Marvel Entertainment Q3 2008 Earnings Call Transcript

Marvel Entertainment, Inc. (MVL)

Q3 2008 Earnings Call

November 4, 2008 9:00 am ET

Executives

F. Peter Cuneo - Vice-Chairman of the Board

Kenneth West - Executive Vice President, Chief Financial Officer

David Maisel - Chairman, Marvel Studios

Matt Finick - Senior Vice President Marvel Studios

John Turitzin - Executive Vice President, Office of the Chief Executive

Analysts

Drew Crum - Stifel Nicolaus

Todd Schwartzman - Sidoti & Company

Alan Gould - Natexis Bleichroder

Jason Bazinet - Citigroup

Barton Crockett - J.P. Morgan

David Miller - Caris & Company

Doug Creutz - Cowen & Company

Ben Mogil - Thomas Weisel Partners

David Bank - RBC Capital Markets

Joseph Hovorka - Raymond James

Jake Hindelong - Monness, Crespi, Hardt & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Marvel Entertainment third quarter results conference call. (Operator Instructions) I would like now to turn the conference over to Peter Cuneo, Vice Chairman of the Board. Please go ahead, sir.

F. Peter Cuneo

Thank you, Operator and good morning, everyone. Welcome to Marvel's third quarter 2008 conference call. With us in New York as speakers today we have in addition to myself David Maisel, who is the Chairman of Marvel Studios; John Turitzin, who is Executive Vice President of Marvel and our General Counsel; and Ken West, who is our Chief Financial Officer.

As is typical, we’ll today with our Safe Harbor announcement. We will then have some prepared comments from Ken West. He will be followed by a few prepared comments from David Maisel and then we will open the floor to questions and answers.

John Turitzin

Some of the statements that the company will make on this conference call, such as statements of the company’s plans, expectations, and financial guidance, are forward-looking. While forward-looking statements reflect the company’s good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties, and the company’s actual results could differ materially from those discussed on this phone call.

Some of these risks and uncertainties are described in today’s news announcement and the company’s filings with the Securities and Exchange Commission, including the company’s reports on Form 8-K, 10-K, and 10-Q. Marvel assumes no obligation to publicly update or revise any forward-looking statements.

Kenneth West

Good morning, everyone. Marvel's third quarter results issued this morning included a lot of detail in the press release, so I’ll just review the highlights with you now. Net income rose 39% to $50.6 million in Q308, on a 48% increase in net sales, yielding earnings per share of $0.64 versus earnings per share of $0.45 last year’s Q3.

Turning now to our segments, as anticipated, licensing segment net sales declined year over year despite improvements in both domestic and international licensing activity. The decrease in licensing was principally related to a $16.1 million decline in net sales from our Spider-man merchandise joint venture as we move further and further from the May 2007 release of the Spider-man 3 movie.

In addition, year-ago third quarter licensing net sales benefited from settlements of various audit claims which totaled $16.8 million, the majority of which was recorded within studio licensing and was the primary reason for the year-over-year decline in studio licensing.

Our operating margin for the licensing segment was 73% compared with 72% in the prior year period, in line with targeted ranges.

Q3 2008 licensing segment net sales reflect a total contribution of $12 million from Hasbro, $7 million of which was recorded within domestic consumer products and $5 million in international. We anticipate generating overage collections under the Hasbro license beginning some time in 2011.

Results from the publishing segment were modestly behind the prior year period, principally due to lower net sales of high margin custom publishing programs and trade paperbacks.

Operating margins within the publishing segment was 37%, in line with the expected range of full-year publishing segment operating margin of 37% to 40%. The year-over-year decrease in margin reflects higher spending related to our online initiative, which amounted to approximately $1 million in the quarter and lower custom publishing.

Film production segment net sales of $90 million in Q308 represents a second quarter of revenues from our Marvel produced feature film slate. Net sales in the segment included an earlier-than-expected recognition of $60 million related to the theatrical box office of the Iron Man feature film. Film production net sales also reflect our producer fees to date for Iron Man and The Incredible Hulk as well as the DVD component of the foreign pre-sales for Iron Man.

Gross profit in the film production segment was $45 million and operating income was $40.4 million, which is net of this segment’s SG&A.

Cash generation remains strong in the quarter and net of the $13.3 million spend on the repurchase of the remaining film facility mezzanine debt, cash and equivalents, restricted cash and short-term investments amount to $145.4 million at September 30, 2008, up from $122 million as of June 30, 2008.

