Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Marvel Entertainment Q4 2005 Earnings Conference Call Transcript (MVL)

February 23, 2006

Executives

F. Peter Cuneo, Vice Chairman

Avi Arad, Chairman & CEO, Marvel Studios

Kenneth West, EVP and CFO

Analysts

Glen Reid, Bear Stearns

Robert Routh, Jefferies & Company

Mike Savner, Banc of America

Barton Crockett, JP Morgan Securities

Alan Gould, Natexis Bleichroder Inc.

Lowell Singer, SG Cowen Securities Corporation

Gordon Hodge, Thomas Weisel Partners

David Kestenbaum, Morgan Joseph

Tony Chicas, Piper Jaffrey

F. Peter Cuneo Vice-Chairman.

Thank you very much operator and good morning everyone. With us today we have from California Avi Arad, our CEO of Marvel studios and of course a member of the Marvel board, with us in NY we have Ken West who is our Chief Financial Officer and John Turitzen who is EVP and our general counsel. We’re going to start today by reading our safe harbor statement. We’ll then have a couple of prepared comments from Ken West and then we’ll immediately go to Q&A.

Some of the statements that the company will make on this conference call, such as statements of the company’s plans, expectations and financial guidance are forward looking. Our forward looking statements reflect the company’s good faith beliefs, they are not guarantees of future performance and involve risks and uncertainties and the company’s actual results could differ materially from those discussed on this phone call. Some of these risks and uncertainties are discussed in today’s press announcement and the company’s filings with the SEC, including the company’s reports on form 8K, 10K and 10Q. Marvel assumes no obligation to publicly update or revise any forward-looking statements.

Thank you very much. Ken West has some comments.

Ken West, EVP and CFO.

Thank you Peter and good morning. I will first focus on brief remarks about our results for Q4 and full year 2005 then close with an update of our financial guidance for 2006.

Our independent auditors are in the process of completing their audit of the company’s 2005 consolidated annual financial statement and their evaluation of the design and effectiveness of the company’s internal controls pursuant to section 404 of the Sarbanes-Oxley act. The independent auditors report will be included in the company’s form 10K which we expect to file within the next 2 weeks.

Now for a review of our Q4 and full year 2005 operating income results, which are in line with the company’s internal budget and reflect the impact of a previously disclosed one time cash charge related to the early termination of our master toy license with ToyBiz worldwide. This one-time pretax charge, the estimated range of which was disclosed on January 9th, amounted to $12.5 million in the 4th quarter or the equivalent of $.07 per diluted share after tax. For the full year 2005, total net sales were $391 million, down from $514 million in 2004 and principally reflect the anticipated shift to more licensing related toy revenue in 2005 from the direct sales of Spider Man action figures and accessories.

Consolidated operating margins were approximately 44% for both 2005 and 2004.

Now for a few divisional highlights for Q4.

Reflecting the $50 million video game extension with ActiVision, licensing segment net sales increased 44% year over year to $81.7 million. The revenue from the ActiVision extension more than offset the year over year decline in contributions from the Spiderman merchandising LP. Full year international sales amounted to $36.5 million, which were actually ahead of our forecast of $35 million for the year.

Licensing division operating margins in dispute for 2005 period, improved to 68% compared to 61% in the prior year period, principally related to the volume of license revenues and the provision for certain legal costs in Q4 2004.

Net sales for the publishing segment increased 6% from the prior year period, primarily due to higher advertising revenue. Operating income for the Q4 2000 period and Q4 2005 period was $8.6 million for an operating margin of 37% compared to an operating margin of 53% in the 2004 fourth quarter, which reflected one time benefits of %2.4 million.

As we have mentioned throughout 2005, the toy segment transition from Marvel-produced and direct-sold action figures and accessories for the Spiderman movie, the lines produced by our master toy licensee, lead to the expected decline in toy segment revenue of 45% to $12 million during Q4. Q4 2005 licensed Fantastic Four toy sales were approximately $2.8 million at wholesale and full year sales for this line were approximately $69 million.

As I noted earlier, toy segment operating results also include the $12.5 million one time charge associated with the early termination of the license agreement with ToyBiz Worldwide as we are taking these toy lines in house for fiscal 2006.

I will now turn to our balance sheet, free cash flow and purchase activity during the fourth quarter and year to date.

