Exhibit 99.2
MARVEL ENTERPRISES INCORPORATED
Fiscal 2003 Second Quarter Results
Moderator: Allen Lipson
August 12, 2003
9:00 am EDT
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the
Marvel Enterprises Second Quarter conference call. During the
presentation all participants will be in a listen-only mode.
Afterwards we will conduct a question and answer session. At that
time if you have a question please press the one followed by the
four on your telephone.
As a reminder, this conference is being recorded Tuesday, August
12, 2003. I would now like to turn the conference over to Mr.
Allen Lipson, President and Chief Executive Officer of Marvel
Enterprises Incorporated. Please go ahead, sir.
Allen Lipson: Thank you, operator. Welcome to Marvel's Fiscal 2003 Second
Quarter conference call. On the call with me today are Ken West,
our CFO, Alan Fine, head of our toy operations and also
responsible for overseeing our major toy licensee, and Peter
Cuneo, Vice Chairman.
Since Bill Jemas is unfortunately not able to be with us since he
is away on a business trip in China I've asked also to attend Gui
Karyo, Executive V.P. of Operations and Joe Quesada, Editor and
Chief of Marvel Comics.
Finally, Avi Arad, CEO of Marvel Studios will not be able to join
us today since he is on his way back from Israel after visiting
his mother who is extremely ill.
On today's call we plan to make our comments as concise as
possible and allow generous time for Q&A. Before we get to the
heart of the call Matt Finick will present a few cautionary
comments.
Matt Finick: Good morning. Certain statements that the company will make on
this phone call and webcast are forward-looking statements and
involve risks and uncertainties such as statements of the
company's plans, goals, objectives, expectations, intentions, and
financial guidance.
Participants on this phone call and webcast are cautioned that
while the forward-looking statements reflect the company's good
faith beliefs they are not guarantees of future performance and
involve known and unknown risks and uncertainties, and the
company's actual results could differ materially from those
discussed on this phone call.
Certain of these factors could cause or contribute to such
differences are described in today's news announcement and
company's filings with the Securities and Exchange Commission,
including the company's annual report on Form 10-K, quarter
reports on Form 10-Q, and current reports on Form 8-K.
Also, today's call and webcast may include non-GAAP financial
measures within the meaning of SEC Regulation G. A reconciliation
of all non-GAAP financial measures to the most directly
comparable financial measures calculated and presented in
accordance with GAAP can be found in the press release that was
issued this morning. Marvel assumes no obligation to publicly
update or revise any forward-looking statements. Thank you.
Allen Lipson: Thanks, Matt. I would now like to turn the call over to our CFO,
Ken West, for a review of the quarterly financials, as well as
our updated and new financial guidance. Ken?
Ken West: Thank you, Allen. Good morning. We have improved economic results
to discuss, but I'll try to limit my remarks to highlights of the
quarter so as to provide some color for the remainder of the year
and initial guidance for 2004.
Consolidated net revenue was up in the second quarter versus the
prior year second quarter to $90 million. Revenues increased
strongly for both licensing and publishing segments whereas toy
sales were down as expected. Consolidated gross profit nearly
doubled to $73 million, reflecting a gross profit percentage
improvement from 51% to 81% of net sales caused by the influence
of high margin licensing income during the quarter and lower toy
sales.
Consolidated SG&A is up over the second quarter of '02 and as a
percent of net revenues SG&A has increased from 30% to 35%. Now
included in SG&A are accruals for estimated studio royalties of
approximately $13 million, representing the estimated studio
share of merchandise licensing associated with various movie
projects already released.
Going forward, we are simplifying our economic performance
measurement to the GAAP measurement referred to as operating
income to replace references to the non-GAAP measure referred to
as EBITDA, which is intended to streamline our future reporting.
And as you can see on the last page of today's earnings release
there is nearly a page of reconciling tables by division simply
identifying that the only reconciling difference for Marvel
between EBITDA and operating income is depreciation, which
amounts to approximately $3.5 million per year.
Operating income for the second quarter has more then doubled
that of the second quarter of '02 from $20 million to
approximately $43 million and to repeat for Marvel EBITDA
translates to operating income after deducting the company's
depreciation charges, which again amount to approximately $3.5
million per year.
The quarter's results include the initial merchandise licensing
effort associated with The Hulk both domestically and abroad and
continued license income - associated with toy royalties from
strong, classic Hulk toy sales.
During the second quarter we also recognized our half share of
the Spider-Man: The Movie joint venture entities' collected
overages, which amounts approximated $2.1 million. Additionally,
we experience a record of reported overages during the quarter
contributing over $6 million in licensing income above original
estimates; a difficult elements to forecast.
