Marvel Q2 Financial Report

Marvel Q2 Financial Report

Jay Cochran - August 05, 2008
Marvel Entertainment, Inc. (NYSE: MVL), a global character-based entertainment and licensing company, today reported operating results for its second quarter and six months ended June 30, 2008.

For Q2 2008, Marvel reported net sales of $156.9 million and net income of $46.7 million, or $0.59 per diluted share, compared to net sales of $101.5 million and net income of $29.1 million, or $0.34 per diluted share, in Q2 2007. The year-over-year improvement reflects a strong performance in the licensing segment and initial contributions from the film production segment of $28.9 million in net sales and $7.7 million in gross profit attributable to a portion of the foreign presales for the Iron Man and The Incredible Hulk feature films

(1) Effective January 1, 2008, revenue and operating income from Marvelís licensee Hasbro previously reported in the toy segment is now recorded within the Licensing segment. Marvelís in-licensed toy lines are now aggregated with corporate overhead in ďAll Other,Ē reflecting the Companyís exit from this business. Segment information for the year-ago periods has been restated accordingly.

Marvelís Chairman, Morton Handel, commented, ďRevenue from Marvelís film production segment commenced in the second quarter with the release of Iron Man and The Incredible Hulk. Weíre very pleased with the success of these films which have generated $817 million in global box office receipts -- $571 million from Iron Man and $246 million from The Incredible Hulk -- with Iron Man still to open in Japan. Because of the timing of our distributorsí revenue reporting, our Q2 results did not reflect any revenue from the filmsí box office performance. We did, however, record initial revenues in Q2 from the foreign pre-sales of both movies. In addition, the high level of media and consumer interest in these two films helped to drive strong results in our domestic and international licensing divisions in the period.

ďWith growing international sales to complement our already strong domestic licensing program and a focus on generating higher value from online and interactive activities, we believe Marvel is well positioned as we develop our pipeline of future self-produced feature films.

ďDuring the second quarter we repurchased, at a discount to face value, $46.7 million of the Mezzanine notes outstanding under our film slate facility. The repurchase reflects our long-term confidence in the film slate, improves our ability to seek enhancements to the film slate structure, and significantly reduces our net interest expense on the facility going forward.Ē

Second Quarter Segment Review:

- Licensing Segment net sales increased to $94.9 million in Q2 2008 from $65.6 million in Q2 2007. The increase was driven primarily by the recognition of revenue previously deferred due to earliest-in-store restrictions related to the Iron Man and The Incredible Hulk feature films. The increase was partially offset by a decline in Spider-Man JV net sales to $13.0 million compared to $18.2 million in Q2 2007. Operating income in the licensing segment increased 54% on a year-over-year basis to $77.5 million in Q2 2008 from $50.2 million in Q2 2007. Q2 2008 licensing segment operating income benefited from an $8.3 million reduction in a reserve we had taken in Q4 2007 for amounts claimed due to Sony, our joint venture partner in our Spider-Man merchandising limited partnership, as our share of merchandise participations paid by Sony to film talent on Spider-Man movies. The reversal was made after Sony notified us that it had revised those amounts. Including this reduction, which has been recorded as a benefit to SG&A in the licensing segment, the licensing segment operating margin for Q2 2008 was 82% compared to 77% in the prior-year period.

(1) Effective January 1, 2008, income from Marvelís toy licensee Hasbro, Inc. is reflected within Marvelís Licensing segment in Domestic and International Consumer Products. The year-ago periods have been restated to reflect this treatment.

- Marvelís Publishing Segment net sales declined 3% to $31.8 million in Q2 2008 principally due to a decline in sales to the direct channel. The decline in sales principally reflects stronger sales in Q2 2007 generated from Civil War trade paperbacks and the high profile limited edition comic book series The Dark Tower and The Death of Captain America. Operating income declined 20% to $11.7 million in Q2 2008 and operating margin declined to 37% versus 45% in Q2 2007. These decreases principally reflect lower net sales volume of comic books, trade paperbacks and hard cover books, coupled with an increase in cost of goods sold driven by rising costs for talent and paper. Additionally, Publishingís operating income was affected by additional overhead related to digital media investments in Q2 2008.

- Marvelís Film Production segment recorded sales for the first time of $28.9 million, primarily from the theatrical component of the foreign presales for both Iron Man and The Incredible Hulk. Amortization of capitalized film production expenses of $21.2 million are based on our best estimate of each filmís expected ďultimateĒ performance, yielding a gross profit of $7.7 million. Q2 2008 Film Production segment operating income of $2.2 million is net of segment SG&A. These results compared to a loss of $0.3 million in Q2 2007, primarily reflecting non-capitalized film-production expenses.

- Under the category All Other, Marvel had an operating loss of $6.2 million for Q2 2008, compared to an operating loss of $8.6 million for Q2 2007. All Other includes the remaining results of Marvelís former toy operations, as well as corporate overhead, which was $7.4 million in Q2 2008 and $5.7 million in Q2 2007.

