Playboy Enterprises Q4 2006 Earnings Call Transcript

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Playboy Enterprises Inc. (PLA)
Q4 2006 Earnings Call
February 13, 2007 11:00 am ET

Executives

Martha Lindeman - IR
Linda Havard - EVP Finance and Operations, CFO
Christie Hefner - Chairman, CEO

Analysts

Lucas Binder - UBS
Michael Savner - Banc of America Securities
David Miller - Sanders Morris Harris
John Klim - Credit Suisse
David Bank - RBC Capital Markets
Robert Routh - Jefferies
Dennis McAlpine - McAlpine Associates

Presentation

Operator

Good day and welcome to today's teleconference call. At this time, I would like to hand the call over to Ms. Martha Lindeman. Ms. Lindeman you may begin.

Martha Lindeman

Good morning everyone, and welcome to the Fourth Quarter Conference Call. If you need a copy of our press release and earnings supplement, you can look on our website at www.peiinvestor.com, or you can call Arissa at 312-373-2432.

During the call today, we will be making forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act. These statements reflect our current beliefs and plans. They are not guaranteed and involve risks and uncertainties that could cause our actual 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.

With me today are Linda Havard, our CFO and Christie Hefner, our Chairman. And we will start with Linda, who will describe in further detail the quarter's results and then we will turn this over to Christie. Linda?

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Linda Havard

Thank you Martha and good morning everyone. We delivered on our financial guidance for the fourth quarter and the full year in spite of the continuing challenges in Publishing and Domestic TV, our two largest businesses. While the quarter's results did include some unanticipated charges which I will describe in more detail shortly, these charges were completely offset by a tax benefit in the quarter.

So the $0.11 in EPS that we reported for the quarter was comparable to the normal operating results we have been reporting all year, as the unanticipated charges and tax benefit netted out to zero.

Turning first to the Entertainment Group and Domestic TV in particular, we did see a decline in fourth quarter 2006 revenues compared to 2005. This reflects trends we have discussed throughout the year, namely increased competition on the video-on-demand platform, compared to pay-per-view, and the loss of exclusivity on one of the satellite services. This led to a decline in pay-per-view cable and satellite revenues year-over-year.

That said, it was not all bad news. VOD revenues more than doubled between the first and second halves of 2006 and the fourth quarter was particularly strong. While a large percentage of this growth was due to increased distribution, a very healthy piece of it reflected improved performance.

We are also pleased with how well the Playboy TV subscription product is performing, despite the lack of marketing support from the distributors that we think could further improve results.

International TV and Mobile revenues were up 2% versus the prior year quarter, due to a slight decline in the amount of TV programming that we sold overseas to third parties. Our decision to outsource the Spice catalog and online store, which we believe will improve profitability going forward, led to a decline in fourth quarter 2006 online revenues compared to the prior year period, more than offsetting the quarter-over-quarter and year-over-year growth in subscription revenues.

Expansion of the playboy.com website and the resulting gains in online and advertising sales helped increase other entertainment group revenues more than 35% in the quarter compared to the prior year.

In addition, the launch of Playboy Radio on SIRIUS and growth in DVD sales due to the recent acquisition of CJI, also contributed to the increase in this other revenue categories.

On the cost side, there were also a few items of note; unique to the 2006 fourth quarter, we recorded a $1.8 million settlement related to the Directrix litigation against our Domestic TV business. This settlement will allow us to avoid both the cost and distraction of continuing the case.

In addition and also impacting Domestic TV, in the fourth quarter we began amortizing certain MSO carriage agreements modifying their estimated useful life from indefinite, which meant no amortization, to definite. As a result of this modification, we will be recording non-cash amortization expense against our domestic TV business of approximately $300,000 per quarter or an additional $1.3 million annually.

Looking across the quarter and full year of 2006, we recorded a slight increase in total programming and content expense, which came to just over $11 million for the quarter. The 8% increase from last year's fourth quarter was in part due to support for the launch of our new networks and in support of our online business.

For the year, amortization expense totaled just under $42 million, again in line with our expectations. While TV programming amortization declined slightly in the year, online content expense nearly doubled, reflecting the growing size and value of that business.

Turning to publishing, as anticipated, we recorded an 11% increase in Playboy Magazine's advertising revenues for the quarter, compared to the prior year, which helped to offset lower circulation revenues. The gain in profitable ad revenues, combined with editorial and marketing cost reductions that we outlined last summer, led to improved magazine performance and drove the year-over-year improvement.

