JAKKS Pacific Inc (JAKK) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the JAKKS Pacific second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Jack Friedman, Chairman and Chief Executive Officer of JAKKS Pacific. Mr. Friedman, you may begin, sir.

Good morning, ladies and gentlemen. I am Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the second quarter and six months ended June 30th, 2005.

With me on the call today are Stephen Berman, President and COO and Joel Bennett, Executive Vice President and CFO. I will provide an overview of the quarter and our operational results. And then Joel will provide detailed comments regarding the financial results. I will then conclude the prepared portion of the call with highlights of our product lines and current business trends before we open the call for your questions.

Before I begin, I would like to point out that any comments made about future performance, events or circumstances, including estimates of sales and earnings per share for 2005 and forward-looking statements are subject to safe harbor protection under the federal securities laws. Such statements reflect our best judgment today based on current market trends and conditions and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected and forward-looking statements. For details concerning these and other risks and uncertainties you should consult our most recent Form 10k and 10q filed with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. With that, I will begin.

Our second quarter was highlighted by record revenue and a significant increase in year-over-year profitability. During the second quarter, our revenue growth was complimented by an increase of 390 basis points and operating margin.

Over the years we have channelled our marketing and product development expertise to build a diverse portfolio of innovative licensed and nonlicensed consumer products. We offer key product lines for all types of consumers and retailers and today JAKKS Pacific products are sold in virtually every type of retail environment.

True to our vision, this diversity offers JAKKS more consistent revenue flow throughout the year with products that have selling seasons counter-seasonal to those of traditional toys. The end results are stronger diversified sales, higher operating margins and improved earnings. For the second quarter of '05, net sales increased to $127.1 million and net income increased to $11.6 million or $0.39 per share.

During the quarter, we had several strong contributors to our record revenue. Our internally developed Fly Wheels vehicle product line continues to perform well and we are excited about its potential during the upcoming fall and holiday season. Also during the second quarter, we maintained our category-leading position with our plug-it-in-and-play TV games and we experienced strong sales of Cabbage Patch Kids, our Sky Dancers small action doll line, Doodle Bear plush line, and our boys action figures.

In addition our international business is performing quite well and was up over 100% from the second quarter of '04 as we continued to expand our distribution of our lines to Europe, South America, Australia and New Zealand. In addition, with the recent acquisition of Pet Pals product line, coupled with a number of new licensing agreements and new products from all JAKKS divisions, we have many exciting offerings for the second half of '05 and beyond.

With the Pet Pal acquisition, while it is one of the smaller deals we've done recently, it's an exciting one. The pet products industry is a very large industry. Pet Pals offers us the opportunity to expand relationships with many of our existing retail partners and it also opens up new retail outlets for us as well. Something we look for in acquisitions. In addition to the core Pet Pal line of pet toys, treats, clothing, and beds, we believe we can add innovation to the category. Our development teams are working on a number of new initiatives that we believe will grow that business in the coming years. I will expand on that a bit more later in the call.

Our financial position remains very strong at the end of the second quarter with approximately $256.4 million of working capital including cash and equivalents of $192.5 million. We have ample capacity to pursue additional strategic acquisition opportunities and for our ongoing investment in organic growth. Before I get into more details about our products and growth opportunities, I will turn the call over to Joel Bennett for a review of our financials for the second quarter and the first half of '05.

Joel.

Thank you, Jack. Second quarter net sales increased to $127.1 million in 2005, compared to $109 million in the comparable period last year. Net income for the second quarter of 2005 increased 94% to $11.6 million, or $0.39 per diluted share, compared to $6 million or $0.22 dollars per diluted share for the same period last year.

The company's net sales for the six months ended June 30, 2005, increased to $261.8 million from $183.4 million during the same period in 2004. Net income for the first six months of 2005 was $21.7 million, or $0.73 dollars per diluted share compared to first six months 2004 earnings of $9.8 million or $0.38 dollars per diluted share.

Sales of traditional toys which includes wheels, action figure, TV games, plush, dolls and promotional products were $74.2 million for the second quarter and $171.8 million for the first six months of 2005 compared with $62.1 million for the second quarter and $103.1 million for the first six months of 2004. This represents approximately 58.4% and 65.6% of overall sales respectively for 2005. Contributors in this area were Fly Wheel, plug it in and play TV games, boys action figures, Cabbage Patch Kids, Sky Dancers, action doll line, Care Bears and our new Doodle Bear plush line.

