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Playboy Enterprises, Inc. (PLA)
Q2 2007 Earnings Call
Tuesday, August 7, 2007 11:00 am ET

Executives

Martha Lindeman - Investor Relations
Linda G. Havard - Chief Financial Officer, Executive Vice President, Finance and Operations
Christie Hefner - Chairman of the Board, Chief Executive Officer

Analysts

David Miller - Sanders Morris Harris Group
Michael Kelman - Susquehanna Financial Group
Lucas Binder - UBS
David Bank – RBC Capital Markets
David Leibowitz - Burnham Securities
Dennis McAlpine - McAlpine Associates

Presentation

Operator

Welcome to today’s teleconference. At this time, all participants are in a listen-only mode. Later, there will be an opportunity to ask questions during our Q&A session. Please note, this call may be recorded. I will now turn the program over to your moderator, Miss Martha Lindeman. Go ahead please.

Martha Lindeman

Thank you. Good morning, everyone, and welcome to the second quarter conference call. If you need a copy of our press release and earning 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 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 that describes some of the factors that could cause our results to differ materially from today's discussion.

We will start today with Linda Havard, who will describe in further detail the quarter's results and then we will turn this over to Christie Hefner who will talk about our outlook for the remainder of the year. Linda?

Linda Havard

Thanks, Martha, and good morning, everyone. We've been working hard to grow our licensing online and international businesses while also focusing on the stabilization of our domestic television business. The results of these efforts were evident in the improved top- and bottom-line performance that we reported in the second quarter.

Looking first at the entertainment group, and at domestic TV specifically, second quarter revenues rose nearly 4% to $21.6 million compared to last year. While the gain in part reflected positive cash adjustments of $1.8 million related to prior periods, we also saw a growth in Playboy TV revenues, primarily due to increased buys.

As expected, loss of linear carriage resulting from the migration of video on demand led to lower movie network pay-per-view revenues, although gains in VOD revenues helped counterbalance that. The efforts that we've made to improve both our product and the marketing are currently showing results.

International TV second-quarter revenues increased by $2 million, or 16%, to $13.7 million versus last year. Significant increases resulted from our private Spice joint venture, due to organic growth of that business, along with higher revenues from a number of our licensed networks, primarily in Europe.

In online, all three of our major revenue generators – our pay sites E-commerce and advertising – contributed to the gain in second-quarter revenues compared to last year. The pay sites benefited from the addition of Club Jenna content. E-commerce results were positively affected by the earlier release of the summer Playboy catalogue this year, and by the addition of revenues from our female-oriented Bunny Shop, which was launched in late 2006. The resulting increase has more than offset loss of revenues related to our decision last year to outsource our Spice catalogue, a decision that has led to increased E-commerce profitability.

The $4.3 million in higher revenues reported by the Entertainment group in this year's second quarter, versus last year's, is encouraging. Our cost-control efforts, particularly in domestic TV, helped us to carry more than 50% of that increase to the segment and operating income line. This is made more impressive by the fact that we are incurring increased VOD distribution and carriage agreement amortization expense that we didn't have last year. Our expense-control efforts will continue, and programming remains the focus.

With the year halfway behind us, we continue to project that the content amortization expense, including both TV programming and online content, will be less than $40 million this year, versus approximately $42 million last year.

Turning now to publishing, we see no letup in the difficult operating conditions that are affecting the whole industry, and particularly the men's market. Just last week it was announced that Stuff magazine would be folded into Maxim, and that follows the closing of FHM announced earlier this year.

Industry-wide, newsstand, subscription, and advertising market all remain under pressure. On top of these challenges, this year we were recording $1.2 million in additional non-cash subscription collection costs that we didn't have last year, and the publishing group already absorbed more than $1 million in post-employment expense, primarily related to long-term editorial executives in the first half of the year.

On a positive note, we're continuing to expand our licensed international editions of the magazine, with improved revenues and profits from these foreign additions in this year's second quarter. Licensing turned in another strong quarter performance, benefiting from growth in our consumer-product business and from our Las Vegas entertainment venues in the Palms Casino resort, which opened in October of 2006.

The licensing group also benefited from the sale of a piece of artwork by Andy Warhol during the quarter, which generated revenues of approximately $400,000.

As a reminder, the Playboy's Jazz Festival falls in the second quarter of each year, and is booked on the marketing events line in Licensing. The jazz fest is essential break-even, and generates large amounts of goodwill and publicity to the company.

