Alloy F3Q07 (Qtr End 10/31/07) Earnings Call Transcript

Dec. 5.07 | About: Alloy Inc. (ALOY)

Alloy, Inc. (ALOY) F3Q07 Earnings Call December 5, 2007 5:00 PM ET

Executives

Jody Smith - Investor Relations

Joseph D. Frehe - Chief Financial Officer

Matthew C. Diamond - Chairman of the Board, Chief ExecutiveOfficer

James K. Johnson - President, Chief Operating Officer,Director

Analysts

William Martin

Steve Martin

Ed Boden

P.J. Sollitt

Greg Rochmorten

Bill Blazek

Robert Moses

Unidentified Analyst

Dan Fielding

Operator

Good afternoon. My name is Tasha and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Alloy Q3 earnings conference call. (Operator Instructions) Ms. Smith, youmay begin your conference.

Jody Smith

Thank you. Good afternoon. Thank you for taking the time tojoin us for our conference call on Alloy's third quarter fiscal 2007 earnings.Participating in today’s discussion are Matt Diamond, Chief Executive Officer;Jim Johnson, Chief Operating Officer; and Joe Frehe, Chief Financial Officer.

Alloy reported its third quarter fiscal 2007 earnings afterthe close of the market today. If you have not previously received a copy ofthe press release, it’s available on Alloy's website at alloymarketing.com.

Joe will begin by providing a discussion of our financialresults and position, followed by Matt who will provide a discussion of ouroperational highlights and an update on recent events. We will then open thesession up for questions and answers.

Our press release and this presentation reference severalnon-GAAP financial measures; specifically, adjusted EBITDA and free cash flow.We have included these non-GAAP measures because we believe that they areimportant in evaluating the company’s operating performance.

Because they are not calculated in accordance with GAAP,they should not be considered in isolation of or as a substitute for net incomeas an indicator of operating performance or net cash flow provided by operatingactivities as a measure of liquidity.

At the end of our press release, we have providedsupplemental disclosures to reconcile the non-GAAP financial measures to theirGAAP counterparts in accordance with the SEC’s Regulation G. Certain remarksthat we may make during this call about future expectations, plans andprospects for Alloy constitute forward-looking statements for purposes of theSafe Harbor provisions under the Private Securities Litigation Reform Act of 1995.Our actual results may differ materially from those indicated by theseforward-looking statements as a result of various important factors, includingthose that are discussed in our annual report on Form 10-K for the fiscal yearended January 31, 2007 and in our other periodic SEC filings, which are on filewith the SEC and available on the SEC’s website at sec.gov. Please refer tothose filings for a full description of those factors.

I’ll now turn over the program to Joe Frehe.

Joseph D. Frehe

Thank you, Jody. Good afternoon and thank you for joiningAlloy's third quarter fiscal 2007 conference call. I’d like to begin byhighlighting some of the key financial information for the quarter.

Revenue for our third quarter ended October 31, 2007increased $2.8 million to $66.5 million from $63.7 million in the third quarterof fiscal 2006. Revenue in the media and placement segment increased while thepromotion segment declined.

Media segment revenue increased 47% or $6.9 million to $21.7million. This increase was driven by our acquisitions of Frontline and ChannelOne and higher Alloy entertainment revenue, partially offset by lower displayboard sales.

Placement segment revenue increased 11%, or $1.9 million, to$18.9 million. This increase was principally attributed to a $3.6 millionincrease in broadcast placement and multicultural newspaper revenue, partiallyoffset by a 10% reduction in college newspaper placement revenue.

Promotion segment revenue decreased 19% or $6 million to$25.9 million. This decrease was primarily driven by a decline in ourpromotional and sponsorship revenues versus the same quarter of last year.

Adjusted EBITDA, which we define as operating income plusdepreciation and amortization, non-cash stock-based compensation and specialcharges, for the quarter decreased approximately $1.8 million to $9.3 millionfrom $11.1 million in the third quarter of fiscal 2006. The decrease inadjusted EBITDA was primarily driven by the impact of lower revenue in ourpromotion, sponsorship and display board businesses and a higher medicalbenefit expenses in our corporate segment.

