Playboy Enterprises, Inc. Q1 2008 Earnings Call Transcript

Playboy Enterprises, Inc. (PLA)

Q1 2008 Earnings Call

May 6, 2008 11:00 am ET

Executives

Christie Hefner – Chairman and Chief Executive Officer

Linda Havard – Chief Financial Officer and Executive Vice President, Finance and Operations

Robert Myers – Executive Vice President and President of Media

Alex Vaickus – Executive Vice President and President of Global Licensing

Martha Lindeman - Senior Vice President, Corporate Communications and Investor Relations

Analysts

David Liebowitz - Burnham Securities

David Miller - Sanders Morris Harris Group

David Bank – RBC Capital Markets

Presentation

Martha Lindeman

Good morning everyone and welcome to the first quarter 2008 conference call. If you need a copy of our press release and earnings supplement you can look on our web site at www.PEIinvestor.com or you can call Larissa at 312-373-2432.

Just as a reminder, during the call today, we will be making forward-looking statements pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act. These statements reflect our current beliefs and plans. They are not guaranteed and involve risks and uncertainties that could cause our actual results to differ materially from those discussed today.

We are under no obligation to update these statements. I refer you to the Safe Harbor language in today’s release, which describes some of the factors that could cause our results to differ materially from today’s discussion.

We will start today with our Chief Financial Officer, Linda Havard, who will be followed by Bob Myers, our President of Media and Alex Vaickus, our President of Licensing. And then we will end with our Chairman and CEO, Christie Hefner. With that I will turn you over to Linda.

Linda Havard

Good morning everyone. This year’s first quarter results reflected three major variances when compared to the 2007 first quarter: lower profits in the media business, restructuring and severance expenses that are related to improving our future profitability and the lack of revenues from the sale of artwork and positive cash adjustments in TV that we had last year.

While Bob is going to talk at length about the media businesses and what changes we are implementing, here’s a quick overview of the quarter. On the print side we’ve been working against difficult publishing industry trends for 3 years, during which time we’ve been able to reduce our costs by nearly $12 million. These efforts continue.

We lowered the rate base of Playboy Magazine effective with the January 2008 issue which contributed to the first quarter 2008 advertising revenue decline but which also helped to significantly lower printing, paper and mailing expense.

We’re continuously looking at a wide range of other cost control opportunities and our 2008 first quarter publishing results included approximately $500,000 for head count reduction and furtherance of those efforts.

In the Entertainment Group, although domestic TV revenues declined year-over-year, they were roughly in line with year end 2007 and with our expectations. A large positive cash adjustment and last year’s first quarter and a negative cash adjustment this past quarter contributed $2.6 million to the year-over-year negative domestic TV revenue variance.

In a fixed cost business like TV, as you’ve heard us say before, a high percentage of those incremental revenues fall to the bottom line and as a result TV profitability declined in the 2008 first quarter compared to last year’s first quarter.

In Online, the quarter’s reduced profitability compared to last year reflected a one-time inventory expense related to the outsourcing of our E-commerce business, together with investments we’re making in upgrading our web site and services that you’ll hear Bob talk about shortly.

These investments include technology infrastructure improvements that will allow us to more quickly store and search our digital archives, and increase the cost effective use of our content across multiple platforms.

The International TV business, which has a multi-year record of solid revenue growth, turned in another quarter of revenue gains. The improved first quarter results primarily reflected increased network sales in Europe.

Our International Licensing business also remains strong. First quarter of 2008 international consumer product revenues were up 10% compared to the same period a year ago, with particular strength in Asian and Latin American markets.

The opportunistic sale of artwork in the 2007 first quarter was responsible for the negative comparison with last year. As the earnings release describes, Licensing revenues would have increased 5% excluding the artwork sale.

Our operating results also included nearly $600,000 in restructuring charges primarily related to the outsourcing of our e-commerce business to eFashion Solutions, a deal which we closed in January. We do not expect additional charges related to this deal.

Shortly after the first quarter closed, we completed the sale of assets related to the Andrita television studio. We believe we have already recorded the majority of the costs associated with that transaction, although we could have a few hundred thousand dollars of additional expense in the second quarter. This expense would be reflected on the income statement below the segment income line.

As you work on your models for future quarters, please keep in mind the impact that each of these two transactions will have on revenues going forward. The sale of Andrita Studios will result in a loss of approximately $2 million in quarterly revenues for services we provided to third parties and had booked in domestic TV.

