WPT Enterprises, Inc. Q2 2008 Earnings Call Transcript

WPT Enterprises, Inc. (WPTE)

Q2 2008 Earnings Call Transcript

August 6, 2008 12:00 pm ET

Executives

Andrew Greenbaum – IR, Integrated Corporate Research

Steve Lipscomb – President and CEO

Scott Friedman – CFO

Analysts

Clint Morrison – Feltl and Company

Steven Silk – C. Silk & Sons

Presentation

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the WPT Enterprises, Inc. second quarter 2008 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions) As a reminder, this conference is being recorded today, Wednesday, August 06, 2008. I would now like to turn the conference over to Mr. Andrew Greenbaum of Integrated Corporate Research. Please go ahead, sir.

Andrew Greenbaum

Good morning everyone, and thanks for joining us today to discuss WPT Enterprises second quarter 2008 financial results. With us on today’s call are Steve Lipscomb, President and Chief Executive Officer and Scott Friedman, Chief Financial Officer. By now, everyone should have access to the press release which went out this morning at 8:30 am Eastern Time. If you have not received it, it is available on the Investor Relations portion of the World Poker Tour’s Web site.

Before we can begin today, we would like to remain everyone of the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. Following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. For a more detailed discussion of the factors that could cause actual results to differ materially from those projected and any forward-looking statements, we refer you to WPT’s filings with the Securities and Exchange Commission, including the most recent annual report filed on Form 10-K, the Quarterly Report filed on Form 10-Q for the first quarter 2008, as well as the company’s current reports filed on Form 8-K.

And with that I’d like to turn the call over to Steve.

Steve Lipscomb

Thank you Andrew and thank you everyone for joining us this morning. On today’s call, I’d like to do the following. One, highlight events of the second quarter 2008; two, update you on our primary initiatives, including real money gaming, our online subscription business ClubWPT.com, WPT China, and our emerging sponsorship business; three, I’d like to briefly discuss our cost reduction efforts. Scott will provide financial details for the second quarter and then we will open up the call to take your questions.

Let’s start with real money gaming. Like many companies, the online gaming marketplace that cannot take US Feds, we found it difficult to establish a foothold in the international market despite considerable promotion and marketing efforts. At the same we’ve seen growth in our ability to generate revenue from sponsorship from online gaming concerns that recognize the value of associating with our brand and programming.

We’ve also witnessed the international online gaming marketplace becoming increasingly predatory with online gaming ventures often spending more than the lifetime value of a customer in order to acquire market share, something that we are not prepared to do. As such, we have been refocusing our resources on the revenue generating opportunities in our business, specifically sponsorship, ClubWPT.com and WPT China. This has resulted in a significant reduction in our headcount and G&A expenses. Going forward, any promotional and marketing spending will be opportunistic. We will spend only when it makes economic sense to do so. Given its philosophy, we anticipate the cost of our real money gaming operations to be significantly less.

Turning to the tour and our domestic television operations. During the quarter as expected we delivered eight Season VI episodes to GSN. The show continued to achieve high ratings. However, on June 07, 2008 GSN’s option lapsed and they decided not to exercise their option for Season VII of the World Poker Tour television series. We’ve enjoyed watching the show and our numbers grow on GSN and we hope that we can find ways to collaborate with the network in the future.

On July 17, we announced the beginning of a comprehensive partnership with Fox Sports Network and the News Corporation family. The first phase of that partnership entails moving the World Poker Tour television series to the Fox Sports Network or FSN. 26 one hour episodes of WPT Season VII will be broadcast on FSN beginning as early as the fourth quarter of 2008. FSN, the country’s leading provider of local sports television reaches more than 80 million homes in the United States.

The next phase of our partnership was announced last week when Fox joined together with WPTE to promote and build our online subscription poker business ClubWPT.com. (inaudible) are already running on ClubWPT.com for players to qualify for a seat on a new televised series entitled ClubWPT.com to air in addition to the World Poker Tour professional events on FSN. The innovative format of ClubWPT.com television show is tailored to drive traffic to the subscription model site. Significant promotional leverage by WPT and Fox will accompany to launch of this new series.