Subsequent to Marvel’s recent $250 million share repurchase authorization announced on November 9, 2005 and through year end 2005, Marvel has already repurchased 6.9 million shares of common stock for an aggregate cost of $113 million. Combining these purchases with those associated with the balance of last year’s $250 million share repurchase authorization, total 2005 share repurchases aggregated $304.5 million or 16.2 million shares repurchased.

Giving effect to these purchases, we closed 2005 with cash and short term investments of approximately $48 million. Share repurchases have been funded by available cash and free cash flow. As we have often stated, given the relatively modest capital needs of our licensing-oriented business, Marvel’s board of director viewed the repurchase of common stock using the company’s excess cash, ongoing free cash flow and borrowing capacity, as providing the greatest potential long term benefit to our share holders. The board remains firmly committed to repurchasing shares in the open market, pursuant to our outstanding authorization.

Now for our financial guidance for 2006.

Our updated 2006 guidance for revenue is in the range of $320-$350 million or a $50 million increase from the prior forecast range, reflecting our decision to take the Marvel action figures and accessories line in house this year when we will now record the revenue associated with each product sale. This compares to our prior operation under the master toy license where we would record only the royalty income associated with these toy lines.

The guidance range for 2006 net income remains unchanged at the range of $38-$59 million. Full year guidance for earnings per share, reflecting the benefit of share repurchases to date, but before any benefit from future share repurchases, if any, is now in the range of $.44-$.55, increased from the previous range of $.37-$.52.

Key factors contributing to our 2006 outlook include the following:

The benefit from share repurchase activity to date, net of any interest expense or . However, our guidance does not include any expected benefit from future stock repurchases. Now the contribution anticipated from the S3 feature film slated for release during the year; substantial merchandise license generation will take place in 2006, associated with the Spiderman 3 theatrical release but such revenues will not be recognized into income until 2007. Accordingly, there will be no expected contributions from the Spiderman join venture in 2006, vs. a contribution of approximately $25 million in 2005.

Studio license revenues of $10-$13 million are anticipated in ’06, down from $24 million in ’05 as well as up to $5 million in incremental expenses related to the expansion of our Marvel studio operation. Additionally, approximately $16 million or approximately $.11 per share net of tax in interest and other non-cash amortization related to Marvel’s film slate credit facility, vs. charges of $4 million in 2005.

Additionally, non-cash option expense of approximately $5 million required under our new accounting principle and international licensing revenues in excess of $30 million as we anniversary our early agreement and focus more on new larger opportunities that are less predictable, involve longer lead times, and are often in new product categories and new territories plus continuing modest improvement in publishing sales and operating income.

As we have previously indicated, despite the reduced expected revenue in net income in 2006, we do expect a very strong performance with the generation of substantial free cash flow. This performance in a period of reduced revenue and net income is largely the result of expected collection of minimum annual license guarantees from agreements signed 1-2 years earlier as well as from the $100 million non-refundable advance received in the first quarter of 2006, pursuant to our master toy license agreement with Hasbro.

Let me now turn the call back over to Peter, to commence our Q&A period.

F. Peter Cuneo.

Thanks very much Ken. Can we have the first question please operator?

Question-and-Answer Session

Operator:

The first question comes from Michael Savner, Bank of America.

Michael Savner.

Hi, good morning. A few questions if that’s okay. First, can you give us a little more granularity on the guidance revision? Obviously you’re bringing up revenue guidance, diluting net income. In terms of why the margins are going to be lower in ’06 I assume that has to do with the shift on the toy side and maybe some more clarity would be helpful. Second, a little bit more detail on your share repurchase plans. Kind of the optimal balance. Obviously the cash position’s much lower than it was in the beginning of ’05 and you’re near the end of the authorization; so are you implying that you’d maybe bring on some debt to buy back some shares? And then lastly, SG&A, a relatively large spike in SG&A vs. last year, especially in the 4th quarter. Maybe just talk about what was going on in the SG&A line in ’05. Thanks very much.

F. Peter Cuneo.

Okay. Why don’t we start…Ken will comment on the guidance, particularly with the change in revenue due to the change in how we’re handling toys for 2006, which is a transition period. And Ken can also talk a little bit more about the share repurchase.

Ken West.

