Mad Catz Interactive Inc (MCZ)

MCZ 
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Mad Catz Interactive, Inc. (MCZ)

F2Q12 (Qtr End 09/30/2011) Earnings Call

November 9, 2011 5:00 pm ET

Executives

Norberto Aja - IR, Jaffoni & Collins, Inc.

Darren Richardson - President and CEO

Allyson Evans - CFO

Analysts

Ronald Rotter - RLR Capital Management

Stan Trilling - Credit Suisse

Presentation

Operator

Welcome to the Mad Catz Interactive fiscal 2012 second quarter results conference call. (Operator Instructions) It is now my pleasure to turn the conference to Norberto Aja.

Norberto Aja

Good afternoon everyone and welcome to Mad Catz's fiscal 2012 second quarter earnings conference call. With me on the call today are Darren Richardson, Mad Catz's President and Chief Executive Officer; and Allyson Evans, Mad Catz's Chief Financial Officer.

Darren will provide an overview of the results and his perspectives on the industry environment and the company's upcoming product set. Afterwards, Allyson will review the financial results in greater detail, before turning the call back to Darren for some closing remarks.

But before we begin, let me just take a few minutes to read the Safe Harbor language. Today's discussions will contain forward-looking statements about the company's financial results, estimates and business prospects that involve substantial risks and uncertainties.

The company assumes no obligation to update the forward-looking statements contained in this conference call as a result of new information or future events or developments. You can identify these statements by the fact that they use the words such as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance.

Among the factors that could cause the actual results to differ materially are the following; the ability to maintain or renew the company's licenses, competitive developments affecting the company's current products, first party price reductions, the ability to successfully market both new and existing products domestically and internationally, difficulties or delays in manufacturing, or a downturn in the market or industry.

A further list and description of these risks, uncertainties and other matters can be found in the company's reports filed with the Securities and Exchange Commission and the Canadian Securities Administrators. A further list of these risks and uncertainties and other matters can also be found on the company's reports filed with the appropriate regulatory authorities.

Today's call, November 9, 2011 and webcast includes non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all the non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release.

With that, I would now like to introduce Darren Richardson, President and Chief Executive Officer of Mad Catz. Darren?

Darren Richardson

Thank you, Norberto, and good afternoon everyone. Thank you for joining us today. Fiscal 2012 second quarter sales of $25.8 million are on par with the second highest level ever recorded in the second quarter in the company's history.

However, the same quarter last year was a blow out quarter by any measure. Thanks largely to the initial launch shipments of Rock Band 3 and strong sales contribution from a distribution agreement for third-party products, but it seems being terminated. So this year was always going to be a difficult comparison, but it's hard not to be a little disappointed with the results.

We have a promising new product development pipeline, as evidenced yesterday by the announcement that four Mad Catz products were named as CES Innovations 2012 Design and Engineering Award Honorees. And we are hopeful that strong new product launches combined with margin in excess of our targeted 30% could bridge a large part of the sale shortfall.

Unfortunately, product development and manufacturing delays resulted in a nominal sales contribution from new products during the quarter. And while gross margins improved from the prior quarter, they were below our target.

We remained focused on executing our plan to grow their business and as expected, expenses grew 5%, predominantly on the back of increased sales, marketing and research and development expenses. In other words, we continue to invest in the business, its strength and the company's future. In the process, we're growing the base of evergreen products, products that don't need to be reinvented each year. And we're expanding our distribution platform to new markets.

As we continue to invest in the transformation of the company from a provider of commodity video game products to a company that develops innovative products for passionate consumers. We expect to continue investing in sales, marketing and research and development expenses that could negatively impact the results in the short-term. But we believe we'll benefit the business in the long-term. We're committed to our business plan and we're confident in the ability of our talented team to execute on our growth strategies and deliver long-term success.

In conclusion, Mad Catz is committed to delivering products that appeal to passionate consumers, growing its distribution platform and creating a vehicle for delivering sustainable, profitable growth. We've made progress on these initiatives over the last several years. And while we clearly have more work to do, we fully understand the challenges and opportunities and are focused on the job at hand.

With that, I'd like to turn the call over to Allyson to provide some additional color on the results.

Allyson Evans

Thanks, Darren. Let me begin with a brief review of the income statement. Net sales for the fiscal second quarter were $25.8 million, down 31% from $37.4 million in the fiscal 2011 second quarter. This decline was primarily driven by the negative comparison to the launch of Rock Band 3 and strong sales contribution from the distribution of third party products in the prior year quarter. Partially offsetting these declines were strong sales of our Tritton-branded headsets, including products related to the recent launch of Gears of War 3 and our Cyborg R.A.T. Gaming Mice.

Read the rest of this transcript for free on seekingalpha.com