Mad Catz Interactive Inc (MCZ)

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Mad Catz Interactive, Inc. (MCZ)

F3Q2012 Earnings Conference Call

February 8, 2012 5:00 PM ET


Norberto Aja – Investor Relations

Darren Richardson – President and Chief Executive Officer

Allyson Evans – Chief Financial Officer


Ronald Rotter – RLR Partners

Elliot Christian Huber [ph]

David Brigham – Brigham Investments

Stan Trilling – Credit Suisse

Joseph Miranda [ph]



Ladies and gentlemen, thank you for standing by, and welcome to the Mad Catz Interactive fiscal 2012 third quarter results conference call. (Operator instructions) As a reminder, the conference is being recorded, Wednesday, February 8, 2012. I would now like to turn the conference over to Norberto Aja, Investor Relations. Please go ahead.

Norberto Aja

Thank you, operator. Good afternoon everyone and welcome to Mad Catz's fiscal 2012 third 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, his perspective 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.

Before we begin, however, let me just make a few remarks regarding the Safe Harbor language. Today's discussion 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 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, as well as 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 and description of these risks and uncertainties and other matters can be found in the company's reports filed with the appropriate regulatory authorities.

Today's call, February 8, 2012 and web cast includes non-GAAP financial measures within the meaning of the SEC Regulation G. When required, a reconciliation of all 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 CEO of Mad Catz. Darren?

Darren Richardson

Thank you, Norberto. Good afternoon everyone and thank you for joining us on the call today. The current quarter results are meaningfully below the record [ph] year ago levels, and we can easily identify the factors that led to this outcome. Most significantly, the decline in sales of video game specific products related to titles such as Rock Band 3 and Call of Duty, the discontinuation of a third party distribution agreement in Europe, and missing plan release dates with several high-profile products.

However, the quarter also brought several accomplishments for Mad Catz, most notably, the year-over-year sales increases in the fiscal 2012 third quarter of the company’s Tritton, Cyborg and Saitek branded products, and the extremely positive product reviews we’re seeing.

To best understand where we’re in the face of the challenging economy, the console life cycle, the rapid emergence of smart phones and tablets as gaming platforms, and the evolving retail landscape, I want to take a few minutes to review Mad Catz evolution over the past several years. This will provide you with a deeper perspective, not only on the recent quarter’s results, but more importantly how we’re positioning the company for the future and a return to growth.

In the past, Mad Catz was known as a value price producer of control pads and accessories that sold at a discount to first party products. Four years ago, control pads accounted for 35% of our sales, about $30 million of net sales on an annualized basis. This quarter control pads accounted for 9% of sales and $13 million of net sales over the last 12 months, a decline of $17 million.

More importantly, there is a distinct difference in our product strategy over this period, and a significant percentage of our control pads sold today are at premium prices to first party products, rather than at a discount. Four years ago, the sale of accessories, commodity items like batteries, charging solutions, cases and cables, accounted for 48% of sales and over $40 million in net sales on an annualized basis. This quarter, accessory sales accounted for 9% of sales and $30 million on an annualized basis, a decline of $29 million.

Again, a key differentiating factor over this period is that the bulk of accessories we sell today are licensed or unique. The value segment of our business has been significant to our decline for a few years going from over 80% of net sales 4 years ago to well under 15% today. Given the macro factors discussed earlier, the value price segment has the potential for further decline. Fortunately, our exposure to this segment is now limited from a sales perspective, and is even more limited from a gross profit perspective.

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