Absolutely. With respect to the guidance for 2006; as you know and we just discussed the fact that we’re taking the master toy license which was terminated and all the production related activities and direct sales in-house for the year. And as a result, of course, we have the implied impact of increased revenue, the contribution of which has an offsetting impact. Certainly there’s a higher margin of direct sales and there are also incremental costs associated with advertising and promoting and carrying these inventory levels and all those are mixed together, as a result generating down to approximately the same level of anticipated net income.

As far as our treasury stock activity. As we’re already stated, we have been very active in the market. We have an open, authorized amount to acquire and we will continue to monitor opportunistic buys of the future until this program is complete and that will continue to use available cash resources including the potential of available debt to the extent necessary.

Michael Savner.

With regard to the SG&A in the 4th quarter, can you comment on that as well? The increase in SG&A in the 4th quarter?

Ken West, EVP and CFO.

Yes, one of the elements of the SG&A, in addition to certain legal costs that were accrued into the period relating to ramping up for our Marvel studios operations. That would be principally the most significant component.

Michael Savner.

And the rest of the year increase in SG&A? Because SG&A is growing a lot faster than…well, obviously revenues are down but I mean, throughout the first 9 months of the year, SG&A was up as well, though.

Ken West.

Do you mean, are there new investments…?

F. Peter Cuneo.

SG&A is up also because we’ve been growing the staff. Particularly in California at Marvel Studios and in our international offices, principally in Tokyo and in London. So there is some additional overhead associated with upgrading and adding to those staffs, as our business expands.

Michael Savner.

Great, that’s helpful. Thank you.

Operator:

The next question is from the line of Barton Crocket, JP Morgan.

Barton Crockett.

Hi, actually Barton Crocket and thank you. I wanted to ask you a couple of questions here. First, on the from operations guidance, you guys said on your 3rd quarter earnings call November 9th, $70 million is what you saw for cash from operations in ’06. Since then, you’ve announced Hasbro is going to give you $100 million, so you’ve only raised the guidance on this new version to $100 million. I was wondering if previously you’d included Hasbro but it wasn’t fully articulated or whether the contribution from other things like Hasbro has come down, vs. what you saw before? And secondly, I was wondering if you would just tell us how much is left on the share repurchase authorization as of February 22? And also just given that you’ve spent more in share repurchase in the first quarter through then than you have on the balance sheet Hasbro coming through, what’s the cash balance that we have as of the 22nd? And then I guess a final question, any color on Curious George toy sales and an explanation of why you think came in slightly below your reduced guidance range for the year? Thanks.

F. Peter Cuneo.

There were a number of questions, let me take a few of those that I can recall and then we’ll address the remainder. As far as what’s remaining to be authorized under our stock buy back, there’s approximately 55 million left to be acquired. Our current available cash is approximating about $60 million and as far as our free cash flow anticipated for 2006, there has been a change in our guidance and that has many components. As you noted, we do have the Hasbro advance, which we disclosed of $100 million, there are cash taxes associated with the collection of that, there’s also script development costs that we’re anticipating to outlay, associated with our studio operations and the toy shift, the actual acquisition of inventories that were not originally anticipated and the costs associated with running the toys.

I’d also like to mention that we are at present debt free with regard to our HSBC line of credit. We do have a small amount of outstanding debt against the credit facility we have for our film slate. But with regard to the HSBC credit facility, we have at this point no balance.

With regard to Curious George, we are very pleased with the start of Curious George. Sales are meeting our expectations. Curious George is a program for us that we think has more activity associated with it in the back half of the year, particularly in line with the launch on public television throughout the United States of the Curious George animated series for children and of course the holiday season, which follows shortly thereafter. So we’re at this point quite pleased with Curious George and we’ll just have to see how it goes.

Ken West.

What was your question on Fantastic Four, Barton?

Barton Crockett.

I was asking for some color on why that came in below your slightly reduced guidance for $70-$75 million this year.

F. Peter Cuneo.

Quite frankly, we had some manufacturing disruption, to be candid, with our old toy licensee, ToyBiz Worldwide. We probably would have made very close to our original forecast, which we gave you over a year ago of $80 million, had that not occurred.

Barton Crockett.

Okay, great. And then just to be clear, have you already collected the Hasbro cash? And what was it that you collected, net of tax?