In our seasonal product category which includes Go Fly A Kite, the Noodle, and Storm water toys and junior sports items were $4.4 million for the second quarter and $13.6 million for the first six months of 2005 as compared to $8.8 million for the second quarter and $18.1 million for the first six months of 2004. This represents approximately 3.5% and 5.2% of overall sales respectively for 2005. The Noodle was impacted as a result of one of our key customers splitting the business between ourselves and another company, and while competition in this category is strong, we expect to pick up expanded placement in 2006 through improved sourcing and more competitive pricing.

Our art activities and writing instruments category, which consists primarily of our Flying Colors and Pentech division had sales of $17.4 million for the second quarter and $27.4 million for the first six months of 2005. This compares to $26 million for the quarter and $41.3 million for the first six months of 2004. This represents approximately 17.7% and 10.6% of our overall sales respectively for 2005.

This decline we attribute to continuing softness in the Activities and Stationary areas and in absence of strong licenses in the Activity area. We are working to make significant changes in this area and expect to see increases in the future, especially in Stationary with the introduction of our new Ultra Sharp pencil and a full new line of pens, pencils and other stationary items. Pet Pal pet products contributed only nominally in the second quarter of 2005 due to the timing of the closing of the quarter and its stage of development. And we are expecting that they will make a nominal contribution in the second half of 2005.

Finally, international sales were $30 million for the quarter and $47.6 million for the first six months of 2005 as compared with $12.6 million for the quarter and $20.9 million for the first six months of 2004. This represents approximately 23.6% and 18.2% of overall sales for 2005. The restructuring in our international division helped us penetrate new international territories and add new distribution channels around the world. Our line of TV games, Fly Wheels, Blopens and WWE action figures were key drivers in this category for the second quarter.

Gross margins for the second quarter and first six months of 2005 were comparable at 37.8% and 39% respectively to the same periods in 2004. Lower tooling costs were offset by higher royalties.

SG&A expenses increased $500,000 to $33.5 million, or 26.3% of net sales. This compares to 30.1% of net sales in the second quarter of 2004. Lower operating expenses including stock-based compensation was offset in part by higher advertising, product development and appreciation and amortization. For the first six months of 2005, SG&A expenses increased $15.5 million to $74 million, or 28.3% of net sales. This compares to 31.9% of net sales in 2004.

The decrease as a percentage of net sales of 360 basis points is due to higher sales growth compared to our operating expenses, some of which are fixed in nature. The dollar increase is primarily due to an increase in advertising for our products, including Play Along which have proportionally higher advertising.

Operating margins for the second quarter and first six months of 2005 increased 390 basis points and 360 basis points respectively, compared to the same periods last year. We expect the margin to wind up in the 11 to 13% range for all of 2005.

For the quarter, our video game Joint Venture produced a profit of $1.2 million compared to $4,000 in 2004. This was due to a new X Box game release in 2005 and no new titles in the same quarter last year. For the six months the JV profit of $1.3 million was approximately $900,000 higher than the same period last year. We expect to see the JV contribution accelerate in the second half of the year as we release three new full-price titles.

Cash flow from operations of the second quarter of 2005 was $11.6 million for the quarter and $18.5 million for the first six months. This compares to $16.8 million for the second quarter and $38.2 million for the first six months of 2004.

Our financial position remains very strong even after the acquisition of Pet Pal and we ended the quarter with $192.5 million in cash and equivalents and $256.4 million in networking capital. Accounts receivable decreased nominally to $77.2 million from $77.4 million at the end of the first quarter with DSOs of 55 days, up slightly from 52 days.

Inventory increased to $72.2 million from the March 31st balance of $62.8 million with DSIs of $98, up modestly from 89 days. Inventory levels reflect a transition from the back to school season into the peak third quarter shipping season. We expect to see lower inventory levels by the fourth quarter.

In addition, we expect to continue to improve cash flow and reduce working capital needs in the long-term, both of which will have a favorable impact on our return on equity. With that, I'll return to call back to Jack Friedman.

Throughout the years we have worked hard to build JAKKS Pacific into the company it is today. We used our marketing know-how, product development capabilities and relationships on the manufacturing side with our licensing partners and with our diverse retail partners to successfully position our growing portfolio of consumer products in the U.S. market and throughout the world. In turn, we more than doubled our revenue during the past three years.