Net income amounted to $32.7 million as compared to net income of
$8.4 million last year second quarter. Net income per share on a
diluted basis rose from $0.10 to $0.42 for the second quarter on
a higher weighted average share count brought about via the
conversion of previously outstanding convertible preferred stock,
and cash and CDs amounted to approximately $144 million at June
30.
Now for the full year 2003. Our projection for sales is now
estimated in the range of $287 to $293 million, an increase over
the previous guidance of $225 to $230 million, whereas operating
income is now estimated to reach approximately $132 to $137
million an increase over previously forecast results by over 20%
due to the growing popularity of Marvel characters via license
activities as exhibited to date by strong retail sales growth.
Major drivers for our second half results are anticipated to be
continued character licensing, including the important toy
category for both The Hulk and Spidey properties, and an
anticipated increase in Lord of the Ring toy sales preceding the
movie release later this year.
2003 earnings per share is estimated at $1.26 to $1.31, excluding
the impact of recording a value associated with unused Federal
NOL carry forwards.
Now for 2004. Sales will reflect a shift from license income
associated with licenses Marvel character classic toy sales to
sales of Spider-Man: The Movie toys by our own toy division. All
and all we forecast consolidated sales to rise to a range of $315
to $345 million, an estimated increase of 10% to 15% over 2003,
including anticipated strong sales for Spider-Man Movie toys.
Operating income is forecasted in the range of $137 to $157
million - a wide range dependent on the timing of various factors
identified in today's earnings release, principally the range of
potential box-office and DVD success of Spider-Man 2 and related
licensing efforts around that movie event and the timing of The
Punisher and the Fantastic Four movies and related licensing.
Despite higher anticipated operating and pre-tax income assuming
an effective future income tax rate of 37% for 2004, which
compares to 16% in 2003, will result in a decline in forecasted
net income to a range of $74 to $87 million and earnings per
share of $0.96 to $1.14.
Our economic model looks strong to support our goals to early
retire the company's 12% senior notes when first callable in June
2004 at a call price of 106 requiring approximately $160 million
to redeem, plus $9 million for the interest payment associated
with the first six months of 2004. Future cash flows will be
accumulated to achieve this stated goal and commence paying
Federal income taxes sometime in late 2004. Allen?
Allen Lipson: Thanks, Ken. I really don't have much to add regarding our recent
financial performance at this time other then to congratulate
each of our divisions for their great achievement.
I do want to note, however, that fiscal 2003 was front-end loaded
as far as licensing and entertainment projects are concerned
while next year looks to be more back-end loaded, at least from
the point of view of the flow of entertainment projects currently
slated.
As Ken noted on our guidance for 2004 we are very optimistic
about our potential to deliver year-over-year gains in revenues
and operating income, which solely because of a higher tax rate
will translate into slightly lower net income and earnings per
share.
And that brings us to the larger questions of what is Marvel's
long-term growth strategy? How do we intend to continue to
capitalize on our growing base of strengths? What are our plans
for the future?
As we indicated in today's release, Marvel is currently in the
planning phase of what we call chapter two of our strategic
evolution. During this planning we will refine and formalize our
thinking. Our strategy over the past few years has been focused
on managing our businesses, brands, and capital structure in
order to bring the company back to health and consumer
prominence.
With these objectives largely complete and the prospect of strong
cash flows and a debt free capital structure emerging in 2004 it
is appropriate that we revisit our business strategies and goals
to best leverage our talent pool, intellectual properties base,
brand recognition, and strong capital position.
Let me reiterate, however, that we have not, nor will, we deviate
from our core disciplines of cost control, capital discipline,
and mitigating financial risk.
Before commenting on our operating divisions, I would like to
remind everyone that there were three major Marvel films in 2003:
Daredevil, X-Men 2, and Hulk - each of which captured the number
one position in the opening weekend box office results and each
of which surpassed the $100 million box office market in the U.S.
In 2002 we only had Spider-Man, so the number of films are up
significantly with the pipeline for 2004 and beyond looking very
solid. The three films in 2003 were important in driving the
momentum in our licensing division.
With respect to licensing we have come to recognize that we
haven't even begun to scratch the surface on developing a broad
range of opportunities to repackage or repurpose our characters
to target specific demographic and market niches.
