JAKKS Pacific Inc (JAKK) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the JAKKS Pacific third-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Jack Friedman, Chairman and Chief Executive Officer of JAKKS Pacific. Mr. Friedman, you may begin.

Good morning, ladies and gentlemen. This is Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the third quarter and nine months ended September 30.

With us today on the call are Stephen Berman, President and COO, and Joel Bennett, CFO. I will provide 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 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 (indiscernible) 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 our current market trends and conditions, and are subject to certain risks and uncertainties which would cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other risks and uncertainties, you should consult the most recent Form 10-K and 10-Q 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. We are pleased with our third-quarter and first nine-month results as we enter the upcoming holiday toy season. We see wonderful momentum for our dynamic product portfolio at retail. In the third quarter, we offered to offer our customers a diversified line of innovative products, resulting in many key product placements at retail and record sales and earnings. These record earnings were due to our record topline growth, careful cost controls and improving operating efficiencies. The end results are stronger, diversified sales, higher operating margins, and improved earnings for JAKKS Pacific.

For the quarter, net sales increased to 233.5 million and earnings increased 41% to 32.8 million or $1.05 per fully diluted share. In addition, our cash flow from operations improved -- (technical difficulty) -- I'm sorry -- improved to $54.5 million for the nine months.

Our third quarter was highlighted by a number of key successes. Our Fly Wheels vehicle line, which recently made the "Hot Dozen" list by Toy Wishes magazine, performed very well in the third quarter and we expect it's going to be a big hit in the fourth quarter as well as the introduction of our Fly Wheels radio control. Our Cabbage Patch Kids dolls and Doodle Bears plush lines, marketed under our Play Along division and other lines, including our Dora the Explorer activities from our Flying Colors division, and are also selling well in the third quarter. We continue to be the leader in the Plug It In & Play TV Games category and are expanding our leadership position with new offerings based on kid-focused titles such as Disney Princesses, Dora the Explorer, and a new SpongeBob SquarePants title.

We have secured primer retail placement nationwide for the upcoming holiday season for many of our product offerings, and the early responses from our retail partners are very encouraging. This year, we offered our customers our most diversified product offerings in our ten-year history, and we are very proud of our current and upcoming portfolio. We will be unveiling several new product offerings that will be on the shelves in 2006, many of which will be showcased next week at the International Toy Show in New York -- and we really have some fantastic new products.

But 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 third quarter and the first nine months. Thanks, Joel.

Thank you, Jack.

Picking up with the year-to-date, the Company's net sales for the nine months ended September 30, 2005 increased to $495.3 million from 389.5 million during the same period in 2004. Reported net income for the nine months was 54.5 million, or $1.77 per diluted share, compared to first nine-month 2004 earnings of $33.1 million, or $1.14 per share.

Sales of traditional toys, which includes wheels, action figures, TV games, plush dolls and promotional products, were $178.2 million for the third quarter and $350.1 million for the first nine months of 2005. This compares to $158.3 million for the third quarter and $261.5 million for the first nine months of 2004. This represents approximately 76% of third-quarter sales and 71% of overall sales for 2005 year-to-date. The largest contributors in this area were our Plug It In & Play TV Games line, Fly Wheels, boys action figures, Cabbage Patch Kids, and our Care Bears and Doodle Bears plush lines.

In our seasonal product category, which includes Go Fly a Kite, Funnoodle, and Storm Water Toys and junior sports items, sales were $1.2 million for the third quarter and 14.8 million for the first nine months. This compares to $1.2 million for the third quarter of 2004 and 19.3 million for the first nine months of 2004. This represents approximately 0.5% and 3% of overall sales, respectively, for 2005. The third and fourth quarters are the off-season for this category, thus historically soft.

Our Art Activities and Writing Instruments category, which consist primarily of Flying Colors and Pentech divisions, had sales of $15.5 million for the third quarter and $43 million for the first nine months of 2005, as compared with $18.2 million for the quarter and 59.5 million for the first nine months of 2004. This represents approximately 6.6% and 8.6% of overall sales, respectively, for 2005.

A modest increase in the activities area was offset by continuing challenges in the writing instrument segment of our business. This category was impacted by consolidation of SKUs at some of the drug channels and one of our largest customers reducing the amount of inventory on-hand. We are working on a number of opportunities for the beginning of 2006 and expect this category will be better positioned for 2006.

We are in the very early stages of the introduction of our new Pet Products line, which we will market under JPI. We expect this line to only contribute nominally to sales in 2005 and for the quarter. Jack will get into more details on the new Pet line for 2006 later in the call.

Finally, international sales were $35.4 million for the quarter and $82.9 million for the first nine months of 2005. This compares to $28.5 million for the quarter and $49.5 million for the first nine months of 2004. This represents approximately 15% and 16.7% of overall sales for 2005. JAKKS has become a crucial and valuable manufacturer to key distributors worldwide, and our efforts to go our international business are really beginning to pay off.

Gross margins for the third quarter and first nine months of 2005 improved modestly to 40% and 39.5%, compared to the same periods in 2004. Lower royalties were offset in part by higher product costs in the quarter and lower tooling costs were offset in part by higher royalties for the nine months.