Our relationship with FSN begins the transition from a television licensing business to a sponsorship focused sports league. The FSN deal provides critical flexibility to enhance our sponsorship offerings on and off air in the US market. What it does not provide is a significant license fee revenues that we have become accustomed to in the US market. Rather than license fees WPT has the rights to incorporate sponsors to its own benefit as well as four 30-second advertising spots per episode for the first two airings. And while the license period for each episode is consistent with our previous networks, only one year of that commitment is exclusive.

I had a chance to spend time with George Greenberg, FSN’s EVP of programming and production when Season VII kicked off at the incomparable Bellagio in July. I feel it is important to communicate my belief the World Poker Tour, the league that launched the sport has finally found a partner who is as excited about poker and the WPT as we are. We look forward to building these and other initiatives together.

Our focusing back on the particulars of CLUBWPT.com, simply put the business seems to work. People come to the Web site, they play and they stay. With little marketing the side has steadily grown to nearly 3,000 paying subscribers with over 15,000 total players. CLUBWPT.com’s show on FSN will be our first opportunity to open up a large ticket to turn this business on full force and drive CLUBWPT.com to the next level. Our target for the year end is still to reach 16,000 to 20,000 paying subscriber.

Turning to international television distribution and sponsorship, we continue to see strong revenue from our multi-year relationship with party gaming. During the second quarter, we recognized $600,000 in sponsorship revenue from the party gaming agreement and $3.6 million over the course of a year versus $2.2 million in international license fees. We believe this is a strong affirmation of the viability of the sponsorship model that we’ve been discussing. The international poker marketplace is exploding as new markets are opening and established markets are maturing quickly making future ground for distribution of our best in class programming. Broadcasters have shown a new willingness to commit them to multiple season deals often in territories that were previously unwilling to broadcast poker, which enhances our position for global sponsorship.

The most recent examples are new broadcast deal with a largest sports network in India, a new deal with the biggest network in Greece, and the extension of our relationship with a largest broadcaster in Italy. Beginning on September 19, episodes of Season IV will air on India’s Zee Sports, the flagship sport channel under Zee Network, which is the largest producer of Hindi programming in the world. Also Season IV episodes will begin airing this fall on Mega Channel, the number one television network in Greece. And finally, Mediaset/Italia Uno in Italy is extending its broadcast license to air 22 Season IV episodes of the World Poker Tour commencing this September.

Now turning to our China operations; we believe we are on track to achieve our year-end 2008 goals. During the second quarter, we hosted and filmed the first ever WPT China National Traktor Poker Tour championship, which was held in Nanjing. We are in ongoing discussions with several broadcasters in different provinces to secure television distribution of our event. We are also now negotiating with several large sponsors. Overall, we are on track with the three key goals we set for our China operation this year. The first to launch Season II of the WPT China National Traktor Poker Tour, the second to have a fully integrated online platform by the end of the third quarter of this year, and the third to launch subscription based mobile game by the third quarter. We continue to believe that online and mobile will generate the largest long term financial opportunities and value in this space.

Now before I pass the call over to Scott to go through the financial results, I’d like to briefly comment on the restructuring efforts that we’ve undertaken during this quarter. Over the past several months we had taken a hard look at our operations across the board with a view toward rightsizing and streamlining our entire business. We made certain changes during the second quarter and have continued these efforts during the third quarter that will allow us to focus on the core areas of the business including domestic and international sponsorship, television production, CLUBWPT.com, and WPT China.

We believe by focusing on these areas and significantly reducing or eliminating costs in other areas we are preparing the company to be profitable in 2009.

Now with that I will turn the call over to Scott to go through the financial results.

Scott Friedman

Thanks Steve. Revenues for the second quarter of 2008 were $5.1 million compared to $7.7 million in the same period of 2007.

The decrease in revenue in the second quarter 2008 was primarily due to a decrease in domestic television license fees, which is due to lower per episode license fees under the GSN agreement in effect during the 2008 period compared to the Travel Channel agreement which was in effect during the 2007 period.

Domestic television license revenues were $2.4 million in the second quarter of 2008, compared to $4.3 million in the second quarter of 2007. International television licensing revenues decreased to $0.4 million compared to $0.8 million in the prior year with the decrease being due to lower fees associated with international distribution agreements. But as Steve mentioned, this decrease was partially offset by an additional $600,000 in revenue in the quarter that was generated by international sponsorship.