E-commerce revenues will be lower than last year by approximately $4 million each quarter as a result of the outsourcing deal. However, both transactions will contribute to improved profitability.

The E-commerce deal should be favorable immediately, and the Andrita transaction is expected to be cash-positive immediately and approximately breakeven on a P&L basis in 2008, but favorable in future years on a P&L basis.

First quarter 2008 corporate, administration, and promotion expense increased, largely due to higher stock-option expense compared to last year, when we had recorded a favorable forfeiture adjustment of nearly $500,000.

This quarter’s non-operating results also were unfavorably affected by approximately $450,000 in unrealized losses on forward foreign currency contracts, which will reverse in subsequent quarters this year.

Moving to the balance sheet, you’ll note on the investor’s supplement an approximately $18 million decrease in our March 31 cash position versus March 2007. $6 million of assets to fund our deferred compensation plans were reclassified from short-term to long-term in 2007.

Also, since March of 2007 we made our last large deferred Califa acquisition payment of $7 million. And we exercised early buy-out options on $6 million of equipment leases related to the Andrita facility in anticipation of the sale.

Since the Andrita transaction closed in early April, the $12 million purchase price payment will be reflected on the balance sheet in the second quarter.

With that as a backdrop, let me turn you over to Bob.

Robert Meyers

Thank you, Linda. The media industry is in the midst of dramatic change in the way consumers access and use content. We are adapting as well; streamlining some operations while investing in the growth of others. Clearly, there are numerous challenges, but there are also significant opportunities.

Let me start with our two mature businesses of Domestic Publishing and TV. The challenges in the domestic magazine business have been discussed at length in previous calls. We have seen no let-up in the negative circulation and advertising trends.

In fact, even the celebrity titles, which up until recently have been solid performers on the newsstand are seeing sales pressure and 3 of them have recently reduced their rate base.

Our goal is to build a structure for the publishing business that is in line with the harsh realities of today’s print media world. We know that Playboy Magazine has a unique connection to readers and has a rich source of content. Moreover, as the brand driver, the magazine plays an integral role in creating appeal for other products and platforms.

As Linda described, we continue to focus on reducing costs, including ways to lower manufacturing expense, cut overhead, and increase editorial efficiency. I do not want to leave you with the impression that we have abandoned the top line.

We are still active in our search for revenue opportunities, particularly on the advertising sales front. Although magazine ad pages are expected to decline modestly in the second quarter compared to prior year, we expect to record a solid improvement over first quarter 2008 ad pages.

We continue to deliver the message that Playboy is the largest men’s monthly magazine and one of the most efficient ways to reach a large male audience, and we are expanding existing accounts and breaking new ones.

By way of example, we’ve developed this year a strong partnership with Mazda, which includes a customized print ad campaign that you can see in the May issue and which will continue.

A large percentage of our proposals are designed and integrated online and print advertising campaigns and our Playboy.com site gives us an entree to expand publishing revenues as well as online.

Our core strategy is to combine Playboy in print and online to leverage the magazine’s assets and grow online into a very significant profit center.

Turning to domestic TV, on the revenue side we are particularly pleased with the improvements in our Playboy TV monthly subscription revenue across both cable and satellite. And we believe that this growth will continue, aided by improved marketing and increased distribution.

We also expect Video on Demand revenues to grow, benefiting from additional shelf space. Our video networks will remain challenged as their household reach continues to shrink and the cable operators focus their on demand platforms.

As Linda mentioned, we expected to see a decline in domestic TV revenues over the next four quarters due to the sale of the Andrita Studios assets last month and the resulting loss of third party revenues.

We are focused on ensuring that we have the appropriate cost structure and programming for all of our platforms, and we have identified additional opportunities to reduce overhead and other expenses.

Domestic TV remains a very profitable business, as well as an important source of content that we exploit across many of our media platforms.

Chief among these platforms are International TV as well as additional media of online and mobile. Over the years, these businesses have expanded on the shoulders of our existing programming through the addition of localized content to international markets and the creation of unique, original content designed especially for online and mobile.

This mix of content has resulted in our media properties reaching more consumers today than at any time in our history.

For traditional media companies digital has been a disruptive medium. It shares many of the same qualities as our other properties. Timely and easy to access like TV; portable like print, while adding a new dimension − interactivity. At the same time, it creates new competition for consumer retention and advertising dollars.