Licensing recorded yet another year-over-year increase in both quarterly revenues and segment income, benefiting primarily from the early October opening of the Playboy venues at The Palms in Las Vegas.

Corporate Administration and Promotion expense was essentially flat in the fourth quarter compared to the prior year. Effective with the fourth quarter of 2006, we began expensing certain costs related to our trademarks that previously had been capitalized. This charge totaled a $0.5 million in the fourth quarter.

We believe that $2 million annually is a reasonable assumption for this expense going forward. As noted in the press release, this modification and the carriage agreement amortization, are together expected to reduce 2007 profits by approximately $3.3 million or $0.10 a share.

We ended the year with approximately $36 million in cash, marketable securities and short-term investments. This was down by approximately $16 million from yearend 2005 as a result of our acquisition of Club Jenna in 2006, and payments related to prior years' acquisition and capital expenditures.

We ended the year in a strong financial position with over $30 million in cash, with $40 million available by our unused revolving credit facility and with only a $115 million and 3% debt, providing ample flexibility for our future growth.

And with that I'll turn it over to Christie.

Christie Hefner

Thank you, Linda. We are very pleased that we delivered on guidance this year and particularly that we had strong performance in licensing, double-digit growth in online and managed a very challenging environment to reduce our domestic publishing losses. But I don't want to leave the impression that we are satisfied with these results, we believe that we can perform better and it's our goal to do so.

As we have discussed at some length over the past year, our two largest revenue generating businesses are both mature and in transition, which has created a very challenging operating environment. The Magazine faces serious challenges that are echoed across the publishing industry and these dynamics are not likely to change nor are they easily offset. That's why we were particularly pleased with our ability to manage effectively in that difficult environment this year. It is our expectation that we will continue to do so. Thus, although circulation will remain under pressure, we are pleased that advertising is off to a strong start to the year with a projection of 22% increase in the Magazine's ad revenues for the first quarter of 2007 compared to last year. This is a result of hard work that our ad sales team has been engaged in, building new relationships, particularly in fashion and consumer electronics, wining back some liquor business, as well as finding new ways to work with existing advertisers. We felt that the fourth quarter ad sales up-tick was the beginning of a strong trend and are pleased that we now have two back to back quarters indicative of that.

In addition, the launch of an expanded free website has allowed us to almost double our online ad revenues in 2006 that positions us for meaningful growth in online advertising in 2007 as well, as our sales team has a wider array of online options to sell, as a complement to and in addition to pages in the magazine.

That's the basis on which we feel positive about our goal to see sufficient year-over-year growth in ad revenues that will allow us to offset the continued pressure that the Men's Magazine marketplace is seen in new stand as well as the increased cost of paper that are a continuation from the increases over the past few years, as well as this years expected 8% increase in postage on top of last year's 5%.

Thus, our goal is to continue to effectively manage our investment in the magazine, and we believe that the Publishing Groups 2007 result will be consistent with the range of the last two years.

While Domestic TV's profitability has declined, it is important to remember that this is a business that remained a major contributor. The arrival of VOD technology has significantly altered the competitive landscape, making it easier for new competitors to enter to the market and at the same time shifting the method of buying content for the consumer, but not growing the overall business.

As Linda pointed out, we are seeing nice year-over-year and quarter-over-quarter revenue gains in VOD, and do not believe that VOD has in anyway yet reached its potential. Thus, we will continue to focus on the basic blocking and tackling of product mix, merchandising and marketing that we believe will lead to continued growth in VOD in 2007.

We have long said however, that the greater opportunity for the company on the Domestic TV side rests with Playboy TV as an SVOD product. In that regard, subscriptions are continuing to grow as a result of both distribution growth and as consumers become more comfortable with the technology. On the positive side, we have by no means reached our level of potential on the Playboy SVOD business. The kind of subscription performance in new systems that we expect to enjoy, compared to what we have seen in our legacy systems, has not yet well achieved. And we believe that continuing to work with the MSOs and the satellite partners to provide the appropriate marketing support along with the increased distribution in cable is going to continue to drive higher Playboy SVOD revenues.