As a result, second-quarter revenues are always slightly higher and the operating margin a little lower than what is typical for the Licensing group during the other three quarters of the year.

Finally, second-quarter corporate administration and promotion expense was essentially flat in this year's second quarter, versus last year. As mentioned on our first-quarter conference call, we are now reporting a quarterly charge of approximately $0.5 million related to expensing certain trademark costs.

These trademark costs were offset in the second quarter by a combination of lower marketing expense and post-employment benefits related to publishing employees that were allocated to that group.

And now I will turn you over to Christie.

Christie Hefner

Thank you, Linda. Good morning, everybody. Our strategic priorities are twofold. First: to maintain our strong, competitive position in the mature businesses of domestic TV and publishing. And second: to leverage the power of the Playboy brand globally through both digital platforms and licensing ventures. So let me talk about our progress on each of these fronts for a few minutes.

For the past year and a half, we've discussed the challenges we've faced in terms of reduced market share in our domestic TV business. The downward slide appears to have been arrested as domestic TV revenues have now flattened. The growth in Playboy TV and VOD revenues was a result of a solid increase in the number of consumer buys, indicating the success of the work we've been doing in terms of programming, marketing, and customer interface.

Those of you who are viewers of Playboy TV will have seen the early results of the efforts we're making to differentiate that network by adding new branded programs and presenting a mix of long- and short-form content. The evolution will continue and is designed both to capitalize on subscription video on demand, and to respond to the changing viewing habits of consumers.

Beginning September 3, all three hours of Playboy prime, which is 8-11pm Eastern time, will reflect this new look and attitude. We believe that these changes will both increase Playboy TV's appeal as a compelling economic value for consumers and encourage operators to market the network as a subscription or FVOD product.

Excluding out-of-period cash adjustments, second-half 2007 revenues are expected to be roughly equal to the first half, as growth in Playboy TV, as well as in our VOD movie revenues, is expected to continue offsetting lower pay-per-view revenue.

The issues we and other domestic magazine publishers face are more challenging than those we're seeing in TV, and less easily addressed. More media choices are creating enormous competition for consumers and advertisers. Nevertheless, Playboy has many advantages: a powerful brand, a large international presence, and multiple media platforms that are successful stand-alone businesses. While other publishers talk about expanding overseas and creating new digital services, we already have those initiatives in place and generating profits.

The industry's spring readership study shows that Playboy Magazine again ranked on top in terms of reader involvement, which is measured by factors such as time spent and issues read. We are leveraging these results along with our increased number of visitors to Playboy.com’s expanded lifestyle sections in order to increase ad revenue.

We are pleased that in the first half, combined print and online sales increased 13% over last year. Looking ahead, we anticipate a 5% increase in Playboy magazine's third quarter 2007 ad revenues, and we believe that ad revenues for print and online combined will continue to show growth in the second half over both the second half of last year and the first half of this year.

Given the continued challenges in the domestic print business, including large, uncontrollable costs, we believe the 2007 publishing group losses are likely to be in line with what we reported in 2005. This is based on an expectation that the magazine's revenue base is probably going to be close to $10 million lower in 2007 than it was two years ago, which demonstrates how successful we have been in controlling those expenses that are manageable in order to maintain the same level of results, despite cost pressures in the uncontrollable expense categories and downward pressures on revenues.

On the international front, our international publishing business is healthy and growing. As projected, we will launch two new additions overseas this year. One is already publishing in Georgia, and the other will also be launched in Eastern Europe in the fourth quarter. This will bring our total to 24 licensed editions in different countries around the world.

This global appeal extends to our international television business where we expect to continue to show both top-line improvement and profit-contribution growth for the remainder of the year. We are benefiting from opportunities for growth in Eastern Europe and Russia, and in Latin America we are preparing for the launch of a new network from our joint venture with Claxon Interactive Playboy Lifestyle. That network will be launched in the fourth quarter.

On the digital side, in addition to the ad-sales initiatives that I've already discussed, we're adding more video content, creating new web products, and revamping some of our premium-pay sites. We believe these initiatives will continue to support the growth opportunities that we perceive for digital globally.

Turning to licensing, we're continuing to grow our core consumer products business through the development of new categories and new territories. We have recently executed agreements for accessories, beauty products, and apparel in Asia and in Europe. These are new products that will be launching in the second half. We have also been focused on expanding our presence in the Latin American market, and have signed a licensing deal that will cover a number of categories in much of Spanish-speaking Central and South America.