Operating income decreased $2.4 million to $7 million in thethird quarter of fiscal 2007 from $9.4 million in the third quarter of fiscal2006. The decrease in operating income is due to lower adjusted EBITDA, higherstock-based compensation, and higher depreciation and amortization.

During the quarter, we recorded an extraordinary gain of$5.5 million related to our acquisition of Channel One. This was a result ofour actual acquisition costs being lower than our initial estimate.

As you may recall, in the third quarter of 2006 we recordeda $15.8 million expense related to the conversion of $56.6 million of ourconvertible debentures. There was no debt conversion expense recorded duringthe third quarter of 2007.

Our net income increased $19.5 million to $12.4 million inthe third quarter of fiscal 2007 from a net loss of $7.1 million in the thirdquarter of fiscal 2006. Net income per diluted share in the third quarter offiscal 2007 was $0.90 from a negative $0.55 per basic share in the thirdquarter of fiscal 2006.

We believe free cash flow is an important measure of anycompany’s operating performance as it represents the amount of cash availablefor debt service, acquisitions, and stock repurchases.

Our free cash flow, which we define as net income or lossplus depreciation and amortization, amortization of debt discount, non-cashstock-based compensation, debt conversion expenses, and special charges lesscapital expenditures, for the third quarter of fiscal 2007 decreasedapproximately $1.7 million to $8.1 million from $9.8 million in the thirdquarter of fiscal 2006. This decrease is due to lower earnings, an increase incapital expenditures that were partially offset by lower interest expense.

Free cash flow per share in the third quarter of fiscal 2007was $0.59 per diluted share compared with $0.77 per diluted share in the thirdquarter of fiscal 2006.

Our weighted average shares used in the computation of freecash flow per share increased 8%, principally as a result of the issuance ofcommon stock related to the 2006 conversion of the debentures and the Frontlineacquisition, partially offset by our repurchase of nearly 1 million shares ofcommon stock at the end of December 2006.

Turning to our balance sheet, our balance sheet is strong atOctober 31st. Our cash and marketable securities were $25.8 million. Thisbalance includes a $4 million advance on a revolving credit facility. Ourworking capital was $37.5 million and our senior convertible debt outstandingremained at $1.4 million.

Our accounts receivable at the end of the quarter werehigher than our year-end balance as a result of the first quarter acquisitionand normal seasonal increases. DSO, or days sales outstanding at the end of thequarter was about 69 days compared with 65 days at January 31, 2007.

Our capital expenditures for the year are now projected at$14.6 million versus $16 million. The reduction primarily relates to anadjustment in the equipment upgrade schedule for Channel One. We now expectthis upgrade to be completed during the first quarter of 2008.

With that, let me turn the discussion over to Matt.

Matthew C. Diamond

Thanks, Joe. As Joe mentioned, EBITDA for the third quarterwas $9.3 million versus $11.1 million last year. This is slightly below wherewe [expected to be] and is primarily the result of some second half softness inour promotion segment. I will speak about this business more fully below butfirst I want to provide an update as to how we’re progressing toward our toplevel strategy and what it will mean for the upcoming fiscal year.

As we have stated, our goal is profitable growth, bothorganic and through acquisitions, particularly in our media segment. We believethis will significantly increase our corporate value for three principalreasons.

First, the financial profile of our media segment can bemuch higher margin than our other businesses and therefore should carry ahigher earnings multiple. Second, as a small public company, we have ameaningful fixed corporate cost as a percentage of our revenue and earnings.Additional EBITDA without increased corporate costs improves our operatingleverage.

Third, we operate in a fast-paced and growing media andmarketing environment where the market demands new and improved businesses andservices, so we must continually be reinventing ourselves. We continue to becommitted to this strategy.

Although 2007 EBITDA is down, we believe that we have putourselves in a position to have a significantly stronger fiscal year in 2008.As we mentioned in our press release, we expect 2008 revenues to be $225million to $240 million and our EBITDA to be approximately $20 million to $24million. We have four quantifiable reasons for why we believe we will achievethese results.