Additionally, we continued to have no borrowings under our $100 million HSBC line of credit and have a share repurchase authorization for a total availability of $128.2 million as of September 30.

As indicated on our balance sheet, total non-recourse film borrowings decreased during the quarter to $182 million at September 30, 2008, compared to $262 million at June 30. This decrease principally reflects the repayment of borrowings using our film proceeds and the buy-back of our mezzanine film debt.

Now for guidance -- this morning we updated our full-year 2008 financial guidance and initiated 2009 full-year guidance. Specifically, our updated 2008 guidance now reflects additional film production segment revenues and associated expenses principally related to proceeds from the Iron Man feature film and DVD release. We expect the majority of Iron Man DVD revenues in 2008. Although this rise in earnings expectation is merely moving revenue and profits from 2009 into 2008, we are of course pleased to receive cash earlier to repay debt sooner. For 2008, contributions from The Incredible Hulk will consist of Marvel's 5% gross participation as well as the recognition of the theatrical and home video portions of the guarantees on the five pre-sold territories.

Our revised 2008 diluted earnings per share outlook has risen to the range of $2.45 to $2.65 per share, which is discussed in detail in the guidance section of today’s press release.

Now turning to our 2009 financial guidance -- there will be no Marvel Studios produced films and licensing contributions related to the Wolverine feature film, which will be released in May 2009, are expected to be lower than contributions from both Iron Man and Hulk in 2008. Further, there will be minimal Spider-man joint venture income, roughly a $45 million decrease in 2008, as we have already recognized revenue of $51 million for the nine month period ended September 30, 2008.

Our view on 2009 performance has also been tempered somewhat by the uncertain economic outlook. Since we expect the majority of Iron Man’s DVD revenues in 2008, The Incredible Hulk home video revenues will be the major driver for the film production segment in 2009. As The Incredible Hulk’s percentage contribution is significantly lower than that of Iron Man, gross margins in the film production segment are expected to decrease from 45% in 2008 to roughly 20% in 2009, due to the higher weighting of The Incredible Hulk related revenue.

As we did last year, we have provided the primary assumptions for each segment’s contribution to our 2009 guidance in today’s press release. At a macro level, the low-end of the 2009 range assumes there is an approximately 10% to 15% negative impact to all of our businesses related to the challenging consumer environment. The high-end assumes business as usual with no negative impact. As a result of all of these factors, we anticipate revenues of $415 million to $460 million in 2009 and net income of $80 million to $105 million, with earnings per share of $1.00 to $1.35.

With the need to find one-third of the production budget of the Iron Man 2 and Thor feature films, as well as finding the pre-production costs of both Captain American and the Avengers during 2009, aggregating approximately $175 million, and without [giving affect] to any further stock repurchases, we expect to end 2009 with cash in excess of $100 million and still no borrowings under our corporate credit facility. Based on anticipated film proceeds from both Iron Man and The Incredible Hulk, and borrowings to produce Thor and Iron Man 2, we estimate interest expense to approximate $14 million in 2009.

As we have often stated, we run our company to maximize profitability and cash flow over the long-term and do not expect smooth year-over-year progression.

Let me now turn the call over to David Maisel to provide an update on our studio activities and successes to date.

David Maisel

Thanks, Ken. We are obviously very happy with the successful launch of the new Marvel Studios in 2008. Our first two films, Iron Man and The Incredible Hulk, have now surpassed $840 million in worldwide box office and are two of the leading DVDs of the year with close to $250 million in worldwide revenues to date. Iron Man itself is currently the 21st biggest domestic movie of all time and the number one DVD of the year so far, and as Ken mentioned, helped to create the high level of profits we are seeing in 2008.

However, perhaps even more importantly, this successful launch of the Marvel Studios sets the foundation for the future growth. 2010 is scheduled to bring Iron Man 2 and Thor, while 2011 has The First Avenger: Captain America and The Avengers movie. We’ve announced Robert Downey Jr. will star in both Iron Man 2 and The Avengers, and Jon Favreau will direct Iron Man 2 and executive produce The Avengers. We will be making other talent and director announcements as these deals are finalized.

On one other note, by 2010 we also expect that our Spider-man Broadway musical will premiere on Broadway. This is the musical directed by Julie Taymor, the director of The Lion King, with music written by Bone and The Edge from the rock band, U2.