In total, event hosting and sponsorship revenues slightly decreased to $1.3 million compared to $1.4 million in the second quarter of 2007, primarily due to no sponsorship revenues from Budweiser in the second quarter of 2008.

Product licensing revenues decreased to $0.6 million in the second quarter of 2008, compared to $1 million in the second quarter of 2007. The variance may not be as drastic as it sounds as the decrease was primarily due to higher license fees in the second quarter of 2007 relating to final royalty payments from Take-Two Interactive and Jakks Pacific, and decreased revenues from Hands-On Mobile in the current quarter as compared to the 2007 period.

Online gaming revenues rose modestly in the second quarter of 2008 compared to the second quarter of 2007. For the six months ended June 29, 2008, online gaming revenues declined compared to the first six months of 2007. There were lower levels of player activity on our site on the Cryptologic network in the 2008 period versus the site operated by WagerWorks in the 2007 period; however, 2007 revenues were reduced as the company transitioned its operations from the WagerWorks network to the Cryptologic network in June 2007.

Cost of revenues decreased to $2.8 million in the second quarter of 2008 from $3.1 million in the second quarter of 2007. The decrease was primarily a result of the delivery of eight episodes of Season VI in the current period versus the delivery of nine episodes of Season V in the prior year period.

Overall gross margins were 45% in the second quarter of 2008 compared to 60% in the second quarter of 2007. Domestic television licensing margins were 9% in the second quarter of 2008 compared to 40% in the same period in 2007. This decrease was principally due to lower fees per episode under the GSN contract. The lower domestic television margins in the 2008 period were partially offset by increased margin contribution from international sponsorship fees. This underscores why our focus is shifting towards the higher margin sponsorship model.

Selling, general and administrative expenses increased slightly to $6.4 million in the second quarter of 2008, compared to $6.0 million in the second quarter of 2007. Higher costs associated with the implementation of the company's sales and marketing plans for its online gaming, WPT China and ClubWPT.com businesses were partially offset by a reduction in general and administrative expenses resulting from reduced headcount expenses company-wide.

The company reported net loss for the quarter of $3.9 million, or $0.19 per fully diluted share, compared to a net loss of $3.3 million, or $0.16 per fully diluted share, in the 2007 period.

As reported at June 29, 2008, we had no debt, and total cash, cash equivalents and investments in marketable securities of approximately $24.3 million, which included a $11.4 million of auction rate securities or ARS. Based on June accounts statements received from the firms managing our ARS portfolio, we concluded that the value of our ARS has temporarily declined by approximately $1 million as of June 29, a result of the current lack of liquidity. We do not believe that the lack of liquidity relating these auction rate securities will have an impact on our ability to fund our operations during the next 12 months.

And now turning to guidance; for the third quarter of 2008, revenues are expected to be in the range of $2.2 million to $2.6 million. We also expect to deliver the remaining three episodes of Season VI of the WPT television series in the third quarter of 2008. We expect lower gross margins for domestic television in 2008 versus 2007 as a result of the terms of the agreement with GSN. We expect to recognize host fee and sponsorship revenues as remaining WPT Season VI domestic episodes are aired during the third quarter of 2008. We expect increased subscribers to ClubWPT.com as a result of creating a new poker program, which is expected to begin airing FSN in September 2008, to drive awareness and traffic to the Web site.

We expect to recognize international sponsorship revenues as episodes are aired during the third and fourth quarters of 2008. We expect to not obtain license fees relating to Season VII of the WPT television series, which is expected to begin airing in December 2008. We expect to seek sponsorship revenues relating to Season VII of the WPT television series. And we expect to launch Season II of the WPT China National Traktor Poker Tour and begin to recognize revenue from China-related activities by the fourth quarter of 2008.

Regarding expenses, we expect to incur production costs relating to Season VII of the WPT television series while seeking sponsorship revenues. We expect lower selling, general and administrative costs in online gaming. We expect higher sales and marketing costs associated with producing the new ClubWPT.com poker program. And we expect increased costs associated with launching Season II of the WPT China National Traktor Poker Tour and to have a fully integrated online and mobile platform by the end of the third quarter of 2008.