TV initiatives such as Spider-Man Animation on MTV are attracting
a new audience for Marvel. While we must keep some exciting plans
under wrap for the time being for competitive reasons, we have
already used this concept very successfully in our re-telling of
classic Marvel stories in the Ultimate comic series, as well as
the creation of the very popular new toy line and licensing
program aimed at preschool children called Spider-Man & Friends.
Spider-Man & Friends repurposes classic model characters to make
them more rounded, friendly, and suitable for preschool play. The
line has been extremely successful and underscores the brand and
the character equity that has been built over our 60 plus years
of existence.
In our publishing group we continue to focus on the following key
issues: providing each month a strong and varied base of high
quality entertainment worthy of the Marvel brand; expanding
distribution into new venues to increase sales and attract new
readers; increasing our reader base, including under represented
demographics; customer publishing projects extending comic
context for targeted audiences such as the one done for the New
York Post.
While we are pleased with our progress in these areas we also
recognize there are challenges in the publishing area which needs
to be addressed.
In toys we look to build off the strengths of our design and
marketing teams and our success with top selling, role playing
toys, such as the Web Blaster and Hulk Hands.
Toy Biz is a respected brand recognized to innovation and a
strong sell though yet it consists of the relatively small team
of people. Importantly, toy lines are a very influential category
in the field of licensing and strong toy lines can add
substantial brand awareness in the market thereby driving
momentum and sales for other Marvel branded merchandise.
Accordingly, our ability to manage this key license area via Alan
Fine and his Toy Biz team, creates a very important strategic
advantage for Marvel. Again, we participate in this segment with
very little capital risk.
Now before I turn this call over to your questions I would like
to mention that we are not able to comment on the status of our
legal proceedings at this time. We are committed to disclosing
material developments in each case, but in the interim there is
little that we can say other then the timelines tend to be long
and the costs have been above average as we have noted in today's
news announcement.
As Marvel's chief asset is our library of intellectual property
we are very aggressive in protecting or defending our rights to
these assets, as well as enforcing the terms of all of our
contracts. We believe that it is our fiduciary duty, as well as
good business, and we wish to be known as a fierce defender of
our intellectual property rights.
With that I would like to open the call to your questions.
Operator, may we take the first question?
Operator: Thank you. Ladies and gentlemen if you would like to register a
question please press the one followed by the four on your
telephone. You will hear a three-tone prompt to acknowledge your
request.
If your question has been answered and you would like to withdraw
your registration please press the one followed by the three. If
you are using a speakerphone please lift your handset before
entering your request.
One moment please for the first question. Robert Routh from
Natexis Bleichroeder please go ahead with your question.
David Brenner: It's actually David Brenner calling from Bleichroder. Great
quarter. I had a couple quick questions here. With respect to -
you addressed this a little bit in your comments. I'm wondering
with respect to your net cash position and your free cash flow
going into next year would you consider either a dividend or a
share buyback to supplement your business model.
And the second question is the Spider-Man toy sales seem to be
going strong still this year. I'm wondering what you expect for
the second half of the year and also when you expect to launch
toys related to Spider-Man 2.
Allen Lipson: Well, with respect to dividends or buyback we would possibly
consider those alternatives at the timie, meaning next year after
our goal of retiring the outstanding notes have been
accomplished, but you know we'd have to see it at that time, what
the competing capital requirements were and whether that was the
best use of the available cash, but we would consider it of
course. With respect to the toy sales - Alan, why don't you
answer that?
Alan Fine: Good morning. We continue to see very solid demand in sell
through for Spider-Man licensed toys and we will see that through
the second half. We have a very strong first half with Spider-Man
and we're tracking to about - for the full year about 55% of last
year's total sales on Spider-Man. It's very, very solid for an
in-between year, between movies.
We're very pleased with that. We're especially pleased with the
retail sell through and the excitement that we have from our
customers. Allen.
David Brenner: Great, thanks. And just as far as the licensees for Spider-Man 2,
is it safe to assume that there will be more or perhaps many more
then there were for the first movie?
Allen Lipson: There should be more. Whether there are going to be many more -
not necessarily so. The issue is you do want to control and
maximize revenue and control the number of licensees out there,
and so more does not necessarily equal better.
David Brenner: Okay, great. Thanks very much.
Alan Lipson: Thanks, David.
Operator: Our next question comes from the line of Gordon Hodge, Thomas
Weisel Partners. Please go ahead, sir.
Gordon Hodge: Yeah, good morning. A couple of questions. One, I was just
wondering if you could comment on the new Spider-Man animation
project on MTV. It sounds like it just got launched. Should we
anticipate any deficits there for you and then what the
opportunity might be down the road in television?
