Playboy Q2 2006 Earnings Conference Call Transcript (PLA)

posted on: August 08, 2006 | about stocks: PLA

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Playboy Enterprises, Inc. (PLA)
Q2 2006 Earnings Conference Call
August 8, 2006 11:00 am ET

Executives

Christie Hefner - Chairman and CEO
Linda Havard - CFO
Martha Lindeman – SVP, IR

Analysts

Michael Savner - Banc of America
David Bank - RBC Capital Markets
David Miller - Sanders Morris Harris
Robert Ralph - Jefferies & Co.
Del Warmington - Delwell Capital
Dennis McAlpine - McAlpine Associates
David Leibowitz - Burnham Securities, Inc.
Lucas Binder - UBS
Steve Marascia - Anderson and Strudwick
Matthew Harrigan - Janco Partners
Michael Savner - Banc of America Securities
Michael Kelman - Susquehanna Financial Group
Kevin Foll - McIntyre Capital

Presentation

Operator

Good day. All sites are on the conference line in a listen-only mode. Please note this call may be recorded. I would now like to turn the program over to Martha Lindeman. Please go ahead.

Martha Lindeman

Thank you. Good morning and welcome everyone to the second quarter conference call. If you need a copy of our release and earnings supplement, please look on our website at www.peiinvestor.com.

During the call today, we will be making forward-looking statements pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act. These statements reflect our current beliefs and plans. They are not guaranteed and involve risks and uncertainties that could cause our results to differ materially from those discussed today. We are under no obligation to update these statements. I refer you to the Safe Harbor language in today's release, which describes some of the factors that could cause our results to differ materially from today's discussion.

During this call, we also may make reference to non-GAAP measures. This information, including a reconciliation to the related GAAP measure, is available in today’s release.

With me today are Linda Havard, who will take you through the details of the quarter; and Christie Hefner, who will discuss the outlook for the reminder of the year. We will start with Linda.

Linda Havard

Thank you, Martha. As we projected, the second quarter proved difficult for our two largest businesses: domestic TV and Playboy Magazine, resulting in a significant decline in segment profit compared to last year. Last month we described for you some of the action steps we are taking to mitigate the impact of these challenges, including: the reduction of acquisition spending for our adult television channels; and the reduction of editorial spending for the magazine, including staff restructuring, which primarily affected entertainment; as well as the implementation of cost reductions in marketing, technology and administration. The restructuring charge, which totaled $1.9 million or $0.06 a share, further impaired the quarter’s results.

In the Entertainment group, the second quarter results suffered from the comparisons with last year when we reported $2.6 million in very high margin, one-time revenues related to the discontinuation of two deals; one in domestic TV, the other in our e-commerce business.

Beyond that, as anticipated and as we described in our first quarter call, the year-over-year reduction in operating income primarily reflected the challenges we faced in our domestic TV business. Revenues declined due to the continued loss of linear carriage with no impact yet from the recent roll out on Comcast Systems, coupled with the challenges in increased competition in VOD and the loss of two of our movie channels on the DirecTV platform.

The impact of less shelf space and more competition resulted in lower buy rates on our movie services. On Playboy TV, the pay-per-view decline was partially offset by higher monthly subscription revenues on both cable and DTH, which is encouraging, given the expected roll out of our subscription video on demand product.

On the international side, the 11% revenue growth in the second quarter came from our U.K. networks and higher royalties from mobile carriers in both Europe and the Far East. There were corresponding increases in distribution and marketing expense.

In online, our acquisition of an affiliate network of websites last fall was responsible for the significant increase in subscription revenues. This growth was partly masked by lower e-commerce revenues which reflected the unfavorable comparison due to last year’s termination fee.

As part of our cost control efforts, we now projected that our 2006 cash investments in content spending will be down approximately $2 million from our prior projection. That projection did not include programming for either Sirius Radio or the CJI acquisition.

Our P&L will not benefit from the reductions this year, due to the approximately three-year amortization schedule. Therefore, 2006 amortization expense is expected to improve only slightly from the original projection.

Effective cost control measures helped narrow the Publishing group’s loss versus last year’s second quarter by $600,000 despite a $1.7 million decline in revenues. Advertising revenues were down 16%, reflecting the continuing transaction of ad dollars to other media. Although subscription revenues declined by approximately 9%, second quarter newsstand revenues rose more than 20%, driven by the $1 per issue cover price increase we implemented in January.