On the adult side, as expected, we saw significant decline in the fourth quarter 2006 revenues compared to the prior year. This is a result of the ease of competition in VOD, where -- while we now have the largest share of any supplier on VOD, that share is on average only half of the share we had on pay-per-view. To help combat the effects of this decline, we are pursuing four strategies: We are strengthening the product; we are working on a consolidation with our -- working on a consolidation with our partners in order to improve the marketing, both of the technology and of our product; we are reducing, wherever possible, the expenses associated with the product; and we are aggressively developing direct consumer channels of distribution.

As a part of those strategies, we rebranded and launched four movie networks at the end of 2006. We do not yet have definitive data on their performance. At this point what we do believe is that given the fact that the total number of households reached by our linear networks continues to decline, and given the reality of the shelf space that we expect to get in VOD, that the net is such that the linear network revenue declines will more than offset the games that we will make on VOD as well as on Playboy SVOD.

Consequently, this area of Domestic TV is where our cost cutting initiatives are focused. As we get a clear handle on the near term prospects for this business and are better able to chart the rate of transition from traditional linear programs to growth in VOD and SVOD that will allow us to develop the right kinds of investment in programming, channel lineups and marketing that are needed to but not more than necessary to support this declining business. As we examine these alternatives, nothing is off the table.

While Domestic and International TV remain a major distribution platform for many years to come; as I referenced, an important part of our strategy is to continue to focus on the growth in the newer digital technology.

We have been selling successfully our video programming through the Internet and these direct-to-consumer sales have contributed to the double-digit increase in online subscription revenue for the year. We expect to see continued strong top-line growth in this business in 2007 as broadband penetration increases and as we continue to expand our product offerings.

Clearly the direct-to-consumer business offers us distinct advantages, not only in terms of the revenue share, but also in allowing us to maximize marketing. As we've noted, online together with International TV and Mobile and global licensing will remain the growth drivers going forward.

Turning to the licensing group; we were very pleased to see strong performance from the group and based on that and what we see in the pipeline, we expect to again to see top and bottom-line growth of 15% to 20% in 2007. That growth will be aided by The Palms full year of operations, but also by the continued expansion in to new markets, new product categories, and more distribution outlets. Even with the needed marketing support as we expand territories and product lines, and the development costs necessary to pursue new LBE opportunities, we expect '07 margins to be as high as '06.

Licensing remains a fast growing business and the list of opportunities is not just long, but diverse. Our opportunities are not limited to licensing; of course, on the media side, the success of the article section of the website has encouraged us to expand the development and distribution of our Playboy lifestyle content across all platforms. The strength and flexibility of the Playboy brand allows us to pursue a range of opportunities, from ad supported TV blocks such as we already have in Germany, to the creation of lifestyle content for mobile devices and for partnership with large online companies.

Moreover, we expect to take our licensed international editions of the magazine into new markets in 2007, and to continue to create new lifestyle products like Playboy Passport that are tangible and profitable representation of the brand's power and cache.

In the same way, in our popular Girls Next Door, co-production with E, is expected to begin its third season next month.

We will also continue to be adding to our premium content offerings as the sale of Playboy style premium content and the complementary sale of adult content remains our largest business.

Our two recent acquisitions of both ICS and CJI have allowed us to strengthen our adult product line, while providing key marketing expertise within the company that can also be applied against Playboy branded products. That allows us to cost effectively distribute both styles of content across a range of digital platforms and our reorganization under Bob Meyers as President of all of our Media Businesses, puts us in a position where we can drive the cross content collaboration as well as the cross marketing and cross advertising sales opportunities.

On closing, let me add that beyond the guidance we have just provided, we are not prepared to give annual EPS guidance at this point until we have more visibility on 2007 Domestic Television and the specifics of the initiatives to reduce our cost structure that we are finalizing as we speak. These reductions combined with the revenue generating initiatives that I have spoken about, we believe to make a significant difference to our projected 2007 results and position the company for further growth moving forward.

With that we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from the side of Lucas Binder with UBS. Please go ahead.

Lucas Binder - UBS

Hi guys, thanks very much. I had a few questions for you, one housekeeping. Linda, what was your stock option expense during the quarter?

Linda Havard

It was approximately $3 million for the year, so it's the quarter of that Lucas.

Lucas Binder - UBS

Okay. So we will stick with -- and as far as 2007 probably running at the same run-rate?

Linda Havard

About the same run-rate, maybe little bit higher as we add more options.