First, 2008 will include a full year contribution fromChannel One and Frontline Marketing. As we have said before, Channel One had anegative EBITDA this year as we had to rebuild this business. The business isprogressing nicely and in fact was slightly above break-even this quarter. Weexpect Channel One to be a positive contributor in 2008. This swing willmeaningfully impact year-over-year performance. In addition, we will pick up anadditional EBITDA from the inclusion of a full year and growth associated withFrontline, as that business was acquired in late April of 2007.

The second reason is that at the end of last year, our ownedand represented interactive web properties generated approximately 3 millionunique users. These sites currently generate about 17 million unique users.This is a 5.5 times increase in very targeted, sellable ad inventory and willlead to meaningful revenue and EBITDA growth in 2008.

Third, as we previously stated, we made several data acquisitionsfor our database group in 2007 and revenue and EBITDA will start to begenerated on these acquisitions in fiscal 2008.

Finally, although our promotions business is experiencing aweaker-than-expected second half of 2007, we believe this is temporary as weshow significant strength in pre-booked business for 2008. AMP Agency is closeto $9 million ahead of last year at this time in pre-booked or committedbusiness for the following year. In total, we have already pre-booked 83% ofthe group’s 2007 revenue two months before 2008 begins. For this reason, we areable to forecast solid growth for the group next year.

Based on these facts and our estimates in our business, weare very comfortable with our guidance for 2008. In addition, as noted in our pressrelease, we intend to repurchase shares in the open market as part of a stockrepurchase plan. Based on our expectations for 2008, we believe our stock to bevery attractive at today’s valuation.

While we will continue to look aggressively for acquisitionsand business development opportunities, we believe [inaudible] [to beeffectively deployed] in buying back our stock at these valuations.

Now I would like to open the call to Q&A. Operator,could you open it up for questions, please?

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from William Martin.

William Martin

Thanks for taking my question. On Channel One, can you justtalk a little bit about the ongoing CapEx requirements for that business?

Matthew C. Diamond

Sure. Actually, as you can tell, I have a very bad cold soit’s hard for me, so I’m going to let Joe on to address that.

Joseph D. Frehe

The main issue for the CapEx for Channel One is that weexpected most of the DVR receiver upgrades to be completed this year and we areprojecting that total CapEx for Channel One to be about 9.9 this year. But wedo believe around $5 million to $6 million in CapEx will still be required forChannel One next year and basically that’s just carry over the existing programwe are working on currently.

William Martin

So even though you have 8,500 schools in that network and afairly old network where Primedia didn’t spend a lot of money on upgrades,you’re going to be able to spend less than $1,000 per year per school on anongoing basis?

Matthew C. Diamond

We spend a lot more than that on operations on an ongoingbasis. In fact, it’s a significant investment in the school and the entirefranchise. What we’re referring to is specifically what we don’t expensethrough our income statement and is part of the CapEx. And yes, we’re able toget significant leverage through some partnerships with some manufacturers tobuild out the network. These are basically high-end digital video equipment andI don’t think it’s an accurate statement to say that Primedia didn’t invest inthe infrastructure at all. They definitely did.

They invested a substantial amount year over year. What theydidn’t do, which is what we immediately did, is upgraded the entire networkfrom an analog to a digital platform. And so we’ve been working closely withthe schools. I can tell you where we put the DVRs in place and it’s part of ourrollout plan now. The feedback has been fantastic. They are excited about it.We have other schools that have asked us to join the network because of it andfrankly, we’re just moving forward as aggressively as we can.

William Martin

That’s great. My second question deals with the success ofGossip Girl, and I was curious if you could comment on the economics of thatand the prospects for another season, and also just comment on the secondSisterhood movie and what potential impact that may have.

Matthew C. Diamond

Sure. [We are in essence] producers/authors for Gossip Girland a series of other books and television and movie productions now in thepipeline and it’s a pretty exciting piece of our business that we’re verybullish on and one of the reasons why next year’s guidance, we’re comfortablegiving and do feel it will be approximately two times the EBITDA that it wasthis year. Alloy Entertainment is one of those positive contributors.

Gossip Girl has been picked up for another season so we areexcited about that. In picking that up, there are some economics. We don’tbreak out specifically what they are. They are confidential agreements butobviously they are six figure benefits to us.

