Thursday, March 22, 2007

MCZ--Conversation with the CFO

Note: See full write-up and thesis for MCZ here

Below are the highlights from the call with the CFO. I am preparing for a trip abroad for a couple months (more on this shortly), so I unfortunately do not have time to write this up as cleanly as I would like. These are based on my notes and interpretation in several cases, and should not be seen as direct word or guidance from the company:

1) We should likely only expect about 1 game/year to be released by MCZ for the time being. They are trying to take a measured approach to ramping up software releases
2) They are very excited about the Inair technology. They see it as a low risk/high reward situation
3) They do not yet have a license with Nintendo to produce Wii's controller. Also, from what I could tell from his careful choice of words, they do not appear to have reverse engineered it yet, though it sounds like they are working on it (he did not confirm this, but that was my impression of what he was saying between the lines).
4) On gross margins, they have made some tangible changes the last 2-3 quarters to try and improve these. Though they don't want to guide for 29% every quarter, it was clear to me that, in the historical range of 22-29%, they are hoping to hit the higher end of that range, primarily through the sale of more licensed products ( e.g. NFL controllers) and keeping costs under control.
5) They clearly have ambitions to grow revenue up from $100M going forward, and it sounds as though they expect they are able to do so.

A few other points I learned:
1) On licensed product, the main issue in getting these deals done is that some publishers want to protect their brand, and are concerned with diluting it by providing accessories. Also, some publishers that decide to make accessories want to control the quality of those accessories, and thus decide to produce in house. That said, publishers like these deals because its free money, and some don't like doing it themselves because its not their core competency, and not enough money on its own right to be worth the bother of doing it in house. I found this explanation helpful to better understanding the dynamic in how publishers decide whether or not to do a deal.
2) Management appears to take a very measured, risk-adverse approach to developing and launching products. They do not take big risks--they go for singles and doubles, not homeruns. This is good, in the sense that one big mistake likely won't sink a year's earnings, but at the same time this to a degree limits the possibility of a fast ramp in revenue (e.g. by investing heavilly in releasing more hardware/software bundles, which are higher risk/reward).
3) They expect strong operational leverage, meaning they can grow revenue from here with limited increases in expenses pertaining to operations. This was a good confirmation, as it supports my FY07 earnings expectations of ~$.11, if we can grow revenue 10% and have gross margins of 26%.

Overall, though I have some concerns about the Wii controllers not being ready (particularly given the potential here if they could get something out the door), things still seem on target. Q4 in terms of both revenue and gross margins should be helpful going forward in assessing what to expect for next year.


Disclosure: I am long MCZ shares

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