Lucas Binder - UBS

Okay. When you look at the impact of the Playboy Club on the licensing revenue line, the expectation is that this is running at a $4 million run-rate. Is that still consistent with your expectations?

Linda Havard

Yes. But I wouldn't straight-line it Lucas. We experienced that all operators, including our partner, who as you know, ran the highly successful Rain and Ghost Bar Clubs before we opened with them. Is that there is a ramp-up. So on an annual run-rate basis, our performance we believe will be consistent with what we had expected and hoped for and what The Palms expected and hoped for, but that doesn't mean that the first quarter is necessarily one quarter of that.

Lucas Binder - UBS

Okay. And so it will have a scaling impact in 2007.

Linda Havard

The 2007 run-rate will be consistent with what we believed it would.

Lucas Binder - UBS

Okay.

Linda Havard

I wouldn't take 2006 as one full quarter.

Lucas Binder - UBS

And then lastly, could you talk a little bit about -- you said that there is really nothing that's safe as far as cost cutting is concerned, and you look at the Domestic TV business in the town. Can you talk about some of the -- where you see some further cost cutting opportunities that are in excess of what you have announced in the past?

Linda Havard

Well, for reasons that you can understand it would be not helpful to management to start to speculate on those changes until they are finished and announced. But, I think everybody on this call is aware of where the large areas of costs are and that is where we will be looking at. So, those are tied into the number of networks that we have, which are a function of the number of different editing standards, as well as different positions, the content acquisition and creation costs, which include how we operate our studio and our infrastructure costs.

Lucas Binder - UBS

Okay. Great, thank you very much.

Operator

Our next question comes from the side of Michael Savner with Banc of America Securities. Please go ahead.

Michael Savner - Banc of America Securities

Hi, good morning. Thanks very much. Few questions as well as if I look to the previous. First, Christie in the Publishing Group; I think it's certainly very positive to see the uptick in advertising revenue expected in the first quarter and decent performance in the fourth quarter. Is it fair to think that you have gotten over the hump and '06 was the reset year and now we are going to look for continued improvement for the duration of the year; and if this recent trend seems to be the case, then I guess I am a little surprised maybe you are just being conservative about why you wouldn't see some kind of reduction to those losses in publishing if those gains in the ad revenue should be enough to offset even the increasing cost structure.

I do have a follow-up, but just to go off with that last question about The Palms and maybe this is a subtle nuance, but I thought it -- the way it was articulated to us from the very beginning is that The Palms deal was based on guaranteed minimum payments you would get and the performance based compensation you get would be very minimal. So when you talk about a scale, can you maybe just give us a little bit more color, because that sounds different than what I think we've heard before. Maybe I am just misunderstanding.

Christie Hefner

Sure Mike. Let me take the second question first and maybe by trying to be as helpful as possible, I've muddied the waters and for that I apologize. Your stated understanding is absolutely correct. Most of the approximately $4 million in annual royalty revenues and in 80% profit margin that we have spoken about are indeed guaranteed. Included in the expected $4 million is some minority portion that was tied to and is tied to royalties on admission cover charges and liquor charges. Nothing has changed in terms of what we think the performance will be. I just wasn't sure exactly what Lucas was trying to calculate, so I wanted to make the point, which is relatively speaking to your point not significant that there is some ramp-up that's involved. But your assumption that the majority of the 4 million annually is guaranteed, is absolutely correct. Nothing has changed in that regard.

Michael Savner - Banc of America Securities

Okay, great.

Christie Hefner

In terms of the publishing, I guess I would say it's a combination. Your characterization of our being cautious is not conservative, is correct. In other words we try and be that way, particularly because publishing by its nature has a certain inherent lack of visibility beyond one quarter, both on the newsstand and even in terms of advertising sales. I think all you guys that follow other publishing companies know that the business long ago moved away from annual contracts and is now a business where each issue is being sold down to the wire. So we just think that the prudent thing to do is to say to you, that even with meaningful cost increases that are having to be absorbed, we don't feel that we are going to be exceeding, that we are going to be worsening our performance in '07 over '06. We feel very good about what we have demonstrated as our ability to manage the cost without in anyway compromising the quality of the magazine and therefore its critical value as a brand driver. We are very pleased with our ability to deliver on our goal of turning the corner on advertising sales, and at this point I just feel that that's the better place to put a stake in the ground, than to try and move the stake forward beyond what I have said.