In addition to that, we have book fees every time -- thesuccess of the show, we sell more books which helps our financials and thecontract itself with Gossip Girl, as well as the other TV contracts, arebasically episode-by-episode fee, so every time they get picked up or renewed,we get a benefit.

Your other question was related to the movies, sequels toSisterhood as well as some others that are in the pipeline. We have a moviecoming out this summer or fall with Summit Partners that we are excited about.All of those again are fees that we get as the movies get produced and thenobviously if they are successful, there’s some back-end opportunity.

So we are excited about it. It’s been an investment we’vemade for many years and they’ve been on a nice roll and we see that continuingcertainly into 2008 and probably beyond.

William Martin

Great. Thank you very much.

Operator

Your next question comes from the line of Steve Martin.

Steve Martin

Well, a couple of my questions have been asked already butcan you talk about what the sales mix looks like at Channel One and why you areso comfortable about the improvement for next year? I guess I’m a little surprisedit made money this quarter.

Matthew C. Diamond

Yeah, it’s gone extremely well. A few things to answer yourquestion; the entertainment category, which is the first category that Alloycould hit the ground running, simply because of our current relationships, wewere able to capitalize on right away.

A significant part of the challenge that Channel One hadfrom a revenue perspective the last couple of years is they just didn’t haveaccount coverage. The interest from the market was definitely there. We’vecleaned up what we accept on the advertising side as far as our guidelines arevery strict with regard to food and junk food and things like that, and peoplethat want to support the schools and support the program -- I can tell you itwas met very, very positively.

So we’ve been able to one, hit the ground running withentertainment category as well as I would say wireless is a category we’repretty bullish on next year and we think some other key areas that have alwaysbeen big areas for Alloy we’ve been able to extend.

The second part though from an income statement perspectivewas the full year impact and now we’re getting the benefit in this back half ofthe year of a lot of the contracts that we either renegotiated or negotiated aspart of the restructured Channel One. And we see as an example for next year,we’ll get the benefit of that full year. We’re getting the benefit of thatpartnership right now, as I think NBC is as well.

We have the full year impact next year and it’s starting tobenefit us a little bit this year of a renegotiated contract with our serviceprovider on the back-end to service the schools. That too is a little bithigher now because the digital upgrade isn’t complete, but will go down, buteven with that we were able to get slightly above break-even this quarter.

Steve Martin

Where do you see your -- where are you in the expensereduction? When you look out to next year, what does the expense level looklike and is that going to be your base?

Matthew C. Diamond

I would say right now -- what we have now is our fullrenegotiated and accurate cost structure with the exception that once the fullupgrade is done, the costs will come down again on the maintenance side and weexpect that in the first quarter, middle of the first quarter to be completed.So we’re pretty close. That’s the big change.

And then frankly, it is about leveraging that base andcontinuing to work with advertisers that are appropriate for the network.

Steve Martin

All right. And can you -- the placement business had anincrease. Can you talk a little bit about that? Although it was not at theEBITDA line.

Matthew C. Diamond

The placement business, really that business in general isoften cross-sold and we’ve done well just getting out there in the marketplacewith our existing cross-selling sales force, so that’s why that did well forthe quarter. It was largely driven by broadcast and the benefit of that, whichhas a little bit lower margin and that’s why you don’t see as much to the bottomline.

Steve Martin

Thank you.

Operator

Your next question comes from the line of Ed [Boden].

Ed Boden

I guess I just have a couple of questions; you guys kind ofalluded to in your comments that the Channel One revenues and that would be profitableinto next year. Do you guys expect that to be profitable every quarter or isjust the overall year going to be profitable?

Matthew C. Diamond

We haven’t decided at this point how much of that -- wedon’t break out our media segment in those segments. There’s just frankly toomany of them. Having said that, we’ll certainly give some of the trend guidancefor something as significant as a Channel One. We haven’t done that yet but wewill. So we’ll have to take a good look at that and see. Q2 would be the onequarter, just because you’ve got the summer months and you don’t have revenueassociated with really June and July, so that’s the one month that most likelywould be negative but we’ll have to take a good look at that and give some ofthat guidance.

