The last four quarters have been brutal to the video game industry:
- Sales have stalled for industry giants Electronic Arts (Nasdaq: ERTS) and Activision Blizzard (Nasdaq: ATVI).
- It's even worse for Nintendo (OTC BB: NTDOY.PK) and THQ (Nasdaq: THQI), which both saw their revenues slashed by more than 25% year over year.
- Getting down to specific genres, former billion-dollar franchises Rock Band and Guitar Hero have been abandoned by their corporate masters, left for dead in the ditch.
Just don't mention any of this to Mad Catz Interactive (NYSE: MCZ). The maker of third-party game controllers saw sales rising by 54.6% in the just-reported fiscal 2011. Gross margins held relatively steady, and the company reported $0.18 of GAAP earnings per share for the year, up from $0.08 per diluted share in 2010.
And if you thought that Rock Band was dead, Mad Catz would tell you otherwise. "Net sales were primarily driven by strong sales of our products related to Rock Band 3 and a line of Tritton gaming headset products," CFO Allyson Vanderford told analysts on the conference call. However, management then dodged questions about the future of that franchise, so don't bank on a Rock Band 4 just yet.
So how does Mad Catz grow while most of the industry gnashes its teeth about casual games and aging consoles? By thinking bigger, of course.
The company is expanding rapidly in international markets and is introducing some new product types. The Tritton audio line, produced in a co-branding agreement with Microsoft (Nasdaq: MSFT), is the biggest growth driver of them all -- it contributed 23% of total sales in the fourth quarter versus not existing last year.
Mad Catz is even getting into the higher-margin software side of gaming through its acquisition of flight simulator developer V Max Simulation. That move builds upon Mad Catz's existing expertise in flight-simulation hardware, so there's some brand name leverage going on there.
Management also raised some cash in a recent private placement to buy back highly dilutive convertible stock debt, and the company is now debt-free. Something had to be done to stop the galloping dilution those notes carried, so this is a net positive for investors.
All told, I think it's unfair to use Mad Catz as a proxy for the gaming industry as the company is moving beyond designing controllers for other people's games. That international expansion also throws comparisons off-kilter. You should judge Mad Catz on its own merits, and I like what I see.
As fine as these results were, investors had clearly hoped for even better and the stock is diving today. I'll take that as an opportunity to add an outperform call on Mad Catz in my All-Star CAPS portfolio. Click here to follow along -- CAPS is fun, free, and informational all at once.
