Money McBags wants to write about COOL today as they put up a Q more fucktastic than Sarah Shahi covered in $100 bills and doused with Bridgitte Bardot‘s nipple sweat (from an early 1950′s vintage bottle of course).  Readers know Money McBags has often shit all over this company because, well, because it is a shitty company, but he pointed them out several times in the last few months (near the end of this, and this, but unfortunately not near the end of this) as the name got momentum behind it thanks to their release of something called Zumba Fitness which is now the #2 most popular Wii title as fat people love dancing for salsa (or to salsa, whatever).

As Money McBags explained a couple of months ago, this company relies on finding new games to hit a trend and every few years they will seemingly strike it big because as the old saying goes “if you throw enough spaghetti against the wall, eventually something will stick (unless you are producing the Spiderman musical)” and Money McBags doesn’t like investing in boom/bust cycles (though he will always invest in these booming busts).  That said, COOL is now in the boom part of the cycle thanks to this Zumba thing blowing up like a Charlie Sheen tweet or Barry Bonds’ head.  So let’s take a look at the Q and try to figure out if there is something here or if this is more of a fad than state Poet Laureates (and note to Wisconsin, if you are looking for a “Dick Joke” Laureate, Money McBags’ offer stands).

1.  Revenue was up ~72% to $48.5MM thanks to this Zumba Fitness which was the 5th best selling video game in January according to market research firm the NPD Group (and Money McBags did his own firm market research and found NPD COO Karyn Schoenbart to be delightful).  Zumba Fitness was 60% of revenues which pushed the Cooking Mama franchise (and that franchise now includes Babysitting Mama which got 4 stars from Roman Polanski) down from 50% of revenues to 30% of revenues and if you do the math, that means it was essentially flat at $14.5MM.  Revenues last year were $29.2MM so ex-Zumba fitness they would have been down ~$5MM or ~20%, so just remember, no matter what COOL management says, they have one title that is working and the rest is about as successful as Terricka Dye’s teacher career.

2.  Gross margin shot up to 40.5% from 29.8% as Zumba Fitness is a premium priced product like Belvedere Vodka and Ashley Dupre.  That said, guidance is for this to fall back down to ~30% by the end of the year as the title gets staler than Andrew Dice Clay’s stand-up routine (though Money McBags does love you Dice).  As they said on the call “Zumba has a couple of price stages it will go through during the year before we either have another game to replace it or it just kind of levels off.if we have 40% margins in the first quarter, I think by the fourth quarter of this year we’ll be down more, closer to our norms in the 30% range

3.  Non-Gaap eps was $.20 which was up from $.08 and kicks the shit out of any quarter they have ever had (ok, that might not be true, but it is close enough as over the past four years the company has had negative eps in three of those years and earned a whopping $.12 per share in 2008, so Money McBags is pretty sure his hypothesis is at least directionally correct).

4.  They launched their first Cooking Mama Facebook game which has garnered 750k friends and likely zero revenue, but hey, why the fuck not?  They won’t release any financial data around this venture and said they have yet to put marketing dollars behind it (so it is likely just a little loss, and not a big one), but they seemed to be excited enough about this that they will launch 3 more Facebook games this fiscal year including Parking Wars and Oh Shit You Got Fat Since High School (and one of those may be made up).

5.  Money McBags has spent the last 10ish days nailing 7s, but today he finally firmed up and hit a 5 or so.  And yes, that has nothing to do with COOL, but Money McBags thought you would be interested to know.

6.  Operating costs shot the fuck up from $6MM to ~$11.6MM as they invested a shitload of money in to marketing and that actually caused them to have negative operating cost leverage despite their huge top line growth.  Thanks to gross margin expansion, they did get a shit load of operating income leverage though, but marketing costs grew faster than revenues, so just be aware of that (and also be aware of this).

7.  Guidance is almost as intriguing as a Dov Charney marketing campaign with $100MM to $110MM revenues and $.20 to $.25 non-gaap eps (and remember, companies like this basically make all of their profits during the holiday season when people feel the need to overspend on their kids to make up for the love they don’t give them the rest of the year, so that is why eps is essentially flat for the year after Q1).  Anyway, guidance is interesting because they have already brought in $48.5MM for the year so they are planning on just ~$51.5MM to $61.5MM for the next 3 quarters and in those 3 Qs last year, they did ~$46MM in revenue so um, really?  If this Zumba thing is so fucking cocktacular that it was the #2 selling game for the Wii, and if they are starting to penetrate the Kinect market (though not as lovingly as Eliot Spitzer penetrated the chicken neck market), and if they are just releasing Zumba in Europe now, why the fuck would sales be only 10% above last year at the low end?  No really?

As we saw above, but also as we saw the Non-Zumba revenue was down ~20% in Q1 so if we assume shit gets worse and all sales from last year will drop 30% as titles get old and the refreshes don’t work, that means that revenue from old titles will be ~$32.2MM in the last 9 months of the year so to hit guidance, Zumba Fitness would need to bring in just $19.5MM to $29.5MM for the rest of the year or only ~65% to 100% of what it did in Q1.  So does that sound reasonable?  Well shit, if Cooking Mama several years out was ~50% of sales last year, that means it generated ~$23MM in sales in the final 9 months of last year (granted there were a shit ton of Cooking Mama games out there such as Garden Mama and Baby Mama), so if this fucking Zumba is so great shouldn’t it at least generate that?  And if so, that would be in the mid-range of guidance so all of a sudden we’re creeping up to that ~$.26 eps range and the stock is only trading at ~9x that despite the huge run up today and despite having $17MM in cash on the balance sheet (depending if you want to fully count their factored receivables).  So shit, that’s actually kind of attractive.

But here’s the deal, those numbers above and assumptions were pulled so far out of Money McBags’ ass that there are actually pieces of his kidneys in them, so buyer beware.  He could easily make a case for Zumba being a one hit wonder and sales falling the fuck off after Q1 with their slowly dying Cooking Mama franchise continuing to wilt and finally forcing them to release Welfare Mama.  If we take them at their word (though this management team has underperformed so often, it is hard to do so), they are trading at 10x low end guidance for what be >35% revenue growth and a company growing like that should trade at a minimum of 15x so applying that multiple, the stock should be worth at least $3 or ~40% more than it is today.

That said, if we assume that Zumba sales continue to be strong because they have already sold 1MM of those fuckers, are a top 5 video game, and are launching in Europe, and thus say Zumba can do 115% of its Q1 revenue over the next 3Qs, then that would be ~$34MM in revenue and adding that to a guess at a declining legacy business gets to ~$66MM revenue for the final 3Qs and ~$115MM revenue for the year.  Using 34% as a blended gross margin, ~$6MM per Q in operating costs (up from ~$4.5MM per Q last year), and a 2% tax rate (thank you NOLs), we get another ~$.12 of eps so ~$.32 for the year and if the company hits that kind of number, there is no reason it shouldn’t trade for 15x to 20x that so um, yeah, that is a lot of fucking upside (but again, the numbers are pulled directly from Money McBags’ rectum).

So what do we do (besides Jessica Bratich)?  Shit, honestly, Money McBags doesn’t know because he’s just not comfortable with this management team and he is not comfortable in his understanding of this Zumba shit.  That said, the fucking upside is here so you should all go to your local Gamestop, Best Buy, or Weight Watchers meeting, and poke around to see if people are still buying Zumba, because if they are, this stock has plenty of room to go up.  If you have money about which you don’t care, feel free to send it to Money McBags (and hit him up at moneymcbags@gmail.com for more info on that), but if you have money about which you really don’t care, this is a pretty good speculative trade as long as you realize that the management team is completely full of shit and Zumba could go to zero tomorrow for all Money McBags knows (which is why Money McBags personally won’t be buying).  That said, he thinks it is more likely they beat guidance and in that case, as long as they don’t fuck up operating costs (which is ~35% likely), there is plenty of upside.

Writer’s note: For those unfamiliar with all things awesome, the headline for this column is a reference to the great New Edition song of the early 1980s.  Shout out to BBD and the whole East Coast family.

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