F. Peter Cuneo.

We actually did collect the advance, it was $100 million, the tax outlay will be required approximately May 15, so has not been disbursed, but we have the full advance that was required pursuant to that contract.

Barton Crockett.

And so the tax advance, some estimate of how much that might be?

F. Peter Cuneo.

Probably in the range of $35-$40 million

Barton Crockett

Okay, great. Thank you.

Operator:

The next question is from the line of Robert Routh, Jeffries.

Robert Routh.

Yeah, good morning guys. Just one quick question regarding the buy back. You’re now at $55 million but you’ve yet to cap any debt in order to continue increasing share repurchases, you did mention on the last call that $125 million could be used off of credit facility. I’m wondering does the board at this point in time have any intention of re-upping that buy back once this one is extinguished, or is this kind of it at this point in time?

F. Peter Cuneo.

Well as Ken indicated earlier, the board is certainly very interested in continuing to buy back our stock. We would do this of course at opportunistic prices. It is not a complete open program and so the board is constantly evaluating where we are on the stock buy back vis-à-vis the prices and the financial condition of the company. So this is always on the board’s priority list and gets constant attention, but I don’t think there’s anything that we can tell you specifically today.

Robert Routh.

Okay, great. And just one follow up. I noticed that you guys got back the rights to the Hulk. I’m wondering if you can comment a little bit about that and what your intentions are related to that and I know it’s quite early to say, but given that you’ve pushed just about everything out into ’07, yet you’ve increased guidance for ’06, I’m wondering if you can give us any sense even rough, general picture, as to how you may see 2007 starting to shape up. Because it seems as though investors at this point should be looking out to ’07 rather than ’06.

F. Peter Cuneo.

Why don’t we start with the Hulk question and Avi Arad will answer that.

Avi Arad.

Good morning. Hulk was, as we all know, was a universal project and has been in development for quite a while. Like all our movies, all our contracts, movies have to meet specific release dates. And if principal photography does not reach a certain date, then we get our properties back. Same thing as with New Line. So as time and development was taking its course, we entered into discussions with Universal. There was a realization that it would be quite difficult to make this principal photography date, and gave Marvel an opportunity to recoup our rights. In return, Universal will be the distributor for Hulk, but we’ll do it on our terms, which will give us all rights, all licensing, all revenues; an advantageous position on one of our prime properties. We are very aggressive in development on Hulk and actually it’s the same situation with Ironman, that we got back to New Line. Again, they couldn’t make the principal photography date and gave us an opportunity to recoup and regroup and this is also in development.

F. Peter Cuneo.

Thanks, Avi. With regard to guidance in ’07, Rob, as you know we don’t typically issue specific guidance until the third quarter of the previous year. So we don’t have anything specific at this point. However, I think you can see that we have 3 major motion pictures coming out next year we have Spiderman 3, and the licensing effort on Spiderman 3 is under way as we speak and seems to be going well. We have Ghost Rider, which was postponed by SONY from this year into early 2007. We have, we think, a very fun toy line along with Ghost Rider and that’s certainly a merchandisable film. And of course Fantastic Four 2 with Fox, which I think bears well; comments on the fact that I think Fox who have was very successful and they’re very quickly proceeding with a very high quality sequel that also would be a toyatic film that’s highly merchandisable. So we have three very big events right now, schedule for 2007. we also have some of our programs starting to mature, like our direct to video program, Avengers 1, was just released a couple of days ago and seems to be going very well. It’s a little early to make a final judgment, but we’re pleased with the start on Avengers 1. And so there is a lot of forward momentum for 2007. As far as the specific numbers are concerned though, it probably won’t be for another 9 months before we’ll give specific guidance.

Robert Routh.

Great. Thank you very much.

Operator:

The next question is from the line of Gordon Hodge, Thomas Weisel and Partners.

Gordon Hodge.

Good morning. Just a couple of question. One I was just curious on taking back the toy manufacturing business from ToyBiz, I’m just wondering logistically how that is going in terms of have you got a manufacturer all lined up and is the transition complete? And also in your studio guidance for ’06, I’m curious do you include or anticipate a Spiderman 3 advance of any kind this year, or would that all fall in ’07? And also on the video game side, which I assume is also included in the studio line; do you have to make up the full $50 million in terms of to get to overages; in which case we wouldn’t anticipate some video game revenue in 2006? Thanks.

