Overview of operations.
Mad Catz Interactive is not satisfied with its performance in fiscal year 2012. However, it is difficult to compare numbers to those of last year because a number of video games and distribution agreements from fiscal year 2011 have been discontinued. Further, Mad Catz Interactive had delay problems in launching key products in the 2011 holiday season. In fiscal year 2012, Mad Catz Interactive also faced headwinds in the economy, the transition of the Nintendo Wii and the move to smartphones and tablets.
Mad Catz Interactive decided 3 years ago to switch to high-value products for passionate, hard-core consumers. That shift is still ongoing. It has had some success in growing sales of Saitek flight simulation products, its Cyborg products (40 percent sales growth), and its Tritton premium audio products (48 percent sales growth). The high end products have longer life spans, and will attract the hard core gamers. The more casual gamers will move more to smartphones and tablets.
Although it benefits from partnering with premium game titles, such as its recent Halo 4 agreement, Mad Catz Interactive believes its best prospects are to create products for passionate consumers that don't depend on outside sources.
Mad Catz Interactive has been focusing on expanding internationally. Over 50 percent of sales are now generated outside the United States. The company is seeing good results, especially in Asia. It also had double digit growth in Europe in Q4. In the past few years, Mad Catz Interactive added new salespeople in Spain, Scandinavia, Hong Kong, and China. In certain cases, it is opening new distribution centers in other regions. When starting in new regions, it takes one to three years to break even.
Mad Catz Interactive believes it will return to growth in Q1/2013. It also has a lot of new products for the holiday season and some new releases. It has also been gaining significant shelf space over the last 2 or 3 months.
The new Warhead 7.1 headset will start to be mass produced in the new few weeks and should be in the stores in August. At the recent E3 trade show in Los Angeles, Mad Catz received positive feedback about the Warhead 7.1 headset, its Kunai headsets, its new video game Damage Inc Pacific Squadron World War II, and its Wii U products. It received a broad spectrum of coverage from top-tier media, such as Gamestop and Gadget. Mad Catz Interactive also had a good showing at CES and got a lot of good reviews from there.
Mad Catz Interactive is expanding its audio products to new platforms and expanding the R.A.T. PC and Mac products.
Financials.
Net sales for fiscal year 2012 declined 36 percent, due to a slowdown in products relating to Rock Band 3, and from a deterioration in PS3 and Wii product sales. Net sales in Q4 declined by 13 percent.
In fiscal year 2012, sales in North America declined 49 percent due to weakness in Rock Band 3, and represented 49 percent of total sales. Sales in Europe declined 18 percent due to reduced contribution from distribution of third party products, and represented 46 percent of total sales. Sales to other areas increased 40 percent and represented 5 percent of sales.
In Q4, sales in North American declined 35 percent and represented 48 percent of sales. European sales increased 14 percent and represented 43 percent of sales. Sales to other regions increased 124 percent and represented 9 percent of sales. The improvement in European sales was because the company is working on a direct basis with more retailers and there was a difficult comp because of a distribution agreement ending at the end of Q4 2011. The Tritton and Cyborg line are doing well in Europe.
For fiscal year 2012, gross margin was 27 percent, a decline of 200 basis points. In Q4, gross margins were 31 percent, which met the company's goal to maintain gross margins above 30 percent.
Operating expenses in fiscal year 2012 rose 2 percent and were 30 percent of net sales. The increase in expenses was due to ongoing investment in geographic sales expansion and R&D. Total operating expenses in Q4 declined 4 percent and were 29 percent of net sales.
In fiscal year 2012. Mad Catz Interactive had an operating loss of $3.9 million versus $18.8 million of net income in fiscal year 2011. Its net loss for fiscal year 2012 was $.03 per diluted share compared to $.18 income per diluted share in 2011.
In Q4, Mad Catz Interactive had net income of $.8 million. It earnings per shares $.01, compared to $.03/share in Q4/2011.
At the end of the quarter, Mad Catz Interactive had borrowings under its revolving credit facility of $16.7 and a net position of bank loan less cash of $14.2 million. The $14.5 million long-term debt was paid off during fiscal year 2012. Mad Catz Interactive is currently in negotiations with Wells Fargo to renew its credit facility.
Inventory increased 16 percent, and most of the increase was due to higher levels of Tritton products. Inventory turns in Q4 was 3 times, compared to 5.6 times in Q4/2011. A lot of the inventory was orders for the holiday period that arrived late, which will take a couple of months to work through.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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