Martha Stewart Living Omnimedia Q3 2007 Earnings Call Transcript

| About: Martha Stewart (MSO)

MarthaStewart Living Omnimedia, Inc. (NYSE:MSO)

Q32007 Earnings Call

November 2, 2007 10:00 am ET


HowardHochhauser - Chief Financial Officer

SusanLyne – President and Chief Executive Officer


RichardIngrassia - Roth Capital Partners

RichardTullo - Sidoti & Company, LLC

DavidKestenbaum - Morgan Joseph

MichaelMeltz - Bear Stearns & Co.


Welcometo the Martha Stewart Living Omnimedia third quarter 2007 earnings conferencecall and webcast. (Operator Instructions) At this time, it is my pleasure tointroduce Howard Hochhauser, Chief Financial Officer of Martha Stewart LivingOmnimedia.

Howard Hochhauser

Thankyou. I'd like to cover three topics with those of you on the call. First, areview of the third quarter; second, I'll go through the business by segment;and finally, I'll provide updated guidance.

Beforeturning the call over to Susan, let me remind you that our discussions willcontain forward-looking statements which are made pursuit to the PrivateSecurities Litigation Reform Act of 1995, as amended. The statements are notguarantees of future performance, and involve certain risks and uncertaintieswhich are difficult to predict. Actual future results and trends may differmaterially from what is forecast in forward-looking statements due to a varietyof factors. Now, let me turn things over to Susan.

Susan Lyne

Goodmorning to all of you joining us on our Q3 earnings call. I'm happy to reportthat we posted a great quarter with double-digit revenue growth and positivetrends in operating income, adjusted EBITDA and per-share results. These gainsunderscore the vibrancy of our brands.

Publishingrevenues grew 27% with ad revenues surging by 40%. Merchandising continues tobuild strong business items. Our key financial objectives this year were toreturn to profitability and deliver positive free cash flow of the full-year2007. We are firmly on track to achieve these goals. Publishing remains ourpower hitter.

Asnoted, ad revenue is up 40% for the quarter, led by robust sales at MarthaStewart Living. Ad revenue growth continues to exceedpage growth, but pages were also up, 32% at Living, 23% of Everyday Foodand 24% at Body and Soul.

Ican tell you today that fourth quarter looks just as strong. October andNovember revenue results for Living have been outstanding and ad pages forDecember are within striking distance of our 2002 record. Our book businesswith Clarkson Potter is cooking, pun intended. Earlier this fall, we releasedthe Martha Stewart Living Cookbook, Volumes 1 and 2. These are the first twotitles in our new agreement with Clarkson to publish 10 books over a 5-yearperiod. Next up, Martha Stewart Wedding Cakes. This book will featuremore than 150 inspiring wedding cakes for both the bride and the baker, and isdue out in late December.

Ournew merchandising initiatives are gathering momentum. Last month in Ormond Beach, Florida, we opened up what was our ninth Martha Stewart KB Home community.In today's real estate environment, the upside to our near-term financialresults in this licensing bill has been limited, but consumer response to thesehomes continues to be positive relative to like communities in the market, andwe plan to open additional communities in 2008.

OurMartha Stewart's Crafts line, which launched at Michaels Arts & CraftStores earlier this year, is currently rolling out to independent craftretailers. Our goal is to get this business right in the near-term, and then toscale it.

Tothat end, we were very encouraged by the response to our Halloween productwhich had extremely strong sell through as always. We continue to advance ourstrategic position in the crafts market, most recently, with our investment inlicense with Wilton.

Butour key merchandising initiative this quarter was the September launch of ourMartha Stewart collection at Macy's. The consumer response has been terrificand while we don't have numbers to share at this stage, early indicators arehighly encouraging. Our white wear collection of dishes and serving pieces is arun away success along with Trousseau bedding, our enamel cookware and all thespecial occasion products.