In keeping with our conservative fiscal approach, we are not funding the show but we are co-producing it and have a meaningful first dollar gross participation, which could create significant upside if the show is successful and spawns multiple touring companies around the world.

With that, I turn it over to Peter for Q&A.

F. Peter Cuneo

Thank you, David. Operator, we are ready to start.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Drew Crum with Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Good morning, everyone. I just want to get some additional color on your guidance for 2008 and specifically on the licensing and publishing businesses for the fourth quarter. I believe your previous guidance as far as revenue was concerned was 260 to 270 and I guess if you assume what you have given us for film production, it would imply perhaps some degradation in either licensing and/or publishing, so I’m just looking for some additional color there.

Kenneth West

In fact, there has been no degradation that’s been noticed to date, other than within the publishing segment of a slight downturn in advertising in custom trade publishing. But other than that, licensing continues as anticipated, no changes to that whatsoever and we are very happy with the contribution of the films in ’08.

Drew Crum - Stifel Nicolaus

So Ken, it’s still 260 to 270 that’s your revenue assumption for ’08?

Kenneth West

With respect to which -- are you talking about a specific --

Drew Crum - Stifel Nicolaus

With respect to the licensing segment.

Kenneth West

Roughly, in general.

Drew Crum - Stifel Nicolaus

Okay, fair enough. And then your expectations for Hulk, I presume you still anticipate this being a profitable film?

Kenneth West

Yes, both films, both profitable.

Drew Crum - Stifel Nicolaus

Okay, and David, can you provide any color as far as the number of DVD units you’ve sold for each title?

Matt Finick

We would prefer to talk in terms of sales and revenues, so including rental figures, total worldwide sell-through for Iron Man through November 2nd was about $175 million in revenues and for Hulk, it was roughly $69 million in revenues. And I would remind everyone that these figures exclude the presold territories such as Germany, France, Australia, and Japan and Spain, and that also domestically Iron Man DVD shipped on September 30th and Hulk on October 21st, so you have more data for Iron Man.

Drew Crum - Stifel Nicolaus

Okay, thanks, that’s helpful. And then last question, your expectations for cash at year-end for 2008?

Kenneth West

Approximately -- well, well in excess of $100 million, so we are sitting very comfortably with a very nice position.

Drew Crum - Stifel Nicolaus

Okay. Thanks, guys.

Operator

Your next question comes from the line of Todd [Schwartzman] from Sidoti.

Todd Schwartzman - Sidoti & Company

Good morning, gentlemen. The $1.35 top-end of the guidance, I just want to get clear on this, is your assumption there a status quo with respect to the economy or is there a slight improvement that you would need to see that $1.35?

F. Peter Cuneo

If you look at our range of $1.00 to $1.35 and you take -- we had mentioned that we have discounted some of our numbers, most of our numbers between 10% and 15% for the possible effect of the global recession that we are currently faced with for ’09, and that is off of the roughly midpoint of our range. That’s how you get to about $1.00. So going above the midpoint of our range would represent upside to our current forecast.

Todd Schwartzman - Sidoti & Company

Okay. With respect to publishing, the higher costs that you saw during the quarter, is it safe to say that these are going to remain the norm for the foreseeable future? The talent, paper, lower cost in publishing revenues?

Kenneth West

Yes, those costs are anticipated to be at this higher level. The challenge we will have is in regard to the ability that we may possess to pass along some of those costs in higher pricing of the product but in the challenging environment that we are facing for 2009, it may not be the opportune moment to do so. As we also noted, that we are making initiatives in the digital media which we think is going to be a boon for our future, long-term.

Todd Schwartzman - Sidoti & Company

Okay, and lastly, could you maybe talk a little bit about the mix of your licensee’s products by retail price points?

F. Peter Cuneo

To be honest, Todd, we’re not sure what you are referring to.

Todd Schwartzman - Sidoti & Company

The whole slew of products in the marketplace that your licensees produce, do you have any data that would indicate that the median price point of all those hundreds or thousands of items, whatever it is, is north of $30 or south of $20 or what have you? In other words, I’m just trying to get a feel to how sensitive the consumer, your business is going to be as far as the licensing segment -- how, what the current economic environment is going to mean for license sales in the next six or 12 months.