And then also, does your guidance for next year incorporate any
Fantastic Four advances or any video game sales? Thanks.
Allen Lipson: Sure. With respect to Spider-Man, that is a program that is
licensed. We do not contribute anything to that, so there's no
deficit financing from our point of view. It is a true licensing
agreement coming within the Spider-Man Movie agreement.
The reception has been extremely positive and in fact they've
been running double runs putting back to back because it's been
so good. What it does attract is it's a new type of audience for
us because of the fact that it's on MTV and it's a demographics
that is very attractive to us.
With respect to additional TV we are looking at additional TV
projects. We have a - I think as we put in the announcement, a
Blade animation for TV that's in the works and there are a couple
of other live action TV programs in the works for us.
Ken West: Now as far as our 2004 guidance is there a very minimal amount
associated with advances for - or options payments for Fantastic
Four. Hopefully that addresses that accurately.
Gordon Hodge: Great, thanks.
Allen Lipson: Sure.
Ken West: Thanks, Gordon.
Operator: Our next question comes from the line of Arvind Bhatia from
Southwest Securities. Please go ahead with your question.
Arvind Bhatia: Good morning.
Allen Lipson: Good morning.
Ken West: Good morning, Arvind.
Arvind Bhatia: A wonderful quarter again. A few questions here. This is going to
be hard to quantify, but how do you think about Spider-Man 2
versus Spider-Man 1 as a franchise? For all the different
modeling purposes you guys tend to be very conservative, but is
there sort of a magnitude or a level that, you know, you could
provide items on two - the same as one, or down or up? You know
anything on a macro basis that you can provide conceptionaly?
Allen Lipson: Well, with respect to Spider-Man 2, as far as how well the movie
is going to do, in our modeling obviously we do - we are fairly
conservative and so therefore we would not look at Spider-Man 2
doing as well as Spider-Man 1.
Although, if you take a look at the history you will see that in
sequels Blade 2 did better then Blade 1, and X-Men 2 did better
then X-Men 1, which you know could then argue that Spider-Man 2
is going to do better then Spider-Man 1.
But as I say being fairly conservative we cannot model that way,
although we hope and there is a reasonable expectation that it
will occur.
Arvind Bhatia: How much down are you modeling?
Allen Lipson: Excuse me?
Arvind Bhatia: How much are you modeling it to be down?
Allen Lipson: That we do not - you know that we wouldn't - we don't give that
kind of information.
Arvind Bhatia: Okay.
Allen Lipson: But we do not model it to be as high as Spider-Man 1.
Arvind Bhatia: Okay. As far as Spider-Man royalties in Q3 and Q4, is there
anything in your models, Ken?
Ken West: There are small amounts of the back-end and ancillary revenues
built into our second half and the remainder, which relate to
syndicated and TV shows and other elements of that, and so they
are anticipated in '04.
Arvind Bhatia: Okay. Two other questions. One relates to the Artisan issue. A
lot of people have talked about it. Are there any comments you
guys have regarding your interest in that studio at this point?
And then the second question relates to Iron Fist, which was in
your schedule last time when you gave guidance and it's not in
your guidance at this point. Can you talk about the status of
that movie?
Allen Lipson: Sure. With respect to Artisan let me first say that obviously
we've been following what's occurring because of the fact that we
have a relationship with Artisan with respect to our licensing
agreement and the upcoming Punisher movie. At the same time I
would like to, you know, flatly state that at the present time
we're not looking to do any major acquisition - period.
With respect to Iron Fist it's no longer on the timetable since
there were certain hold-ups which prompted us to take it off - we
didn't know the release date and things like that and so - here
again being conservative, we just took it off the list.
Arvind Bhatia: So you're saying that it's still possible that it could come out
next year?
Allen Lipson: Next year? No. I do not envision it to come out next year, but
they're working on Punisher for next year.
Arvind Bhatia: Right.
Allen Lipson: And we do know that is their primary focus. Artisan's primary
focus is on that and another film unrelated to us. I think it's
called Dirty Dancing: Havana Nights and those are really the only
two films they're working on for next year.
Arvind Bhatia: Okay, you guys provided - a number which was you said less then
10% off of the EBITDA for 2003 or expected to come from the movie
- the three movies that came out this year. That's what you
talked about last quarter. What's the sort of number it uses now
with the movies now already out and can you talk about a
statistic that you model for next year?
Allen Lipson: Ken?
Ken West: The participation built into our '04 guidance for studio is less
then 20% of our licensing income and then I'd have to do a quick
calculation of what it is in total, but it would be in the range
of 14% to 16% of consolidated 2004 guidance.