We have a profitable and successful online business and our goal is to build on this base to further expand our Playboy audience. To that end we are investing in a major revamp of our existing site including our technical infrastructure. While the full results won’t be evident until year-end, our focus over the past months has been on completely upgrading the Playboy.com site.

We will offer an even wider array of content, add new interactive community and user generated content features, and create stronger links to our other businesses.

To increase traffic, we are expanding our marketing and improving search engine optimization. And while the results of all these efforts won’t be fully apparent to consumers until late this year at the earliest, the investments will contribute to reduced profitability through the remainder of the year.

We are optimistic about the future potential of this business and I look forward to sharing our progress as the year continues.

In addition, we are also working with other web sites that can help us reach a larger audience. Last week we announced the creation of Playboy Audience Network, a suite of digital partnerships that includes YouTube, Breakmedia, Media Networks and other entertainment sites.

We believe that we can lend our brand authority to the interactive online experience, creating an online extension to our existing efforts to create more high touch connections to the brand, the success of which has been demonstrated by retail stores and entertainment venues.

Now, let me turn you over to Alex to talk more about those initiatives.

Alex Vaickus

Thanks Bob. Let me start by spending a few minutes on our core consumer products business. Overall we’re very pleased with the continued strong performance we’ve seen particularly in Asia and Latin America.

There’s no question that the weak U.S. economy has affected domestic sales and we’re even starting to see some softness in Europe, which has been a very strong market for us over the past few years. And that weakness is again due to weaker consumer spending in that region.

To help combat the softer retail environment, we’re focusing on maintaining our overall brand image and presence and supporting product sales with dedicated marketing initiatives.

Globally, we continue to fill in distribution gaps and develop new products for launch. In addition to traditional apparel and accessories lines, we’re expanding into new product areas.

Recently we announced a global deal with Codi for the development of a men’s fragrance line, which we expect to launch this fall. We’ve also recently launched our Playboy Energy Drink, which is now available in Boston, Miami and will be rolling out nationally and actually internationally this summer as well.

Given the continued strength of the Asian economies, we expect to open one or two new Playboy concept boutiques in that region this year. Beyond these, however, we’re unlikely to complete deals or encourage partners to open additional stores until we’re more comfortable that the retail environment is stabilized.

Turning to location-based entertainment venues, you may have read media stories about the weak economy affecting some Las Vegas properties. We’re happy to report that the Playboy venues at the Palms have not seen the effects of the slowdown to-date. And in fact we’ve enjoyed a strong quarter financially compared to last year.

You may also have heard media reports about attempts to reign in the pace of growth in Macao. In late April Macao authorities announced that they were halting the issue of new gaming licenses and freezing land allocations. This does not affect us.

Construction in Macao Studio City is progressing well. Our project is on track to open in late 2009, and we remain very excited about this initiative.

We’re also pursuing additional projects that meet our three general critical criteria: good location, good partner, and good deal. We expect to close and announce an additional deal this year.

Overall the outlook for the Licensing Group in 2008 remains very promising, despite our concerns about the economy both here and in Europe. We continue to believe that we can deliver high single-digit revenue and profit growth in 2008 versus last year, excluding our sales, and that we can further build upon that growth in the years to come.

And now I’ll turn it over to Christie.

Christie Hefner

Thank you, Alex. There’s no question that the first quarter was difficult. There were some unusual contributors including severance, restructuring, foreign exchange and negative cash adjustment in domestic TV.

But looking more at the underlying dynamics, like other companies we are affected by both the overall economy and by industry trends in specific sectors, including retail and print publishing.

Nevertheless we strongly believe we can and will deliver results that won’t just return the company to an appropriate level of profitability, but achieve profitability that is commensurate with our potential.

I’d like to review our strategies to help to align what our expectations are with how you look at the company. Taking the Mature Media businesses first, we remain focused on reducing the cost structures to a level that is appropriate to support the existing business models, while at the same time continuing to pursue new revenue opportunities.

What does that mean? That means in Direct TV we are looking, and believe that we can identify additional costs to take out of the business and are also pleased to see that adjusting for the negative cash adjustment in the first quarter, domestic TV revenues remain stable.

We are also pleased to see the growth in Playboy TV and the growth in International TV and expect to see continuations of those trends.

