Conference Call Analysis
I've listened to the conference call a couple of times and have pieced together this description of the Microprose situation. It contains a combination of fact and speculation--please comment.
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Let's go back in time to early December '97. The merger had fallen through and the company found itself in the midst of a real mess. While the merger talks were in progress, they had lost a fair portion of their sales & marketing team (who thought that they were going to be redundant after the merger completed). They had alienated some of their key retailers, who were scared away by the GT reputation. Dark Earth was selling poorly (and ultimately resulted in a significant write-off). Worms2 was doing great in Europe, but the margins were low (distribution, not production royalties). There were no new products ready for Christmas and the whole company had slowed down waiting for the merger to finalize. Not a good situation.
Mr. Race got the executive team together and made a plan. On December 5th, they announced the merger was off and pre-announced a $7-$10 million loss for the current quarter, trying to communicate the mess they were in. The stock immediately dumped to $2 a share. The executives bought some stock, maybe 5-10K shares apiece, amounting to around 100K shares for the entire team. Relatively small numbers, but they wanted to send a message to the employees regarding their commitment to rebuilding the company. As the month wore on, Mr. Race went on a tour of all 5 development studios, assessing the status of each product. The news was pretty good. The schedules were somewhat behind, but nothing excessive. Some of the delays were for an important reason--adding support for the newest technology (3D graphics, force feedback joysticks, internet multiplayer, and more). He went to the employees to ask them to dig in for a rebuilding effort. As an incentive, new options were granted at $2 a share. Perhaps he even promised that they would stay independent. Employees seemed to buy the plan and further defections were stopped. In fact, the development team grew slightly. Retailer relationships started mending as the sales & marketing efforts got back on track. It was going to be painful, but the plan was moving.
Flash forward to this week. Speculators were buying the stock, hoping for a surprise, or maybe a buyout of a desperate company. When the actual numbers came out, the speculators dumped. There was no surprise in the numbers. And the conference call made it very clear that a buyout is unlikely. The company is waiting for a good price, knowing that it owes that to its employees and shareholders. Plus it really believes in the value of its product pipeline. Unfortunately, the next quarter or two will be a little rough. Best case, fiscal 98 ends well and we see a return to the $5-10 stock price when year-end numbers are announced in May 99. A legitimate buyer may surface earlier, but don't count on it.
Some other tidbits:
* Total employee head count: 388 (stable over last 5 quarters).
* Total development & QA head count: 220 (15% turnover rate--normal for industry they claim).
* Total cash: $21 million, and they expect to keep it above the mid-to-low teens.
* Ultimate Civilization 2 and Addiction Pinball were pushed into fiscal Q198.
* They are planning an east coast road show in mid March.
* The sales force will be completely rebuilt by the middle of fiscal Q198.
* The risk of NASDAQ delisting is very low, but a reverse split might be needed. (They claim it is the least dilutive option for the shareholders.)
* In 1997, 893 new games were released industry wide. Only 25 sold more than 100K units.
* They don't plan to get into the console business until the next generation arrives. They estimate 1999-2000 some time.
* They are discussing OEM relationships with Compaq on a racing game and Creative on a couple of other games.
* The expenses in Q3 were higher than normal because of one-time expenses related to purchases of 3rd party games and deferred payments on preferred stock.
* Current options were not repriced. New ones were granted.
* A number of new games were announced including Top Gun 2: Hornet's Nest, Choplifter 3D, Civilization 2 Finale, Apache, more?
* A total of 9 sequels will be released in fiscal 98--proven brand names with the latest technology. |