Ourbridal registration has been extraordinary. And that's without Fine China,which launches in January. This is the first time our merchandising segment hasplayed in the wedding space and the response only underscores our brand equitywith brides.

Goingforward, we're working to refine and add to the collection; categories likedecorative accessories, storage and gift items, are high on our list to makethis program an engine both for us and for Macy's.

Onour last call, I got a question about our same-store sales declines at Kmartand whether this might indicate waning consumer interest. My answer then wasthat our sales had more to do with inventory levels than lack of new product,than anything else. And that we were looking forward to the September re-launchof our fashion bedding. The first fully refreshed collection in several years.

I'mhappy to report that fashion bedding is up 42% since re-launch, a strongindication that consumer interest is as high as ever. The positive response toour new product launches gives us increasing confidence about the prospects forour forthcoming co-branded food line with Costco. This line of fresh and frozenfoods is on track to launch in early 2008.

Nextmonth, we will offer consumers a sneak peek or taste of what's in store with ahormone and antibiotic free-smoked ham for the holidays. Many people considerham the ultimate holiday entree, and you know Martha's ham will be the ultimateof the ultimate.

InJanuary, we'll launch with soups, followed shortly by dips and h’orderves. Intotal, we will be introducing 28 SKU's in '08, in three categories: ready-to-use, ready-to-heat andready-to-serve.

BeforeI move off merchandising, I want to mention our 1-800-FLOWERS partnership. Thisis an important new business, because it will allow us to offer same-daydelivery, the lion share of the flower market, a 1-800-FLORIST network, as wellas direct-from-growers business. We expect to launch the program in earlyApril, in time for Mother's Day.

Ontobroadcasting. Our nationally syndicated television series, The Martha StewartShow, kicked off its third season in September. Our ratings are currently southof where we'd like them to be. This we attribute to new time slots in more than50% of the country and continued erosion in the overall syndicated daytimetelevision market.

Butthe good news is that advertising rates and high margins, product integrationsare up and our production costs are down. We have targeted several milliondollars in production cost savings and are on track to achieve it.

Weare focused on a few avenues to improve the performance of our broadcastbusiness. I just mentioned cost and we are committed to bring costs in linewith revenues. On the revenues side, we're orienting the show's content to whatwe do best: more how-to programming featuring experts. We're also expanding ourtelevision presence with several new initiatives.

Wehave an agreement with the Scripps-owned Fine Living TV Network to air The MarthaStewart Show at prime time on a day-to-day basis. Scripps were also pickup aseries for the DIY Network consisting of a half-hour Martha Stewart Craftsegments; that show begins airing later this month.

We'refurther expanding our relationship with Fine Living in the fourth quarter withthree holiday specials. This high margin deal, which leverages existing videosegments, underscores the value of our Evergreen Content, and also serves tocross-market some of our other offerings. The Halloween special, for example,was a terrific promotional tool for our Halloween special issue.

Alsoin the cable arena, we signed a deal with Comcast Digital and Cox Cable toprovide Martha Stewart On Demand, a new VIP service available to theircustomers - approximately 15 million households in total. This offering is offto a great start and is a terrific fit with our content strategy. We want ourpassionate consumers to have access to Martha, our team of experts, and ourcreative content whenever, wherever, and however they want it.

Thatstrategy makes for a good segue to an update on our Internet business. Internetis, of course, a key strategic priority for us. Our third quarter resultslooked back in isolation are somewhat below our expectations, but there areimportant trends and developments in this business that lead us to believe weare making progress. While traffic was relatively flat in the third quarter,which was disappointing, current trends are very positive with every key metricregistering strong growth last month.

ForOctober, page views are up 33% year-over-year; page views per unique were up23% and time spent per visit up 18% for the same period. Traffic is the firststep, of course, because ad dollars follow eyeballs. To capture thatopportunity we have to stay focused and execute well. The platform we built isfundamentally strong and flexible in all the ways we have hoped.