On the digital media side, including both online and mobile, here we are investing. We believe strongly that by upgrading both our infrastructure and the breadth of our content we have an opportunity to increase traffic and through that direct consumers to an array of purchase opportunities that will both grow revenues and profits for Online, but also create links that will help all of our other properties.

This is a key for the company’s growth and it’s important to remember that unlike many traditional media companies, this is a business that is already profitable and a business in which we have demonstrated our ability to generate revenues across multiple revenue streams.

On the Licensing side, we are looking to continue to expand our product lines and Alex spoke to you about several initiatives there. It’s also worth noting that in spite of a very weak retail environment, we’re seeing continued strength in the appeal of our products.

Similarly, in spite of a weak real estate development market in many locations, we are encouraged by the conversations we are having regarding other entertainment venues.

Meanwhile, we continue to cut and control costs across all of our businesses. For all of these reasons, in spite of these results, we remain very confident of our ability to generate profitable growth of the company leveraging the assets of the company.

When you think about what those assets are, you may want to focus on the fact that we have started to change the way we describe ourselves. For 50 plus years, we have been thought of as the media company, and there have been various iterations of that as we evolved from a domestic magazine publisher to a global multi-media entertainment company. But, fundamentally, we were defined by our media properties.

As we look at both the company today and where the business opportunities are tomorrow, we recognize that more than anything else we are a brand driven company. The Playboy brand is what creates the unique connection we have with consumers and gives us a vital competitive edge.

Most importantly, we believe it is the strength and appeal of the brand that will drive the company’s future success and we intend to leverage that both in immersive real world environments and in the virtual environment to increase shareholder value.

With that we are happy to open it up to questions.

Question-and-Answer Session

Operator

Our first question comes from David Bank – RBC Capital Markets.

David Bank – RBC Capital Markets

As usual a couple of questions here; I’ll go through them as quick as I can. The first one is Bob, could you give us a little more color in terms of what you saw in the first quarter for CPM growth and what you’re seeing in the second quarter as the page decline is decelerating, which looks like good news, I just want to see on the CPMs.

The second is could you give a little bit more clarity on where the charges were, the $1.1 million in restructuring and $0.4 million unrealized losses. We see the $0.6 million on the income statement related to the e-commerce stuff. I’m not sure where the others are.

Can you also tell us on the E-commerce revenue losses, from the restructuring, is there a seasonality to that, like not a huge number, but what’s the seasonality?

Alex, the consumer is definitely being hit right now, but the License business is still relatively immature, so is there any particular category that’s getting hit? What do you see as the re-igniter of double digit growth? What’s the biggest obstacle here and when do you think you could see a turn? Thanks.

Christie Hefner

Thanks David. Linda, why don’t you speak to the charges question first?

Linda Havard

Sure. David the severance was actually in the publishing results; there was $600,000 in the publishing operating results. There is that $450,000 in other net, which is where the unrealized losses on the foreign currency contracts show up.

$600,000 of restructuring charges are related to the E-commerce and those are termination of contracts, so those are the three lines that are impacted.

I also mentioned in my comments that when you look at quarter-to-quarter comparison, this quarter had lower E-commerce contribution as a result of the one-time inventory charge, but that also did affect revenues in E-commerce.

David Bank – RBC Capital Markets

Okay.

Christie Hefner

On the CPM question, David, that’s, I think, pretty straight forward. The CPM has not decreased as much as the rate base decreased, so we’re actually clawing back some of that rate-base decrease, and are pleased, as Bob mentioned, with the quarter-over-quarter, second to first quarter growth in advertising. So hopefully that clarified it.

David Bank – RBC Capital Markets

So you guided page growth down 5%, but you’re looking at growth overall, which would imply certain material increases in CPMs right?

Christie Hefner

We’re talking about two different comparisons, David. We’re talking about second quarter compared to first quarter. That’s where we’re seeing strong growth. On a second quarter to second quarter comparison, I would still expect will be off on revenues, but it will be in the single digits.

David Bank – RBC Capital Markets

Okay. Got it.

Christie Hefner

Did Linda answer your e-commerce question then, David?

David Bank – RBC Capital Markets

Just seasonal. You’re losing I think you said $2 to $4 million a year; is it in any particular quarter?

Christie Hefner

$4 million per quarter actually, for the e-commerce outsourcing. That’s a revenue stream for us.

David Bank – RBC Capital Markets

I’m sorry, $4 million per quarter?

Christie Hefner

Per quarter on E-commerce.