Arvind Bhatia: That's revenue or are you talking about EBITDA?
Ken West: That's based on operating income, our new measurement.
Arvind Bhatia: Okay. And this quarter was there any benefit from the Panini deal
that you guys signed when you announced that towards the end of
last quarter?
Allen Lipson: No.
Ken West: No, minimal.
Arvind Bhatia: Okay. Thanks, guys and congratulations.
Allen Lipson: Thank you.
Ken West: Thank you, Arvind.
Operator: Our next question comes from the line of Bill Lennan with W.R.
Hambrecht. Please go ahead with your question.
Bill Lennan: Okay, thanks. Two questions. First, could you give us an update
on what payments are still outstanding for Spider-Man revenues
that you may still recognize or perhaps did recognize in the
quarter? And I'm referring mainly to some of the television
rights, domestic and international, if you've recognized all that
you're going to on that front.
And then secondly, for next year's guidance could you talk a
little bit about what sort of progress next year's guidance
implies on the international licensing opportunity? Will you have
people on the ground internationally and how much of that
opportunity do you think you'll start realizing next year?
Thanks.
Allen Lipson: Sure. With respect to the first - your first question, we really
haven't recognized very much, if anything, from the TV revenues
via free pay or any of those ancillary types of revenues as of
yet.
With respect to guidance the next year on international we have
taken it up a little. We do expect to have a certain number of
people actually on the ground in Europe by next year sometime.
Bill Lennan: Okay, does your guidance then reflect some of the progress that
team will actually make or have you kept that all for upside? Is
it something that you're counting on or not counting on in the
numbers?
Ken West: We do - as Allen mentioned we have a moderate anticipated growth
in international licensing...
Bill Lennan: Okay.
Ken West ...for 2004. Although the percentage may be large, the base to
which it's being applied - and that is our anticipated results
for 2003 international licensing - is not a very large number. So
that is our growth opportunity and we've applied a fairly
conservative estimate of its opportunities for growth as we just
talked about.
Bill Lennan: Thank you.
Operator: Our next question comes from the line of Peter Mirsky with
Oppenheimer & Company. Please go ahead, sir.
Peter Mirsky: Thanks very much. This is Peter Mirsky. Just a couple of
questions. First, in your `04 guidance you talked a lot about
timing. Can you mention - can you give us an update on status of
the Fantastic Four and perhaps The Punisher?
And also I assume there's a performance function of all the films
and merchandise that will come out. You mentioned the Spider-Man
film. Can you give any kind of - any discussion on your
assumptions for performance for merchandise for Spider-Man or
anything for Fantastic Four?
Allen Lipson: We don't give specifics with respect to any movie in terms of
guidance. We don't break it down that way. With respect to the
Fantastic Four and The Punisher, Fantastic Four - The Punisher is
of course Green-lit and as a matter of fact Principal Photography
should be starting fairly shortly.
Fantastic Four is more up in the air, although Fox right now has
said they want it in December of next year. There still is
certain - it still has a ways to go in terms of finishing up the
script and so on and so forth before Principal Photography can
start and that's why it's more of a - it's more of a question as
to when its going to come out next year or maybe 2005. But again,
Fox has said they want it for December of 2004.
Peter Mirsky: Okay, if I could just press for one second on the Spider-Man. You
mentioned with the film that your assumption would be not as -
you're just - for modeling purposes - just not as strong as the
first film. Can you make any similar comment on the toys?
Ken West: We do anticipate that the toys will be at least as strong as that
exhibited in 2002 and we're very much looking forward to the
introduction of the Spider-Man 2 toy line to be sold by the toy
division of Marvel.
Allen Lipson: And that's based upon what we've seen from the marketplace and
the reception that we've gotten from the retailers so far, but I
think we would be somewhat remised to think Spider-Man 2: The
Movie is going to be, you know, an $850 million box office movie
again.
Peter Mirsky: Right. Okay, thanks very much.
Operator: Our next question comes from the line of Joseph Garner with
Emerald Asset Management. Please go ahead.
Joseph Garner: Good morning.
Allen Lipson: Good morning.
Ken West: Good morning.
Joseph Garner: A few questions for you. The first one, can you tell us if there
have been any revenues recognized at this point from the three
movies released this year and what would be the time frame under
which you would expect those revenues to flow in given that it
seems like you have a bit of a tail between when the movies are
released and when you actually see the revenues?
Ken West: There has been some small amount of revenue recognized associated
with The Hulk movie to date and as far as the other movies
Daredevil also - again, a small element. We're waiting on the
backend on really all three movies still in the future.