F. Peter Cuneo.

Gordon, let’s talk about first of all the payments from SONY on Spiderman 3 in ’06, yes we expect an additional $5 million payment which coincides with the start of principal photography. As you know, we get 2 payments from SONY with regard to Spiderman film. The first is $5 million when they pick up their option for a sequel and the second is another $5 million when principal photography starts.

Gordon Hodge.

Okay, great.

F. Peter Cuneo.

Your other question with regard to the $50 million payment on ActiVision…the $50 million payment on ActiVision was actually an extension of a current deal. So it has no impact on overages from that deal. And we do expect overages from ActiVision in 2006 and 2007 and beyond. That particular payment was to extend that agreement out another, I forget, 4-5 years and has nothing to do with our overage payments.

Gordon Hodge.

Okay, so you’ll see overages you won’t have to then…it’s just in a few years you might, the $50 million applies to a couple of years out.

F. Peter Cuneo.

That’s correct.

Gordon Hodge.

And just on the logistics of manufacturing the toys and so forth?

F. Peter Cuneo.

Yes, I think that’s going very smoothly. The company felt that it would be more difficult from a logistical standpoint to make a transition from one master toy licensee to another. This has to do with moving inventory, moving tooling and it became very clear to us that it would be a little simpler, actually, would grease the skins a little bit easier, if you will, if we took over the business for what we think will be roughly 9-12 months. And that’s the reason we made that decision. We certainly are not planning to stay in the toy business in any great way in the future.

Gordon Hodge.

I guess the question is just, who is manufacturing the toys for you? Did you…

F. Peter Cuneo.

We have many traditional toy manufacturers that Marvel has used for many, many years. And we continue to also get quotes from new places. I think that is, it’s a concern but not a major concern.

Gordon Hodge.

Perfect. Thank you.

Operator:

The next question is from the line of Glen Reid, Bear Stearns.

Glen Reid.

Hi, thanks. Three quick questions. On your publishing business, I wonder if you could kind of give us an update on how that’s going relative to your expectations. I guess sales were up 6% in the quarter and after the 7-11 arrangement, I wonder if you could give us an idea of how that’s going. Another question, can you give us an idea, what are the restrictions that are still in place on insider sales relative to the buy back program? And then finally, I know you said it was a little early, but maybe you could give us some sense on your expectations for the direct to DVD initiatives on the Avengers.

F. Peter Cuneo.

Okay, with regard to publishing, we’re very pleased with 2005. Again, we had good growth overall. Our profit margins continue to be very, very good up in to the high 38% last year. And I’ve often said I think we may have the most profitable print publishing business in the world, although I can’t prove it. We had very good growth in just about all areas, but this was certainly led by the growth in mass merchants and in the bulk business, which is our new distribution. 7-11 is going well. We’re very pleased with how that looks to date. We’ll continue to monitor that in 2006. From a product standpoint, the biggest growth area was in what we call graphic novels or trade paperbacks. We think that the growth will continue in double digits, double digit growth for that category in 2006.

We, as you know, have signed a number of very exciting writers and artists and of course we now have an involvement with a number of well-known people in the comic book business and we’re very pleased with how that seems to be going. For 2006, again, we’re expecting overall modest growth but lead by the same categories that lead us in 2005.

With regard to insider restrictions, the only individual that is restricted at this point is Ike Perlmutter. And then finally with regard to the direct to DVD business, we think we’re off to a very good start. I know that yesterday looking at Amazon that Avengers was either #8 or #9 on the top selling list. You look at the top 20 on Amazon, basically all but 2 of the properties are theatrical release DVD’s. The two exceptions are Avengers and of course, the Lost television show. So we’re extremely excited about how well we’ve started. We’ll see how sell-through is. The product is just hitting stores now. We have a very wide estimate that we’ll do somewhere between 600,000 and 1,000,000 units, but again it’s a wide estimate because we’re really just at the start of that program. The reviews have been very good from a quality standpoint and we’re extremely pleased with how it started and we’ll have more information 3 months from now. As we go on, we have 2 more releases scheduled for this year: Ultimate Avengers 2 will be the next release, followed by Ironman.

Glen Reid.

