Marvel Entertainment, Inc. (NYSE: MVL), a global character-based entertainment and licensing company, today reported operating results for its third quarter and nine months ended September 30, 2008. Marvel also today raised its 2008 financial guidance for net sales, net income and diluted EPS and initiated financial guidance for 2009.
For Q3 2008, Marvel reported net sales of $182.5 million and net income of $50.6 million, or $0.64 per diluted share, compared to net sales of $123.6 million and net income of $36.3 million, or $0.45 per diluted share, in Q3 2007. The year-over-year improvement reflects an earlier-than-expected recognition of approximately $60 million in film revenues associated with the box office performance of Marvelís Iron Man feature film.
Marvel Entertainment, Inc.
Segment Net Sales and Operating Income (Unaudited)
(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 Marvelís exit from the toy business during early 2008. Segment information for the year-ago periods has been reclassified accordingly.
Marvel's Chairman, Morton Handel, commented, "In addition to achieving continued strength in our operating results during the third quarter, we made fundamental changes in our film facility and our film distribution agreement which enable us to improve the distribution terms of our coming Marvel film slate releases. The enhancements to our film slate structure reflect our long-term confidence in our self-produced feature films, while also maintaining discipline in limiting financial risk.
"We're very pleased with the success that we've achieved thus far in 2008 and that we anticipate for the remainder of the year. Reflecting our financial strength, for the first nine months of 2008 Marvel has generated cash flow from operating activities of $172 million, and we remain optimistic regarding our long-term prospects across all of our businesses. However, we anticipate only a modest performance in 2009 for revenues and net income. The 2009 decline reflects an expected substantial reduction in Spider-Man L.P. revenue, the absence of any new Marvel Studios feature film releases during the year and a related decrease in licensing activity, as well as the expectation that the economic environment may affect the performance of retailers and licensees. Additionally, the increase announced today in our financial guidance for 2008 as a result of earlier-than-expected revenue from Iron Man box office and DVD sales causes an offset in our expected 2009 revenue. Looking ahead to 2010 and 2011, we expect to return to releasing two tent-pole summer movies per year with their related licensing and marketing programs to drive our company-wide performance.
"While Marvel's core licensing business continues to grow, global visibility and consumer demand created by tent-pole feature films based on our characters, as well as the timing of related revenues, creates variability in our year over year operating income. As an organization, we take a multi-year view in managing our business. We believe such a perspective is both prudent and beneficial for our shareholders."
Third Quarter Segment Review
As anticipated, Licensing Segment
net sales declined to $58.1 million in Q3 2008 compared to $82.2 million in Q3 2007, principally reflecting decreases from Spider-Man L.P., Marvelís Spider-Man feature film merchandising joint venture, and $16.8 million in the 2007 period from unusually high audit settlements that were recorded predominately in Studio Licensing. The decline in Spider-Man L.P. revenues reflects the time that has passed since the May 2007 release of Spider-Man 3. Q3 2008 benefited from licensing activity related to the Iron Man and The Incredible Hulk feature film franchises. Operating income in the Licensing segment declined to $42.5 million in Q3 2008 from $59.0 million in Q3 2007. Licensing segment operating margin for Q3 2008 and Q3 2007 was 73% and 72%, respectively.
Marvel Entertainment, Inc.
Licensing Sales by Division (Unaudited) (1)
(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 reclassified to reflect this treatment.
(2) Domestic Consumer Products includes substantially all of Marvelís global interactive licensing business.
Marvelís Publishing Segment
net sales declined 3% to $34.0 million in Q3 2008 reflecting lower net sales of trade paperbacks and high-margin custom publishing, partially offset by increases in sales of traditional comics. Q3 2008 operating income declined 15% to $12.7 million as operating margin declined to 37% compared to 43% in Q3 2007. The decreases in operating income and margin principally reflect investments being made in Marvelís digital media initiatives, as well as the impact of higher costs for talent and paper and lower custom publishing revenues.
Marvelís Film Production
segment recorded sales of $90.2 million in Q3 2008, reflecting theatrical box office revenues from Iron Man, Marvelís producer fee to date for Iron Man and The Incredible Hulk, and the DVD component of the foreign pre-sale for Iron Man, which was released on DVD on September 30, 2008. Against these revenues, Marvel amortized capitalized film production expenses of $45.2 million (based on Marvelís estimate of each filmís expected ďultimateĒ performance), contributing a gross profit of $45.0 million. Q3 2008 Film Production segment operating income of $40.4 million is net of segment SG&A. These results compared to no film production revenue and an operating loss of $1.2 million in Q3 2007, primarily reflecting non-capitalized film-production expenses.