Balance Sheet and Cash Use Update:

As of June 30, 2008, Marvel had cash and investments of $122.0 million (including $10.2 million in restricted cash) with no outstanding borrowings under its $100 million line of credit with HSBC Bank. During Q2 2008, Marvel repurchased $46.7 million of its film facility Mezzanine notes, which bear interest at LIBOR plus 7%. The notes were repurchased at a 5% discount to par, resulting in a gain of approximately $2.3 million which was recorded as a gain on repurchase of debt. Marvel did not repurchase any shares of its common stock during Q2 2008. Marvel has approximately $128 million remaining under its share repurchase authorizations.

Financial Guidance:

Commencing with this news release, Marvel has now included revenues and expenses from its self-produced feature films Iron Man and The Incredible Hulk in its financial guidance. Marvelís previous guidance excluded feature film contributions. Marvelís updated guidance also reflects a modest increase in full year contributions from its licensing segment and slightly reduced operating income expectations from publishing.

(1) Marvelís previous financial guidance, provided on May 5, 2008, excluded revenues or expenses related to the box office, home video/DVD, TV or media sales performance from Marvelís self-produced films Iron Man and The Incredible Hulk. No such exclusions apply to today's guidance and all sources of revenue and expense, to the extent anticipated to be recorded in 2008, are now included.

Primary Assumptions/Drivers for Full Year 2008 Financial Guidance:

- Marvelís Licensing segment is expected to contribute net sales of approximately $260M - $270M in 2008 and to generate an operating margin of approximately 68% - 78%.

- Marvelís Film Production segment is expected to contribute revenues of approximately $65-80M in 2008 and to generate an operating margin of approximately 8% Ė 18%.

- Marvelís Publishing segment is expected to contribute net sales of approximately $130M Ė $135M in 2008. The Publishing segment should generate an operating margin of approximately 37% - 40% for full year 2008, which principally reflects investments in digital media initiatives approximating $4 million in 2008.

- The ďAll OtherĒ category includes corporate overhead and contributions from in-licensed toy lines. Corporate overhead, which excludes toy contributions, is expected to approximate $26.0 million in 2008 compared to $22.4 million in 2007.

- Marvel anticipates an effective tax rate of 38% in 2008.

- Marvelís guidance is based on 78.6 million diluted shares for 2008 and does not reflect any future share repurchase activity.

Marvel cautions investors that variations in the timing of licenses and entertainment events, the timing of their revenue recognition, and their level of success result in variations and uncertainty in forecasting the Companyís financial results. These factors could have a material impact on year-over-year annual and sequential quarterly results comparisons as well as on Marvelís ability to achieve its financial guidance.

About Marvel Entertainment, Inc.

With a library of over 5,000 characters built over more than sixty years of comic book publishing, Marvel Entertainment, Inc. is one of the world's most prominent character-based entertainment companies. Marvel utilizes its character franchises in licensing, entertainment (via Marvel Studios) and publishing (via Marvel Comics), with emphasis on feature films, home DVD, consumer products, video games, action figures and role-playing toys, television and promotions. Marvel's strategy is to leverage its franchises in a growing array of opportunities around the world. For more information visit

Except for any historical information that they contain, the statements in this news release regarding Marvel's plans are forward-looking statements that are subject to certain risks and uncertainties, including a decrease in the level of media exposure or popularity of Marvel's characters, financial difficulties of Marvel's licensees, changing consumer preferences, delays and cancellations of movies and television productions based on Marvel characters, and concentration of Marvelís toy licensing with one licensee.

In addition, in connection with Marvel Studiosí film production operations, including those related to the slate of feature films Marvel plans to produce on its own with proceeds from its $525 million film slate facility (the ďFilm FacilityĒ), the following factors, among others, could cause Marvelís financial performance to differ materially from that expressed in any forward-looking statements: (i) Marvel Studiosí potential inability to attract and retain creative talent, (ii) the potential lack of popularity of Marvelís films, (iii) the expense associated with producing films, (iv) union activity or other events which could interrupt film production, including strikes by Hollywood writers, directors and actors, (v) changes or disruptions in the way films are distributed, including a decline in the profitability of the DVD market, (vi) piracy of films and related products, (vii) Marvel Studiosí dependence on a single distributor for its self-produced films, (viii) that Marvel will depend on its film distributors for the implementation of internal controls related to the accounting of film-production activities, (ix) Marvelís potential inability to meet the conditions necessary for an initial funding of a film under the Film Facility, (x) Marvelís potential inability to obtain financing to make more than four films if certain tests related to the economic performance of the film slate are not satisfied (specifically, an interim asset test and a foreign pre-sales test) and (xi) fluctuations in reported income or loss related to the accounting of film-production activities.

These and other risks and uncertainties are described in Marvel's filings with the Securities and Exchange Commission, including Marvel's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Marvel assumes no obligation to publicly update or revise any forward-looking statements.


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