Goingforward, our first priority is to maximize the potential of site using the learning we've gotten this last six months toguide future investment. Food and holidays are major traffic drivers and wewill continue to refine and expand those offerings. But we're seeing realopportunity in areas like weddings and whole living as well. I want to justnote here that our success with Macy's bridal registry may be impactingwedding's traffic on this site or vice versa, but there are clearly synergieshere that we would to mine.

Nextweek, we will launch the first phase of our personalization and communityfeatures. We have always had a passionate and engaged Martha Stewart community.Now those users will be able to communicate more directly with us and oneanother. They will also be able to save content, their personal web page andcomment on, rate and review articles, recipes, and how-to content.

Newproducts are part of our strategy, too. We are exploring the commercialviability of a project we're calling Marthapedia and recently invested in PhaseI of that project. If research indicates that this is as big an opportunity aswe believe, we will move forward positioning Marthapedia as the destination forall information about the home.

Weare committed to building a powerful Internet platform and recent traffictrends indicate that our investment is resonating with users. But of course thetrue measure of success is in how we monetize it.

Youmay have seen earlier this week that we announced a few key appointments on ourmedia sales team under Wenda Harris Millard. We are actively seeking toleverage our Internet platform with our proven media assets, to offer marketersmore cross-platform opportunities. We think we can deliver something otherscannot in the form of broader programs that bigger marketers are increasinglydemanding in their media buys.

Goingforward, we will look to extend the momentum we've seen in publishing acrossall of our media platforms. We aim to create a nexus of unique strength inmedia and advertising, where the interests of advertisers and a highly engagedconsumer base come together.

Inconclusion, this has been a terrific quarter with results that underscore thevitality of our brand. Our merchandising initiatives, including our line atMacy's, are showing strong business momentum and there is every reason toexpect publishing to remain strong.

Weare on track to a return to profitability as we approach the end of 2007 withall cylinders firing. I'm going to turn the call back to Howard now to walk youthrough a more detailed financial review and our guidance. Thank you.

Howard Hochhauser

Thankyou, Susan. Beginning with the quarter review, our strong third quarter resultsare an important measure of the company's overall health in 2007, the year weexpect to return to profitability.

Totalrevenue in the quarter was up to 13% to $69.3 million and our adjusted EBITDAloss of $700,000 came in well ahead of our guidance, and ahead of last year's$2.6 million loss which would have been $5.1 million, excluding a $2.5 millionone-time gain in the prior-year period. That's an improvement of $4.4 million.

Inthe publishing segment, revenue grew 27% or $9.9 million, while adjusted EBITDAincreased $4.8 million to $7.7 million. The significant growth in adjustedEBITDA illustrates the high incremental margins associated with our publishingbusiness. We published 2 issues of Blueprint in the third quarter, up from 1 inthe prior year's quarter with a Q3 investment of $1.7 million. We finished thequarter with $64.8 million in cash, cash equivalents and short-terminvestments.

Now,I'll turn to full-year guidance for 2007. On a consolidated basis, we are revisingour guidance, targeting $330 million in revenue, a range of $7.5 million to $9.5million for operating income, and a range of $33 to $35 million for adjustedEBITDA. I'll talk about why in a moment.

CapExshould approximate $5 million, and we do not expect any material tax charges inthe year. The key factor in our guidance for the year is our continued strengthin publishing. As Susan mentioned, this includes what we already know to be excellentresults in November and December for Living; however, it is still too early tocall a strong quarter for merchandising, due to the weak housing market, whichlimits our near-term upside from our KB deal.

Whilewe are highly encouraged by our initial indications from Macy's, we are alsowell aware of the trends reported by many major retailers in their most recentmonthly same-store sales reports. We are therefore factoring in a degree ofcaution into our outlook.

