Tuesday, June 5, 2007

MCZ FY07 Results – Turnaround appears intact

MCZ reported earnings of $.01 in Q4, of $.07 for the year. This is their 2nd straight quarter of strong gross margins, which came in at 29.1%--particularly impressive considering there was no major release of high margin product in the quarter, as far as I am aware. Management has done an excellent job improving gross margins on low margin product, and refocusing the business on more attractive products going forward. Management also kept expenses down, and has continued to paid down a good chunk of debt from cash flows. Looking ahead to next year, the company should benefit from launch of the InAir headphones, halo faceplates, as well as additional licensing deals that should be announced over the next year.

On the downside, management suggested they will not be launching a software title in the next fiscal year, which could make revenue comps difficult. I estimate that software accounted for about 12-13% of revenue in FY07 (including a whopping 28% in Q1), and its possible they could lose upwards of half of that next year as their current titles age. They are going to have to figure out a way to make up for that revenue--InAir and more licensed products could do the trick, aided also by a continuing recovery in the company's core hardware accessory sales, though it may be difficult to grow revenue more than a few percent, barring a knock out hit of some kind. The company will look to launch up to two titles in FY09, once the console transition is well behind us, and the installed base is more favorable to a MCZ release.

At 18x earnings (as of this writing), Madcatz does not appear particularly cheap. But looking ahead to next year and beyond, if the company continues to grow revenues at higher gross margin levels, earnings should ramp up quickly due to the operating leverage in the business. Revenue growth of as little as 3% would translate into earnings of about $.11 at a gross margin of 27.5%, assuming expenses in line with expenses this year. That said, the future is far from guaranteed—the InAir launch in particular is a totally new space for MCZ, and very little has so far been released about it. MCZ is and will likely continue to be a hit driven business, and its success relies on continually churning out new products. I will be looking to further announcements of licensing deals, more details on InAir, a Wii controller announcement, and q2 results (with 6 days of Halo sales) to see how MCZ should fare this fiscal year and beyond.

Disclosure: I am long shares of MCZ, and reserve the right to buy or sell shares without notice. This analysis is for educational purposes only, and should not be construed as investment advice or fact. Do your own due dilligence.


slempel said...

Good article, except my notes from the conference call say FY08 for the software bundles.

Research Intensive Investing said...

I believe that is calendar year, not fiscal year. MCZ next fiscal year ends March 31 FY08, so unless they launch in the first 3 months of calendar 2008, we will not see the impact of a software launch in FY08. I would be surprised to see MCZ launch a title then, given that this is typically one of the weakest parts of the year for video game sales.