Under the category All Other
, Marvel had operating losses of $7.4 million and $7.1 million in the Q3 2008 and Q3 2007 periods, respectively. All Other in Q3 2008 and Q3 2007, respectively, included $0.2 million and $6.5 million in revenue, and $0.3 million and $0.1 million in operating income, related to the wind-down of Marvelís former toy operations, as well as corporate overhead of $7.6 million and $7.1 million, respectively.
Balance Sheet and Cash Use Update
Marvel experienced strong cash collections in Q3 2008, principally related to cash-basis international licensing activity. As of September 30, 2008, Marvel had cash and equivalents of $145.4 million (including $19.6 million in restricted cash) with no outstanding borrowings under its $100 million line of credit with HSBC Bank. During the third quarter Marvel repurchased, at approximately face value, $13.3 million of Mezzanine notes under its film slate facility. The purchases represented the outstanding balance of these notes, which bear interest at LIBOR plus 7%. Marvelís repurchase of the entire Mezzanine tranche, the highest-cost piece of the film slate facility, significantly reduces its future net interest expense on the film slate facility.
Collection of film production revenues of approximately $60 million and the repurchase of our remaining outstanding mezzanine debt served to reduce aggregate outstanding borrowings under Marvelís film facilities from $262 million at June 30, 2008 to $182 million at September 30, 2008.
Marvel Studios Entertainment Pipeline
(scheduled release dates are subject to change)
Marvel has raised its 2008 financial guidance to reflect the Q3 recognition and expected Q4 recognition of substantial box office and DVD revenues from Marvelís Iron Man feature film, as well as modestly improved expectations for its licensing business. Iron Man box office and DVD revenues had previously been anticipated primarily in 2009. Including the $90 million in Film Production segment revenues recorded in Q3 2008, Marvel now anticipates total 2008 Film Production segment revenues of approximately $245 - $275 million, compared to its August 5, 2008 estimate of $65 - $80 million, which was updated on September 29th to an estimate of $125 - $140 million.
Marvel has also initiated financial guidance for 2009 which reflects the previously mentioned shift of a substantial portion of Iron Man box office and DVD revenue out of 2009 into 2008, as well as an anticipated substantial decline in Licensing segment revenue. Specifically, Marvel anticipates an approximately $45 million decline in licensing revenue related to Spider-Man L.P. in 2009 versus 2008 and lower domestic and international licensing revenue as Marvel will not have any of its own film slate releases during the year. Further, 2008 licensing operating results reflect a gain of approximately $20 million related to interactive settlements which will not recur in 2009. The low end of Marvelís 2009 financial guidance reflects a discount of 10-15% related to the potential effect of an economic recession on Marvelís business.
Marvel Entertainment Ė Financial Guidance
(1) As provided on August 5, 2008.
Primary Assumptions for Full-Year 2009 Financial Guidance
Marvelís Licensing segment is expected to contribute net sales of approximately $170 million - $200 million in 2009 and to generate an operating margin of approximately 70 - 74%. Marvel expects full-year 2009 Licensing segment net sales will have approximately the following mix:
-- 50% from Domestic Consumer Products
-- 40% from International Consumer Products
-- 7% from Marvel Studios (excludes revenues related to Marvelís self-produced feature films)
-- 3% from Spider-Man L.P.
Marvelís Film Production segment is expected to contribute revenues of approximately $120 million - $130 million in 2009 and to generate an operating margin of approximately 12% - 18%.
Marvelís Publishing segment is expected to contribute net sales of approximately $125 million - $130 million in 2009, with an operating margin of approximately 34% - 37%, reflecting approximately $6 million in ongoing investments in digital media initiatives.
The ďAll OtherĒ category principally reflects corporate overhead, which is expected to approximate $29 million in 2009 compared to an estimated $30 million in 2008.
Marvel anticipates an effective tax rate of 39.8% in 2009.
Marvelís guidance is based on 79.2 million diluted shares for 2009 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 Marvelís 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.