David Bank – RBC Capital Markets

Okay and flat across each quarter?

Christie Hefner

Yes. There is seasonality, and you can go back and look at it, but it’s approximately $4 million a quarter.

David Bank – RBC Capital Markets

Okay.

Christie Hefner

But just to remind you, David, that revenue stream, which has been our second largest, has historically been our lowest margin revenue stream.

And as we indicated when we announced the eFashion deal, even in the first year, that is going to be a net positive in terms of profitability for that business for us, and has significant upside as they are better positioned to grow that business commensurate with the kind of success we’ve seen at retail through the licensing business.

By virtue of the growth potential benefit our company in two regards. One, through the royalties negotiated between Playboy Digital and eFashions, and two through the royalties that are licensees will be generating by virtue of selling more product through the direct marketing channels.

David Bank – RBC Capital Markets

So, and are there guarantees associated with the licensing deal?

Christie Hefner

Yes.

David Bank – RBC Capital Markets

Could you give us any color in terms of what we might expect to see?

Christie Hefner

I think that was the $4 million guidance, you know you’ll see $4 million less in the quarterly revenue number.

David Bank – RBC Capital Markets

Okay, that’s fine. I just have one more follow-up for Linda, which would be, there’s a fair amount of noise here. You’ve got the $1.5 million of charges and then you’ve got $0.6 million of restructuring charge. You highlight $1.1 million of charges related to restructuring and $0.4 million of unrealized losses. Is that exclusive or inclusive of the $0.6 million restructuring that you see as a restructuring charge?

Linda Havard

That includes it, so there’s $0.6 million of the restructuring charge itself; $500,000 of severance in the Publishing Group on $1 million. And then the $400,000 of the foreign exchange that’ll reverse, and the $700,000 of the out-of-period negative cash adjustment that we had the book in the first quarter for domestic TV.

David Bank – RBC Capital Markets

Okay. So if you were to do an apples-to-apples comparison, what do you think the clean EPS and operating income comparison would be?

Linda Havard

You have to then make comparable adjustments in the first quarter of last year in terms of out-of-period cash adjustments for domestic TV which were around $1.9 million, in terms of severance which was around $800,000.

So Martha can talk you through that later David, if that would be helpful, but I just wanted in addition to speaking about the impact that we are feeling like every other company in our industry sectors of retail and publishing, that there are some non-repeating issues that impacted the first quarter, those being the $4 million that we just spoke about.

Just to your point about Licensing, what I would say about that, David, is that our ability to have confidence in a projection of high single digits, given the uncertainty at retail and in the economies of both the U.S. and Europe, which represent 60% of our consumer products business, gives you a pretty good idea that we think we have a brand and a positioning in terms of price points and consumer appeal that can weather even a challenging retail environment.

To the extent that that retail environment improves, which everyone thinks it will do, the unknown is at what rate, we will benefit from that.

Then the other component in Licensing as you know is our goal to fill the pipeline in a way in which we are adding a location-based project every year.

David Bank – RBC Capital Markets

Any update there?

Linda Havard

No, because as you know I don’t like to make forecasts. I like to announce deals.

David Bank – RBC Capital Markets

Okay. Thank you very much.

Operator

Our next question comes from David Miller - Sanders Morris Harris Group.

David Miller - Sanders Morris Harris Group

On the publishing line with the loss of $3.2 million segment EBIT that’s a good $0.5 million below what we thought. I was just wondering if you could quantify how much that number is being affected by pulp costs and also fuel costs if you’re able to quantify it.

And then on Licensing, Christie or Linda, I’m just not really clear on where the weakness is coming from year-over-year. I know you had some stated remarks on the subject but it looks like you cited strength in International, you cited strength in Vegas, if you could give me a little bit more color on where the weakness is coming from that would be great and then I have a follow-up. Thanks.

Robert Meyers

Let me speak about the pulp and fuel costs. If you look at it on apples-to-apples basis, paper costs have gone up and fuel costs have gone up and ink costs have gone up and anything that’s associated with petroleum has gone up. But since we reduced our rate base and we’ve renegotiated some of our deals, our costs in those areas have actually gone down.

The issues that we have faced on a quarter-to-quarter basis that you’re pointing out, I think have a lot more to do with some top line issues in both advertising and on the subscription side as well as a little bit on the newsstand side which we’re addressing, but we’ve been aggressive and we’ll continue to be aggressive about managing our costs and taking those costs out so those don’t really impact us as much as others.