We still expect to add three licensed Playboy concept stores this year. Our Auckland store opened in the first quarter, our London store will open this quarter, and we expect to open one more in the fourth quarter. As noted in the earnings release, we continue to believe that the Licensing group’s 2007 operating income growth will be in the 20-25% range compared to last year, excluding the benefit of the art sales in both years.

A notable accomplishment of the second quarter, and one that will have a significant impact starting in late 2009, was the announcement of a location-based entertainment project in Macao. Under the terms of the deal, we will be partnering with Macao Studio City to create within their very large footprint on Cotai, a 40,000 square foot multi-faceted entertainment center that will be called Playboy Mansion Macao. It will feature various aspects of the Playboy mansion including a game room, Hugh M. Hefner villa, pool, and grotto, as well as dining, nightclub, retail space, and of course gaming.

For us, the mansion joint venture has both licensing and equity components. We expect to contribute approximately $5 million in return for a 49% interest in the mansion venue. Given the dynamic nature of the Macao market, the time to open, and the equity element of this deal, it is difficult to estimate today the annual contribution. However, we believe that even in its first year, the annual revenues are likely to be in the approximately $4 million range, with the potential for meaningful growth beyond that.

We have excellent partners who have a terrific location on Macao and have demonstrated a strong sense of how the Playboy brand can be effectively used. Our partners include eSun, one of Asia's leading media and entertainment companies, New Cotai, a consortium of US investors, and CapitaLand, one of the largest real estate companies in Asia. Macao Studio City's co-chairman is David Friedman, who was Sheldon Adelson's number two for many years and played a key role in opening the Sands Casino in Macao.

The complex includes a Ritz Carlton, a Marriot, and David Tang's first Asian hotel. It also includes 1 million square feet of retail which will be developed by Taubman. Melco will be the gaming operator, and combined, these terrific partners provide the market knowledge, operating expertise, and access to capital that will help insure a highly successful venture. Of equal importance to us is the value they clearly place on the Playboy brand.

We will continue to look for that quality in future partnerships. It is our belief that Las Vegas and Macao are only the beginning, and we are very optimistic about our potential to close additional location-based entertainment deals. Our goal is to create a number of unique venues, each of which will combine gaming and club elements in good locations with experienced partners in markets where our brand is strong.

Markets of particular interest to us include London, Atlantic City, Eastern Europe, Mexico, and the Caribbean. As the Macao agreement demonstrates, we are not taking a cookie-cutter approach to these transactions, but will develop a financial model that makes the most sense for each individual deal. And with that overview, we will now open it up to questions.

Question-and-Answer Session

Operator

Thank you. At this time, if you would like to ask a question, please press the Star and One on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Once again, if you would like to ask a question, please press the Star and One on your touch-tone phone. We'll take our first question from David Miller with SMH Capital. Go ahead please.

David Miller - Sanders Morris Harris Group

Yeah, hi. Good morning. Christie, I'm sure I don't have to tell you that the media buying community is starting to aggressively push back on the mid-single digit CPM increases being sought after by many magazines in general, and I'll let you decide whether or not you are seeking those same CPM increases. Obviously most magazines are attempting to extract the higher CPMs from advertisers in order to level the playing field against higher costs, paper, postage, transportation costs, etc. Are media planners getting value out of their magazine campaigns for the prices they're paying? Especially for those types of magazines which have weak newsstand sales, which you guys do. I was just wondering if you could comment. Thank you.

Christie Hefner

Sure, David. I think that what most media buyers recognize, and what all of independent research that's been done by industries as diverse as automotive and pharmaceuticals, is that the best media plan, as measured by return on dollars and the ability to generate sales, is a mix with a strong print component, a strong television component, and a strong internet component. That, shorting the magazine component in a media strategy, does not accrue to the benefit of the advertiser, because there are critical elements that magazines play in that mix in terms of engagement in and building loyalty to the brand, as well as telling the story of the product.

So I think, actually, if you were to single out any of those three and challenge the medium to justify its CPMs, the culprit would probably be television, especially broadcast television, where there is an ever-decreasing audience and an ever-increasing CPM increase attempt.

David Miller - Sanders Morris Harris Group

Right.

Christie Hefner

So, I think they're probably the most vulnerable on that issue. Overall, what I would say is that for us, and I think we're not unique in this regard, the issue in working with advertisers is about the value in terms of reach and lack of duplication, and page rate becomes as important as CPM. So, we’re always looking at what our overall circulation strategy should be, in terms of positioning ourselves so that we’re a compelling buy on a page-rate buy.