Our recent acquisition of Pet Pal, from which we now have is a promising line of pet products, including toys, treats, clothing, toys and beds based on American Kennel Club, SpongeBob SquarePants and other licenses, provides us with an entry into additional new retail channels and consumer product categories. We are confident that relationships we have cultivated since our inception ten years ago will help us place the pet products in a number of our mass accounts where the line is not already sold. In addition, we look to expand the pet line with innovative products that will capitalize on popular trends or for pet owners unique and well-priced supplies for their pets.

As we reflect on the past ten years and also the state of our business today, several factors resonate with us. Our business strategy since inception has been to expand through organic growth as well as with meaningful strategic acquisitions such as Toy Max and Play Along are great examples.

From Toy Max, we not only got Go Fly A Kite and Noodle seasonal products, diverse consumer products from our toy portfolio but we all got a sleeper product called Activision Ten In One TV game. We had the vision and insight to take this one-off product and turn it into large category for JAKKS and an even larger one for our retail partners as well as a host of competitors. But competition is healthy and as the category matures and evolves and our careful planning comes into effect, we remain committed to this line for the long term.

We went out quietly in 2003 and 2004 and secured today's and yesterday's top licenses to ensure that we would have very good content. We continue to seek out and source the latest technology and innovation. We've been able to maintain an incredible price point, even with the technology improving with each and every unit.

We took that one Activision team game unit and turned it into a line of more than 20 different SKUs to date. Through the Toy Max acquisition we also got our foot in the door at QVC and subsequently started an entire telemarketing sales department. We also used that one product to get us into electronics channel and many other channels that now carry TV games and other JAKKS consumer products who might not have before. Toy Max had Activision games in the Avon catalog and just a handful of other retailers, and today we sell TV games at over 300 different retailers.

Play Along is another example. With Play Along, they had a number of key kid properties for '04, including Care Bears and Cabbage Patch Kids. We knew they had key products that were timeless. We knew they had a fantastic management team that would prove to be a key asset to JAKKS. We believed like them, that classic properties that we were going after would be new to an entire new generation of children today.

And, yes, we did expect and plan for a downtrend in Care Bears. We have worked closely with Play Along to manage inventory and expectations at retail and are looking forward to bringing the brand back to even higher numbers in 2006 as we gear up for the new Care Bears TV show. With input and guidance from our Malibu team, we've put the Doodle Bear under Play Along, which is among Play Along's top sellers for '05 and a top seller at retail.

Turning to our existing lines of business, as we look to the second half of '05, based on early responses from our retail partners and indications for our fall holiday sell-in, we remain positive about the remainder of the year. I would like to highlight a few of these lines that we are especially excited about. We will all also address a few areas where we have room for improvement. Then we will open the call for questions.

JAKKS Pacific continues to be the category leader in TV game plug it in and play segment. And this category is great for our company story for '05.

For the quarter, the star seller was Star Wars Episode 3 and our wireless version of Star Wars will be on shelves in the second half of the year. As the category matures and we learn more about the business, we are seeing that our kid-driven and adult-interest titles are emerging as top sellers.

We have a fantastic lineup for the holiday season, highlighted by several titles for girls: Dora the Explorer, Disney Princess and Care Bears. For all kids we have SpongeBob 2, Disney 2, Nick Tunes, Fantastic Four and Dragonball Z and even titles for all ages including adults such as Wheel of Fortune and Bass Fishing.

We're not seeing single unit sales in the vein of what we did with Miss Pacman and Pacman. The individual SKUs continue to sell well and are expected to contribute to our traditional toys category moving forward.

In boy's action, our WWE action figures and Fly Wheels both were strong contributors in the second quarter. We had the Fly Wheels product line of collectible wheels and tires with launchers at most of our major customers in the U.S. and internationally and we have expanded the line with a radio control Fly Wheel, multiple play sets and accessories, and also the introduction of skateboard Fly Wheels for the third quarter. We expect further growth this internally developed vehicle line later this year and into '06 and beyond.

In seasonal, overall sale of our kites turned out to be within our expectations with licensed kites as particularly strong sellers. Also in kites, we gained market share as as a result of having increased distribution of our kite program in warehouse clubs and [inaudible] channels.

Our Play Along division continues to bring exciting products to the market and they are building brands for the long term. The most pleasantly surprising line from Play Along is Doodle Bear, a 15-inch stuffed teddy bear made out of cotton fabric that comes with washable markers that kids use to write on their bears and all the writing comes off with a simple rinse in the washing machine. The sales of these items have exceeded our expectations. For the second half of the year, we have increased production and are adding two additional SKUs, the Magic Glow Doodle Bear and Doodle Bear Monsters for boys.

