Majesco _COOL_ – Zooming on Zumba Sales.pdf

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                            Majesco (COOL) – Zooming on Zumba Sales

Price: $1.14                                                                            January 23, 2011
Market cap: $45M                                                                        Analysis by Tony
Enterprise value: $40M                                                    
Basic & Diluted shares: 39.3M                                         
Potential additional shares: 5.4M


Majesco is a small video game publisher whose focus is on lower budget games geared towards casual
players. Majesco has a roughly $45 million market cap compared to the larger US listed video game
publishers such as THQ (THQI), Take-Two Interactive (TTWO), Electronic Arts (ERTS) and Activision
Blizzard (ATVI) which have market caps ranging from $400 million to $14 billion. Small publishers have
not fared well over the last decade as the video game market became increasing dependent on
blockbuster titles and their ever escalating development costs. Several smaller publishers such as
Midway, Acclaim and Infogrames/Atari folded. Had Majesco not changed its focus several years ago it
probably would have suffered the same fate. Up until around 2006 Majesco was still pursuing
developing triple-A titles. However after high profile efforts such as Advent Rising failed to sell up to
expectations Majesco decided to focus on casual games, primarily on the Nintendo DS and Wii. I am
kind of surprised that Majesco made it, but to their credit they cut expenses way back and found just
enough licensed opportunities that ended up doing fairly well such as Cooking Mama, Jillian Michaels,
and Zumba, while the growth in motion control gaming, gaming on social networks, and digital
distribution has leveled the playing field somewhat for smaller publishers.

Zumba sets foundation for potential turnaround

After being in a gradual decline for the better part of a year, there has been some excitement around
Majesco’s stock the past month. The shares are up around 100% from their 52 week low over
excitement about sales of the company’s Zumba Fitness game. After that strong run the stock gave back
around 20% after reporting fiscal year end results which included guidance that disappointed (and
perplexed) many analysts. I believe management was being overly conservative and will end up
significantly beating their guidance for the year, with the bulk of that over-performance occurring in the
current quarter.

On January 11th, Majesco announced that it had shipped more than 500,000 units of Zumba Fitness
across all platforms. Online and channel checks in the subsequent week indicated short supply so I am
confident the majority of those 500,000 units had already sold through. I believe Zumba Fitness will
have legs and become a franchise which Majesco can build its turnaround efforts on.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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The Zumba phenomenon is huge and still growing. According to Zumba’s website and various reports
there are over 10 million people taking Zumba classes weekly, and over 5 million Zumba DVDs have
been sold. The following charts from Google Insights and Alexa show the growth in search activity for
Zumba and traffic to Zumba’s official site. On Google Insights I excluded terms referring to the Zumba
game to limit their impact on results. As can be seen interest in Zumba has never been higher.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                              Page 3 of 14

Even if Zumba’s popularity were to peak, that doesn’t necessarily mean it will just fade away like passing
fads such as Heelys or Silly Bandz. Remember Jazzercise? I thought it had died long ago. Actually,
Jazzercise posted its most successful year in the company’s 41-year history in 2009/2010. If supported
with quality releases I believe Zumba could be a long term franchise for Majesco.

Besides showing the growth in Zumba’s popularity over the last couple years, both the Google Insights
and Alexa charts show a clear seasonal pattern. Interest spikes around the beginning of the year (New
Year’s resolutions) and then continues strong into the spring (get in shape season) and summer. This is
the same seasonality witnessed in gym memberships, weight loss product sales, etc. This bodes well for
the game’s sales over the coming months.

 Several dance and fitness games have sold a million units. Additionally the better ones tend to be
steady sellers. They do not follow the usual steep sales decay curve that hardcore titles do.