Kenneth West

Todd, that’s an interesting question and it has a lot of potential avenues to go. Clearly the licensed articles or -- let’s go back to the number of different licensees we have. We have well over 500 active licensees worldwide. Many of these licensees have maybe on average 20 to 30 different articles and number of SKUs for that but in general the retail price associated with most Marvel licensed items are within that $30 to $5 or $2 range, so they are not -- they are not durable goods. They are these smaller dollar ticket items. But the real concern that we have on a global basis is the credit availabilities for all of our licensees that are manufacturers, and whether they have the credit availability just to produce the products and get it extended out to the retail community to make it available for consumers, and the consumers, the concern that consumers are not going to be spending or will be spending. So that’s what we are concerned with for the future.

Todd Schwartzman - Sidoti & Company

Thanks.

Operator

Your next question comes from the line of Alan Gould with Natexis.

Alan Gould - Natexis Bleichroder

Thank you. First, Matt, if you could just clarify the $175 million and $69 million of video revenue, is that wholesale revenue plus rent plus your share of the revenue sharing?

Matt Finick

That would include rentals, yes.

Alan Gould - Natexis Bleichroder

So that’s wholesale -- that’s not a retail number?

Matt Finick

Right, that’s wholesale -- that’s basically revenues to Paramount and ourselves.

Alan Gould - Natexis Bleichroder

Okay, very good. And then second, next year you said on the film line it’s mostly the Hulk home video you are going to be recognizing -- will you also recognize the pay TV for Iron Man and Hulk next year?

Matt Finick

Yes, that would be my expectation. We would record cash receipts for that window, yes.

Alan Gould - Natexis Bleichroder

Okay, and last Ken, could you just clarify or repeat -- you said how much cash would you have at the end of ’09 after paying the one-third film costs?

Kenneth West

We anticipate having cash in excess of $100 million.

Alan Gould - Natexis Bleichroder

At the end of ’09?

Kenneth West

At the end of ’09, yes -- a slightly higher amount at the end of ’08 and no borrowings against our HSBC credit facility, which has a facility total of $100 million.

Alan Gould - Natexis Bleichroder

Okay, did you give how much you think the film facility will be at that point?

Kenneth West

No, I have not given that number.

Alan Gould - Natexis Bleichroder

Would you care to?

Kenneth West

Well, it’s a little too early [for that]. We know we will be borrowing to produce both Iron Man 2 and Thor during 2009. We’ll be paying back some amounts associated with the collections we anticipate for the DVDs and other windows in the film, and borrowing the interest, so it’s a big moving target and we’ll be differently prepared for the next quarterly conference call for that topic.

Alan Gould - Natexis Bleichroder

Okay. Thank you.

Operator

Your next question comes from the line of Jason Bazinet with Citigroup.

Jason Bazinet - Citigroup

I just have a longer term question -- if you look at the mezzanine notes that you paid down in the third quarter, which was higher cost paper, and you look at the amendment six, where you guys are going to begin to pay for some of the production costs yourself, philosophically if you have a lot of cash, would you move to sort of move out of the film facility that you have and sort of self-fund these? Or do you sort of view the non-recourse nature of the debt and the terms that you have there is an implicit asset for the firm and you will probably continue to run the LLC for the foreseeable future, even if you have cash?

David Maisel

Our plan right now -- it’s a good question. You know, because of the success of the films, we have taken the moves that you outlined by buying back the $60 million of mezz and making the new distribution deal, which not only got us more favorable economic terms but allows us to now have the upside worldwide on the movies, rather than being forced to pre-sell territories. And obviously that entailed us putting up one-third of the budget.

So we’ve moved a bit more in terms of using the Marvel capital, so we view right now that the balance we have with still two-thirds of the funding coming from our non-recourse facility, is an attractive mix and that the rate that we are paying there is attractive.

At the same time, we are constantly looking, as evidenced by the new distribution deal and the improvements that we put into that deal, which frankly have happened at an early point in the studio. Normally that might not happen until much later. We were able to do that at an early point, which we were very happy about. We’re constantly looking at any way we can fine-tune our facility, fine-tune our distribution and improve the profitability of our movies.

One of the aspects -- two things I’d like to mention there; we have with this credit environment increased costs tied to the facility, about 130 basis points because of the ambac downgrade. We’re constantly evaluating the fees and the implications of the ambac charges versus the benefits received. At this point in time, we are happy with the facility but we are constantly evaluating that situation.