And then, we’re obviously continuing to put a lot of focus – and you can see the benefit of that starting with the last quarter of last year – in trying to drive growth in our online ad sales. Because candidly, while the CPM is much lower online, the cost of delivering the message online is much lower to us as well. So, if you can show strong growth on the online-ad sales side and modest growth on the print-ad sales side, that makes for, I think, a pretty attractive mix.

David Miller - Sanders Morris Harris Group

What would you say your top three categories are, at the magazine right now, in terms of advertising categories, in terms of sales volume?

Christie Hefner

It hasn’t changed over the years. Historically it has been tobacco and liquor because we are an age-verified magazine, and those industries, as you probably know, David, have been under a lot of pressure to make sure that they are not putting their ad messages in places where there is a significant readership under 21, so that benefits our company.

And then direct mail because we historically had an extremely engaged audience. You heard me reference the most recent spring statistics, but that has been true forever. So, one great thing about any direct response advertising is that if it is running in a magazine, you know it is running because the audience has responded to it, because that’s the one kind of advertising that is pure, tested, measure-the-results and roll-out-what-works.

David Miller - Sanders Morris Harris Group

OK. Thank You.

Operator

We’ll take our next question from Michael Kelman with Susquehanna Financial Group. Go ahead please.

Michael Kelman - Susquehanna Financial Group

Thanks very much, hi. I wanted to ask a couple quick questions on the domestic TV and entertainment business. First, from a more macro prospective, can you talk a little bit more about what was driving the changes in the group? Is it more of a re-branding of the channels or is it the content? Is it weakness from competition, or is it the overall category is starting to show some signs of improvement?

And then secondly, just so we have a clean basis for the back half of the year, in the third and fourth quarters of last year, were there any prior period adjustments, or are those clean numbers to assume for a base to grow that off of?

And then lastly, I know previously you talked about the entertainment group -- your expectations were that operating income would be flat for the last nine months of the year of 2007 relative to 2006. Is that still a good benchmark to use, or has that changed?

Linda Harvard

Mike, let me go ahead and start with the cash adjustments. There are cash adjustments every quarter that are generally pretty small, and they were larger in the first and second quarters of this year because of the launch of new networks and just not having history in which to be able to accrue revenues. So, in the last two quarters of last year, no, they were small.

Michael Kelman - Susquehanna Financial Group

Great.

Christie Hefner

Mike, let me speak to the first one. While I think that all of the contributors that you referenced, one could say, are factors, the way that I would try to describe it is, I think that we are really hitting our stride. I think that we - and you all understand - have been absorbing what it means to deliver the adult product in this new methodology of VOD, with the different shelf space, the different consumer interface, as compared to the years of experience and extractability of linear adult channels. And I think that the team that we have in place on programming and VOD and marketing side, have, as you would expect them to, learned from the early months of performance and data, because one of the advantages of VOD is candidly you get better and more specific actionable data, what works, and we have been responding to that.

On the Playboy side, I think that what we are doing in terms of the evolution of the channel, is really as much as anything in anticipation of what SVOD, as it continues to be rolled out, represents for it. And in that regard, as I alluded to, it really represents sell-in and a sell-through opportunity. The sell-in is to engage the distribution partners to in fact communicate to the consumers that Playboy is a subscription option. And we thing differentiating the network as much as we can with more brand-driven programming and with a mix of programming that will be compelling will help us in that regard. And the sell-through is indeed to make it a compelling subscription option. So that’s the way that I would try to describe how we are seeing the TV dynamic.

Martha Linderman

Mike?

Michael Kelman - Sesquehanna Financial Group

Yes.

Martha Linderman

I’m sorry, it’s Martha. You asked a third question and I spilt some coffee and distracted everyone.

Michael Kelman - Sesquehanna Financial Group

The third question was in regards to the entertainment operating income. Previously there was guidance that the last nine months of 2007 would be roughly equal to the last nine months of 2006. I was wondering if there is any change to that guidance.

Linda Harvard

Mike, it's Linda, now I’m coughing and can’t talk.

We aren’t giving guidance for operating income for the entertainment group. What you’ll have to do is put together the pieces of guidance that Christie gave you, which really talks about the stabilization of the domestic TV revenues in the first half of this year, and the first half and second half being roughly equal, the upside that we see in the digital business and the international TV business and that’s pretty much what we are willing to say at this point.

Michael Kelman - Sesquehanna Financial Group

OK, thanks very much.