Joseph Garner: When would you expect those to flow and will that happen this
year or do you think that will fall into the early part of next
year? Is that in your `04 guidance?
Ken West: It's principally in the '04 guidance.
Joseph Garner: Okay. Can you talk - you know, you talked a little bit about the
third quarter guidance. It looks like the fourth quarter would
imply just a - you know, slightly better then breakeven type of
quarter.
Can you talk about your thinking toward that and - you know,
particularly with maybe toy sales coming in in the holiday time
frame it would seem that the profitability might be higher then a
little better then breakeven scenario. So if you could talk a
little bit about the fourth quarter and your thinking there.
Ken West: Just to reiterate a point that you did make, that we do
anticipate that there will be a strong sell-in in the third
quarter associated with the toy line, so that's built into our
guidance. The fourth quarter would be a little bit late
associated with the sell-in for the holiday season.
In the fourth quarter, although low, built into our model, we
believe that as fairly stated there's associated continued
licensing activities and the sell through of licensed properties
associated with Hulk, Spider-Man, and many other Marvel character
activities.
Joseph Garner: Given your comment that you've exceeded many of the minimums on
several of your licenses out there, is - are you anticipating
that in the guidance for the second half of the year? It would
seem that once you get past that minimum threshold there could be
considerable incremental licensing coming through.
Ken West: We do have elements of forecasted overages in our third and
fourth quarter projections; however, on the basis that we have
more then 500 active licenses both domestically and
internationally that is, as I mentioned in my remarks, to be one
of the most difficult elements to forecast.
So we believe we have a reasonable estimate associated with those
anticipated overages and if sell through continues as strongly as
reflected in the second quarter we may see some continued
surprises.
Joseph Garner: Okay. On the Spider-Man 2 front can you talk about when you would
expect the toy line to be released? Given that, I believe Hulk,
the toy line, started to come out early this year.
And then secondly, given some of the things that have been
included in the lawsuit regarding the impact on your licensing
activities, how does that factor into your guidance for next
year? Are you assuming that - you know, that that would have an
adverse impact on what you're able to realize licensing - and
just if you could talk about that a little bit to.
Allen Lipson: With respect to the suit and realization of licensing we do not
expect it will have any impact whatsoever.
Joseph Garner: Okay.
Allen Lipson: As we have said before, the suit should have absolutely no impact
upon licensing associated with Spider-Man 2 or the production
going forward with Spider-Man 2.
Joseph Garner: Okay, and the toy line?
Allen Lipson: Alan?
Alan Fine: Yes. The toy line will start to slowly ship in the first quarter
with the build up going into the second quarter, peaking for the
movie release, which is of course, in July.
Joseph Garner: Okay, and then the - since we have Joe Quesada on the line can
you talk about sort of your - I guess your strategic outlook for
the publishing segment? If I remember in last quarter's call Bill
Jemas was talking about revamping a lot of the titles. There were
a significant number that were dropped and a significant number
of new ones started. How are - what kind of results are you
seeing from the new lines?
And then, you know, given the comment earlier about some of the
challenges that the publishing segment faces, can you talk about
your plans to address some of those challenges?
Joe Quesada: Good morning. Actually if we're going to talk about the
performance of certain titles I'd rather have Gui Karyo handle
that particular question. He's a little bit more versed in that.
With respect to what we have planned for the upcoming publishing
schedule in 2004, we do see more growth in our top tier titles
and expansion of those top tier titles. And other top tier titles
as we make creative commitments with our top creators I think you
will be hearing probably relatively quickly down the road within
the next month or two.
We recently announced a brand new Ultimate title, which is again
Ultimate being our top selling brand, Ultimate Fantastic Four,
which was met with incredibly positive reviews by everyone. More
of these announcements will be forthcoming, but again, for
competitive purposes we would like to hold onto this information
as best as possible.
Gui Karyo: Yeah, to follow up on Joe's comment, as many of you know the
Ultimates line is our fastest growing line, which is very
directly tied to our media properties, and in light of Fantastic
Four the Ultimate Fantastic Four book is going to be launching
early next year, and we're very excited about that.
But on a more - on a grander scale, following up on Bill Jemas'
comments previously, we have gone through a process of rebuilding
our title line so that our over arching title count is about I'd
say 10% to 15% larger then it was the last time this conference
call was held.
Mostly with the re-launch of titles relating to our top tier
characters and in a couple of cases in the re-launch of a few of
the characters that we think have long-term brand value to the
company that we're trying to build more support for.