Another note is we have made a decision to take significant space in Los Angeles, a place called Raleigh Studios in Manhattan Beach, where we are moving our L.A. studio headquarters, and we will also have dedicated sound stages and pre- and post-production areas where we will be making and developing and shooting all of our next four movies. That’s a significant move on Marvel, a significant investment in space. We believe that by doing that, we will not only have cost efficiencies by being able to have all the productions under one roof and negotiate various volume discounts and other sorts of cost efficiencies, but also hopefully continue and have a better probability of having the quality that we all saw this past summer in the movies by being the hands-on producers, as we were with Iron Man and The Incredible Hulk.

Jason Bazinet - Citigroup

Very helpful. Thank you.

Operator

Your next question comes from the line of Barton Crockett with J.P. Morgan.

Barton Crockett - J.P. Morgan

Okay, great, thanks for taking the question. Let me see, I wanted to ask a little bit about the recessionary impact that you guys highlighted in the release. You say your guidance presumes I think at the low-end of [hair-cut] for a recession, at the high-end, you know, no real impact from the economy, if I understand it correctly. Now, could you tell us though what you have seen to date? Because in previous presentations, the commentary seemed to be that you are not really seeing any impact from the economy on your business and I’m just wondering if you are starting to see that and if you could detail what you are seeing. Is it slackening of purchases of licensed product or vendors perhaps not coming up with financing to make certain product categories or perhaps a slowing of DVD sales after kind of the first week, which looked strong?

F. Peter Cuneo

I think Ken mentioned that to date, we really haven’t seen a material impact on our business. What we have seen is some pressure on our advertising revenues from the publishing group for advertising in comic books, and some pressure on our customized comic books. But those haven’t resulted in any material downside yet.

You have to remember when it comes to our licensees that we get reports from them on a lag basis, so as we sit here in the room today, I think it’s fair to say that we have not seen any material impact but we are very concerned. You know, in the past when there were little recessions and other downturns, we always gave the speech that very often people who are in the escapism business if anything might even see an up-tick because when times are tough, people like to escape more. The one business that did phenomenally well during the Great Depression was movies, believe it or not, and of course the business is very different today than it was then.

But we are faced with a global downturn potentially here and we’ve never see this before, so I think it’s prudent for us at this point to be very cautious in our projections.

Barton Crockett - J.P. Morgan

Okay. All right, and then what we have seen in terms of unit shipments on your DVDs, you know, for Iron Man and Hulk, the first week, some of the trade press put Iron Man at 7.2 million with 500,000 Blu-Ray and the Hulk at 3 million in the first week. That looked a little bit better than what I would have expected and would suggest to me that DVD revenues may come in above kind of the ideal film model that you guys had laid out for both of those films within the respective box office ranges. And you just quoted these revenue numbers and I haven’t crunched the numbers on that yet but could you give us a sense of whether you see the DVDs coming in within your guidance range for your ideal model or somewhere outside of it at this point for those movies?

Matt Finick

The DVD sell-through that we’ve been seeing to date is in line with our [estimates] and as Ken indicated, we have not made any material adjustment to our ultimate assumptions at this time.

Barton Crockett - J.P. Morgan

Okay. All right, and then one -- two other quick questions, if I could -- could you talk about first about FX impact on your licensing business, and to a secondary degree on your movie business? I’m not sure if you have any license deals that are foreign currency denominated and to what degree the international part of that licensing is foreign currency denominated.

Kenneth West

We are exposed to different currencies but not to a great degree. With respect to licenses, a majority of our international licenses are U.S. dollar denominated. There are some that are Euro and Sterling, so we are exposed to those. And as far as the collection of studio receipts in different foreign countries, I believe that we are exposed to all those different currencies but the great majority of our receipts have been very successful domestically.

Barton Crockett - J.P. Morgan

Okay, and then the final question, could you -- I just want to be sure I am clear in terms of your approach to share repurchase at this point. It looks like you didn’t do any in the quarter -- is that correct? And it looks like your guidance for next year is exclusive of share repurchase. Should we read that as perhaps a bias against share repurchase in this environment? Could you just clarify?

F. Peter Cuneo

No, I think our response is at it always is -- the board always looks at this program and we will buy stock on an opportunistic basis. But no, you should not read any positive or negative prejudice into that statement.

Barton Crockett - J.P. Morgan

Okay, great. But you didn’t do any share repurchase in the quarter?

Kenneth West

That’s correct. We had no stock repurchases during Q3.

Barton Crockett - J.P. Morgan

Okay, great. Thanks a ton.

Operator

Your next question comes from the line of David Miller with Caris & Company.