Wedo expect to see some modest expense increases in our media businesses,stemming from the build-out of our sales team, and the investment inMarthapedia as Susan discussed. These are revenue-generating provisions sothey're important strategic moves to make now. These disciplined near-terminvestments will help set the stage for 2008 growth. I would note that ourrevised guidance puts us in line with our initial expectations provided back inFebruary calling for adjusted 2007 EBITDA of $32 to $35 million.

Finally,here's our fourth quarter 2007 guidance on both a consolidated and segmentbasis. On a consolidated basis, we are expecting revenue to be approximately $120million, we anticipate operating income in the range of $33 to $35 million, andadjusted EBITDA in the range of $37 to $39 million.

Bysegment, our fourth quarter guidance is as follows. For publishing, fourthquarter revenue is expected to be approximately $53 million. Adjusted EBITDA isexpected to be in the range of $2 to $2.5 million. In the fourth quarter, weanticipate ad page growth of 12% year-over-year for Living and 8% for Everyday Food.We expect revenue growth to continue to outpace page growth, with total revenueforecasted to increase approximately 23%.

Merchandisingrevenues for the fourth quarter are expected to approximate $49 million.Adjusted EBITDA is expected to be $44 million. We anticipate Internet revenuesof about $6 million for the quarter, and adjusted EBITDA to be in the range of breakevento $1 million.

Broadcastingrevenue is expected to be $12 million, with adjusted EBITDA in the range of a $0.5million to $1.0 million. Corporate expenses should approximate $9.5 million.

Inclosing, the quarter's results are a strong endorsement of our strategic focuson delivering solid, near-term gains while accelerating the company's long-termexpansion. Our strong year-to-date results position us very well to return toprofitability and generate free cash flow for the full year of 2007. These willbe significant achievements for the company and place us on a good path headinginto 2008.

Meanwhile,we continue to pursue new ways of augment growth and shareholder returns withimproved capital efficiency by putting our strong balance sheet to work. Welook forward to sharing the fruits of that effort in the coming quarters.

Thankyou, we'll now turn it over to the operator for Q&A.

Question-and-Answer Session


(Operator Instructions)

Ourfirst question is coming from Rich Ingrassia - Roth Capital.

Rich Ingrassia - Roth Capital

Aquestion about the Internet business in maybe a little bit more detail if youcan. Beyond the content initiatives and the effect that they may have ontraffic and engagement and in rate, can you speak maybe a little bit moredetail on the potential diversification and enhancement of the revenue models,specifically what initiatives do you have in mind there, along the lines of adnetwork participation, video advertising, behavioral targeting, that sort ofthing?

Susan Lyne

Ican talk about the ad network initiative we began last month, but I want to bepretty clear here that our primary revenue stream is going to be advertising.We really are a two-revenue model business: advertising revenue, licensingrevenue. And so we're going to stick to what we do really well. We do believethat because we have such robust and unique media products across publishing,broadcasting, and ultimately Internet, that we do have a different opportunityto really monetize that.

Oneof the reasons we brought Wenda Harris Millard into the company was to reallytake advantage of that. So we have, in fact, announced what we're callingMartha's Circle, which is a group of very high-quality site and blogs thateverybody at our company feels are very in keeping with what we do and yetoffer people the ability to go deeper into one or another niche area. We areselling that advertising around our Martha site.

Butthe largest growth we see going forward certainly for the near-term is going tobe coming from and from the Omnimedia sales of our magazines,television and Internet.

Rich Ingrassia - Roth Capital

Onthe magazine side, page growth has obviously been strong and easy to track yourprogress there. Can you maybe fill in a little more detail on CPMs, if notspecific numbers, are we getting close to returning to 2002 levels now? If not,maybe when? And at what point do you think they normalize in '08 or '09?

Howard Hochhauser

Toyour point, as I was reading my speech, I wanted to point out something, wesaid that Living page growth will increase 12% and 8% for Everyday Food, and Iwrote in, because it's an important point, that total publishing revenue willincrease 23%. And the reason I did that is, what you see there is a bigincrease in total revenue in the publishing segment. So if total revenue is up23%, ad revenue is up closer to 30%. So our rates, in our revenue on apercentage basis will increase approximately double.

