Majesco Entertainment Earnings Expected In-Line

Majesco (NASDAQ:COOL) will report Q4:11 (ending October) results after market close on Tuesday, January 17, with a conference call at 1:30pm PT (dial-in: 800-860- 2442, webcast: IR section of www.majescoentertainment.com)

We expect Q4 results in-line with our revised estimates for revenue of $33 million and EPS of $0.07, compared with implied guidance for revenue of $20 – 30 million and non-GAAP EPS of $0.00 – 0.03, and the consensus estimates for revenue of $26 million and EPS of $0.03.

We believe Zumba Fitness again drove sales and margin expansion. NPD data shows that Majesco’s Q4 U.S. retail sales tracked up ≈ 65%, due primarily to strong Zumba Fitness sales. We are raising our Q4:11 catalog estimates to reflect this. Zumba was the #1 fitness game in the US in 2011 based on NPD data, and it was a best seller in the UK as well. As of Q3:11, it sold over 3 million units worldwide.

Despite recent success, Majesco’s growth over the long-term depends on its ability to generate new franchises that can meaningfully impact the bottom line. A light release slate, apart from Zumba Fitness, and sales declines for the DS and Wii (Majesco’s primary platforms) may temper the company’s long-term growth potential. We do believe Majesco’s platform diversity is improving significantly as it now includes more games for Kinect and Move, which may help mitigate the impact from further DS and Wii sales declines. However, in our view, the Zumba sequel is unlikely to sell as many units as the original due to low attach rates among its target market and recent history that suggests exercise games may become fad items.

Maintaining our NEUTRAL rating, and our 12-month price target of $4, which reflects a forward multiple of 9x our FY:12 adjusted EPS estimate of $0.46. This multiple is below Majesco’s expected normalized growth rate to reflect uneven growth performance. Although we have a positive bias towards the stock, we remain cautious about the long-term sustainability of Zumba Fitness sales. Our price target reflects significant upside to current share prices, but we note that the stock has been trading within a large volatile range recently.

Michael Pachter is an analyst at Wedbush Morgan.

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