David Miller - Caris & Company

Good morning. Just one question -- in a strange way, your choice to front-load Iron Man and Hulk DVD economics away from the first half of ’09 and into the balance of ’08 really allows for convenient foreshadowing into 2010, so you’ve got two films coming out in 2010, obviously including Iron Man 2. We now have a pretty good proxy for what you guys can earn in a year in which there are two films. I know you don’t really want to foreshadow 2010 too much, but are there any other film events in 2010 that are non-owned properties, such as residual fees from X-Men: Wolverine or Spider-man 4 or anything like that that we can plug into our models for 2010? Thanks.

David Maisel

Regarding 2010, obviously we have our two films, Iron Man 2 and Thor, that we’ve announced and we’ve set dates for. At this point in time, there’s not a film from one of our license partners, a Marvel movie. You know, we continue to receive our participations in the previously released movies. You know, Wolverine is coming out next May. We’ll get the second year of our participation in that film and obviously details from the previous films. 2011 we have our two movies. We are awaiting, as is the rest of the industry, the announcement from Sony on when Spider-man 4 will actually be presented.

David Miller - Caris & Company

Okay. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Doug Creutz with Cowen & Company.

Doug Creutz - Cowen & Company

Yes, thanks. It looks like in your publishing guidance for next year that you are basically assuming it to be pretty flat year over year. Can you talk about kind of how you see growth trending? Is that still on average a low-single-digit grower? What are sort of the puts and takes on next year, why it might be flat? Thanks.

Kenneth West

In general, we are expecting that what we call the direct market of comic books through the retail channels of comic book stores, we do believe that to be flat but in fact we are anticipating with caution that there will be lesser amounts sold through the book market. That is our concern with the financial viability of retailers like Borders and Walden Books and also the revenue recorded associated or anticipated with advertising and custom comics produced elements are also anticipated to be down.

F. Peter Cuneo

Remember also that we are making a substantial investment in our digital publishing effort and we’ve noted in our press release today that the out-of-pocket in 2009 we anticipate will be around $6 million for that effort. So when you look at the publishing segment as a whole, you will see a decline in the profitability.

Doug Creutz - Cowen & Company

Okay. Thank you.

Operator

Your next question comes from the line of Ben Mogil with Thomas Weisel Partners.

Ben Mogil - Thomas Weisel Partners

Good morning. I wanted to ask you a little bit, going I guess to Barton’s question about currency -- even in markets abroad where you sort of receive U.S. dollars as the license payments, are you not exposed to the underlying currency volatility as the local market is ultimately the driver, if you will, of the license fees?

Kenneth West

Well, Ben, as I mentioned before, we are exposed to those variations in the local currency versus our functional currency, which is the U.S. dollar. So we are looking at different potential hedge issues, but at present we have not hedged any of those foreign currency risks. But the majority of our international licenses are still U.S. dollar denominated.

Ben Mogil - Thomas Weisel Partners

Okay. I mean, can you give us a sense when you came up with the guidance what currency sort of major exchange rate assumptions you were using?

Kenneth West

That -- I don’t have that handy but we do not anticipate any further material swings in the dollar compared to the major currencies of Euro and Sterling.

Ben Mogil - Thomas Weisel Partners

Okay. And then I think going back to the original commentary about the macro impact of 10% to 15%, is that on the licensing and publishing businesses only or is that on film as well?

Kenneth West

That’s all business overall, across the board -- 10% to 15% for ’09.

Ben Mogil - Thomas Weisel Partners

Okay. And then I think just sort of last question, sort of in terms of the supplier issue, you mentioned the availability of credit in order to manufacture the licensed products, do you have a sort of contingency plan if in fact a number of your manufacturing companies run into real liquidity issues? Would you be willing to extend liquidity on a sort of very short-term basis or do you have sort of alternate, better capitalized suppliers that can fill in quickly? I want to get a sense from a disruption perspective how meaningful or not this could be.

Kenneth West

There is a potential for the concern, as we are talking about cautious language associated with 2009 and establishing our guidance as we have. I don’t think we are in the position that we would be extending credit to any of our licensees but to the extent if they are major contributors to us and important to our future, and there’s no alternate supplier of similar products to get the articles into the same territories and markets, we would look at it potentially but have not ever demonstrated a history of extending credit to any of our licensees. As a converse, we actually get large advances from our licensees to give them the rights to exploit the Marvel IP to their benefit and to our own.