At the end of the second quarter and in the beginning of the third quarter of 2008, the company began implementing headcount reductions and other cost cutting measures.

And now I’d like to open up the call to take your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Clint Morrison with Feltl and Company. Please go ahead.

Clint Morrison – Feltl and Company

Hey guys. The ClubWPT, it looks like your revenue from that was essentially flat with the previous quarter, yet I got the impression that we're seeing some increase in paying subscribers and so forth. Am I reading something wrong or how come we didn’t see any increase in revenue there?

Steve Lipscomb

Clint, the numbers did go up. Right now, that number is actually included in the other revenue line within the P&L, if they go up quarter-over-quarter, but it’s not substantial at this point. What I would point out is our expectations for the site to grow to 16,000 to 20,000 subscribers by the end of the year. So you will see that number coming up and we will be calling out that number separately on the P&L going forward. It’s just right now it has been minimal that it hasn’t made sense to call out yet.

Clint Morrison – Feltl and Company

Okay. And really it is this Fox effort that is going to be driving the traffic, correct?

Steve Lipscomb

That’s right.

Clint Morrison – Feltl and Company

And tell me again when that show starts airing?

Steve Lipscomb

It will begin airing in the third quarter.

Clint Morrison – Feltl and Company

You're gathering September, right?

Steve Lipscomb

Yes.

Clint Morrison – Feltl and Company

Okay. So we probably won’t see a whole lot of impact from it in the September numbers and consequently in the September paying subscription revenue?

Steve Lipscomb

I think that is a fair point. You're going to see a bigger uptick in the fourth quarter.

Clint Morrison – Feltl and Company

Okay. And can you – or maybe you did and I missed it – kind of quantify it all, how the size of sort of the headcount cost reductions you’ve sort of done already and how much more is to come?

Steve Lipscomb

One of the things I can give to you Clint to help you out on the SG&A line, we're projecting for that to go down by approximately 15% to 20% from the second quarter’s numbers.

Clint Morrison – Feltl and Company

Third quarter down 15% to 20% from Q2?

Steve Lipscomb

That’s right. And then we'll obviously be continuing to look at ways to bring that down but I think that’s a good number for you for now. The other thing to highlight is any severance costs are included within that number as well. So if you back that number out, our savings are even higher.

Clint Morrison – Feltl and Company

Okay. And on the production costs of your new Fox game show kind of program, whatever you want to call it, my understanding is if you get sponsorships you will be able to capitalize those costs, otherwise you're going to have to expand, so how many episodes are we going to actually produce in the third quarter and sort of what that expense or capitalize number might be?

Steve Lipscomb

So a couple of questions there. One of them I'll address. How many events we're going to do? So we have three events scheduled for the third quarter. The costs we're continually looked at to decrease, to give you a good ball-park figure, we're looking probably somewhere between $500,000 and $600,000 worth of cost. As for capitalization, I don’t think I want to make that judgment call on this call as it is still something that we need to get approved by our auditors. Historically, if there has been an agreement in place by the end of the quarter, we typically capitalize those costs. If there's not an agreement in place by the end of the quarter, we expense those costs, so that gives you historical but I think for purposes of today, basically I still need to get confirmation and run this through the auditors.

Clint Morrison – Feltl and Company

Okay. And then just a final question on China, you're still comfortable you're going to see revenue in Q4? It sounds like both the mobile as well as the online system is going to be kind of up and running at the end of the third quarter. And you're going to get revenue from both those sources or what is the expectation?

Steve Lipscomb

Yes. We should be able to get revenue from both of those. I saw the mobile games markup yesterday and it is pretty fantastic. So the products that we're creating there I think are terrific and the impact from seeing what was happening at the first championship there it was clear that we were building something pretty significant in the Chinese market, which I think will have its own value as soon as we start bringing revenue in. The other thing to be aware of is sponsorship is a big part of that business. So the talk with sponsors is ongoing and we have interest already for a very new brand that’s out there. But because there's such an interest of getting into China, I think that we have a good shot at making that a big part of where we get revenue as well.

