agreement, for total liquidity of approximately $20 million. We continue to have no long-term debt on our balance sheet. As of July 31, we had approximately $7.3 million invested in capitalized software and prepaid license fees, primarily for games pre-released later in the calendar year. We ended the third quarter with $2.4 million in inventory, compared to $7.8 million at the end of the third quarter last year. As in years past, we expect our inventory and accounts receivable balances to increase seasonably between now and the end of our fiscal year, as we invest in our holiday game slate.

We generally end our year with most of our cash balance invested and the working capital necessary to bring our holiday game slate to market. This leaves us with lower cash balance but higher availability under our accounts receivable factoring agreement at the end of our October fiscal year. Our cash balance is then replenished as we begin to collect these balances in our first quarter of the following fiscal year.

Now for an update on our outlook for the balance of 2013. Given the decline in revenue for the first nine months of our fiscal year, we continue to expect that revenues for all of fiscal 2013 will be significantly below 2012, and that this will result in a loss for the full year of fiscal 2013. Remember that the end of our fiscal year is October 31, so our fiscal year results do not reflect sales from the holiday months of November and December 2013. The majority of our holiday releases for 2013, including Zumba Fitness World Party and Zumba Kids will be street dated in November 2013. Therefore sales for these products will be reflected in our first-quarter fiscal 2014 financial results. Now I'll turn it back to Jesse to review our upcoming product releases. Jesse?

Thanks Mike. I will now provide some comments on our release slate for the 2013 holiday season. As I said earlier, we believe our current strategy, focusing on high profile properties with established audiences is a right one for the evolving landscape and will help us break through the market clutter. I have already talked about our mobile games, our internally developed releases include the August launch of Phineas and Ferb, Quest for Cool Stuff on the Xbox 360, Wii U, Wii, Nintendo 3DS and DS. Join Phineas and Ferb as they travel to out of this world places in their newest invention, the All-Terrain Transformatron, an upgradable, customizable, ultra-cool amphibious ride, that lets the boys collect treasures to display in their back yard Museum of Cool. We anticipate this to be a nice stocking stuffer for the holiday season coming up.

In November, we release Zumba Fitness World Party, the latest game in the successful dance fitness franchise that has sold more than 9 million units worldwide. Available on Kinect for Xbox 360, Wii U, Wii, as well as Xbox One, Zumba Fitness World Party is a fun fitness journey that embodies Zumba's global reach of over 185 countries by taking your workout to exotic locations around the world. Burn up to 1,000 calories per hour with new modes, dance styles and 40 high-energy new routines set to a world class soundtrack featuring Lady Gaga, Daddy Yankee, and Pitbull. The first brand extension of the best-selling Zumba franchise, Zumba Kids is custom-designed for younger players. Launching this November on Kinect for Xbox 360 and Wii, Zumba kids features a range of dance styles, creative mini games, customization, and chart-topping hits from Justin Bieber and Willow Smith to keep the kids moving.

This holiday, we will also release three titles from our new distribution agreement with Little Orbit, a license-focused game publisher known for their work with major entertainment companies. Monster High 13 Wishes Shadow Secrets whisks fans away on an amazing adventure with their favorite freaky [gad] ghouls who jump, climb and swing through multiple magical levels to save Monster High. This game will be available on the Wii U, the Wii, Nintendo 3DS, and DS. Young Justice, Legacy will be available in November on PlayStation 3, Xbox 360 and Wii U. The game is based on the acclaimed Cartoon Network animated series inspired by the DC Comics characters. Also in November, we will be distributing Barbie Dreamhouse Party on the Wii U, Wii, Nintendo 3DS and DS, which will take fans behind the pink doors and into the fantastic world of the Barbie Dreamhouse Mansion. Keep a lookout for other partnerships like this in the future as we leverage our distribution infrastructure for incremental revenue streams.

In closing, we believe that our release slate is the right strategy for this transition year in our industry. With the upcoming release of the next-generation consoles and our two new strategic initiatives, we believe that we are now well-positioned for renewed growth in 2014. We will now open the call up for questions. Operator?

(Operator Instructions)

Ed Woo, Ascendiant Capital.

I was curious about your recent announcement to go into casino gaming. Was this something that you guys have been looking at for a while, or was there any specific recent event to cause you to decide to make this investment?

Thanks Ed. We have been looking at this space for quite a while. It is an area that is growing, has been growing rapidly, and we've been exploring the different potential opportunities. As that industry is growing at such a fast pace, we felt that it would be important to get in early as the jurisdictional issues open up in the US, and find the right partner to do that with, and that is what we hope we did.

Looking towards the new consoles that are coming out this year, have your expectations changed over the past couple of months? I know that it seems that the retailers particulars are stronger than it has ever been for every console and that the marketing more bullish. Has your expectations changed, and also how much more difficult has it been to be able to work on the new platform versus prior console transitions?

I will go with your first question first. As far as the new platforms are concerned, we are extremely excited about them. I think that the energy that these new platforms are going to infuse in our industry will be very high. The games that are coming out for them that have thus far have been announced are extremely exciting, and we think that our offering of Zumba World Party on the Xbox One is just going to be something that the market truly takes notice of, as something that differentiates us from everything else, in a very positive way. As far as the development processes are concerned, I would say that nothing more than the usual. Having been in this industry for 25 years, and about five or six transitions, I see nothing more than the usual transition issues and just getting used to the new software development kits and the new technologies. But the developers that we work with and our internal team is very experienced to manage it. Great. Thank you, and good luck.

(Operator Instructions)

[Chris Mix, UBS].

I'm sorry, my question was just answered. Thank you.

(Operator Instructions)

At this time I show no additional questions in the queue. I would like to turn the conference back over to Mr. Sutton for his closing remarks.

Thank you all for joining us today. We look forward to reporting back to you on the 2013 holiday season, on our year-end call in January. At that time, we anticipate updating you on holiday sales, initial business development and our partnership in GMS, and our first launch under Midnight City brands. Have a wonderful day.

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.