The Licensing group reported another quarter of revenue and profit growth versus the prior year. International revenue growth in the second quarter of this year came from higher royalties from new and existing licensees in both Western Europe and Southeast Asia, while the favorable domestic revenue variance primarily reflected increase sales from our accessories licensee.

As a reminder, our high profile Playboy Jazz Festival takes place during the second quarter. It results in higher revenues, but as an essentially breakeven promotional event, causes a modest deterioration in second quarter operating margins for the Licensing group each year.

A roughly $2.3 million increase in second quarter corporate administration and promotion expense was primarily due to two factors: the elimination of $1.4 million in trademark and administrative fees from the online segment, resulting from our repurchase in late 2005 of the minority interest in Playboy.com; as well as the timing of certain marketing and promotion expenses.

Company-wide, the impact of stock option expense total $800,000 for the quarter. Now let me turn you over to Christie.

Christie Hefner

Thank you, Linda. While our new media licensing businesses are healthy and growing, we clearly have some challenges near term in both domestic television and Playboy Magazine, each of which is in the midst of significant, industry-wide structural changes.

We have already made tangible progress on the magazine. Despite the continuing difficulties on the revenue side that we have documented to you in the past, as well as this year’s higher paper and postage prices, we are seeing the losses narrow. We can't change the dynamics of the magazine publishing business, but we can change how we operate, and we did: raising the cover price, lowering the rate base, reducing the draw and managing editorial costs.

The magazine remains very strong. The spring MRI research showed that we are reaching more and better-educated readers, including a nearly 10% increase among the elusive and coveted 18 to 24-year-old reader. While we still expect the Publishing group to show a loss, our goal is to report improved second half results compared to last year.

With the continued splintering of consumer attention among a range of platforms, we are increasing our focus on leveraging the magazine as the cornerstone of a successful multimedia collaboration with other Playboy branded media; particularly online and mobile. Our business groups are finding new ways to cross market, share content, and expand advertiser opportunities, and you will see this continuing going forward.

The domestic television business is a more difficult challenge. While still very profitable, revenues have declined and margins have eroded. This is the only business whose dynamics have deteriorated since the last quarter, and it is the sole impetus for the change in guidance that we are giving today. I'd like to take a few minutes here to describe the issues that we are addressing to minimize the negative financial impact.

First is the increasingly competitive nature of the business, which manifests itself in a variety of ways, from the loss of exclusivity with our linear channels on DirecTV, to the overall reduction in shelf space on the on-demand movie platforms. Overall, consumption of adult products has plateaued. There are more players in the market and fewer barriers to entry on the VOD platform, because small players can offer distributors a handful of titles which don’t require the extensive programming infrastructure of a 24/7 linear network. With distribution in the hands of an increasingly small number of players, it is an ever more difficult environment in which to negotiate our contracts.

Additionally, in this transition from linear networks to VOD, there seems to be a dip in buy rates as consumers learn to use an unfamiliar technology. Past experience has shown that this is generally temporary and that buy rates will rebound. But in the meanwhile, VOD roll out is accelerating the loss of carriage of our linear networks, while we carry the additional cost burden of VOD distribution.

As a result of all of these issues, the business today is more difficult than at anytime in our history. Here is what we are doing about it.

First, we are focused on using the unique assets of Playboy to leverage our competitive advantage. Chief among these is Playboy TV, which offers a programming schedule that uniquely lends itself to a subscription VOD product. As Linda pointed out one of the bright spots in our second quarter domestic TV business was the growth in Playboy TV monthly subs in both cable and satellite. We believe that our subscription VOD package will make this an even more compelling purchase.

Secondly, we have strengthened our competitive position in the adult marketplace through our recent Club Jenna acquisition, and we will begin using those assets to create and distribute exclusive programming.

Third, we are aggressively working to increase distribution on both new and existing platforms including the telcos. Two telcos have recently launched Playboy TV with premium on-demand capability and we are the leading provider of movies on their transactional VOD platform. Comcast, which began rolling us out only a few weeks ago, has already launched Playboy and our movie services in more than 7 million on-demand households.

Finally, we are focusing on better management and execution, starting with reduced costs in a business that is profitable, but mature. We have cut the programming and the marketing budgets and I have made some staffing changes where I felt they were needed. This scrutiny will continue.

As a result, we believe that the third quarter will mark the nadir of our domestic TV performance with consecutive quarter revenue improvement beginning in the fourth.