Operator

We’ll take our next question from Lucas Binder with UBS. Go ahead, please.

Lucas Binder – UBS

Hi, good morning. A couple of quick questions for you. When we talk about Macau can you help clarify exactly what that $4 million means? Is that the $4 million in revenues that you think the mansion in Macau will generate for you, or on its own of which it will take a share of, and then your 49% shares of the revenues or the profitability?

Christie Hefner

This is Christie, good morning.

Lucas Binder – UBS

Good morning.

Christie Hefner

We’re taking projections just for PEI’s portion of it. So that $4 million projection for the first year is our best estimate of what we would be generating to us, as a combination of loyalties on revenues, which is across all of the revenue streams, including gaming, and our 49% equity issue.

Lucas Binder – UBS

OK, great. And then, real quick, two other quick questions. In the second quarter you saw investments in TV programming really come down from cash perspective, and you did provide a little bit of guidance as far as where you see amortization for the year. Do you think that the cash investments are going to continue trend toward the $7 million a quarter level or is it probably going to come back higher?

And then the one other follow-up is, was there anything that led to interest expense being lower in the quarter that I might have missed?

Linda Harvard

On the cash investment side, we aren’t giving specific guidance, but as I said in my comments, programming is a focus.

In terms of interest expense, what you see is slightly lowered because we had imputed interest on the deferred acquisition purchase price from acquisitions in last year’s second quarter.

Lucas Binder – UBS

OK, great. Thank you very much.

Operator

We’ll take our next question from David Bank with RBC Capital Markets. Go ahead, please.

David Bank – RBC Capital Markets

Thanks very much. Good morning, a couple of questions. First if I could start with Macau, and again, a further clarification. The $4 million in the first year, is that an annualized 2010 or is that what you think since you open in 2009, what you think you’d get in 2009? And part B of that question is, I realize that there is not a lot of disclosure you probably can or want to give right now about the project, but given that, can you give us a little more clarity on how you arrived at a $5 million price for 49% of the venture? What sort of metrics went into that? What was behind the evaluation?

The second question is: The reversal really contributed, to a certain extent, to the stability of the domestic TV - that statement depends a little bit, at least optically, on the reversal on the accounting stuff at domestic TV. So, is that just kind of a recurring/nonrecurring item, you think, for the next couple of quarters? I just want to get a little clarity on that.

The last question is, Linda, on the FX side, what was the contribution from FX adjustments? And thanks for hearing me for all of the questions.

Linda Harvard

David, thanks, let me take the last two questions first. In terms of the revenue recognition, the adjustments relate to either the newly launched Spice Digital Movie Network, for which we have no historical information, or on the VOD side to new launches. So those adjustments will get smaller and eventually go to zero. So the first two quarters will be aberrant in that sense. So what we are saying is that if you take out the revenue adjustments for the first two quarters, what we’re looking at is fairly flat revenue each quarter for domestic TV. So that’s where we see the stabilization. That’s just revenue recognition as you would know it.

On the FX side, it really affects us on the international TV side, both in revenues and on the expense side, so net-net that has really zero impact.

Christie Hefner

Hey, David, let me speak to the Macau questions. The $4 million is for the first year. So depending on exactly what month we open, the first twelve months. So what we’re trying to do is give you some visibility as to what that is. That is predicated on putting together a model with our partners and with analysts that follow the market, of what both with gaming and entertainment potential is, given the footprint and the number of tables and the space that we’re working off of and our knowledge of what the royalties are across those businesses.

And because, as you can imagine, as the business is first up and running, there is not assumed in that $4 million any dividends. So that $4 million is an assumption based on what we believe, looking ahead, we can generate in royalties, as I answered the previous question, 4 PEI out of the project.

And then the upside, which is unlimited in this deal, falls into both the category of royalty upside, as revenues grow across the categories, and then what we believe is the meaningful upside of actually owning equity in this deal.

David Bank – RBC Capital Markets

Okay. And are you paying a management fee to your partners? Can you give a little bit more visibility in terms of what the 49% is coming off of, like what goes into that net?

Christie Hefner

There’s not a lot I can say at this point, but I think that you could safely assume that the decision of higher staff versus an outside firm to manage something, that all those decisions, given we’re basically sharing equity here, are being made and have been made based on what’s going to generate the most return for the partners.

David Bank – RBC Capital Markets

Okay. Thanks for answering so many questions.