Christie Hefner

In other words the point to remember here is we are working to offset declining revenues in a business that is a legacy business that is not going to turn around to become a growth business.

So just in the quarter we worked to offset $3 million of lower revenues plus, to Bob’s point, higher uncontrollable costs on a unit basis of paper and ink, and were able to do that in terms of net results of the first quarter operating numbers that Bob shared with you. So that’s the context in which you have to look at it.

David Miller

Okay.

Alex Vaickus

And then in terms of the Licensing numbers, although the overall International number, as we have cited, shows significant growth in the first quarter. Within that segment there are areas of weakness, and Europe is a particular area of weakness. And even within Europe, the U.K. and Italy, which are our two biggest markets, are particularly showing some signs of weakness this year.

The domestic market is also becoming a challenge for us and has been a challenge within the first quarter. So I think as you look towards the overall numbers, what we were able to do is offset some of what we saw in Europe by growing business in Southeast Asia and Latin America, areas we said we were going to grow the last few years, and that the net-net number doesn’t quite reflect what is actually happening in certain markets like the U.K. and Italy.

David Miller - Sanders Morris Harris Group

Okay. And then Christie, a quarter ago on your fourth quarter call you did not issue EPS guidance, you just cited the transitional issues that you talked about on your stated remarks today and the issues that you are set to tackle over the next 3 quarters. I take it you will keep on refraining from issuing EPS guidance at this time?

Christie Hefner

Yes.

David Miller - Sanders Morris Harris Group

Okay. Thank you.

Operator

Our next question comes from David Liebowitz - Burnham Securities.

David Liebowitz - Burnham Securities

Briefly, in terms of your preferences or priorities in the forward-looking aspect of how the company is being viewed and where you would like to be going, could you prioritize them for us?

Christie Hefner

There are two overarching priorities. One is the continued growth of Licensing which we believe will be driven by good performance as we’ve been discussing, even when the retail environment is soft from our core consumer products business.

The fact that we’ve built a global business allows us, as Alex mentioned, to offset weaknesses in parts of the world with strength in other parts of the world, and the ability to step up when we add location-based projects, our running rate of high-margin revenues, is clearly a growth driver for the company and remains so.

As I alluded to even in a market in which every day you pick up a paper, you can see a weakness on hotel side or in the condo hotel market or in real estate development. We’re continuing to be very pleased with the quality of partner who we are in discussions with for interesting projects around the world.

Then the second driver, again, consistent with what we’ve talked about in the past we really believe will be Online. What I think is a little different is that we believe that the potential of Online is much greater than the performance we’ve seen in the last several years.

To realize that potential, we have to catch up in terms of technological infrastructure and breadth of content, and interconnectedness between what we do in the virtual world, and what we’re doing with our other businesses in terms of e-commerce, in terms of events, in terms of advertising, in terms of social networking, et cetera.

So those are the two greatest priorities, and then across the more mature businesses, and the company overall, of course, like almost every company I know, and every CEO I know, we continue to identify and take action against opportunities to reduce the overall cost structure.

David Liebowitz - Burnham Securities

Okay, now, in terms of businesses, could you give us an update on gaming and what is on the calendar for the fiscal year upcoming?

Christie Hefner

We’re, as we said, continuing to see, in spite some of weakness in Vegas, good performance from our property there. We expect that to continue. We’re continuing to be on track for Macao, and actually, I suppose you could say, we’ll benefit from the position that the government has taken in a hiatus on issuing new licenses, and are on track for a late 2009 opening.

We’re on track to close and announce another deal for a combination of entertainment and gaming this year.

David Liebowitz - Burnham Securities

What about the operating margins here? Anything you can give us in hard numbers that you could share with us without violating the code of silence?

Christie Hefner

Nothing has changed from the original guidance we gave when we first signed the deal with the Palms, which is that while our consumer products licensing business is a 60% margin business; our location-based entertainment business, we believe, will be generally an 80% profit margin business. And that remains our belief.

David Liebowitz - Burnham Securities

Thank you very much.

Operator

At this time, I am showing that there are no further questions.

Martha Lindeman

Thank you all very much for joining us this morning, and we look forward to talking to you in the future and keeping you up-to-date on our progress on the things we have talked about this morning. Thank you.

Operator

At this time your conference has concluded. Please disconnect and have a great day.

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