Linda Havard

And speaking as a conservative CFO, let me just add to what Christie said. Circulation is under pressure and as a result, we wanted to make sure that we didn't overestimate what we thought we could do this year. Both, the newsstand business as well as subscription acquisition, as a result of ABC and other things really caused our cost in this area to go up. So it will be a struggle and we will do our best. The goal again is to have losses come in pretty much where they were at last year, but it won't be easy.

Michael Savner - Banc of America Securities

Okay that makes sense, thanks. And just one last quick one, just on the International TV, a little bit surprised to see that come off in the fourth quarter, because it has been a very -- a very nice low double-digit or mid double-digit growth driver for a number of quarters last couple of years. So is your hope and expectation that this falloff in third party sales is going to pickup and you are going to see that return to more traditional growth rates or is there something going on that's going to cause that go from double-digit down to flat growth?

Christie Hefner

I think some of the fourth quarter comparison is due to the timing of third party sales and I do feel in looking ahead and in looking at the aggregate of our both owned and operated networks and our third party sales and of course our international mobile and online, that our ability to generate double-digit growth from the international digital marketplace has not been compromised by this short-term comparison.

Michael Savner - Banc of America Securities

Okay. Thanks sorry for so many questions.

Operator

Our next question comes from the side of David Miller with Sanders Morris Harris. Please go ahead.

David Miller - Sanders Morris Harris

Yeah hi, a couple of questions; Christie I think it was about a year-ago that you mentioned that the Club Jenna transaction would immediately add to Playboy's bottom-line. So with that or either Linda can you just give us sort of a thumbnail sketch on how that transaction did contribute to the bottom-line and then I have a follow-up. Thanks.

Christie Hefner

I'll take the first shot at it. Yes it definitely did, the expected and achieved immediate impact, we report through what we aggregate as other entertainment revenues --

David Miller - Sanders Morris Harris

Right.

Christie Hefner

Because that's where we report our DVD business, which as you know for our businesses before the CJI acquisition was always a small profitable ancillary business because of course our primary distribution of our content is into the home through Pay-TV. So, you can see that nice increase in growth in other for the quarter and the year. And while there are some pieces that contribute into that in addition to DVD, SIRIUS Radio and even some online advertising, that's where its showing up. We are -- going forward into '07, we will also see it show up in addition to other, is of course the benefits of the use of the brand across the other digital platforms, which is one of the opportunities we felt from the acquisition. So, that is in the linear channels, that is in VOD, and that is in online, and that is in mobile. So, it will be spread across all of our platforms in '07.

David Miller - Sanders Morris Harris

Okay, great. And then also, you guys just don't really seem to have a lot of visibility and neither does Time Warner on when there'd be some of consummation of a deal on the SVOD portion. What do you attribute to that? Is it sort of a -- is it a fight over pricing, is it due to the fact that their systems integrations with the Adelphia deal is not yet done or is it a combination of both. If you can shed some color on that, that would be great?

Christie Hefner

That -- actually, both of those were factors in how long it took to do the deal. But actually the deal is done. So, now it is a question of the rate of roll-out on Time Warner. The good news is where they have rolled us out and where they are affectively marketing us and the LA System would be a good example of that. We and they are pleased with the results. So, what we're working them on is actually not the deal anymore, but the rollout on the deal.

David Miller - Sanders Morris Harris

Alright, okay great. Thank you.

Operator

Our next question comes from the side of John Klim with Credit Suisse. Please go ahead.

John Klim - Credit Suisse

Hi, good morning. Are there any other categories, other than liquor that you have seen a significant improvement than at the magazine? And then could you remind us what percent of total ad revenue that the magazine liquor comprises. And then secondly, or I guess thirdly, with oil prices off their high's, have you started to see any positive impact at least it doesn't sound like you've seen any positive impact on newsstand sales. And if not, why might that be? Thank you.

Linda Havard

On the categories, we are seeing some growth in print and for Playboy in liquor as compared to the last 12 months. The other categories that we are seeing some strength in, is consumer electronics and games and actually some growth in fashion. On the issue of newsstand, while high gas prices can have some negative impact on fringe in terms of convenience store traffic and buying; I think that the double-digit decreases of Men's magazines on the newsstand over the last year and a half have to be looked at as part of a bigger, dynamic than just the amount of visits that people are making to their local convenience stores. I think that most publishers feel that the newsstand is an increasingly difficult way to move magazines. It's a high return rate business today compared to 20 years ago. Their consolidation which creates less good display and restocking and the newsstand buyer, who is a younger consumer, is the most likely consumer to share shift time with print as against time online and television. So, I just don't have any reason to think that what has been a more secular trend on the newsstand is going to be reversed by a change in gas prices.

