DEEP STOCK ANALYSIS: Majesco Entertainment Earnings

The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.

Majesco (NASDAQ:COOL) Q3 earnings were well below expectations.  Management attributed the y-o-y revenue decline to a slow U.S. retail market, the declines of the Wii and DS as the devices approach the end of their cycles, and changes to the timing of Zumba Fitness releases in Europe. Revenue was $9 million, compared with our estimate of $13 million, and consensus of $14 million. Non-GAAP EPS was $(0.09), compared with our estimate and consensus of $(0.04). Majesco did not provide quarterly guidance.

FY:12 results now expected to be in the lower end of the guidance range. Management maintained FY:12 guidance for revenue of $130 – 140 million, and for EPS of $0.20 – 0.30, however results are now expected to be in the lower end of the range. The key driver of management’s expectation is the impact of the Wii and DS on catalog sales as both devices approach the end of their cycles.

Heavy dependence on Zumba Fitness makes the stock risky. For Q3:12 and Q3:11, the  Zumba Fitness franchise accounted for 79% and 80% of Majesco’s sales, respectively. It is clear that this year’s Zumba Fitness will be negatively impacted by the demise of the Wii. Also, the fitness program could prove to be a fad. If Zumba Fitness sales fall, Majesco could struggle to achieve FY:12 guidance.

Investment in social games and publishing agreement with Zynga (NASDAQ:ZNGA) may not pan out. On June 26, Majesco announced Zynga would publish Mini Putt Park on Facebook and Zynga’s website. However, given the game’s modest number of MAUs (120,000 MAUs and 9,000 DAUs according to AppData as of September 10)and quick decline on the platform, we question whether the venture will prove profitable for Majesco. Two mobile titles are set for release this fall.

Harley Pasternak’s Hollywood Workout and NBA Baller Beats must both overcome obstacles to achieve long-term popularity. The first obstacle will be review scores. The Harley game will also have to win over discerning fitness gamers, who eventually passed on Jillian Michaels games. We question the market potential of NBA Baller Beats given issues related to bouncing a real ball indoors.

Maintaining our NEUTRAL rating, but lowering our 12-month price target to $3 from $4. Our revised price target reflects a forward multiple of 10x our revised FY:13 EPS estimate of $0.30. It is below Majesco’s expected normalized growth rate to reflect a history of uneven growth and a worsening outlook for key franchise Zumba Fitness resulting from the declining popularity of the Wii.

Michael Pachter is an analyst at Wedbush Securities.