But we won’t break out in future quarters how Channel One orany of the other media segments are doing. The reason why we made a point ofdoing it now was frankly people have seen the trajectory over the last sixmonths as we acquired Channel One, incurred some losses. We thought we’d makeit break even by next year but we’ve already got it there and that’s one of thereasons we’re so bullish on next year.

Ed Boden

And I think that’s great. Thanks for doing that. The CapExshift that you guys are talking about, does that have to do with how you see orhow you want to roll that out? Or does that have something to do with somethingnot going correct in the rollout and sort of having to take that slowerapproach?

Matthew C. Diamond

It really just came down to the timing of when the machines,the new equipment came into our warehouse. It really had nothing to do withanything else. It’s given us a chance to test some things and aggressivelypromote the ones that we do have but at the end of the day, it ultimately justcame down to when we got the machines and how quickly we can get them into theschools.

Ed Boden

And just a follow-on that, just the comments you have on thegrowth in the promotion segment next year, do you guys see that getting back tothe fiscal year ’06 levels? So it would be flat compared to ’06 levels or doyou see that being slightly less than that?

Matthew C. Diamond

We haven’t gotten to that level of detail yet. However, wedo feel that you are hitting on a key point and that is the promotions businessis a bit cyclical and we’ve seen in our business over the last few years thoseebbs and flows and that too is one of the reasons why we feel good as we lookat the pipeline, that we can return to the levels that we saw in ’06 and wewill certainly break down the guidance a little bit better into the promotions,media and placement segment, be able to look at ’06 and see how it compares tothat.

But right now, it’s looking very, very strong and I wouldsay it’s fair to look at ’06 as a pretty good guide.

Ed Boden

Great. Good job, everyone.

Operator

Your next question comes from the line of Paul [Celit].

P.J. Sollitt

It’s P.J. [Sollitt]. With Channel One, I know part of yourthesis was once that you upgraded the technology to digital and could havetwo-way communications and better data on compliance and participation andother things, that it would lead to more of an opportunity with advertisers. Isit too early to get a read on that?

Matthew C. Diamond

No, in fact, our Nielsen ratings are probably on average 15%to 20% above what they were a year ago already, so -- not to suggest it’s goingto go much higher than that, but the benefit of that upgrade, the benefit ofcommunicating with the schools and really I think meeting their needs has --the whole picture has helped us greatly with the Nielsen ratings and of coursewhat that translates into is sales. So we’re real happy with that.

P.J. Sollitt

How much of the Nielsen improvement is just that it’s beingmeasured correctly now, versus the school’s --

Matthew C. Diamond

It’s of course hard to sometimes break that out. I think aportion of it it is measured more accurately but a big portion of it is thedigital screens are simply better. It’s a big difference between the analogpicture and the digital picture and the schools appreciate it.

I also think the program itself, I think if you look at theprogram and the great job that NBC is doing, the teachers love it and thefeedback that we get on a daily basis from the schools, the teachers, and howthey use the program and how it’s integrated very much into their teaching alsoleads to compliance and viewership.

P.J. Sollitt

And the 17 million unique on the online network, do Iremember right that last quarter that was only 10 million, or was that twoquarters ago?

Matthew C. Diamond

It was approximately a little less than 10, I believe andnow it’s over 17. What we’ve done, and we’re very, very excited about it iswe’ve aggressively gone out and partnered with key sites that we believe fit inwell with our network and we’re able to sell because of our relationships withadvertisers.

So it’s a combination of our existing traffic on our ownsites as well as partner sites that we’re able to monetize right away. So we dothink it’s a nice leading indicator of revenue. We will update with anotherannouncement soon a little more detail on that 17 million because we do feelvery strongly that it’s got incredible potential and we know already from teststhat we’ve done with some select group of advertisers that the market reallylikes it. It’s a unique network that really can target this demographic.

So we’ll do a little update later with some specifics as towhat those sites are and what some of the new partnerships we’ve signed.

P.J. Sollitt

Okay, so we haven’t seen the benefit yet of higher ratesbased on the higher uniques, right? That will be coming forward into ’08 here?

Matthew C. Diamond

And it will come forward we do think in -- and it’s alreadyembedded. I don’t want to suggest --

P.J. Sollitt

In the guidance.