Ben Mogil - Thomas Weisel Partners

Sure. So out of that guise, would you sort of consider sort of short-term waivers of the advances, just to make sure that these companies can actually get stuff out the door?

Kenneth West

It’s possible, although we haven’t seen that yet. We would certainly evaluate if those factors come to our position.

Ben Mogil - Thomas Weisel Partners

Okay, and are any of the actual -- are any of the manufacturers from a concentration perspective, what’s -- either by -- I guess by dollar figure, can you give us a sense of what the single-largest manufacturer represents of a percentage of licensing dollars?

Kenneth West

Well, the Hasbro relationship for toys is clearly the single most significant licensing partner we have. As you can see from their public filings, they are very financially viable. Apart from them, there are as I mentioned well over 500 different active licensees serving so many different markets, different articles and SKUs, it would be hard to identify.

Ben Mogil - Thomas Weisel Partners

Okay.

Kenneth West

In general, we try to work with the strongest companies across all different disciplines and articles.

Ben Mogil - Thomas Weisel Partners

Okay, great. Thank you very much.

Operator

Your next question comes from the line of David Bank with RBC Capital Markets.

David Bank - RBC Capital Markets

Two basic questions -- the first one is can you give a little bit more color on the publishing side? First off, what was the experience in the last two major recessions in ’01 and ’91 in terms of the disruption to the publishing business? And can you give a little bit more clarity on -- you said there was a difference in channel, sort of vulnerability economically to the bookstores versus the direct retailers and the advertising side. So if you can give a breakdown of revenue contribution there. That’s one big question.

And the second question conceptually is given that you guys updated guidance on September 29th and there was a pretty big swing in studio revenue on September 29th, what was the major change that happened subsequently? What was the trigger? What did you know that you didn’t know basically a month ago?

F. Peter Cuneo

Matt is going to take the studio revenue question first and then we’ll address the publishing question.

Matt Finick

What really changed is the DVD, initial DVD sales for Iron Man have been stronger year-to-date resulting in cash coming in a lot faster than we had anticipated to Paramount, so that was the principal change in shifting revenues in from ’09 into ’08.

David Bank - RBC Capital Markets

So the recoupment scheduled accelerated?

Kenneth West

That’s correct. It’s timing. And David, with respect to 2001, although it precedes me personally, I joined the company in 2002, I know that the channels of distribution for published materials have been expanded while I have been here, principally in 2003 through 2004, into what we call the trade market, the Walden Books, the Borders, and also advertising back then was not significant to the publishing business whatsoever. So that has grown up and now being challenged.

David Bank - RBC Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of Joseph Hovorka with Raymond James.

Joseph Hovorka - Raymond James

A couple of things -- first, could you clarify the cut-off for the Iron Man and Hulk DVD revenue? Is that -- how many weeks is that? Is that as of Sunday or is that as of today or --

Matt Finick

That was roughly through November 2nd. And in some international territories, because international territories had staggered releases, for some territories we only had limited data. For example, in the U.K., which is the largest -- one of the largest regions for Iron Man, I had no data because I did not get sell-through data yet.

Joseph Hovorka - Raymond James

Okay. And what is the -- maybe what is the international U.S. split right now and where do you anticipate that to end up? Is it going to be similar to the box office or more skewed towards U.S.? For DVD revenue.

Matt Finick

As a reminder, Joe, some of the larger territories, because we presold those international territories, the DVD units don’t come in to our numbers. So just based on that, domestic would be significantly larger than international.

Joseph Hovorka - Raymond James

Right. I guess I was thinking -- okay, that’s fair. And then unit prices, can you kind of talk about -- I know you didn’t give units for it but with your two-disc set, are we looking at something that’s in the high-teens for a wholesale price, something lower than that? How does that change over the next couple of quarters?

Matt Finick

Good question. For the first six-month release window, wholesale prices can generally be on single disc, the high-teens; for the double disc and the Blu-Ray, it can be over $20. Now, with that said, that’s wholesale pricing before any pricing concessions. And generally speaking, for the first six months that wholesale pricing should hold up for us, especially given the strength of Iron Man sell-through to date.

Joseph Hovorka - Raymond James

Okay. And then again on the DVDs, you said more than half or most of the Iron Man revenue for DVDs is expected in ’08. Is that 51% or is that 80%? If you can just kind of a ballpark, because you are still doing a 45-day delay, right, and on a cash basis?

Matt Finick

The vast majority of the Iron Man DVD we’re expecting in 2008.