The Sky Dancers line of flying mini-action dolls was introduced this past spring to excellent sales. For the fall, we have new items like the Delight Lightup Sky Dancers and Sky Dancers Lightup Castle. Sky Dancers have recently appeared on the Toy Book"What's Hot" list for the months of May and June.

Our plan for the reintroduction of Cabbage Patch Kids is firmly on track. We introduced this line in the fall of 2004 with one item, the classic blonde-haired Cabbage Patch doll. This past spring, we increased the line to four items adding corn silk hair kids, separate fashions and Cabbage Patch Ponies. And for the fall, we have increased the range to eight SKUs by adding Cabbage Patch Babies and other fun items.

We are extremely pleased with the success we have had with our reintroduction of this classic brand and look forward to it becoming another evergreen brand for JAKKS. Cabbage Patch Kids have also recently appeared on Toy Book's "What's Hot" list for the month of June.

Care Bears, which was recently awarded Property of the Year at this past June's international licensing show, we are now selling the line for its fourth year since our introduction in 2002. We continue to build on the foundation we've established for the line and, as expected with the property at this point in its life cycle, we plan for a downward trend for the line for the fall of this year and sales are right on target. We are managing the brand to a more conservative level for spring 2006. However, we are very excited about the animated TV series plan for the fall of '06.

We continue to have an exciting product line for holiday 2005 of collectible plush preschool and feature plush such as the Share A Story bear that reads stories along with the kids and Smart Checkup Care Bear. are bears have been firmly integrated back into pop culture and in the minds of kids as we continue to have strong retail placement and commitment.

Even though the first half of 2005 has been a record, we continue to identify opportunities for improvement in our Crafts and Activities and Seasonal categories. In Art, Activities, and Stationary, we have taken a close look at these businesses and are working on ways to improve them with new and wonderful innovations. We have had an overall decline in both categories and have been working to learn why and what we can do to revitalize this business.

We have the team in place to make this a reality and are pleased to announce our brand new Ultra Sharp liquid graphite pencil. This revolutionary number two equivalent pencil never needs to be sharpened, works on standardized tests, and is a prime example of how JAKKS takes traditional products and makes them better. For students, architects, designers, doctors and many other professions that use pencils our Pen Tech division has secured placement of Ultra Sharp into many retailers nationwide and are striving to change the way people write. This pencil was internally developed by JAKKS.

In Art Activities, while we're disappointed with the sales we've seen for the few past quarters, we're optimistic that we'll be able to grow this business in the near future. We have new Care Bears and My Little Pony activities that are shipping for the fall, as well as Nickelodeon Splat which is being sampled in over one million Nick Jr. magazines and also our new If You Say So line which capitalizes on some of today's hottest trends and targets "tweens," a key demographic for activity.

On the seasonal front, which includes our Go Fly A Kite and Funnoodle division, we have experienced a decline in sales of our foam line of pool products due to increased competition and pricing pressure. Looking forward to spring '06, we have secured new manufacturing sources, strategically located throughout the U.S. as well as Asia and Europe, allowing JAKKS to be much more competitive while not compromising the high standards of quality and maintaining our reputation as the leader in this area of product. With this initiative, we have for the first time in several years key new retail space for '06.

Based on the first six months results from our existing product lines and confidence in what we have going into the second half with a number of new multi-toy licensing agreements and product offerings we have slated for the fall, we are re-affirming our guidance of $600 million in revenue and earnings per diluted share, 660 million in revenue and earnings per diluted share of $2.28.

In closing, we are excited about our continued record growth and we will continue to leverage our expertise to increased shelf space with our existing and new retailers as well as expand our product offerings. We will continue to use our strong balance sheet to reinvest in JAKKS through product development and by increasing advertising and marketing initiatives prudently, as well as seeking out strategic acquisitions.

With that, I would like to open the call to q & a. Thank you all.

Thank you. We will now begin the question and answer session. [OPERATOR INSTRUCTIONS] The first question is from Arvind Bhatia from Southwest Securities.

Hi. Actually this is Craig Bell for Arvind. Good morning. I was wondering if you could give the breakout of revenue for Play Along for the quarter.

Well, this is Jack Friedman speaking. That's very difficult to do. Once we acquire a company, many things are integrated, as I did mention earlier.

Doodle bear, as an example, which was a good contributor to our sales, came from JAKKS Pacific and put into our Play Along line. So it's very difficult to -- I understand your question, but it's very difficult to answer it. Once again, once we integrate things, it's hard to be specific and break out different categories. We do become one company.