Clint Morrison – Feltl and Company

So when do we start sort of running the second season and is there a chance that we actually get sort of sponsorship revenue associated with producing those programs?

Steve Lipscomb

Absolutely. That’s the idea. And the way it begins, when we begin producing it, I have seen the first rough version of a full show with (inaudible) that is I would say, a good chunk of the way there. So what we filmed at the championship will be ready to go into the television market relatively, which then we will take to the broadcasters. We have multiple networks that are currently interested in finding ways to broadcast. So those deals as soon as we have a program to show them, we hope will be finalized and then we'll head out to the market. So certainly we're hoping that we're going to be able to defray costs and have sponsors start to take some of the lift in the market.

Clint Morrison – Feltl and Company

Okay, thank you. (inaudible), let somebody else ask questions.

Steve Lipscomb

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Steven Silk with C. Silk & Sons. Please go ahead.

Steven Silk – C. Silk & Sons

Good morning. So the revenue as you’ve been deriving it in the past from the sponsored networks GSN or Travel, that will not exist anymore as from what I understand. So the question becomes the production costs for each of the shows is really falling on you and is there any way to make it less grandiose to some extent so that the net we have to make us in is great as it had been, number one. And along those same lines, I'm wondering how important it is to the host casino or the host venue as far as having a WPT event, and in my opinion it would seem that it will be very important in my own venue near Connecticut, it’s not just the three days that they do the WPT but its about a month-long event as well as – what you have is to derive value to those casinos. Is there any way we can look at maximizing some of that? Or going to casinos that would encourage having their WPT event and pay you for it?

Steve Lipscomb

Okay, I'll take the first one first, that is we certainly are always looking at the ways to reduce our production costs and in this brave new world of a sponsorship-driven model, we are looking at it and really changing the way that we shoot shows, without sacrificing having a quality product because that is an important part of our brand going into the market. So it is that balancing act that we are very much engaged in, but the answer is yes, we are and will decrease production costs and continue to do that over time, but I wouldn’t –- assuming we can get sponsorship at the level that we believe that we can, and there is a tremendous amount of interest. This may not be as scary a world as it appears. It is just not what we have done before. So while we have been – last year we got $6 million, $7 million from GSN – $7 million from GSN that is a paltry sum compared to the amount of money that is being spent to sponsor poker shows in the marketplace. So we have significant interests both in the U.S. and international from multiple companies in order to have sponsorship that would drive the shows and I think that’s much more like where the market is, and we for a while had been aware that license fees were changing simply because we were literally the only show in the marketplace that received license fees, when there were not one other across any network was receiving a license fee, in essence they were a sponsorship model. So you can’t exist forever in a market no matter how good you are with your brand or your product, so I think we're just reaching the point where the market is guiding us and the good thing is we have interesting people to sponsor and I think that will – when we get a chance to announce those deals, that will help people understand kind of how we sit financially going forward.

And your second question was, the relationship with our casinos. We have a fantastic relationships literally with the best-in-class casinos in the world and those relationships are critical to us and to them and we have been as we extended additional events in those locations asked them to pay additional dollars, which they have; but certainly, it is an ongoing thing for us and them to look at as far as evaluation a way that we might be able to change that relationship. I guess I wouldn’t set up expectations that somehow in the next year or so, those numbers change significantly, predominantly because we’ve grown a big, important business together with them and I would say there are things that we will be able to do together in order to monetize it. We're just moving to a new place that I think their sponsorship will allow us to do that.

Steven Silk – C. Silk & Sons

Now when you switch over to China, you talk about online. Would it be similar to what you have at ClubWPT, is that – I know online gaming is not legal in China, but is this description model something like you’re targeting?

Steve Lipscomb

No, it is a very, very different model. In China, in essence what would be doing is people would come and they would have a chance to play and then with through what are called top-up cards they get money into the online sites, this is already a model that is being used by some very successful sites in China; and then what you do is, you allow them to have extra services by buying an avatar for a very small sum, or being able to participate in tournaments that are exclusive in order to find their way into the way that they change their life by working themselves up and playing in the larger tour that we sponsor. So those ways are very different from here. In other words, several would not be paying a monthly subscription, simply because the rules of engagement are very different there.