I might note that the negative variance in domestic TV has masked some of the positive results in our other entertainment businesses. On the international front we continue to expand our TV carriage. We signed a deal to begin airing movies and Playboy programming via broadband in Germany. Additionally, revenues from overages related to our wireless agreements continue to grow and we remain very positive about the potential for this market.

In online, we are significantly increasing the content that is available through broadband VOD and since our pay-per-minute revenues have more than tripled year-over-year and continue to show steady improvement month-over-month, this is clearly a meaningful opportunity.

These are businesses with enormous growth potential and we are making the investments in content and technology needed to ensure they perform.

Despite the difficulties we are facing in the media environment this year, we remain optimistic about the long-term viability of our strategy which is to create and distribute unique, high quality content for adult audiences around the globe.

Additionally, licensing remains a bright spot. Our strong merchandising efforts remain the solid backbone of this business and our product lines, our number of licensees and the territories we distribute in continue to grow. As last week’s press release indicated, we are expanding our licensed online gaming initiatives to include poker as well as casino games, and those sites -- which will not be open to U.S gamers -- will launch early next year.

Finally, we expect the Playboy Palms project in Las Vegas to open the weekend of October 6. We believe that the opening of the Palms venue, combined with the rollout of Playboy TV as an SVOD product, the leveraging of our CJI acquisition, the growth in our online and mobile businesses, and our reductions in spending will carry us into a stronger fourth quarter in 2007. Now we will open it up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will take our first question from Michael Savner - Banc of America.

Michael Savner - Banc of America

Hi, good morning. Thanks. A couple of questions. First, Christie on the domestic TV, a few questions on pricing and margins. First, just to confirm that the huge drop in direct and satellite households in second quarter -- that all represents the loss of the two channels on DirecTV, correct? That should be mostly a one-time issue, or could we expect to see that continuing?

Second, there seems to be some significant pricing pressures implied in forward guidance on domestic TV. Your comments just now were mostly focused on lower buy rates on VOD. Can you talk about the difference between what you're seeing there? Are you also going to be expecting a decline in your economics, and that’s why margins aren’t improving and that’s why revenue is declining more dramatically year-over-year? Or is that simply a function of buy rates? I’m sorry that’s all one big question.

The second question is, really unfortunately the same question we asked you last quarter, and that’s about the transparency of your business in the way you're approaching your guidance. Because aside from your guidance last quarter, you had made some comments in late June, that you were comfortable with the business drivers that were in place for the second half of the year. You had that opportunity two weeks ago when you disclosed the details about the cost-cutting initiatives to address guidance then; which had been for 50% earnings growth in the second half of the year. Now you are talking about a 70% decline. This 70% cut to your guidance.

How much of that could have been foreseen, and why does there seem to be such a huge gap in the transparency in what's being communicated to the shareholders? Thanks.

Christie Hefner

Thank you, Mike. Starting with your first quarter, yes, the decline is solely attributable to the loss of exclusivity on DirecTV, so that will be the base going forward.

On your second question, in terms of margins, yes, there has been some squeezing on margins in the negotiations with distributors which is an ongoing challenge for all programmers, but the biggest issue in terms of margins is that there is no real offsetting cost savings when revenues are off. Therefore, the overall margin of the business suffers greatly with the loss of revenues from the DirecTV platform and the lower revenues on cable.

Now as you know from what we have said and what you have seen, that revenue dip is a transition both in terms of roll out of VOD and SVOD and in terms of getting through the decline of the reduction of the pay-per-view linear. That is a transitional time that we are in.

The question of transparency really gets to the question of trying to time the timing, which becomes very difficult, frankly, because we are not in control of the rate of roll out, we are not in control of the support that the operators give to the product in terms of placement and marketing and pricing, and we are getting information -- as we have historically – months late in a highly dynamic environment.

So it is very difficult to actually be certain of exactly at what rate the roll outs will occur. Right now we are dealing with the Adelphia acquisition and we think it's good news that is going forward, but now we will have to see at what rate the new systems are absorbed into Comcast and Time Warner, and we get our Playboy roll out on those previous Adelphia systems.

We are also just starting to see from research and from the operators report how the consumer is adjusting to VOD. You’ve heard me say before that I think that the operators are not optimally communicating to the consumer how to use VOD and we are trying to use our direct to the consumer experience via broadband to help them. That is an ongoing process and it isn’t one that we can say we finished and now we will bear all the fruit for it.