Okay. I was just trying to get like the core growth.

I understand. That's why I'm trying to explain it's very difficult or nearly impossible, if not impossible to do that, the way we integrate our business segments.

Okay. And then on the last call, you indicated that TV games were tracking, I think 40% above the year prior to that. Is that still the case? Are you still seeing strong year over year growth?

We are seeing strong year to year growth, particularly on new titles. Our Pac-Man and Ms. Pac-Man games have slowed down. They have to slow down.

Our SpongeBob is doing great, Dora the Explorer and other Nick properties combined with our Nick Tunes, Disney is doing great for us. We're doing great with it. It's a fabulous line and a whole new world for us. We have wonderful exciting ideas for it for next year beyond just new licenses. But, brand new break-through technologies. We're very, very bullish and excited about it.

We're up in the six month period year over year but the revenue is coming from a broader number of titles so the flow is going to be different than it was last year with Pac-Man and Ms. Pac-Man.

We've gone through a fast-growth cycle with the category and we've learned certain things. As example, hardcore game titles don't work particularly well. The very easy to play adult titles work well. And the kids titles like Disney, etc, work great. Our EA Sports did not work very well. Did not work very well for us.

Okay. And then lastly, should we still be thinking about the Star Wars one as the big title of the year?

No. I wouldn't say that. I would say Star Wars will be great and is selling great. It's different than last year, where Pac-Man and Ms. Pac-Man were a huge portion of the business. It's much more spread over many, many titles like our Disney titles, Nick titles, Star Wars of course, and many others. Spongebob 2 looks like a big winner. It's much more evenly spread than it was last year.

Okay. Thank you.

Our next question is from Anthony Gikas from Piper Jaffray.

Good morning guys.

Hi, Tony.

Couple questions for you. Could you give us a little description on how the organic growth was in the quarter and perhaps year to date. I know it's tough to get your arms around exactly, but if you could at least be directional with that. Number two, how are margins holding up on the plug-and-play business? And then I have a couple follow-ups.

Regarding the organic growth of the 15% that we are projecting year--over-year from '04, a little more than half is expected to be organic. The other portion being the anniversarying of the Play Along deal. And so we're still tracking in that range. Although with the Doodle Bear, it probably slants a bit more towards organic growth than acquisition.

As far as margins, with more and more titles and some working better than others, we've had a little bit more in terms of cleanup, closeouts in the warehouse, some modest markdowns at retail. And being a low volume quarter for the year, those had a bigger proportionate impact. But over the course of the year we expect margins to wind up in the 40% range. But not really a fundamental change. It's more just the difference in volume from quarter to quarter.

Okay. Then there's been a lot of talk with some of your competitors about increasing materials costs and labor costs. How is that impacting your business? And more specifically, do you know what the labor costs have increased in China over the last one year and over the last two-year period? Are labor costs up 5% or are they approaching double digits?

In general, lot of the components of toys is the plastic and the petroleum prices have an impact on that. But if you look at our lines between the Doodle Bear, the Care Bears, the Cabbage Patch, a lot of it is cut and sew. It's not that we're immune to it, but there are things that are -- and electronics are down.

Couple years ago we were competing with the cell phone manufacturers for the chips, but since that market has ebbed somewhat, we're able to get -- we're able to pick up a few pennies here and there that offset in part some of the increases that we might see in other areas. But, by committing to the factories early on, they pretty much eat any increase unless it's significant and sustained, which we have not seen as yet.

How about, do you know what the labor cost increases have been over the last year, though? I'm trying to get a feel for what the impact might be in the next calendar year?

This is Jack, Tony. Since we don't own any factories and labor costs are part and parcel with our costs from the factories, we're finding so far that the factories that we use anyway are trying to and succeeding in being more efficient to be able to not try to get price increases from tough guys like us that we're not -- we don't give up easily when it comes to price increases so it hasn't affected us to date, and we don't expect that it will for at least for the balance of this year.

I apologize for the last one here, if you already answered this on the call. Did you break out the non-cash stock base comp for the quarter and year to date?

The quarter was 600,000 and the year to date was 1 million.

Okay. Thanks a lot, guys.

Thank you.

The next question is from [Derek Wenger] from Jeffries and Company.

Can you give us the capital expenditure outlook for the year and what it was for the quarter.

Cap Ex was $1.9 million for the quarter that brought us to $2.8 for the year. We expect that to be about 7 million for all of 2005.