               Source: VGchartz

Fitness games, particularly ones such as Zumba Fitness which are based on popular classes, are also
attractive because of the convenience they offer. Buyers are likely to compare the $40 cost of the game
to their monthly gym membership costs or the $5-$10 cost for Zumba classes on a drop-in basis at a
dance studio. It also offers the convenience of being able to work out at home and being able to
practice alone before taking classes. Of course the same could be said of a DVD, but it appears that
gaming is becoming an increasingly popular medium for following along to an on screen instructor, even
if the accuracy of tracking is questionable. After Zumba game sales start to slow at the $40 price point, I
feel it can become close to an evergreen seller at lower price points, especially $20/$25 where the price
becomes comparable to a fitness DVD.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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Sales potential of Zumba Fitness compared to Jillian Michaels Fitness Ultimatum 2009

Majesco’s biggest hit in recent years was Jillian Michaels Fitness Ultimatum 2009. The game’s release
led to Majesco’s best revenue performance over the last 5 years in their fiscal year ended October 31st,
2009. In that year Majesco generated $94 million in sales, with most of the growth coming from Jillian
Michaels Fitness Ultimatum 2009 for Wii. I believe that Zumba Fitness will be an even more meaningful
contributor to sales this year than Jillian Michaels was in 2009.

I feel that Zumba is a bigger phenomenon than Jillian Michaels. The following Google Insights chart
shows search interest for Zumba, Jillian Michaels, and The Biggest Loser.

 Zumba Fitness is available on all three consoles (Wii, PS3 and Kinect for Xbox 360), whereas Jillian
Michaels Fitness Ultimatum was only available on Wii. Additionally, the Kinect SKU for Zumba Fitness
sells for $50, higher than the $40 Jillian Michaels sold for. The Wii’s installed base is also larger than
when Jillian Michaels released.

 Zumba Fitness has more potential in Europe than Jillian Michaels. Following are Google Insights
regional interest maps for Jillian Michaels and Zumba. In the regional interest section Google Insights
compares the search activity for the selected term to overall search activity for each country and then
scales those results from 1 to 100. The country with the highest ratio is assigned a score of 100. In the
case of Zumba, the US isn’t even in the top 10. Compare this to the region map for Jillian which is
dominated by US and Canada with every other country far behind. Majesco controls the worldwide
publishing rights to Zumba and has partnered with 505 Games on the European launch. The Kinect SKU
launches in Europe this month, and the Wii and PS3 SKUs next quarter. On the conference call
management did not want to be pinned down on European sales but did say there was the potential for
large upside but they were not currently modeling it.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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Google Insights regional interest for Zumba

Google Insights regional interest for Jillian Michaels

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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I believe that Zumba Fitness has better franchise potential. DLC (downloadable content) is logical for
dance games. I believe sequels would be better received than Jillian Michaels 2010, 2011, etc. There
are opportunities for games based on the other Zumba classes/routines such as Zumba Gold for older
participants, Zumbatomic for kids, and Zumba Toning.

 Zumba Fitness has received better user reviews. I believe Jillian Michaels Fitness Ultimatum could have
been a longer lasting franchise for Majesco had they actually produced a good fitness game. Some
Jillian Michaels fitness DVDs have remained on Amazon’s best seller list for years. Instead Majesco
destroyed the brand’s value with what was by practically all accounts a horrible game. User reviews
were not just bad, they were scathing. Many of the user reviews on Amazon indicated they didn’t even
want to give the game 1 star. By contrast user reviews for Zumba Fitness have been generally good,
especially for the Wii/PS3 versions. The following chart summarizes user reviews of the Wii versions of
both Zumba Fitness and Jillian Michaels from major retailers’ sites.

All else being equal better received games will tend to sustain sales longer and also have fewer trade-ins
which compete with new game sales. Reviews of the Kinect SKU are noticeably lower than the Wii and
PS3 SKUs. Complaints included awkward menu navigation and questionable motion tracking. I suspect
Kinect users are comparing the game to Dance Central, a very polished title, accounting for the worse
reviews. Overall, however, I am satisfied from user reviews for Zumba that the game was well enough
received that no long term damage has been done to the franchise potential as was undoubtedly the
case with Jillian Michaels Fitness Ultimatum 2009. I believe this gives Majesco a solid foundation on
which to build for sequels.