So that is a long answer to your question, but I think it's an important question. It is obviously a challenge to see, especially on the adult side, the transparency here. What has shifted is whether we were able to get enough traction in the third quarter in terms of VOD and SVOD to offset the weakness in a pay-per-view, and it's clear we are not. The fourth quarter we think, for the reasons that we have described and the Comcast roll out that is going on, we will.

The only thing I would say about two weeks ago is, I know it is frustrating on your end, but I have to tell you that I think we were all far better served if we stick to our longstanding policy of only speaking to guidance at the quarterly calls and not trying, whenever we think we have new information, to be giving The Street new information.

Michael Savner - Banc of America

Okay, thanks very much.

Operator

We will take our next question from David Bank - RBC Capital Markets.

David Bank - RBC Capital Markets

Thanks, good morning. A couple of questions, I guess a little bit of a follow-up from Mike's. The first question is, and I know your visibility is somewhat limited, and you are dealing with that reality, but you must have some thoughts as you put together guidance. Normally I would expect you to say, David, we can’t really answer this question, but I think given the volatility in the business versus the guidance the last couple of quarters, I am going to press you a little bit.

Which is, you have to at this point have some revenue run rate expectation, and margin on the business. That is, while you have given us some bottom line guidance, I think it would be really helpful if we could have a little bit more specificity in terms of domestic TV run rates and some sense of margins. That would be the first question.

The second one is, do you think the variance in Q3 was more a function of the speed with which some of the MSOs rolled VOD out, or was it more in increased competition on the VOD platform? I am sure the answer is a little bit of both, but could you give a little more color on that?

The last question is, can you quantify the reductions in spending? I know you have done it for programming costs, but if we look at the second half expenses in ’06 versus ’05, how much has actually been cut on a fixed basis versus the variable impacts of revenue? Thank you very much.

Christie Hefner

Thanks, David. Let me try and address your follow-up questions. On the run rate question, as most of you on this call know, going back well over a year the Company and I have taken the view that VOD is not going to represent an opportunity to grow the pie. That it is simply a different delivery mechanism and that at best, it will be a share shifting if VOD is well-executed. The upside for our Company rests with Playboy on a subscription VOD basis.

That fundamental characterization, which was far more conservative than most anybody else offered, remains true with the obvious caveat that we weren’t conservative enough. In seeing what the run rates are, in making projections from the third quarter on, we are taking into account what we are now actually seeing in the marketplace.

That is, as you quite rightly suggest, a combination of less shelf space, we think lower buy rates that may come back based on trending, but we are not assuming that. And, the corresponding less roll out at a time of more loss of linear.

So it is a function of both the rate of the transition of delivery to get penetration of more homes, with lower revenue per home on a platform where we have less shelf space.

So our own view is that the third quarter is going to mark a continuation of decline of adult movie performance, because we can look ahead and see continuing decline of linear networks and not yet sufficient offset on VOD to even make it whole, with Playboy being relatively flat because the traction really comes in the fourth quarter.

So we are trying to use the information that we have to make the best projections for our own purposes and for your purposes. I am not at all satisfied with the ability to project and the lack of transparency, and have made some changes in the organization in part because of that. But I think that time, in a way, is our ally here in that we have more real information from ’06 now that we are entering into the second half, and we know that the Comcast roll out is going on, because that has already begun.

David Bank - RBC Capital Markets

Right, but I guess if I could just press a little bit more. There must be some underlying assumptions for the domestic TV business. I was kind of hoping you could share those a little bit more specifically. Again, I am still not sure what the answer is. You knew that the Comcast roll out was going to be in progress by the end of the quarter. I think it was relatively on the timetable. The announcement seemed to be on the timetable that you had expected. So is it in fact that – is the bigger issue the lower take rate or the fact that it is rolling out, but it is not going to be rolling out as fast as you thought?

It is really important for us to be able to understand the dynamics of the business, which one of those two is the bigger driver; or, are they equal drivers?

Christie Hefner

I understand what you are asking, but I cannot give you a revenue per home kind of formula to try and calculate any more than we did in the pay-per-view environment. I can only try and give you guidance based on what we are seeing the actual performance in the system to be. That includes continuing decline in the third quarter of the adult networks, based on the fact that we are seeing a lower revenue because of less shelf space; and we are not seeing yet sufficient offset in VOD growth to make up those declines in pay-per-view growth.

You are right that the Comcast roll out began about where we thought, but you are also right in assuming that it is not complete and therefore it is not just about when these roll outs begin, but about when we reach full roll out. That we do not see happening until the end of the year.