Okay. Thank you.

The next question is from [Garrett Edson] from Monarch Research.

Hi, guys. Couple quick questions. Regarding TV games, one of your competitors obviously had a problem and lowered their guidance and mentioned there was weakness in their line of plug and play TV games. What do you see over the next six months given the problems of your competitor? Do you think it's just company specific or have you been seeing any sort of softness?

This is Jack Friedman speaking. We are experiencing -- I guess I can't -- my point that we have end plus market share of the category, and our business is being spread out many, many "A" titles. Hardcore gaming titles, which was a surprise to us, like EA Sports, as example, don't sell well. Some of our competitors have those sort of titles and those sort of titles are not working. And we don't believe they will work in the future. They are a work in progress for us. Looks like we have a handle on it.

Not too much different when we ship our WWE wrestling figures. Every couple of months we ship them and have a very good handle on it. That's whats happened to TV games for us. We have a handle on it and it's a process of shipping and rolling in and I do think that it's a long-term business for us. Our market share is at 90%. I think it will grow to 95% as we dominate the shelf space and know how to move in and out products on shelf space.

Okay. Just out of curiosity regarding the wireless controllers for the fall, are you still planning on a 29.99 price point for those controllers?

We hope to get it down to 24.95 in some retailers, 29.95, yes.

Okay. Regarding the Ultra Sharp pencil, what kind of market share do you inevitably see coming from that? I believe in the Reuters article yesterday, you mentioned it was a $600 million market in pencils. What kind of market do you think you can establish out of that?

Really, you can't extrapolate anything from that $600 million category. We have no idea. We hope it's a long-term growth for us, but frankly it's new to us and we have no idea of the --

Okay. And just finally, just regarding Pet Pal. I guess number one, will you mention or have you mentioned the cost of the actual acquisition? And what do you think the inevitable contribution will be going forward really looking in 2006 just going forward?

There's a confidential agreement. It was a nominal amount of money.

Okay, great. Thank you. Sorry.

Thank you.

Thanks a lot.

The next question is from John Taylor from Arcadia. Please go ahead.

I got a couple questions. I think, Joel, when talking about the TV games business, year on year, you mentioned the first half sales were up. Could you give us a comment specifically on directionally what they looked like in the second quarter revenue wise?

And then, the second question is, Jack, I don't know if you want to talk about it, but how's the price point roughly going to compare of the graphite pencil to kind of a regular pencil? Just give the sense of what kind of premium that's going to look like?

And the third question is back to plug and play. Are plug and play games much of the international growth and, if so, could you give us a sense how much? Thanks.

Your last question first. In the international area, certainly TV games is a part of that good growth that we're seeing. We have a new team running our international that are doing a good job. JAKKS is becoming a larger company.

There are not, for the big distributors in Europe, particularly, there aren't too many large American companies for them to do business with any more. Mattel and Hasbro have their own distribution. So we are just about or amongst the biggest companies they can do business with. We're experiencing the sales gains across all our lines. Our Fly Wheels, WWE happens to be extremely hot in Italy and certainly plug and play games are doing well for us in Europe.

The next question you asked, we're not breaking out these sales, particularly of plug it and play games, but it will continue to be an important part of our business.

Regarding the pencils, I would say they're anywheres from -- from 50 to 100% more than a like pencil.

Back to the TV games for just a second. Even though you won't do it percentage-wise of total business, can you give us a trend direction in the second quarter specifically?

I think we kind of stated it, that the business is changed for us. It's ahead. And it's running ahead across more titles. As example, in the back half of the year, we have Disney Princess, Star Wars wireless, Disney 2, Care Bears, Dora, Techmo, Wheel of Fortune, Dora Jr., SpongeBob 2. It's spread out over more titles and we're garnishing even more shelf space than last year. And the revenue is spread across more retailers. It's less concentrated than in '04.

I guess what I'm looking for, is category, is TV games as a category, regardless of how many SKUs it's spread out, was it up or down in the second quarter revenue-wise?

I'd say revenue-wise was about flat in the quarter due to a couple of titles that we did mention like EA Sports, which was a disappointment. In the first half of the year combined, revenue was ahead of '04.

Okay. Very good. Thanks.

[OPERATOR INSTRUCTIONS]

With that we'd like to conclude the conference call and we thank everyone for being online and thank you for your support. Thank you all.

Thank you. Ladies and gentlemen, this concludes today's teleconference. Thank you for participating.