Joseph Hovorka - Raymond James

Okay. And then on the digital opportunities that you keep mentioning, can you flesh that out a little bit? You know, when would we start to expect to get revenue from those opportunities, or significant revenue -- I understand you’ve got some already -- and where is it coming from? Is it coming from subscriptions, will it come from ads? Will it be a combination?

Kenneth West

Joe, I would imagine that probably in the year 2011, we are going to see the first real positive contribution associated with digital media. That would be a combination of ad revenues, digital subscribers picking up on the subscription of comic books but not until that period, because we’ll continue to invest in that and it’s going to take some time and the dollars that we’ve built into our forecast.

Joseph Hovorka - Raymond James

And you said it was $6 million next year, as far as the investment?

Kenneth West

That is right.

Joseph Hovorka - Raymond James

And what have you spent so far to date?

Kenneth West

To date, about 2.5 to 3, and we expect to invest at least $4 million in all of ’08.

Joseph Hovorka - Raymond James

Okay, so roughly a $10 million investment but you said -- so you’ve got some investments in 2010 as well?

Kenneth West

Yes.

Joseph Hovorka - Raymond James

On the magnitude of the ’09 number, $6 million?

Kenneth West

It’s too early to tell specifically, but we would anticipate the continuation of the digital investment for our future. We are certainly not going to comment on ’10 investment at this point.

Joseph Hovorka - Raymond James

Right, okay. Great, thanks, guys.

Operator

Your next question comes from the line of Jake Hindelong with Monness, Crespi, Hardt.

Jake Hindelong - Monness, Crespi, Hardt & Co.

A couple of questions here, first on Iron Man toy sales -- in the first half, there were some constraints. Could you just comment on what you expect for the fourth quarter of ’08 versus the third quarter? And then 2009 versus ’08? And if there’s the potential for this to become more of a perennial type character for you?

Kenneth West

With respect to Iron Man toy sales, both Hasbro and Marvel have been very pleased with the performance of the various SKUs associated with Iron Man product. There wasn’t an adequate or an appropriate amount of sell-in initially because we were all surprised so pleasantly with the demand for those well-designed action figures and accessories, so they have been playing a little catch-up. Q3 is a very strong quarter for Hasbro and Marvel for Iron Man. Q4 I would expect to be a little bit lower and then we see that this will be a perennial desired product for the future but to a lesser degree in ’09 than certainly in ’08 when the movie was really promoting those sales.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Great, thanks, and then just for 2009, can you highlight any other media properties coming up that you think may be able to drive other toy sales, and maybe comment a bit on Avenger toy sales?

Kenneth West

The only media event that we’ve talked about, and it’s in our release, it relates to the Wolverine movie coming out in May of ’09. That in the past has not been a real driver in the sense of X-Men characters have not been real drivers of licensed properties, including toys. So we are hoping for the best.

F. Peter Cuneo

We do have an Iron Man half-hour animated TV show that will be coming out in ’09, which hopefully will assist the Iron Man consumer product sales and that’s part of our strategy to try and have animated television tied to each of our [programs].

David Maisel

But we don’t anticipate that the licensing behind X-Men or Wolverine, for example, would be equal to the combination of Hulk and Iron Man in ’08.

Jake Hindelong - Monness, Crespi, Hardt & Co.

That’s helpful. Thank you.

Operator

And we have a follow-up question from the line of Alan Gould with Natexis.

Alan Gould - Natexis Bleichroder

Could you just remind us what the deal is with Sony? May 4th ’07 I believe was the release date of Spider-man 3. How long after that do they have to commit to producing a Spider-man 4? And how long after that do they have until they actually put it into production?

John Turitzin

They have several years. They are not in any risk right now of losing their rights and I know that Sony -- there’s been some discussion publicly, which I read in the press, about Sony gearing up for something for 2011 but I wouldn’t be looking forward to Sony losing the rights to the movie.

Alan Gould - Natexis Bleichroder

But typically isn't it like they have two or three years to pay the first $5 million or so to commit to it?

F. Peter Cuneo

Alan, they have already done that for Spider-man 4. We’ve already received the first $5 million.

Alan Gould - Natexis Bleichroder

Okay. Thank you, Peter. Thanks, John.

Operator

Mr. Cuneo, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

F. Peter Cuneo

Thank you very much, Operator. Thank you, everyone, for participating. We really appreciate your interest in Marvel and look forward to talking with you in the future. Thanks again.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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