And could you just remind us again, the economics of these direct to DVD deals? Like the splits with Lions gate?

F. Peter Cuneo.

Essentially the way this has worked, our deal with Lion’s Gate works is that Lion’s Gate has funded the entire process, not only the production costs but also the promotional costs. Lion’s Gate is going to spend multi-million dollars promoting the launch of this particular product. We basically though developed the creative all in-house at Marvel’s location in Los Angeles. We have an agreement in which Lion’s Gate gets a distribution fee and recovers their costs for of course production and the creative costs in promotion and then we have a split on the remaining profits.

Typically we don’t describe what the exact splits are, but I would characterize it as very lucrative for Marvel.

Glen Reid.

Okay, thanks a lot.

Operator:

The next question is from the line of Alan Gould, Natexis Bleichroder Inc.

Alan Gould.

Thank you. Question for either Peter or Avi. The Hulk and Ironman, if Universal and New Line are distributing it, does that mean you guys are going to fund the production costs of these films? Any idea what that potential exposure could be? Any way to put that in the film partnership, given Paramount’s not distributing it?

Avi Arad.

Well, Hulk will be distributed by Universal, based on our agreement with them and when the time comes, we’ll decide how we want to fund the Hulk. Ironman is not going to be distributed by New line. It’s up to us where we want to place it. It could end up in Paramount; it could end up somewhere else. Again, we will at the appropriate time…we are developing the project ourselves under the Marvel banner and when it comes to stopping production, we will make a decision if we want to use either the fund or alternate financing for these marquee properties and we comfortable that we’ll find the funding to put it forth.

F. Peter Cuneo.

It’s very unlikely that Marvel would fund either of these two projects directly. These projects will either go into our slate or there will be some other alternative form of financing.

Alan Gould.

Okay, thank you.

F. Peter Cuneo.

Before we go off this, I hope that we have made it clear – maybe we haven’t – how thrilled we are to get both of these properties back. These are two of our top 7 or 8 properties today in the sense of economic value and we are very pleased to have them back and to be in control of these theatrical releases.

Operator:

Our next question is from the line of Tony Chicas, Piper Jaffrey.

Tony Chicas.

Good morning guys. A few questions for you here. Could you quantify for us the expected sales up tick or change related to the Hasbro arrangement beginning in 2007? Maybe just a little color there and are there any provisions in that agreement that Hasbro’s going to exploit some IP at your request or at your benefit? A couple of little housekeeping things, maybe a share count update for 2006 and a tax rate we should be using for the full year and then I have one follow up.

F. Peter Cuneo.

Why don’t we go to Hasbro and why don’t we start with the share count for 2006 and the tax rate?

Ken West.

The effective tax rate we’ve built into our modeling for 2006 approximates 37-37.5%, the weighted average shares that we’re also projecting is approximately 87 million. Also, I just want to point out that in my remarks I indicated that the guidance range for 2006 net income remains unchanged, but I mistakenly said it to be 38-59, its 38-53 million, as reflected in our press release from this morning. I just want to clarify.

F. Peter Cuneo.

With regard to Hasbro, we should talk a little bit about the broad aspects of our arrangement. For example, the royalty rates associated with the Hasbro deal are lower than what we had with ToyBiz Worldwide. However, there are two other major factors that in evaluating who our new partner would be that convinced Marvel that the Hasbro deal would be at least as good if not a better deal. The first is the overall worldwide clout that Hasbro has. ToyBiz dealt exclusively with distributors internationally, so of course ToyBiz worldwide and Marvel, therefore, lost a piece of the action in the sense of using 2-step distribution. In the case of Hasbro of course, they still will use some 2-step distribution, but it’s very small on a worldwide basis. So that will alone increase the sales. Also Hasbro has committed to certain minimum promotional levels, with regard to advertising, etc. on our products, which we did not have with ToyBiz Worldwide. So we think the combination of Hasbro’s tremendous clout internationally and of course in the US, along with increased advertising levels, is going to produce volumes that are substantially higher than we had with ToyBiz Worldwide and we think although the royalty rates are lower that we should on a net basis, in terms of royalties for Marvel, be at least in the same area as with ToyBiz worldwide, but probably better.

Tony Chicas.

Okay. How about on 2006…could you provide some visibility on the sales mix guidance for the year? And how are license signings trending on Spiderman relative to the previous movie? Are they winding up earlier this time around?