Operator

Once again, if you would like to ask a question, please press the Star and One on your touch-tone phone. We’ll take our next question from David Leibowitz with Burnham Securities.

David Leibowitz - Burnham Securities

Good morning. Briefly, on the gaming side, you indicated that two of the venues you are looking at are in Atlantic City and London. Now, in times past you had some difficulty in both of those venues. Is there anything different about your proposal that would perhaps let you fly under the radar? Or are you going to have to go through full reviews in both venues?

Christie Hefner

Hi David, it’s Christie. The issues that you reference are long past. And having personally, as well as through our team, had extensive conversations with the kinds of companies we would partner with in both markets – who are credible, established gaming companies – as well as conversations in some instances with government and legal advisors, I am highly confident that whatever deal we think would make the most sense for our company, with regard to what role we would have, would be a deal that we would be fully able to execute.

And as a part of that, we don’t envision being the gaming operator in any of these markets, not having anything to do with license ability, but having an understanding of what our core competencies are and are not.

David Leibowitz - Burnham Securities

OK, and are any of your partners in Macau involved in either Sentosa Island or the other casino that will be built in Singapore, and can you piggy back on them in that regard if they are participating in either of those two ventures?

Christie Hefner

Candidly, David, I will have to get back to you on your question about participation in the other ventures because I don’t know enough to know across the board of our partners. So let me get that information and I’ll share it with you.

David Leibowitz - Burnham Securities

Thank you, and one last thing. The announcement – and you may have covered this, I had to get off the call briefly – the announcement that every back issue of Playboy is now going to be put onto a digital medium, do you have any up-front experience with that, or is this a third-party vendor who’s doing it for you?

Christie Hefner

It is the latter. In fact, one of the appeals of the deal was to use other people’s money to digitize all that content.

David Leibowitz - Burnham Securities

And how do you share in the revenue stream going forward there?

Christie Hefner

It’s a deal in which it’s a fee plus participation.

David Leibowitz - Burnham Securities

Excellent, thank you very much.

Operator

We’ll take our next question from Dennis McAlpine with McAlpine Associates. Go ahead, please.

Dennis McAlpine - McAlpine Associates

Thank you and good morning. I think one of David’s questions that he was trying to get to is, is Playboy itself licensed now in Las Vegas or Macau or is that just the entity that’s doing the operation?

Christie Hefner

No, we didn’t apply for licenses. The gaming companies hold the licenses, which would be Melco in Macau and the Palms in Las Vegas.

Dennis McAlpine - McAlpine Associates

It would appear that Macau is the first place where you’ve actually put up hard cash, as opposed to a carried interest in return for your product contribution and name contribution. Does this represent a change in philosophy or is this just a unique situation?

Christie Hefner

I think it’s consistent with what I’ve previously said, which is the company in each market would look at the dynamics of that market and negotiate with the partners in that market for what we thought was the deal that made the most sense.

And after we announced the specifics of the Las Vegas deal, I indicated that that structure, which was a licensing-only structure, would not necessarily be the structure in all other markets, and that specifically, there would be markets where we would be interested in taking equity. So, I think what we did at Macau was consistent with what we have said and is representative of the points that in each market we will look to make the deal that we think makes the most sense.

Dennis McAlpine - McAlpine Associates

And then, on the SVOD/pay per view comparisons, can you talk about where you are now on the SVOD roll-out in terms of number of homes available? And can you see a correlation between the decline in pay-per-view and in the increase in the SVOD, i.e. in the same markets, or is this just a general observation?

Linda Havard

Dennis, this is Linda. We don’t give the home counts anymore because they’re not altogether accurate. But I think what we’ve said is that we are seeing the decrease in the linear side, and we’re seeing increases in video-on-demand, and that’s a counter-balance. SVOD is really related to Playboy TV and not the movie network. That’s a different revenue stream.

Dennis McAlpine - McAlpine Associates

Have you seen that decline and increase in the same market or is it an overall trend?

Linda Havard

It really depends. In some of the linear markets, there are linear channels and VOD. In other markets linear is going away and VOD is picking up. So there really isn’t a pattern one way or the other.

Dennis McAlpine - McAlpine Associates

OK, thank you.

Operator

Once again, if you would like to ask a question, please press the Star and One on your touch-tone phone at this time. We appear to have no further questions at this time.

Christie Hefner

Thank you all very much for joining us this morning, and we’ll look forward to talking to you in a couple of months, thank you.

Operator

This concludes today’s teleconference. Thank you for your participation and you may disconnect at any time.

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