I have given several reasons I believe Zumba Fitness has greater sales potential than Jillian Michaels
Fitness Ultimatum, but how do sales actually compare so far? NPD’s video game sales data is the surest
way to verify sales. Since I don’t have access to that data, I use other sources such as VGChartz and
online retailer rankings. Such sources must be used with caution, but sometimes can provide useful real
time insights allowing you to get ahead of the NPD reports.

Below is a table comparing VGChartz sales estimates for the Wii versions of Zumba Fitness and Jillian
Michaels Fitness Ultimatum 2009 over their first 8 weeks of sales. According to VGChartz cumulative
sales of Zumba Fitness on Wii are running ahead of cumulative sales of Jillian 2009 on Wii, and
cumulative Zumba sales across all three consoles are running way ahead.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                              Page 7 of 14

So how does VGchartz estimate sales and how reliable are they? As best I can tell VGchartz bases its
estimates on a combination of historical NPD data, online retailer rankings, information from press
releases, and other analytical methods. In this case I believe VGchartz is in the right ballpark, albeit a
tad on the high side. For example, VGChartz had all SKUs of Zumba Fitness combined breaking the
500,000 sales barrier 6 weeks after release whereas Majesco issued a press release announcing that
milestone after 8 weeks. Similarly VGchartz had Jillian 2009 Wii breaking 500,000 sales 4 months after
release whereas Majesco announced that milestone for the game 5 months after release. It appears
that if you reduce VGChartz numbers by around 20% that puts you pretty close.

Amazon’s bestseller archive is also a useful tool. I used it to plot the weekly Amazon rankings for both
Zumba Wii and Jillian Michaels 2009 Wii in the months after each release. Jillian Michaels 2009 was
released on October 18, 2008 and Zumba Fitness was released on November 15, 2010. Both dropped in
rankings during the holidays when there were a lot of big game releases and rose to start the New Year.
Conservative initial orders by Amazon probably played a part as well in the drop in rankings experienced
by both games shortly after release and in the case of Jillian Michaels the poor user reviews had to have
an effect as well. The effect of The Biggest Loser on Jillian Michaels sales is also shown with the high
rankings at the beginning of new seasons and the subsequent drop offs. The downtrend in Jillian’s
rankings after the New Year is clearly evident. With better reviews and no TV tie-in affecting demand I
expect Zumba to remain higher in the rankings longer.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                                 Page 8 of 14

Online retailers and the websites of brick-and-mortar retailers can provide even more info. Besides
Zumba Fitness remaining in the top 10 on Amazon’s video game best seller list, and in the top 3 on
Gamestop’s best seller list, is has remained high on Amazon’s “Most Wished For” list. According to
Amazon the list represents items most added to users’ wish lists and registries, so it is more of a forward
looking indicator, a back-log of sorts. As of this writing Zumba Fitness for Wii is #3 on the Wish list, and I
note that the top three on the list are all dance/fitness games.

Checks of, and have all indicated limited availability of the game
for online ordering, especially the Wii SKU. Zumba’s website also sells the game and extra belt
accessories. One trick on a couple of those sites is to add the game to your cart and then change the
quantity to some large number like 9999. The site will say that your order exceeds the quantity
available and tell you how many units are in stock. That way you can monitor inventory and sales over
time. The sites of the brick-and-mortar retailers are also useful because they allow you to check in-store
availability for various zip codes.