Steven Silk – C. Silk & Sons

Is there anything online currently, the competitors, as far as they attractive?

Steve Lipscomb

Absolutely. You can look at sites, Kyuoto is one of them and OurGame.

Steven Silk – C. Silk & Sons

I guess I'm wondering, right now, the SG&A expenses are just so out of whack really with the revenue in the revenue guidance. I know the goal is to lay out initiatives and there’d be initial cost but we're not really seeing that. The market is giving you an enterprise value of extreme negative value. There is I think value in the name WPT, and I think we're not seeing that. Is there some point where you say maybe it would be better underneath somebody else’s umbrella, a larger company or talking to an investment bank to see that there's some way to maximize shareholder value?

Steve Lipscomb

Well, you can imagine that we have been approached by a number of entities as the stock price has gone where it has gone, and there certainly are conditions in the market that are pushing consolidation and we are always open to and have discussions regarding strategic alternatives I think for where we sit right now, like pretty much all stocks in this sector, and most stocks generally, we're at a particularly a depressed point with our stock. On the other hand, really what we've announced so far, I think are very exciting and important pieces of what will be the journey forward. The next piece of that is the revenue piece, which is sponsorship and I think our equation in the next 6 to 12 months changes dramatically. So whereas certainly we engage and are interested in having those talks, there's nothing that has to date come to fruition, but certainly, we're open.

Steven Silk – C. Silk & Sons

Right. And you know nine months or three more quarters of these losses puts you in a precarious position as far as your balance sheet. So maybe at some point you have to say stronger gains would willow, you could have competitors that are making a lot of money, let us say illegally, in the United States and they're generating a huge amount of money that having the WPT brand would be able to maximize at least something back for the shareholders. Would you talk about – you know, you still have $2.9 million in value insecure, I know the other day I was looking at PokerPlay magazine and PokerTech is doing very well. That was an investment that you did wisely and were able to monetize very well. So if an outsider was looking at your balance amount and that amount is that something that really has more value than really what you're carrying at?

Unknown Speaker

Well, I think that – I think we are in the unenviable position of having a lot of things regarded that way. I don’t think that when – not only are we being, I believe incorrectly devalued for the fact that we're trading at or under cash, there's no value for China, which maybe hasn’t come completely through to the revenue stage, but in my mind, it’s a very reasonable business to have valuation on top of that, I used to think that comes in time and certainly is something that we could look at and contemplate spinning out the secure gaming investment as well as one of those that just doesn’t get any value. On the other hand Bessemer Venture is a very reputable company in this space, continues to get it funded at a higher level. So, I believe there is value there and the question is what to do with it and I think that there will be a potential – a time down the line when that will turn into a fine investment for us to bear and it has not been at the moment when they are ready to have to go public or bring financing in that would get us out. So the answer is there certainly are those things on the book.

And I want to go back to address the question you were asking before and that is at some point there is a critical moment where our cash runs out and we are in trouble. Today is not that day and the changes that we’ve made are really so that in 2009 we are in a position to be not losing money, but be profitable. And I think that’s really what we’ve positioned ourselves to do and if pieces of the business work out the way we believe they are that’s what we are on track to do. So, understand that we have taken – never easy to do the kind of cutting that we’ve been doing. It’s very challenging and we’ve done it because we believe it’s necessary. On the other hand there are lot the initiatives we are looking at that show great signs of life. So, from club to China to sponsorship, I believe we have a path going forward that brings us to making revenues as opposed to putting a lot of money in online gaming which we have. We are not alone. We talk to companies that did strongly in the US, left the US market after UIGEA and went to spend $10 million in the European market and didn’t have any impact.

We have spent a lot of money trying to find a way into that market. That has been a challenge. We are doing well what you suggest which is going to the companies that are making a lot of money in this space in order to affiliate with them against sponsorship and other revenue.

Steven Silk, C. Silk & Sons

Okay. And, I guess I have drunk the cool end and I am going along with the fact that – and agree with today you’ve built something that’s not being valued if it takes longer than the time that you have that will be of value to somebody else. So, the hypocritical question of the day would be why not take $3 million and buy stock back at where your stock runs at $0.70 perhaps. And if it does work, you’ve reduced the capital shares outstanding by 10% and that can reward the shareholders as well.