Matthew C. Diamond

Yeah, a little bit in the guidance but having said that,this is an interesting test for us. We think there’s some upside to what we’vedone. That’s why we feel comfortable with the guidance and if we can executewhat we think we can, there’s some positive potential there.

P.J. Sollitt

Yeah, that’s great. One last thing on the AMP, you said 87%of it was pre-booked for ’08, is that right?

Matthew C. Diamond

It was actually 83%.

P.J. Sollitt

Eighty-three -- historically, how much sort of I guess you’dcall it spot business, non pre-booked business going into a year would you pickup?

Matthew C. Diamond

We would clarify some, P.J. --

James K. Johnson

I’ll answer this. I just want to be clear -- it’s 83% ofthis year’s revenue number has already been booked for next year, so we arealready 83% of the way two months before we start next year what we finish withthis year.

We typically -- it can range how much additional revenue weget once we are in the -- we book once we are in the year but it’s prettysignificant. It’s usually another 50% or so, so we feel like we have a big headstart on next year, certainly comparatively to where we were last year and wefeel like it’s going to be a really, really good year for that group in 2008.

P.J. Sollitt

That’s great. Actually, one last thing is with thereceivables up just seasonally, what do you think the cash will normalize attowards year-end?

James K. Johnson

If I had to take a crack at it, it would probably beslightly lower than where it is in -- or say lower than it is where we endedthird quarter, so it may be a little bit lower than $25 million. It depends alittle bit on what we do with the debt facility, obviously but I think that --yeah, and obviously the stock buy-back is something that will [have to be fleshout] as well during the fourth quarter but normally, normally we generate alittle bit of cash -- actually, third quarter to fourth quarter I think we arepretty flat, from quarter end to quarter end on cash generation. That’s justour normal flow of the business and then we’ll have a little bit of CapEx andwe’ll have a little bit of a stock buy-back, which will be factors as well.

P.J. Sollitt

We don’t mind cash usage on a buy-back. All right. Thankyou. Congratulations.

Operator

Your next question comes from the line of Greg [Rochmorten].

Greg Rochmorten

Could you give us a little color on your expected tax rategoing forward? I know you don’t give out a lot of detailed guidance and you areworking to improve that but could you give us any color on that?

Joseph D. Frehe

Well, right now we have a lot of NOLs that we are stillutilizing so most of our taxes are state-based or relate to AMP so the rate issomewhere between 8% and 11%.

Greg Rochmorten

Okay, and what’s the present value of the NOLs that you arecurrently using?

Joseph D. Frehe

I don’t know that off hand.

Greg Rochmorten

Okay, and then just one other question; as you look out toQ4 for promotion revenues, will that grow year over year or will the troublesyou’ve been having there, will that continue?

Matthew C. Diamond

We don’t give guidance to that specific level but certainlyit is accurate to say that the -- I would say weaker promotions performancethis year isn’t -- we don’t expect that to be -- it’s not going to change inQ4.

Greg Rochmorten

Okay. All right, thanks, guys.

Operator

Your next question comes from the line of Bill [Blazek].

Bill Blazek

I wanted to get a sense of what the market is like for theadvertising revenue and is the fact that you have Channel One now and the 17million unique users on the Internet, is that starting to open some doors withadvertisers and improve the productivity of your sales force?

Matthew C. Diamond

Yeah, it’s -- I would say to answer your first question, youknow, we read the same things where people are predicting slower growth andconcerns over media revenue. We haven’t seen it directly. Part of it is I thinkin our market, both the youth market as well as some of our segments, like theInternet, they are not forecast down. So in general the sentiment is relativelypositive going into next year.

I think that our traffic with Internet, Channel One andothers, don’t necessarily open new doors. What they do is they allow us toleverage those existing relationships deeper. Because if you look at thebreadth of advertisers that we’ve got, it’s pretty broad. Our key and ourchallenge is how do we go deeper into those relationships, how do we tap intoother budgets, how do we get a bigger portion of those budgets and be a moremeaningful part of their campaigns.