F. Peter Cuneo.

When we look at 2006 and by the way we really view 2006 as a transitional year, as our business model is changing. Our business model is changing in a couple of dramatic ways of which you’re aware, the first being the motion picture slate, but also we’re in a number of other new media categories, like direct to video. The biggest single factor in 2006 is a decline in licensing. We don’t share internal projections, our projections for the toy category and for publishing show increases over the prior year, but the big differences does fall into licensing. And let me give you a few of the dynamics associated with why the revenues in ’06 will be substantially below ’05 for licensing. The first is as Ken previously mentioned, we recorded about $25 million from the Spiderman 2 film, through that joint venture in ’05. We’re projecting $0 in ’06, as we are well past the film now. Studio, our revenue was about $20 million in ’05, and approximately, I’m giving you round figures here, $10 million in ’06. And that is simply again how the timing of certain projects fall. There’s nothing more to be read into that. We did do a lot of renewals in our consolidation program and so on, in 2004 and 2005 and for that reason, we do not expect to see as much in the way of licensing overages in ’06 as we did in ’05 and that’s an additional decline. We expect those overages to rebound in ’07. Also we do not have a highly merchandisable movie in 2006. We have X-men, which as you know, is a very valuable franchise, but isn’t necessary a dynamo when it comes to selling toys and licensing. So that is also a factor, because Fantastic Four, which we had in ’05, was highly successful for us. Also, we had the ActiVision of $50 million in revenue recorded in ’05 and we simply can’t forecast another deal that large. That was the single largest deal we’ve ever had that we have booked immediately. The Hasbro $100 million has actually not been booked into revenue, but is in deferred income. So, it’s very difficult for us to forecast matching the ActiVision deal with another deal of some sort in ’06. So that’s a further decline. Also, as we start to pick up and this is to your second question, licensing on Spiderman 3, that does create a vacuum in ’06 for other licensing because our staff is so involved in getting ready for Spiderman 3. And the response to Spiderman 3 has been excellent and we certainly expect at this point that the minimum guarantees for Spiderman 3 will exceed Spiderman 3, perhaps substantially. Just to give you a sense of that, Spiderman 2, the minimum guarantees were around $30 million and overall royalty payments ended up very close to $100 million. So on Spiderman 3, we expect the minimums to exceed $30 million substantially and we hope that ultimately royalties will do the same, although it’s really obviously way too early to know.

Tony Chicas.

Thank you.

Operator:

Our next question is from the line of Lowell Singer, Cowen and Company.

Lowell Singer.

Thanks, good morning. A couple of questions. Peter, could you talk about what goes into the Hasbro deal? Which toy lines go in and which ones don’t go in? And Avi, I want to ask a couple of questions on the studio. First, where are you on your staffing levels? Do you have all the people in place that you want or are there still additional hires you need to make? And as you look out to 2008, which is clearly…the slate is relatively undefined at this point, can you give us some commentary on the three projects that I guess are in the lead for your first film? And when in 2008 you would expect to release the first film under the Paramount deal? Thanks.

F. Peter Cuneo.

Avi, why don’t you start?

Avi Arad.

Okay. We hope to have; we need to have our first release in 2008. As I said before, we’re in active development on Hulk, Ironman, , Nick Fury, actually on four. When you start doing development like that, it’s like a horse race. You put them all in the gate, you start working on scripts, you start talking to directors, and then the horse that comes out first is going to be the 2008. But we have enough material and we are moving fast enough to probably be there. Which one is the first one we’ll be out with? I cannot tell you today, that’s really hard to predict because, as you know, we just started the process. We have writers that avow to get going. For the timetable, we’re in February ’06 and we feel pretty comfortable about it. As far as staffing, we added a couple of people. We added Michael Helfand, who is President and COO for the studio, and he added legal staff in order to become a producing studio, if you will. As the script comes in and we get into the pre-production process, that will be the time for us to get extra staffing. That probably wouldn’t happen until either later this year or the beginning of 2007. This staffing will consist of production accountant and physical production specialists that will help us with budgeting, with putting productions together.

Lowell Singer.

Are you thinking about a summer ’08 release for the first title?

Avi Arad.