Scott Friedman

The biggest challenge – not the biggest challenge, one big challenge for us is the auction rate security. It’s a liquidity issue. And when we look at the cash we have sitting on the balance sheet it is significantly different from the $24 million number when $11.4 million are in auction rate security. So, that makes that deliberation more challenging for us and our Board when we are looking at making sure that we have the ability to fund the operation through this change because if you get to the point where you can’t afford that next step, $3 million is a very different equation. So, we’ve talked about this. We have contemplated what to do, we are of the belief that taking that money and putting it into turning the business around is the smartest thing that we can do in order to actually return shareholders. And have set such a small float anyway that it’s we think other avenues are probably the better way to go.

Steven Silk, C. Silk & Sons

All right. Thanks for taking my call.

Scott Friedman

All right. Thanks Steve.

Operator

(Operator instructions) Our next question is a follow-up question from the line of Clint Morrison. Please go ahead.

Clint Morrison – Feltl & Company

Hi Steve. We are still generating kind of 250, 300 in online gaming and everything I am hearing has suggests that’s going away. Is there a point where that just goes to zero and sort of what are the costs associated with maintaining a couple of hundred grand a quarter online opportunity?

Steve Lipscomb

We are looking very hard at that business to see what makes sense for us because there are costs just in keeping it going. And so as we balance that we’d have to make the decision whether it makes sense to continue just by limping along or whether it’s more expensive to do that. But we certainly don’t want to have a money loser. So, we are in the middle of that analysis right now and I would say by the next quarter earnings call we will have a real solid understanding of what we plan to do going forward. I don’t think we are prepared to announce that now because we have various obligations and the like that we have to work through, but I can just tell you that it is more likely that we can make money in a much higher margin business for us right now, which is the sponsorship, and predominantly the sponsorship will come from the successful sites in the marketplace, and that really is what we as a company has done well at. And if you look historically at what we’ve made doing and how we’ve been successful it has really been by finding companies that are best in class in their space, do very well and can take a WPT brand and make it into something that makes money for both of us. I just think that requires less manpower, it requires dedicated and talented people but not as large in overhead. I think that’s what we are headed toward because we believe it is a way that we are already making and we can make more money doing it.

Clint Morrison – Feltl & Company

Is there any possibility to basically sell the online site or just sell the online brand and let somebody else fill the money into it can capitalize on it? Or is it just a decision to get out of it or not?

Steven Lipscomb

I think all of those things around the table. I don’t think there is any reason to think that anything shouldn’t be considered.

Clint Morrison – Feltl & Company

Okay, thank you.

Steve Lipscomb

Thank you, Clint.

Operator

And ladies and gentlemen, that does conclude the question and answer session. I would now like to turn it back to management for any closing remarks.

Steve Lipscomb

I think I would just go back to what I’ve been saying in the question and answer period and that really is that when we look at our business we have worked very hard as a management team and with our Board in order transfer the World Poker Tour into something that fits into this market. And it’s never easy to literally launch a market and then find restrictions that you have because you play by the rules that are in your biggest territory; make it very difficult for you to be in the business. The good thing is things have – this market is matured enough to make it possible for us to know where we can fit in and where we can make money. And by this new sponsorship model, by CLUBWPT and its extremely exciting new deal that we have with the Fox News Corp company, as well as looking at China we think we have initiatives that we can invest in at a reasonable and modest rate in order to get solid return and find ourselves in 2009 as a profitable company. I think all of that’s very exciting to us and just by saying once again that as we being to gear for this new television show we are doing with Fox Sports Net, it’s been a unique experience in the whole time we’ve been doing the World Poker Tour to have a partner that brings so much to the table, so much to the initiative and it’s as excited about what we do as we are. So I believe it’s a good move for us and with sponsorship in place we will be from a monetary standpoint a better place than we’ve been in from our inception.

Thanks everybody for getting on the call, and we look forward to talking to you at the end of third quarter.

Operator

Ladies and gentlemen, this concludes the WPT Enterprises, Inc. second quarter 2008 earnings conference call. This conference will be available for replay after 11 am Pacific Standard Time through August 13, at midnight. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325, entering pass code 3905358.

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