Relativeto 2002, to Susan's point about ad pages, we're still about 25% below on anad-revenue basis. That's a mix of rate and volume; the volume being our CPM. Soour rate base in 2002 was about $2.3 million, so we're still 15% below that, sowe still have some rate base to make up, and then we have a rate increase tomake up.

Rich Ingrassia - Roth Capital

Iappreciate that detail there. And then last question, on Costco, is there anyway you can qualify that opportunity for us, Susan? If not a specific number,maybe do you feel it could be as significant as the Macy's contribution in '08?

Susan Lyne

It'snot launching completely in January. We do believe that the two biggestopportunities for our merchandising segment are Macy's and Costco. We said thisconsistently. What we love about Costco is that they carry limited SKUs,high-volume SKUs. So we are very focused on making sure every single one ofthose SKUs we launch next year are things that can drive significant business.

I'mnot going to quantify that right now, but I think that, we have steered, inevery way we can, that we believe this is the other great opportunity for thecompany going forward.


Ournext question comes from Richard Tullo from Sidoti & Co.

Richard Tullo - Sidoti & Co.

Yes,my question is regards to the KB Homes, how many houses were sold in thequarter and did you recognize any revenue? And when can we expect that you willrecognize revenue from the KB Homes deal?

Howard Hochhauser

Whenwe give out our full-year sale numbers, so we're targeting about 400 to 450home to be sold in the full year. But, the way the contract is structured, andwe got into this a little bit, is that that initial sort of pilot program ortest program in Cary, North Carolina is based upon a margin. While we'reselling homes and selling plenty of homes, we're actually not getting paidunder that contract. As housing prices have declined, we're below the marginthreshold. So while we're targeting this 400 to 450 homes, that doesn'tnecessarily translate into profitability, and that's why I highlighted it inthe earnings release and then our speech.

Susan Lyne

Thesecond contract is a different contract, which is really just a straightpercentage on homes sold. We are still impacted there by the softness in homeprices, so that our initial, internal forecasts for KB Homes were higher thanwe are currently selling.

Thatsaid, we do believe this is a great business long term. At some point, thehousing market is going to stabilize and turn around. And these developments,which have between let's say, 150 homes to about 800 homes per development,will be an ongoing annuity for the company.

Rightnow, what we're focused on is making sure that these homes continue to delightconsumers, and that we continue to outsell other similar communities in anymarket we go into. And that's about as much as we can do at this point untilthe market turns around.

Richard Tullo - Sidoti & Co.

Whatdo we need to see from the market in order to see revenues from this project?

Susan Lyne

Thereare revenues - let's be clear. This contributes to the company at this point.It's just contributing at a lower level than we had anticipated. Nobody knew atthat point exactly how deep this housing softness really would turn out to be.So, it will continue to contribute, but as housing prices begin to go up again,it will contribute more.

Richard Tullo - Sidoti & Co.

Afollow-up to merchandising: excluding last year's $3 million one-time benefit,looks like merchandising revenues are up about $2 million year-over-year? Wouldyou attribute that to a pickup in the Kmart business, the Macy's launch, oranything else in particular?

Howard Hochhauser

Thebiggest part of the increase is the launch of Macy's, which officially launchedSeptember tenth. So the biggest piece of that increase is Macy's, and then youhave Crafts in there contributing to an increase on a year-over-year basis aswell. I would actually say while Kmart sales on a relative basis, meaningrelative to Q1 and Q2 have improved, they were still down on a year-over-yearbasis.

Richard Tullo - Sidoti & Co.

Andthe cost savings, was that entirely from broadcast or were there other areasthat you saved money?