My daily checks have generally shown that the Wii SKU remains a strong seller, the PS3 SKU a steady
seller, while the Kinect SKU may be slowing. For example, over the weekend of 1/22-1/23, I observed
Zumba Wii go from available to sold out at 13 of the 20 closest Walmart locations to me whereas the
PS3 SKU went from available to sold out at only 5 of those same locations. Over the same period I
observed inventory at Zumba’s website go from 100 to sold out for Zumba Wii while the Kinect
inventory only went down from 100 to 90. Below is a spreadsheet I have just begun to maintain for
tracking Zumba availability and sales from the various online sources I check daily.

As I have just begun recording the above statistics it is not of great use right now, however over time I
hope to be able to discern trends and correlate the results to reported sell through. The Amazon best-
seller ranking and number of user reviews for each SKU are listed, as is the Gamestop best-seller ranking
for the Wii SKU. The rest of the columns – for Zumba, Walmart, Target, BestBuy and ToysRUs list either
how many units are available online or the number of stores in my area which have the product in stock.
In the case of Walmart it is the number of stores out of my closest 20 locations, Target is out of my
closest 10 locations, and BestBuy is out of my closest 30 locations.

VGChartz, Amazon rankings, and online channel checks all indicate Zumba is selling well. Calibrating
VGChartz numbers against reported sell through and using how Zumba is selling in comparison to Jillian
Michaels as a guide, I feel comfortable projecting Zumba sales of 1.5-2.0 million units in North America
in Majesco’s current fiscal year. I imagine a breakdown of roughly 1 million units on Wii, 500,000 units
on Kinect, and 200,000 units on PS3.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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A brief consideration of “Mama”, social gaming and other titles

Although my investment thesis is mostly based on Zumba, the Mama franchise is worth mentioning.
Since Majesco acquired the North American publishing rights to Cooking Mama the franchise has
accounted for around 40% or more of annual revenues. Two sequels to Cooking Mama on the DS were
released and the series was extended to the Wii and brand extensions were released with Gardening
Mama, Crafting Mama, and Babysitting Mama. All told the “Mama” franchise has sold over 8 million
units and been Majesco’s most reliable seller. Management mentioned the possibility of bringing the
Mama franchise to PS3 and 360 as those consoles attract more casual audiences.

The Mama franchise was recently extended to social gaming with Cooking Mama Friends Café for
Facebook. Monthly Average Users (MAU) have steadily grown since the game went live not long ago. I
have never been big on spending money for in-game items so I am always skeptical about monetization,
but then again PopCap is making $1 million/month selling power-ups for Bejeweled on Facebook. Just a
fraction of that for Cooking Mama could significantly add to earnings for Majesco. There are some
interesting articles on social games here, here and here. Leading social gaming company Zynga has
been valued at $5 billion and other social gaming companies such as Playdom and Playfish fetched $760
million and $400 million from Disney and Electronic Arts, respectively.

 Source: All Facebook statistics

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                              Page 10 of 14

Beyond Zumba and Mama, Majesco’s lineup has always been pretty thin. Looking forward Majesco has
licensed Harley Pasternak and his 5-Factor diet and Martha Stewart to publish video games based on
their properties. While I am not optimistic about the potential for those properties to translate to
games, I would rather Majesco took their chances on those kinds of lifestyle content games than on
games such as Swords or Flip’s Twisted World which were almost guaranteed to flop. Majesco does
have some titles planned for the Nintendo 3DS, but they are planned for release this holiday and will
miss the 3DS’s launch window this March. The 3DS’s launch slate is already crowded with around 25
titles including popular games such as Nintendogs, Pilotwings, The Sims, Pro Evolution Soccer, Super
Street Fighter, Ghost Recon, Splinter Cell, and Rayman. Who knows what else will be released around
holiday, but it looks to be crowded so I do not see how Majesco’s Face Kart and Pet Zombies will stand