John Klim - Credit Suisse

Alright. Thank you very much. It's helpful.

Operator

Our next question comes from the side of David Bank with RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Thanks, good morning.

Linda Havard

Hi David.

David Bank - RBC Capital Markets

A couple of questions. First is, Linda, can you clarify on the trademark expenses? Are those cash costs or non-cash costs? Second, for Christie I guess, historically over the past couple of years you've given pretty explicit guidance on what we call the emerging businesses like online, international, mobile and you kind of referred to it in the call, but I guess I wanted to know if you can clarify it, are you sort of guiding for those businesses to be up? What exactly are you guiding them to be up? And the third question in 2007 -- the third question is could you give us a little bit of a better sense in terms of the timing of cost reductions, when we are likely to see some sort of formal action? That's it for now.

Linda Havard

On the first question, David yes. The trademark costs are cash costs. They are costs to defend our marks.

Christie Hefner

But the cash hasn't changed by the change in account.

Linda Havard

No, we' incur these costs all the time and have been for years.

David Bank - RBC Capital Markets

Okay.

Christie Hefner

On the question of the growth in terms of international, we haven't -- you are obviously, correct in your assessment that we haven't given a specific percentage. But as I said, when Mike asked his question, the change in the fourth quarter in terms of the timing of the third party sales and other dynamics does not change my overall view that we will continue to benefit from strong growth in all three segments and what I just find these all three segments are Online, International Television Online, and Mobile and Global licensing. So, although I've not put a number on it, I am telling you that I believe that the kind of growth that we've seen is what, there's nothing that is telling me that we are not going to continue to see healthy growth in all three of those segments top and bottom-line. On the timing -- the cost reductions, our own internal goal is to have that comprehensive process completed, communicated and executed before the end of the first quarter.

David Bank - RBC Capital Markets

Thanks guys.

Operator

Our next question comes from the side Robert Routh with Jefferies. Please go ahead.

Robert Routh - Jefferies

Yeah, good morning guys. Few quick questions. First, I guess there was kind of a stupid question is, yesterday there was a rumor going around on fly on the wall that you were considering privatizing the company. I am wondering you could comment at all on that because I had a tremendous number of investors calling me to see whether or not it was true. Second, I was wondering if you can comment, I think you settled the Directrix lawsuit. What the status is with the Vivid lawsuit that has been going on with respect to your deal with them. Because I know it hasn't been contingent liabilities according to your lawyers, but it is disclosed in your financials. So I just wanted to see what the status of that was. And also if you could give us any kind of heads-up or clarity in terms of would you consider giving equity in any of your domestic networks to any of your distributor partners in order to get greater market share, similar to the way you had PTV LA and you had internationally other partners that owned equity in the networks in order to get them greater distribution in market share?

Linda Havard

Bob, this is Linda. On the Vivid lawsuit there is nothing new there. It's in the beginning of the suit, there is [discovering] appeals and that sort of thing going on. So there is really not much going on there at all.

Robert Routh - Jefferies

Okay. And as far as the privatization rumor and giving away equity?

Linda Havard

On the -- can you hear me Bob?

Robert Routh - Jefferies

Yes, I can hear you perfectly. Can you hear me?

Linda Havard

That's much better. We were getting some kind of very loud ambient noise.

Robert Routh - Jefferies

I apologize. If you could comment at all on the privatization rumor that was going around yesterday and it was on fly-on-the-wall in terms of is that something the company is considering, since you said you are considering all options. I think its probably not, but any clarification there would be great. And whether or not again you would consider giving any equity in one of the domestic networks to any of your distributor partners as you have done internationally to increase market share and as well as be marketed better by the distributors to take share away from some of the competition that's entering the marketplace?

Linda Havard

Right. On the second question first, in the early days of growth and distribution, when channel capacity was limited and there were deals that were being developed between programmers and distributors for shared equity. We certainly had conversations with the major players in terms of an openness to looking at that kind of deal structure, and frankly found that there was really not a lot of interest on their part. I think that historically they have been more inclined to take ownership in basic cable services, than in paid services. And so, we never found an appetite on their part even in an environment where channel capacity was a significant limitation. I don't think the International TV network business model is as applicable to the domestic, because there the reason why we structured it as a joint venture was the large amount of capital that was required to build the networks to breakeven and profitability.

So, in our international joint venture, there was approximately $80 million of losses funded by the joint venture before we reacquired the networks and there is no corollary in the US. So, the distributors have not shown an interest in taking equity, we don't have the need for capital, and I think frankly the economics are such that there is ample financial incentive to the MSOs and the satellite guys to provide appropriate positioning and marketing. The challenge has historically been cautiousness with regard to adult content, which we are working to overcome by continuing to point out the broad acceptability of Playboy as a brand and therefore the potential to market Playboy both as its own branded channel and as a gateway to the other adult offerings that we provide.

On the going private, no there are not any plans in place. It seems to be a rumor that Mark Boyer raises periodically, it is not a rumor based on any actions that the company has taken, and my own view is that the company has an obligation to run itself as efficiently and effectively as possible and that it does not become more efficient or more profitable simply by being private. Indeed the use of stock as a key component of compensation creates a very clear alignment between the management team and the Board and our public shareholders.

Robert Routh - Jefferies

Great, just kind of what I thought. And just one final follow-up question. You mentioned that you are going through a cost cutting obviously which makes sense in order to create leveraged equity returns in any equity shareholder value. I am just wondering, I know you are going to give more detail later, but just kind of back of the envelope in general. Is there any range in terms of dollar amount that you are looking to cut over the next 12 months, is that $5 million to $10 million, $2 million to $5 million, or are you not ready to yet to even kind of give any vague range in terms of what you are looking at.

Christie Hefner

See -- as in I am not ready yet to give any kind of range.

Robert Routh - Jefferies

Fair enough, okay. Thank you very much.

Operator

(Operator Instructions). Our next question comes from the side of Dennis McAlpine with McAlpine Associates. Please go ahead.

Dennis McAlpine - McAlpine Associates

Thank you and good morning. As we look at the last couple of quarters on Domestic TV, revenues have been down year-over-year about $4 million per quarter. If you look at the revenue side of new frontier there, DTV revenues have been about $2 million. This would imply that there is something over a $2 million decline in other business -- in your other business in Domestic TV. Can you comment on what that is, is that just an adjustment of splits or what's going on with that. And then, two, would you talk about what you have to do as far as increased marketing for video-on-demand and how you are going to promote the individual product as opposed to a given channel?

Christie Hefner

Yeah. I think you're analysis is spot on David, and the answer to your question is cable, Dennis, I am sorry is cable. In other words the decline in pay-per-view is only partially offset by the growth in VOD and SVOD and that's the delta.

In terms of the question about how -- I am not sure the answer alleges up to trying to do this on a conference call. We are working with particularly Comcast and Time Warner for the obvious reasons, but also with the other MSOs on a range of initiatives that include the bundling of Playboy SVOD as an option that the consumer can buy in different packages to before the pin programming that the consumer can access that then builds a bridge to the premium content to the position that we have on the interface. To in the case of say Comcast which is trying to build an electronic guide that allows the consumer to search content whether its through Comcast broadband or Comcast TV to make sure that Playboy and other keywords are adequately available in that search.

Dennis McAlpine - McAlpine Associates

I mean could you comment on what you get for revenue from an SVOD subscriber or what your goal is to get from them?

Christie Hefner

It's the same as it was in subscription in pay-per-view, we get on average 10% on the adult networks and on an average 25% on -- 25% to 30% on Playboy as a percentage of the retail.

Linda Havard

Right and in many cases Dennis the Playboy subscription video-on-demand service on demand piece is not separately priced. So, the subscription is priced and then you get the on-demand with it.

Dennis McAlpine - McAlpine Associates

Okay, thank you.

Christie Hefner

We believe from at least the experience to-date and I think my friends at HBO have the same philosophy. We believe that actually it's probably the better business model as opposed to trying to up the price à la carte for VOD.

Dennis McAlpine - McAlpine Associates

Thank you.

Operator

We pause just a moment, for any further questions to queue. It appears we have no further questions at this time. Ms. Lindeman, I will turn the call back to you for closing remarks.

Martha Lindeman

Okay, we will thank everyone for joining us this morning, and we look forward to talking to you going forward as we make our plans and we will tell you more about it. Thank you very much for joining us.

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