Thursday, August 2, 2007

MCZ: The ups and downs of an evolving story

It's been a while since I've posted on MCZ. I've been receiving some emails on the stock as its drifted lower, so I thought I'd post a brief update. A few events have happened of note since the latest earnings announcement:
1) Several insiders sold shares around the $1.40 level
2) Announcement of a small faceplate deal
3) More details released on the InAir products
4) No GTA or other major faceplate deal announced

Overall, I have been a bit disappointed with the recent developments. I trimmed my position after the insiders sold, as this has been a typically bearish sign for this stock in particular. Take a look at the insider selling in 2005, and you'll see that management has done a pretty good job timing opportunistic points to sell. I don't think this is a long term bearish signal, but I do believe that it, at the very least, signals some short term pessimism.

Though we did get another small faceplate deal, no major deal has struck (in particular, the GTA deal). With Christmas season inching closer, it is beginning to look like MCZ faceplate line-up is set for Christmas. While the line-up itself is strong, I was hoping for more announcements.

The InAir product sounds great--I like the concept, and I think they have their marketing message down. My only concern is on the price-point. Are people really going to shell out that much money on an unproven brand, without a major marketing campaign? I don't know the answer, but its far from assured. Though Inair doesn't need to be a huge hit for it to do well for MCZ, it does need to gain some traction, and I think the price point could be a big hurdle.

Overall, I still believe we'll see a very strong q2 and q3, but that q1 will be weak, due to:
1) No new major product releases
2) Tough revenue comp due to software release in FY07 Q1
3) What is likely to be gross margins below those recorded in q4, which could signal some concerns on sustainability of margins

These are mostly short term issues. I still believe the future is bright for MCZ, particularly as they secure more license deals, launch more software titles, and figure out how to capitalize on the InAir technology. I will be looking to add to my position on continued weakness before the Halo 3 launch in September.

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