And in addition to that, we are constantly trying to guide our
content to hit all of the demographics that our company hits
across the board so that, you know, we have colorful titles being
launched from everything from the very young to the more mature
readers. All of which seem to be doing pretty well, particularly
a few launches this August, which are looking very good for us.
Joseph Garner: Now can you comment on market share in that segment? You have
been gaining share. Are you maintaining the share or what do you
see going on there?
Gui Karyo: We are absolutely maintaining a lead position in the comic book
industry. What we are focusing now on is - as I think the
industry is focused in general - is enlarging the audience. And
as anyone knows, the past two years have seen more media
attention to comic books and comic book properties then it has in
the past ten, largely because of our movie properties and we are
trying to leverage that. Now it is the question of having good
timing.
Joseph Garner: And I'm sorry, one last question. There's been a lot of talk on
past calls regarding trade paperbacks and expanding the
distribution channels on the publishing side. Can you give us an
update on what you're seeing there?
Gui Karyo: Not specifically. What I'll say is that we are leveraging our
relationships with a variety of retailers to enlarge the audience
for trade paperbacks. It - there's a large audience out there.
There is a lot of interest.
As you know, graphic novels have been growing in bookstores
dramatically over the past two years and we believe that there's
an even larger audience out there for the product that we are
trying to reach. It's a matter of finding the right combination
of timing and product.
Joseph Garner: Thank you.
Operator: Our next question comes from the line of Joe Hovorka with Raymond
James. Please proceed with your question.
Joe Hovorka: Thank you. I've got a couple quick questions. First, can you give
the licensing revenue breakouts between toys, apparel,
entertainment, and so on? Secondly, can you talk a little bit
about the licenses that have been signed for Spider-Man 2, what
those minimum guarantees look like versus Spider-Man 1, and
whether or not you book any of that revenue up front?
You mentioned something about back-end revenue on The Hulk movie.
I was under the impression that it was capped for all that
revenue, including DVD. Can you maybe explain that?
And then finally, on your Punisher equity participation for 2004
can you talk a little bit about if - let's make some assumption -
say, there's $50 million of production and $20 million of
marketing expenses. What is a breakeven on a box office number
for you? I guess what I'm trying to get at is there any
distribution fees on top of production and marketing? Is there
any back-end profitability for, you know, someone like John
Travolta or any of the other actors? That's it, thanks.
Ken West: Let me just address specifically the breakdown of our licensing
activity, which will be reflected in our Form 10-Q to be filed
later this afternoon, but just in a summary you address
specifically toys and its influence in licensing activities and
our licensed revenues from toys aggregated approximately $27
million for this second quarter, which compares to about $1
million a year ago second quarter.
And for the six months ended toys, which is really the major
contributor for growth in license income and earnings this year,
approximated $43 million compared to again about $2 million for
the six months ended last year. Allen, do you want to address The
Hulk DVD issues?
Allen Lipson: The Hulk, as we have said before, was - we had a cap on the
revenues related to the movie, which would include DVD sales, as
well as box office revenue. There is no cap of any sort with
respect to licensing revenue, and therefore it's translated into
the additional revenues we've received from the toy sales.
With respect to Punisher, there - the way it works is we do
receive - we do split with Artisan on a 50/50 basis on a true
profit in the picture. There is a relatively small distribution
fee.
With respect to back-end participations of somebody else you
know, I can't comment on that, but it would not be significant
even if there was. But I really can't comment on that point.
Joe Hovorka: Okay. Spider-Man 2 licensees?
Allen Lipson: Oh, Spider-Man 2 licensees. With respect to recognition of
revenue from Spider-Man 2 - you're talking about directly related
to the movie?
Joe Hovorka: Correct, yes.
Allen Lipson: Any Spider-Man 2 licensees...
Ken West: The revenue associated with Spider-Man 2 merchandise licensing
will be recognized in the second quarter of 2004 so...
Allen Lipson: Exactly, so none of that has been recognized yet.
Ken West: Correct. We are collecting some advances on deals that have
already been signed, but that revenue will be deferred until next
year.
Joe Hovorka: Okay, and then one final question. If I'm reading your guidance
right here in regards to, again, The Punisher movie, it sounds as
if even in your high-end estimate for guidance for 2004 you're
not counting on any profitability from the box office itself.
You're just looking for backend DVD and so on? Is that correct?
Allen Lipson: Yes, that is correct.
Joe Hovorka: Okay, thank you.
Allen Lipson: You're welcome.
Ken West: Thank you.