Howard Hochhauser

Theprincipal area of cost savings to date have been in broadcasting where wereduced the production budget by several million dollars, and that will roll inover the course of the season. But where we're knee-deep in the 2008 budgetprocess, and one of the over-arching goals is cost reduction initiativescompany wide.


Ournext question is coming from David Kestenbaum - Morgan Joseph.

David Kestenbaum - Morgan Joseph

Canyou just talk about Marthapedia, when do you plan to roll it out? How much areyou going to be spending on it? Can you just elaborate more on the businessmodel behind it?

Howard Hochhauser

Letme talk about the financial side, I'll let Susan talk about the product side.So, financially, this is really Stage 1. We engaged an outside firm to size themarket, tell us what to build with cost, what it looks like and then judge theopportunity, and make a go/no-go decision in the fourth quarter. That's why theexpense of the cost associated is actually expensed in the quarter and notcapitalized. Once they come back to us and we make this decision, the costsrelated to it next year, which we don't have yet, would be capitalized. AndI'll let Susan talk about the actual product.

Susan Lyne

Ithink that it's clear to us and should be to all of you, I don't know how manyof you saw the home keeping handbook, but it's just one indication of how muchinformation this company has on anything related to the home. So the idea hereis to create a one-stop shop place to go for any information about how to doanything from organize your pantry, get stains out of x or y, wash this or that;literally, millions and millions of pieces of information.

Wewant to make it simple and easy to use for consumers, and really to be a placethat comes up with quick solutions for you to issues you have, but that alsowould allow some interactive components where users can also be adding - not tothe main body of this - but adding to the knowledge base with whatever theirbest practices are in all of these cases.

Weare very excited about it. All the initial research we've done on it is verypromising. We have a company going through the first phase of theconceptualization of it, and as Howard said, once that's delivered to us byyear-end, we'll have a much better sense of the opportunity and whether we willgo forward with it.

David Kestenbaum - Morgan Joseph

ThenHoward you took down the guidance a little bit on EBITDA. Can you quantify howmuch was related to Marthapedia versus the softness in the housing market?

Howard Hochhauser

Marthapediawas roughly a $0.5 million of expense in the period. There's three factors thatplay here, there's the staffing cost, there's the housing market, andMarthapedia. They were in a very rough basis, you know, equal contributors.Although just as an aside, that's not a run rate increase in costs.

Susan Lyne

Thestaff costs, I think Howard's referring to, we brought several people in under WendaHarris Millard as sales people, and so there are some one-time costs in there.

David Kestenbaum - Morgan Joseph

Andthen finally, Macy’s, you had some relative success there, how has that affectedyour relationship with Kmart? Do you feel more positive that they may renew in2010, when that relationship expires? How do you feel about that in generaltoday?

Susan Lyne

I'mjust going to say the same thing I have said, which is that that's stillseveral years off and I don't think we have anything new to add to thatconversation. We are very pleased with the consumer response to the refreshedfashion bedding collection, and we will continue to try to refine and delivergreat products there. But in terms of a go-forward strategy, I have nothing toadd.


Ournext question is coming from Michael Meltz - Bear Stearns.

Michael Meltz - Bear Stearns

Ihave a few questions on the publishing group. Can you tell us what MarthaStewart Living, what the actual ad revenues were up there in the quarter, aswell as circulation revenues? And then secondly on MSL, your lift in the ratebase 2.5% or so, what are you doing with ad rates starting January 1?

Howard Hochhauser

Thetotal rate, you have a 5% plus the CPM increase, we're targeting a 7% totalincrease. Let me give you the Living increase: a little bit north of 30%. Thead revenue increased in Martha Stewart Living. Circ is essentially flat.

Michael Meltz - Bear Stearns

Yourcomment about margin, publishing margin in the fourth quarter, certainly youhad a great margin in the third quarter. What's pulling down the margin in thefourth quarter there? Can you just give us a little bit more clarity?

Howard Hochhauser

Andthen Michael, I actually made a footnote change to my speech for you.