I think both Channel One and the growth in our interactivehave both contributed very positively to that and -- I think that the otherthing to keep in mind that the growth in general of both our interactivesegment as well as Channel One are two key areas of our media segment that wewant to continue to focus on, as well as database. These are areas that we’veinvested in. We said at the very end of last fiscal year that we will focus aninvestment in certain areas. We’ve done it. I think the traffic levels that yousee on our interactive level as well as obviously investment in Channel Onereflected and the advertising dollars are starting definitely to come our waybecause of it.

Bill Blazek

So what do the numbers look like on the interactive side?

Matthew C. Diamond

Well, as we said, 17 million uniques are now -- we’re ableto represent and sell 17 million uniques as of right now.

Bill Blazek

But in terms of revenue or EBITDA?

Matthew C. Diamond

We don’t break out our media segment by any of thedivisions.

Bill Blazek

Okay, thanks.

Operator

(Operator Instructions) Your next question comes from theline of Robert Moses.

Robert Moses

Good afternoon. Just maybe for Joe, I just wanted to clarifyon capital spending for ’07. I think you said $9.9 million for Channel One.What would be the full company number for ’07? And maybe if you have guidancefor ’08 at this point?

Joseph D. Frehe

We expect the full year CapEx this year to be around $14.6million. And we haven’t worked through what we expect our CapEx to be for 2008at this point.

Robert Moses

But you said 5 to 6 for Channel One, and just assumingthere’s no extraordinary programs, is it typically a couple million bucks forthe core Alloy business, give or take?

Joseph D. Frehe

Yes, that would be fair.

Robert Moses

Okay, and then just on that same note then, really no reasonyou think beyond ’08 for that $5.5 million to $6 million in Channel One -- Imean, the chances that that could go a bit lower you think in ’09, just ifthings play out the way you expect? Or do you think there is some likelihood thatthat would continue at that pace for Channel One?

Matthew C. Diamond

The real question ends up being -- to answer that question,it really ends up being driven by the direction we take with Channel One. As wegrow it and expect to grow it and evolve it, we have a project internally wecall Channel One 2.0, which is looking at lots of different options to workwith the schools.

As the business grows, generates more EBITDA, clearly we’llhave some options and invest some of that in CapEx. Depending on that growthand how aggressive that is, we can make some of those decisions.

Joseph D. Frehe

I think that’s fair to say. It’s really driven by ChannelOne. I don’t think there is anything in the core business that would causeCapEx to be over the couple million bucks a year that it has been historically,so it’s really all about Channel One in terms of the CapEx story and we don’treally know enough or have anything specifically on the table at this point toreally speak to that.

Robert Moses

But it would be discretionary and to some extent, if you areseeing say the business rather than a $20 million revenue run-rate kind ofgetting to $30 million or -- I’m just making these numbers up, but some levelto do that based on what you are seeing in demand. In theory, you could mayberamp up CapEx to fund some projects?

Matthew C. Diamond

That’s right. That’s right.

Robert Moses

Okay, so do you have the depreciation and amortization forwhat you are expecting for ’07 and just a guess at ’08 in front of you?

Joseph D. Frehe

Unfortunately I do not have that with me.

Robert Moses

Okay, I’ll follow-up with you on that. Just lastly then,should we think maybe of the promotions business and kind of the pre-bookingthat you are having in ’08, perhaps some of the weakness you are seeing in ’07is just kind of more of a timing and kind of a lot of the money that’searmarked perhaps for that just kind of going into ’08 or is it not really atiming, there’s just kind of weakness that you are seeing in the second half ofthe year?

Matthew C. Diamond

It’s sort of all of the above. It’s not necessarily weaknessand it’s not all related to timing though. That business is just cyclical andit does ebb and flow and it’s just lumpy. So what’s happened is if you look atit this year, it’s been lumpy and down but as we look at the projects thatwe’ve been contracted for towards next year, it’s much higher, as it was a yearago. So it’s just a lumpy business.

We control costs I think pretty well within it as those lumpsgo up and down but that’s really the drivers. So yes, some of it is definitelytiming. I wouldn’t go so far as to say weakness because it’s one or two bigaccounts that you just don’t have aren’t necessarily weakness. They just didn’tspend as much.

It’s very driven by product launches and new initiatives, soas a big client does less with new initiatives, you get less money.