We certainly hope so. We really hope for a summer release and again, it’s a good horse race to have at this point if you look at the schedule. There’s all properties that we think will make our first venture successful.

F. Peter Cuneo.

Okay, thank you Avi. The first question had to do with what toy lines Marvel will continue to do itself and the answer is all the lines we have that are not Marvel related, so this would include things such as Curious George, Lord of the Rings and so on.

Operator:

The next question comes from the line of David Kestenbaum, Morgan Joseph.

David Kestenbaum.

Could you give us a little on the on Ghost Rider? And also you said previously that you spent more on SG&A in Japan. Could you just talk about what the opportunity is there and some of the recent initiatives in that market? Thanks a lot.

Avi Arad.

Okay. Ghost Rider we finished principal photography, we are in post production it’s effectively a movie. It will be close to summer for final completion. If you look at the schedule for the summer starting obviously with our own it’s certainly going to be a juggernaut and Pirates and Superman and Miami Vice and so on and so forth, I think that 20 movies just in June or July, it became one of these incredible traffic jams and we feel we have a very strong movie. There is a great history for President’s weekend; it’s a four day weekend. Certainly we did very well in this weekend, opening a movie at $44 million in very, very bad weather. we feel that Ghost Rider was we did some audience testing and we made a collective decision, why go in the middle, why jeopardize a franchise and not make it the most relevant by going in the middle of the rush hour? So we moved it to February. Obviously, we’ll be alone, everybody will move away. They’re aware of the size of this movie and it’s the right decision all around. Even from a licensing perspective, sort of Evel Knievel meets sci fi, it lends itself to be a screen line and if you converse with Hollywood you’ll see they’re quite excited about it. It was a smart decision just to keep it from a date when everybody is not asking the question and losing business.

F. Peter Cuneo.

Thank you, Avi. With regard to your question regarding the Japanese opportunity, our office in Tokyo is actually a pan-Asian office. The one area in the world where marvel’s characters are far less known is, of course, in Asia. In some of the biggest markets such as China, and I think in China and I travel in China quite a bit, the only character that anyone knows is Spiderman. So the office in Tokyo is engaged in licensing and building up the business throughout Asia, but that will be a longer term procedure than we have say in Europe simply because the characters are far less known. And, we’re going to have to promote them in a steady, cogent way in future years. So there’s a lot less immediate business available in Asia than there is in other parts of the world. We are very pleased with the progress that we’re making at this point. You also know that for example, in china the way media is handled is quite different from other areas of the world. You read the paper every day about certain issues with regard to what the Chinese government wants to control and not control with regard to content. So, all of these things will retard immediate growth, but we certainly think we can be highly successful in those markets for the long term.

Operator:

The next question will be a follow up question from the line of Glen Reid, Bear Stearns.

Glen Reid.

Thanks. Just real quick on the share count. I think Ken you said 83 or 87 million was the forecasted share count for 2006. It looks like you finished or currently are at about 100 million, but you’d also said your EPS guidance does not assume further repurchases. So maybe you could just clarify that for us? Thanks.

Ken West.

Glen, number one I did mention approximately the 87 million weighted average shares, and that of course has implicit within it the potentially diluted securities of auctions that are outstanding and warrants. Number two, we also mentioned that we also know that the weighted average number of shares and the number of shares outstanding as of December 31, ’05 has been effected by the treasury shares that have been acquired since January 1, which was also disclosed.

Glen Reid.

So you ended the year with 105 or 106 and you purchased about 5 or 6 so far in the first quarter, so it puts you at about 100?

Ken West.

I’m sorry, say that again Glen?

Glen Reid.

So I think you ended the year with about 106 million shares and you’ve purchased year to date about 5 or 6…

Ken West.

The 106 million is not the proper answer. In fact, our EPS for the 4th quarter the weighted average number is about 100 million. Again, that includes the diluted securities using that treasury stock method required by GAAP. We will provide additional information in the filing of the 10K that will assist readers to understand better the anticipated weighted average shares, its impact on the treasury shares acquired in Q1.

Glen Reid.

Got you. Okay, thanks.

F. Peter Cuneo.

Thank you very much everyone. I appreciate you tuning in today and we look forward to talking to you again in the future. Thanks.

Operator:

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Marvel Entertainment Q4 2005 Earnings Conference Call Transcript (MVL)

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts