Darren Richardson was constantly managing through either the high end of the current business cycle or the low end. No sooner would Mad Catz Interactive Inc. celebrate a profitable year, then the five-year peak marketing cycle of the latest Xbox or PlayStation console would end, dragging the company’s customized product line down with it.
Following the last roller-coaster ride in 2006, Richardson, who serves as president and CEO of the computer and console gaming accessory manufacturer, decided it was time to reposition the company away from all the peaks and valleys.
“Everyone in the company had worked very hard, and in 2005, we had a record good year,” Richardson says. “Then in 2006, we had a record bad year, and we gave back all the profits we had made the previous year. It felt like all our efforts had been for naught. After doing some analysis, I came to the conclusion that we needed to change our positioning and move away from being a high-volume, low-priced supplier to a low-volume, high-priced leader.”
Richardson locked himself in his office for four days after the company reported a loss for fiscal 2006, getting down into the SKU-level detail for each product at every retail account and creating a mini profit and loss statement for every placement. The analysis paid off because it was after that data review that Richardson decided to change the company’s entire value proposition, a decision that later benefited the bottom line.
After the close of the company’s 2006 fiscal year, Richardson and his team set out to reposition Mad Catz during the next 12 months. Despite backing away from some business, the company’s revenue for fiscal 2007 remained relatively unchanged. Most notable, however, was the fact that its gross margin percentage nearly doubled in 2007, generating $25 million in gross margin versus the $12.6 million in gross margin it earned during the prior year. That gross margin swing returned the company to profitability and allowed Richardson to pay down debt. Richardson says his main lesson was that generating unprofitable sales revenue doesn’t always translate to shareholder value.
Walk away from unprofitable customers
Any CEO who says it’s easy to walk away from revenue has never done it. There’s both security and cachet for companies that attain high levels of market share and Mad Catz previously aspired to reach the top position. But for a company with $100 million in annual revenue in a cyclical niche industry, the line between profit and loss at its current margin was precariously thin.
“When you looked at our numbers from a high level, overall for each product and customer, everything looked OK,” Richardson says. “But there can be hidden costs associated with selling to large retailers, so you have to look at the detail. You have to consider the freight and logistics costs, and with some accounts, the cash-to-cash cycle can be lengthy, and then you also have to consider the company’s overhead in servicing the account. In addition, we often had the company’s operating capital tied up in unprofitable products, which precluded us from expanding beyond the cyclical hardware marketplace. After looking at the numbers in great detail, I presented my idea to the management team, which was basically that we make every product profitable. It came as a bit of a surprise to everyone because it was the opposite of anything we’d ever done before.”
Richardson began taking steps to make each product and each retail placement profitable, knowing that if his ideas failed, he would stop manufacturing the product. His team approached each customer and presented ways to make the relationship more of a win-win situation.
“We didn’t leave anyone high and dry,” Richardson says. “But we did collaborate with each customer about improving our profitability. In some cases, we were able to start using our customer’s supply chain instead of ours because they were open to the idea. Leveraging their system affords us better logistics pricing, and secondly, you have to look at where you bring value. We don’t bring any value in terms of logistics it just adds to our operating costs.”
While the margin improvement plan was successful, some products were eliminated. The subsequent reduction in revenue caused Richardson to reduce the company’s head count by 20 percent to 165 employees.
He says he favors sharing the pain across the company when forced to make staff reductions, and while Mad Catz initiated most of the terminations, not everyone embraced the change in strategic direction, and some people left of their own accord, giving Richardson a little less control over the outcome.
“It was tough for some people because I really think they thought it was the wrong thing to do,” Richardson says. “I was surprised when a couple of people left. In retrospect, I wish I would have fought a little harder to keep some really good people who didn’t stay. It was especially hard on our salespeople because they had to fight for the business initially, and then they had to go back and try to make it profitable.
“During times of change, you really have to spend time talking with a lot of people, and you do a lot of traveling. The toughest part of repositioning the company was the downsizing and convincing everybody that this was the correct strategy, and of course, the investment community always takes a wait-and-see attitude.”
The positives from the downsizing not only included a reduction in overhead, Richardson says it made the company more nimble and ready for the next phase, which included adding back more profitable growth. In addition, he says that he’s made one more permanent adjustment from his business analysis experience: He now requires the sales staff to complete a thorough profitability analysis before he agrees to a new customer relationship.
Eliminate peaks and valleys
Richardson’s ultimate goal was to develop markets that were not only more profitable but less cyclical in order to achieve sustained top-line and bottom-line growth. By selling more products directly out of China, where they were manufactured, rather than out of California, Richardson sped up cash collections to an average of 60 days rather than the previous average of six months. With greater margins and improved cash flow, he paid down $25 million in debt, which ultimately freed up cash and credit lines for new acquisitions and the development of new products for emerging markets.
“To understand the challenge, you have to take a step back for a moment and look at where we were positioned,” Richardson says. “When you write to the console game market, your product is tied to that specific piece of hardware. When you write for the video game market, those games run on computers, so the hardware essentially remains the same, so sales are more level and the market opportunity is larger.
“The best way to take advantage of the PC market was to tie more of our gaming accessories to software, not hardware. We changed our business model to include more products created for gaming software by expanding our licensing agreements.”
Creating unique controllers, joysticks and steering wheels for all the major sports leagues games through licensing agreements gave Mad Catz a more stable revenue stream at high margins, while strategic acquisitions broadened the company’s capabilities, product lines and markets.
Specifically, the acquisition of Saitek, a leading provider of PC game accessories, PC input devices, multimedia audio products, chess and intelligent games in November 2007, added nearly $43 million in revenue to Mad Catz’s top line at margins that were generally higher than those for Mad Catz existing products. In addition, it moved Mad Catz forward into the PC marketplace and strengthened the company’s position in Europe, where it had achieved only 22 percent of its 2007 sales prior to the acquisition.
“We made some strategic acquisitions in some adjacent categories that use the same skill sets, and they’ll allow us to leverage our existing distribution system, so they make sense for us,” Richardson says.
The combined results from all of Richardson’s 2007 initiatives allowed him to reduce prices for some products late in the year, while maintaining margin improvement. That move helped Mad Catz regain some of its earlier lost revenue. Reduced prices and the advent of new accessories create value for the ultimate end customers, the gamers, who are always seeking the thrill of a new gaming experience.
Take control of your destiny
Richardson’s final steps of Mad Catz’s repositioning plan included moving the company back into the game publishing business. The company is creating software for the next generation of hot games that fall under the emerging category called social gaming, where the gaming experience requires greater levels of human interaction by participants. This time around, Mad Catz won’t merely ride along on the coattails of the console makers during the marketing upsurge phase, it will publish the games and manufacture the customized accessories, bundle the products and exercise much greater control over its own destiny.
“While I think that adding incremental growth capability has been the right move for our company, it has to be achieved through the right products that can achieve our desired value position and stabilize our revenue,” Richardson says.
Along those lines, the company also just started marketing a new interactive audio device that sits outside the ear, allowing music listeners using iPods and MP3 players to engage in the listening experience while remaining more aware of their surroundings. The new product capitalizes on the company’s existing distribution system and further diversifies its product lines.
The complete suite of new products has helped Richardson achieve his ultimate goal of repositioning the company as a value leader by enhancing its position with major retailers such as Best Buy, Wal-Mart and GameStop. Mad Catz is no longer simply a niche vendor of low-margin products to the big box stores. Richardson has the sales team acting as category specialists offering both a suite of high margin, emerging technology products along with space and product placement expertise to retailers.
While Mad Catz has increased its head count back up to 260 employees, primarily through acquisitions, the assimilation process is challenging for a company of its size, and the pressure is on Richardson and his team to show more top-line growth in 2008 and a return for the acquisition expense.
“To move a company to a position where it shows consistent growth can take many years, and you have to be incredibly persistent because you are bound to hit some bumps along the way,” Richardson says. “My advice to other CEOs is to really do some soul-searching when you hit a difficult year and agree on a strategy quickly and act on it decisively. We really didn’t have a lot to lose after 2006, so there was nothing holding us back from making the changes. Now, you can actually see some improvements, and that’s helping everyone feel better about our direction.”
HOW TO REACH: Mad Catz Interactive Inc., www.madcatz.com