Robert Moses

Just lastly, maybe just -- I don’t know if you canfinancially quantify the investments. I know the database, the interactive sidethere’s been -- I guess even kind of out of home as well, there’s been somediscrete investments. I think you’ve broken out maybe in the past of severalhundred thousand, maybe $1 million. Do you have a sense of what was spent in’07 on new platforms and programs that will bear fruit and revenue in ’08?

Matthew C. Diamond

I would say between about $1 million and $2 million, and youcan see some of that on our cash flow statement. For example, about a $1million acquisition associated with names is a good example.

One of the things we’ve said about our business that doesgive us encouragement is at the beginning of the year when we said we needed toinvest internally and we said it was going to be a challenging year from anEBITDA perspective because of some of the decisions, we were saying that thesewere pretty quick returns and they weren’t $5 million to $10 million. They wererelatively low amounts.

We believe that’s happened. We believe we’ve invested inwhat we needed to invest in those key areas and I think we’re getting some ofthat return pretty rapidly and you’ll see it next year. So I would say $1million to $2 million and yes, you are going to see that return in those keyareas, particularly interactive database and then obviously Channel One nextyear.

Robert Moses

Okay. Thanks very much.

Operator

(Operator Instructions) Your next question comes from theline of John [inaudible].

Unidentified Analyst

Can you hear me?

Matthew C. Diamond

Yes, we hear you fine.

Unidentified Analyst

I missed -- when you were going through your reasons foryour better expectations for fiscal 2009, I didn’t get the third point aboutacquisitions. Can you redo that?

Matthew C. Diamond

Yes. What I said -- I’ll try to read it again withoutbreaking up as much. As we previously stated, we made several data acquisitionsfor our database group in 2007 and revenue and EBITDA will start to begenerated on these acquisitions in fiscal 2008.

We acquired numerous -- we did some partnerships andacquired names associated with our data group, where we partner with everythingfrom colleges to other lead generation opportunities, so that’s a business thatthe more names you have frankly the more revenue you generate. So we made somekey investments that not only got us a larger, to generate more revenue but italso moves us up the totem pole with clients. We become a more important datasource and you get a premium both in names but as well as just total and they[deduct] them when they match them up with other name sources. You get thebenefit of that.

Unidentified Analyst

Okay, and on your promotions business looking forward, isthat coming from any particular industry or segment of the advertising world?

Matthew C. Diamond

I’m sorry, could you say that again?

Unidentified Analyst

On your promotions business, looking out to the future, Iknow you’ve booked 83% of this year’s business. Do you see any trends wherethat -- any particular industry groups or is it all apparel, is it make-up, isit music? Can you -- do you see any trends there?

Matthew C. Diamond

Really where we’ve been traditionally strong in our existingclients that have just stepped up for bigger programs for next year, so we’vebeen traditionally strong in some key categories like wireless and footwear andthose are the key categories that have just stepped up.

So I wouldn’t go so far as to say some major trend in onehuge area. It’s really just been our traditional strength has stepped up and islooking for bigger programs next year.

Unidentified Analyst

Okay. Great quarter. Thanks.

Operator

Your next question comes from the line of Dan [Fielding].

Dan Fielding

Most of my questions have been answered. I just have one.Can you give me a little more detail on the gain you showed from acquisitions?

Joseph D. Frehe

The gain we booked related to Channel One? Sure. When weacquired Channel One, if you look back at the history, we received cash andworking capital from Primedia and we had an initial estimate for what our liabilitieswere -- some exit costs, some employment agreements, some operating expenses.And as we went through the last six months and evaluated which accruals wereneeded and are necessary, we just trued that up. So that’s how we arrived atthe $5.5 million this quarter.

Dan Fielding

So there is going to be some line item on the balance sheetthat is going to come down, some --

Joseph D. Frehe

Right. Accrued expense. Accrued other expense came down.

Dan Fielding

Okay, I gotcha. All right. Thank you.

Matthew C. Diamond

Thank you all for joining us for this call. I apologize formy voice but we look forward to our Q4 call and a much stronger 2008. Thankyou.

Operator

This concludes today’s conference call. You may nowdisconnect.

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