Revenue projections

Previously I projected Zumba sales of roughly 1.7 million units with 1 million units on Wii, 500,000 on
Kinect and 200,000 on PS3. The rough rule of thumb I use for wholesale prices for video games is 80% of
the retail price. So wholesale price for the Wii and PS3 SKUs which retail for $40 is $32, and wholesale
price for the Kinect SKU which retails for $50 is $40. Using those figures, 1 million x $32 + .5 million x
$40 + .2 million x $32 = $58.4 million in revenue from Zumba Fitness this fiscal year. That is roughly
2/3rds of the midpoint of managements’ revenue guidance of $85-$90 million just from North American
Zumba sales. Management said that they expect the Mama franchise to remain around the same
percentage of sales this year as last, indicating growth in Mama revenues this year. Even assuming flat
Mama sales with last year would mean sales of roughly $32 million. Add that to the $58 million from
Zumba and the result is $90 million in sales, already matching the high end of management’s guidance.
That does not include any European Zumba sales or sales from other games. And every 150,000 units
above my projections that Zumba sells would result in roughly an additional $5 million in revenue.

Looking at the current January quarter, Majesco announced on January 11th that Zumba had shipped
over 500,000 units. As I mentioned, over the subsequent week channel checks indicated short supply so
I think it likely most of that had already sold through and additional reorders were generated for the
quarter. If I assume reorders for an additional 100,000 units were received in the quarter that brings
the total shipped in the quarter to 600,000 units. The breakdown would probably be around 400,000
units on Wii/PS3 and 200,000 units on Kinect. So .4 million x $32 + .2 million x $40 = $20.8 million.
Management mentioned that Babysitting Mama, which also launched in the current quarter, and
Crafting Mama which launched late in the previous quarter have each sold hundreds of thousands of
units, with Crafting Mama generating significant reorders in the current quarter. Let’s assume 300,000
units of Babysitting Mama at $40 wholesale and 100,000 units of Crafting Mama at $24 wholesale.
That’s an additional $14.4 million. Lastly assume $5 million of catalog sales. I feel that is a conservative
estimate as it equates to around 300,000 units at $16 wholesale for titles such as Cooking Mama 1, 2,
and 3, Gardening Mama, Let’s Draw and others combined during the holiday season. Add all those up
and we arrive at $40 million for the quarter. Again this does not include Zumba sales from the European
launch of the Kinect SKU which is slated for this quarter. The two analysts with estimates on the stock

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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appear to believe management is too conservative with guidance as consensus revenue estimates have
moved up in recent days from $23 million to $34 million for the quarter and from $90 million to $105
million for the year, considerably above the high end of management’s guidance.

Earnings projections and model

Management’s guidance for this fiscal year is for sales between $85-$90 million and earnings of $.06-
$0.10/share. There are several reasons to believe that any revenue upside will generate significant
earnings leverage.

First, Majesco has further reduced their operating expenses from last year. With a return to 2009
revenue levels but with reduced overhead, one would expect some earnings leverage.

Second, a larger percentage of sales this fiscal year will be coming from the sale of higher priced SKUs
for the 360, PS3 and Wii compared to the DS. One can see from Majesco’s historical financials that in
2009 when Majesco released the hit Jillian Michaels for Wii, cost of goods dropped to 40% compared to
the 50% seen in years when the majority of Majesco’s sales were from lower priced DS games.

 Third, because of the way video game publishers account for software development costs, earnings
often get juiced when games turn out to be hits. Most publishers capitalize software development costs
after technological feasibility on each game in development has been established. They then start
expensing those costs when the game releases, amortizing that amount over the expected sales life of
the game. When titles turn out to be hits there are two effects which both improve earnings. Not only
are higher revenues generated, but capitalized development costs can be amortized over a longer
period. Conversely, when titles turn out to be flops, earnings take a double hit. Revenues are lower and
capitalized development costs must be recognized on an accelerated schedule. Majesco’s release
schedule over the next few quarters is pretty clean, focused on the Zumba and Mama franchises, and
relatively free from games which are likely to flop.