David Bank - RBC Capital Markets

And in terms of the reductions in spending outside of program content?

Linda Havard

I cannot really quantify those for you, David, but what I can say is that some of that will be reflected in the rest of the year and some of it will not be reflected until ’07, depending on when people leave, et cetera.

David Bank - RBC Capital Markets

Okay, thanks, guys.

Operator

We will take our next question from David Miller with Sanders Morris Harris.

David Miller - Sanders Morris Harris

Good morning, everyone. Christie, just one quick question -- how confident were you as of the last earnings call that Time Warner would come online by the end of -- let’s just call it the end of the third quarter with the SVOD platform? What I am trying to find out is rhetorically, when you gave the previous iteration of guidance of 50% growth of the second-half this year versus the second-half last year, did you have it in your head Time Warner would come online with the SVOD product by the end of the third quarter? Thank you.

Christie Hefner

I saw it as up-side. I did not see it as something that we were counting on. I have not changed my view on Time Warner, which is that I am hopeful that they will begin launching before the end of this year.

The change in terms of what we know today, and therefore what we are giving as guidance versus what we knew and therefore the guidance we gave three months ago, was not related to Playboy SVOD. It is related to the adult part of the business.

David Miller - Sanders Morris Harris

Okay, so if the Time Warner platform via SVOD should come online perhaps in the next three weeks, that you would see as essentially up-side, all other [barrels] being equal, you would see that as up-side, given your budget for the fourth quarter?

Christie Hefner

It would depend, as I said, in talking about Comcast, as to whether what happened was the launch in a couple of systems, which of course is a good sign but is not as significant as the rollout in front of a significant number of homes. We will not get any information about that until two to three months later, so we have to book based on the average historical, not the expected, results.

David Miller - Sanders Morris Harris

Thanks very much.

Operator

We will take our next question from Robert Ralph with Jefferies & Company.

Robert Ralph - Jefferies & Co.

Yes, good morning, a few quick questions. First, I was wondering if you could comment a little bit on obviously the Adelphia situation with Comcast and Time Warner, and how that could possibly impact you, given that you got deals in place with both Comcast and Time Warner. I would think that would be an opportunity that may or may not be figured into your thinking as far as end of ’06 and beyond.

Then I was wondering if you could comment a little bit on your recent acquisition of Club Jenna and whether or not there are any other things you are looking at to buttress your online opportunities, and if there is any possibility of expanding your joint venture that you have with private media, given that there are a lot of competitors entering into this space, and obviously consolidation is going to happen one way or another.

Christie Hefner

Sure, Rob. On the private side, I think at this point, our international TV people are feeling good about the sharing of back-end and the bundling of services, but right now, there are not any plans to expand beyond the territories where we felt we had the most to gain through the joint venture, but at that is evidence of we do not exclude the possibility of venture partners in our international TV networks where we think it can be additive.

On the CJI side, you will actually start to see increased revenues in the second-half from their existing DVD business. We report that on our other line. Then, as we indicated, we are also expecting to leverage the brand and the content into TV as well as online and mobile.

It is going to be accretive this year, principally as a result of the existing profitable DVD business, but certainly within this year, you will also see us making moves to extend profitably the brand and content into the TV, mobile, and online arenas as well.

On the Adelphia question, as I mentioned, FCC approval is a good thing. The Adelphia systems that are being taken over by Comcast did have subscriptions but now they will launch Playboy SVOD, which as you know, we feel is a very good thing.

However, I will note that as is true with all of the MSO’s, we are going to go through the transition of the adult channels, so we had, depending on the system, three or even four linear spike channels on some of the Adelphia systems. We would expect that Comcast will drop those.

On the other hand, we think that the SVOD rollout of our premium product will represent meaningful upside, as we think it does, across the board, and that will be true both for the Time Warner systems that -- or the Time Warner acquisition of Adelphia systems and Comcast’s acquisition of Adelphia systems.

Robert Ralph - Jefferies & Co.

Great. Just two other questions -- given the Palm Casino is scheduled to open this year, we all know you have been looking at a lot of other places. I am wondering if you can just comment on timing or opportunities that you may see, or what you may be thinking about as far as expanding that concept and other licensing opportunities that you obviously are probably looking at.

Finally, given where the stock price is, which is pretty close to its low over the past five years, and your cash balance and you are somewhat over-capitalized, I am wondering whether a company at this level could even consider buying back equity.