Michael Meltz - Bear Stearns


Howard Hochhauser

Inthat you, there is a big positive disconnect in the ad revenue versus the pagegrowth for Living in the fourth quarter. As this relates to the margin, the fourthquarter is our direct mail period. So we dropped substantially all of ourdirect mail in the fourth quarter, and you expense it as incurred. You don'tamortize it over the period. So that's the issue as to why the margin willerode in the fourth quarter. And it has been like that for several years now.

Michael Meltz - Bear Stearns

OnKmart, can you give us the total sales and comp store sales declines in Q3?

Howard Hochhauser

Totalsales for the third quarter were down 15.1, comp stores down 14.6. I don't wantto get too into the weeds, but we've launched refreshed fashion bedding in theperiod, which is a sub-category Soft Home - Soft Home, being one of the biggercategories we participate in.

Soin the six weeks post-launch as compared to the year-to-date period prior tothe launch, fashion bedding was up just over 40%. So you saw this, relative tothe second quarter, our sales or our rate of decline has improved. And thepoint here is simply design or refresh your product and consumers appreciateit.

Michael Meltz - Bear Stearns

Canyou tell us in that six-week period how have Kmart total sales trended?

Howard Hochhauser

Totalsales for our product?

Michael Meltz - Bear Stearns


Howard Hochhauser

Orfor the store? Total sales during that same period were down about 9%.

Susan Lyne

Andlet me just go a little deeper here. Total Soft Home, which is our singlelargest category. Total Soft Home was down 21% pre-launch or pre-re-launch andin total, post-launch was up about 3%. So the fashion bedding performancereally impacted the overall Soft Home business significantly.

Michael Meltz - Bear Stearns

Onequestion on Macy's. I don't think I can let you off the call without somequantification here, given how important it is. Are you tracking close to howyou had anticipated on an annualized basis or what can you tell us about thatlaunch thus far?

Howard Hochhauser

Wefeel really good about it. We're not going to provide any quantification of thesales.

Susan Lyne

Yes,this is too new a program, Michael. Obviously, by our next call we will have aquarter's results under our belts. First of all, it's a new program, and it'sso early right now that I think we would fear misguiding you. We are very encouraged by the early results,but there is a lot of uncertainty in the overall retail market. You read thesame things we do, or listen to the same earnings calls we do, and I think thatto be too forward-looking in what this quarter's going to do, given that, wouldnot be smart.

What I'm really saying is that we are extremely encouraged. I think wefeel that we are doing what we anticipated at this point, and we are veryhopeful for fourth quarter as a whole. But there is enough uncertainty outthere that we are not going to give numbers out at this point.


Ourfinal question is from Rich Tullo - Sidoti & Co.

Richard Tullo - Sidoti & Co.

Quickquestion, it looks like cash building will continue to build, how will youdeploy the cash? I mean, in the past you said that you were looking towardsacquisitions. With the stock being down, would you consider a buy-back?

Howard Hochhauser

Wehave a very active acquisition pipeline, we continue to be pretty disciplinedand have recently walked away from something. And next year, we're deep in thebudget process. Next year, or say 6 to 12 months from now, we will consider astock buy-back. But, today we are very focused on this M&A pipeline. But,yes, we will certainly be considering it next year.

Richard Tullo - Sidoti & Co.

Andwith the deals that you're looking at, are they in the likes of Body & Soul,or they are something different?

Susan Lyne

Weare actually not focused on publishing acquisitions. There are two areas wherewe are very active. One is Internet companies that could give us either qualitytraffic or more importantly tools and applications that would be valuableacross our site and that might allow us to jump our internal development plans.And the second one is brands that we believe have a lot of consumer interest,where we know we have an extremely strong internal design group and merchantteam, and where we believe we could leverage that infrastructure to grow abusiness dramatically. Those are really the two areas we were focused on.


Atthis time there are no further questions. This does conclude today's conferencecall.

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