So directionally, several vectors are pointing in the right direction for improved earnings leverage –
higher revenues, lower cost of goods, reduced amortization of capitalized software development costs
per quarter, and reduced operating expenses. Below is my earnings model along with several top line
scenarios for both the whole year and the current quarter.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                            Page 12 of 14

For 2011 I estimated product costs as 40% of sales, similar to 2009 when more sales came from higher
priced SKUs. I estimated software development and licensing costs at 25% of sales, about midway
between 2009 and 2010. Selling and marketing figures are from management’s guidance that they
would be around 17% during the quarter, settling down to around 15% for the year. Most of the other
figures I did not expect big changes in. I did not include change in fair value of warrants because I
wanted to calculate non GAAP EPS to compare to guidance, and I did not factor anything for income
taxes as Majesco has some $70 million in tax loss carry-forwards. My scenarios for 2011 revenue of $85
and $90 million match with management’s earnings guidance range of $.06-$0.10. The other scenarios
demonstrate the earnings leverage which is possible with some revenue over-performance. The Q1
scenarios show how front end loaded the company’s fiscal year is.

Valuation and trading strategies

The wait won’t be long for catalysts. Management indicated that they would keep the market informed
as Zumba passed important sales milestones. I suspect that we could hear about Zumba passing the 1
million sold milestone shortly after the European launches of the Wii and PS3 SKUs in March, which
could push it over the top. Also in March Majesco will report January quarter results which the market
will be anticipating will be good.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
                                                                                             Page 13 of 14

Majesco’s shares traded above $2 in early 2009 (albeit on only 30 million shares outstanding compared
to 38 million currently). However with the improved fundamentals now and earnings potential of
$.20/share, I think that is a realistic price target. Even if the general markets correct I expect that
Majesco’s strong results will allow it to buck the trend as it did in the first quarter of 2009 when the
general markets were in meltdown mode.

I feel the pullback after earnings offers an attractive entry point. The current price is right about where
it was just after it was announced that Zumba had shipped 500,000 units. Although it would have been
nice to have established a position earlier at $.60-$.70 I feel that Majesco’s shares were still too
speculative then. Although the potential for Zumba Fitness was evident, there was no assurance that
Majesco would not produce a poor game, as they did with Jillian Michaels Fitness Ultimatum 2009. With
a large volume of user reviews to gauge reception, the announcement that 500,000 units have shipped,
and signs of continued strength after the initial excitement, I feel now is a less speculative entry point
which still allows for significant upside. The stock may pull back to around the 20 day moving average
around $1, but I feel that should hold with the continued strong sales of Zumba and Majesco’s front-end
loaded year providing near term catalysts.

 Majesco 5 year chart

Majesco 3 month chart

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks
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I like to end with my exit strategies or what would cause me to change my mind on the stock. My exit
strategy is to wait until after the next quarter or two is reported and then re-evaluate. After the next
earnings report Majesco is likely to either have blown earnings away as I expect, leading to significant
share appreciation, or to have fallen short for some reason I have failed to account for. Either way I
would be looking for greater visibility in Majesco’s outlook beyond the next few quarters. Zumba has
given Majesco a window here to orchestrate a turn-around but visibility beyond Zumba remains poor at
this time. If Zumba sales continue strong for a long time or the company’s social gaming efforts start to
gain traction then the potential exists for Majesco to turn into a multi-bagger from current prices, but I
am not willing to look that far ahead yet. Right now Majesco is highly dependent on packaged good
sales of Zumba and Mama, neither of which is internally owned IP. Also, even the casual game space
has become increasingly competitive and thus I consider it likely that Majesco would want to do a
secondary at some point to bolster their cash balance once Zumba’s success is reflected in the share

Other things which would cause me to sell prior to earnings release are a precipitous decline in online
rankings for Zumba or heavy discounting of the game which would also indicate slowing demand.

 Disclaimer: I am not an investment advisor or financial analyst, just a guy who likes to analyze stocks

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