Christie Hefner

I will take the last one first. We did take a look at it with our investment bankers and the board, on sales of the first quarter and the unanimous conclusion was that the amount that would have to be allocated to a buyback to make any difference in the market was overwhelming and would, of course, work against the desire that the shareholders had to have liquidity in the stock.

Having said that, that does not mean that we do not look at stock buybacks, as we look at other transactions that would accrue to the benefit of the shareholders. I expect when the board meets in conjunction with the Palms opening, there will be a discussion of that again. We will be having a board meeting on Friday, October 6th and we will be having an investors meeting on Friday, October 6th.

One of our focuses for the investor meeting is to talk more about our gaming opportunities, both online and for bricks and mortar, which I remain very positive about.

Other licensing ventures, we are going to be delivering on our three new stores this year. We have already opened Kuala Lumpur. We are not even counting the store in the Palms property, which is doing very well. We will be announcing the other locations in the coming weeks.

Robert Ralph - Jefferies & Co.

Great, thank you very much.

Operator

We will take our next call from Del Warmington with Delwell Capital.

Del Warmington - Delwell Capital

Quick question, as it is related to publishing. The pub plan declined by 7%. How much longer do you think we are going to see the decline in publishing revenue?

Christie Hefner

Well, it is our hope that advertising is going to start to pick up in the fourth quarter, and that that will help us to continue to narrow the loss, but we are up against a dynamic where increasingly, advertisers targeting men are putting their dollars both online and in cable. In our case, particularly some large categories like liquor, which were previously prohibited from advertising on cable television, are now able to, and those are significant challenges.

It is our hope that we can start to see a little revenue turnaround coming into the fourth quarter. We already know our third quarter advertising and those revenues will be down for us compared to third quarter last year.

Del Warmington - Delwell Capital

One last question, as it relates to Indonesia. I think [inaudible] has some product around this area. What is the revenue potential there, and is it worth it?

Christie Hefner

I would say the revenue potential for most countries that are new to the company’s portfolio of 21 foreign additions is modest, with the exception of large territories that will involve targeted and differentiated products like China, because we are in the largest territories, like Germany and Brazil and Japan.

The reason why we think it is worth it is that being able to do business in countries with large middle- and upper-classes that are brand savvy, that have growing economies, which Indonesia is clearly the example of, as is India, is important in terms of the broader opportunities for the company.

I am frankly encouraged by the fact that the third issue of the magazine is out. It returns to having paid advertising. It is getting good distribution. We have had good discussions between our licensee in Indonesia and both local religious groups and the government. I am optimistic about their ability to prevail.

Del Warmington - Delwell Capital

Thank you.

Operator

We will take our next question from Dennis McAlpine with McAlpine Associates.

Dennis McAlpine - McAlpine Associates

Thank you, and good morning. Would you talk about how much of a decline there was in the VOD revenue in the quarter, and whether that was all from DirecTV’s dropping the two channels, or whether it carried beyond that?

Second, would you talk about how much revenue there was at CJI and where that is.

Then, as you look, go into the subscription VOD model, how do you counterbalance the idea of losing let’s say your heaviest customers, who might buy five, six, seven movies or more a month, switching to subscription and then actually having a reduction in revenue as opposed to adding new ones. Do you expect that happening later in the game or even earlier in the game?

Christie Hefner

Okay, Dennis. On the Playboy side, we have real-world experience here with Cablevision on an SVOD basis and with DirecTV on a subscription basis, so we have a basis on which to make projections in terms of the value of SVOD. There, the visibility issue is just a rate of rollout issue, and as I mentioned, we are now in the rollout process with Comcast, and hope to be beginning it with Time Warner before the end of the year.

On the adult side, the VOD decline is a cable decline. DirecTV was the linear channels and would not be reflected under VOD, so you have two different contributors that are impacting the second quarter and will impact the third.

One is the loss of exclusivity on DirecTV, which becomes the new base for satellite, as I mentioned when Mike Savner asked his questions, from which as satellite grows, we would hope to grow with it. The other is the decline in the movie network, which is a combination growth in VOD, a decline in movie network’s linear pay-per-view.

On the CJI side, there was no contribution in the second quarter because the deal closed at the end of the second quarter, so you will start to see the benefit of that in the second-half. The DVD business will be reported through other, and what we do in online and mobile and TV will be reported through those relative relevant segments.

Dennis McAlpine - McAlpine Associates

Thank you.

Operator

We will take our next question from David Leibowitz with Burnham.