Operator: Once again, ladies and gentlemen, if you do have a question
please press the one followed by the four on your telephone. Our
next question comes from the line of Jeff Gates with ECF Value
Funds. Please go ahead.
Dax Vlassis: Yeah, this is actually Dax Vlassis. I was wondering where would
you expect your cash to end in the year?
Ken West: We're estimating that cash at the end of the year will be higher
then presently, but in the range of approximately $165 to $170
million.
Dax Vlassis: Okay, and then the other question I had with respect to your
comment on the ROI projects to increase the long-term value of
the company, can you sort of draw a box around, you know, maybe
what that can mean as far as, you know, what type of acquisitions
you would contemplate or joint ventures - would it be on the
licensing side to gain more content? Or if you could just kind of
elaborate on what you're thinking and maybe also the minimum
hurdle rate for your return on investment project?
Allen Lipson: Well, I can't - we really can't comment on that now because we're
just beginning the process. It's a very - you know, it's a formal
process that we're doing - that we're undertaking and a very
in-depth process. I can say what we're not going to do - it's
much easier to say what we're not going to do.
We're not going to acquire manufacturing operations. We're not
going to open up retail stores. We're not going to acquire, you
know, a movie studio with lots of assets. This is what we're not
going to do.
The issue is we're looking at each of our lines of business from
toys, to licensing, to publishing in depth and to determine where
can we get the maximum return and - in each one of these
divisions and businesses, and where can we invest in the most
prudent manner possible. And at this time I think it would be
premature to even, you know, speculate other then to say what
we're not going to do.
Dax Vlassis: Have you contemplated a minimum hurdle rate for these types of
investments?
Allen Lipson: At the present time, no. That's part of this entire process
because it may be a minimum hurdle rate - it may be one thing,
for instance in publishing, but it could be something different
in licensing so it would depend. It really depends upon the
businesses that we're looking at. It depends upon the operations
that we're envisioning on a go-forward basis, so the hurdle rates
could be different and it wouldn't be necessarily one hurdle
rate.
Dax Vlassis: Okay, thanks.
Allen Lipson: Sure.
Operator: Our next question comes from the line of Gordon Hodge with Thomas
Weisel Partners. Please go ahead with your question.
Gordon Hodge: I just had a couple of follow-ups. One, in the toy number you
just mentioned the license revenues. Does that - I assume that
includes video game revenue, and then also Daredevil DVD I think
is selling pretty well and it sounded like you're not expecting
any contribution from that, however, until next year. Is that -
did I hear that correctly?
Ken West: Yes. I'll address those questions in order. The reference that I
gave before on the magnitude of the toy licensing for the first
half and this most recent second quarter does not include any of
the electronic games. That's included in another category, which
you will see in today's filing of the Form 10-Q.
And specifically our participation in the Daredevil DVD would be
we do anticipate that that will be collected and recognized as
income most likely in the first quarter of 2004.
Gordon Hodge: Great, thanks.
Allen Lipson: Sure.
Operator: Our next question comes from the line of Arvind Bhatia, Southwest
Securities. Please go ahead.
Arvind Bhatia: Hi, a couple of follow-ups for me as well. Can you clarify on
Spider-Man 2 royalties - Ken, I think you mentioned that you will
not be recognizing the advances that you're getting. And from
what I understand, typically you do recognize the present value
of the minimum guarantees. Is this different from the other
licensing deals that you have that evolved from this model that
you don't recognize this?
Ken West: Yes, the principal difference between a specific movie license
and general other merchandise licensing from multiple characters
is that these licenses contain a deliverable such that - very
much like an "earliest on shelf" date precluding the licensee
from actually putting the licensed property on the shelves at
retail, you know, no sooner then a certain date, so that date has
to pass for the culmination of the earnings process to be
completed.
Arvind Bhatia: Okay, I've got it. And then internationally can you talk about
what the revenue run rate is right now - you know, revenue income
run rate as a percentage of your sales and where do you see that
12 months out?
Ken West: For 2003 the international flavor, or the percentage of portion
for our total licensing activity is less then 10% of total and we
do anticipate that to rise in our '04 guidance slightly.
Arvind Bhatia: Okay, thanks.
Operator: Mr. Lipson, I would now like to turn the conference back over to
you for any closing comments.
Allen Lipson: I want to thank everybody for attending Marvel's investor
conference call and we look forward to hosting this call again
after release of our third quarter earnings. Thank you,
everybody.
Operator: Ladies and gentlemen, this does conclude your conference call for
today. We thank you for your participation and ask that you
please disconnect your line.
END