Majesco Earnings Analysis: Here’s Expectations for Q3

Majesco Entertainment (NASDAQ:COOL) Q2 EPS beat from stronger-than-expected sales (Zumba, international) and cost control. Revenue was $30 million, compared with our estimate of $27 million, and the consensus estimate of $30 million. Non-GAAP EPS was $0.07, compared with our estimate of $0.04 and the consensus estimate of $0.08. The  Zumba franchise accounted for 86% of revenue in Q2:12 (up from 75% in Q2:11), while international accounted for 21% (up from 10%).

Lower expectations for Q3. Majesco is expected to release Mini Putt Park for Facebook (currently in open beta), a Zumba expansion pack, and a Zumba avatar collection, but no console games during the quarter. We had previously expected a new game to be announced or an existing game to shift into Q3. As this did not happen, we lowered estimates for Q3.

The company maintained FY:12 revenue guidance of $130 – 140 million, and decreased EPS guidance to $0.20-0.30 from $0.25-0.35 to reflect a challenging retail environment.  In addition, the Q3:12 release slate is very light. We are maintaining our FY:12 estimate for revenue of $140 million, but are lowering our EPS estimate to $0.30 from $0.35 to reflect guidance. We are maintaining our FY:13 estimates for revenue of $155 million and EPS of $0.43.

We believe Harley Pasternak’s Hollywood Workout and NBA Baller Beatsmust both overcome significant 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.

Heavy dependence on  Zumba Fitness, and to a lesser extent, the  Mama games makes the stock somewhat risky.  In our view, the long-term staying power of Zumba games remains unclear, as it could prove to be a passing fad.

Maintaining our NEUTRAL rating and 12-month price target of $4, which reflects a forward multiple of ≈ 9x our FY:13 EPS estimate of $0.43. This is below Majesco’s expected normalized growth rate to reflect uneven growth.

Michael Pachter is an analyst at Wedbush Morgan.