SG&A expenses for the quarter decreased $5.7 million to 46.2 million, or 19.8% of net sales, compared to 25.2% of net sales in the third quarter of 2004. Lower operating expenses, including stock-based compensation and legal expenses, were offset in part by higher depreciation and amortization costs. For the first nine months of 2005, SG&A expenses increased $9.8 million to $120.2 million, or 24.3% of net sales. This compares to 28.4% of net sales in 2004. The decrease as a percentage of net sales of 410 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, which including Play Along, which had proportionally higher advertising needs. This is offset in part by lower operating expenses, including stock-based compensation.

Operating margins for the third quarter and first nine months of 2005 improved 570 basis points and 410 basis points, respectively, compared to the same periods last year. We expect our operating margin for the year to be in the 13% to 14% range. Our improvement in operating margin is due to more effectively managing the fixed cost aspect of our business, such as the recent restructuring in our International division.

For the quarter, our video game joint venture provided profit of $238,000, compared to $911,000 in 2004. This decrease was due to the payment of $807,000 to our joint venture partner in connection with our sales of WWE TV Games -- period. For the nine months, the JV profit of 1.5 million exceeded the 1.2 million last year with the higher video game profit offset by the payment to our joint venture partner. We expect to see the joint venture contribution accelerate in the fourth quarter, as we release two new titles.

Cash flow from operations for the third quarter was $36 million and $54.5 million for the nine months. This compares to $48.2 million in the third quarter of 2004 and 86.4 million for the first nine months of 2004. We ended the quarter with $228 million in cash and equivalents and $293.2 million in net working capital.

Accounts Receivable increased to $144.3 million from 77.2 million on significantly higher sales in the second quarter with DSOs of 55 days comparable to the previous quarter. Inventory increased slightly to 73.9 million from the June 30 balance of 72.2 million with DSIs at 57 days, down significantly from 98 days last quarter and up modestly from the year-ago quarter. We expect to see lower inventory levels of the fourth quarter but higher than 2004 year-end levels due to the earlier timing of the Chinese New Year and the resulting factory closures during that time. In addition, we expect to continue to improve cash flow and reduce working capital needs in the long-term.

Lastly, capital expenditures were $2.6 million for the quarter and the total for 2005 is expected to be approximately $8 million.

Now, I will return the call back to Jack.

Thanks, Joel.

For the past ten years, we have worked to build JAKKS Pacific into the company it is today. As we have grown our consumer products portfolio, several things have happened. We have expanded our retail customer base from mostly mass-merchant toy retailers to a vast variety of retail channels. We worked progressively to place JAKKS' diverse product line at these non-traditional toy sellers, some of which include pet retailers, grocery and drug chains, club stores, pool stores, specialty chains, department stores, auto stores, booksellers, gift stores, TV home shopping, and online retailers. With this expanded reach, we secure new consumers on a daily basis. As a result, the brand recognition for JAKKS Pacific and our products has grown as well.

Through diversifying our product lines, we've also become increasingly less dependent on any one particular item or line. We constantly look to build upon the brands we've licensed and create exciting new nonlicensed ones, based on proven, age-appropriate play patterns, new technology and hot trends. Our product portfolio allows us to build topline volume and replace any brands that may weaken and fall away, a normal occurrence in our business. JAKKS Pacific has consistently done this for over ten years, and we will continue for the next ten years and beyond.

Earlier this year, we introduced Fly Wheels and Doodle Bears, two new lines that we expect will drive topline and bottom-line profits for 2005. But as always, we will never bet our year or quarter on any one product. We believe we have consistently demonstrated our ability to develop products and build upon a solid foundation for JAKKS. With meaningful new product lines, a well-balanced product portfolio and our broad and diverse group of retail partners, we are well-positioned as we look forward to 2006 and beyond.

Now, some color on the drivers for the first nine months of 2005 and a glimpse of 2006. Our Cabbage Patch Kids line continues to build momentum at retail and the introduction of our Cabbage Patch Babies has been very strong. The Cabbage Patch Babies has been selected as a Toy Wishes magazine all-star for the 2005 holiday season. The entire line, which will be given even more extensions in 2006, is supported by an exciting national TV campaign.

Now, in their eighth unprecedented eight-year season at retail, our Care Bears line continued to perform to our expectations, and we feel we are succeeding in our goal to establish this brand as a perennial favorite for kids. We continue to add new Bears to the collections and fund new feature items to the line, like our great new Share-a-Story Bear. The Care Bear includes a storybook and really comes to life when it reads a story to a child.

Doodle Bears continues to be a surprise hit of the year for the Company. Before we expanded the line with a great new feature item called Magic Glow Doodle Bear, which has also been selected as a Toy Wishes all-star. This item has a magic light pen that allows kids to write with light on the bear, while the bear is glowing in the dark. Based on the success of the basic Doodle Bears, we added Doodle Monster for fall to appeal directly to boys, who we know love this item and were buying the blue bear.

The Sky Dancers line is continuing to perform well. Before we added a new deluxe lighter version as well as a magical light (indiscernible) Sky Dancer castle. New for spring of 2006, which is getting ready to start shipping from the Far East next month to retailers to set on stores shelves after Christmas, is our new Dragonflies boys action line of action figures that really fly when they are launched.

On the heels of our successful reintroductions of both Care Bears and Cabbage Patch Play Along, we will bring back to market the iconic classic Troll figure line, one of the most successful novelty collectibles of all time. The small figurines, with bright, crazy hair, Trolls span three generations, first coming to the market in the '60s and '70s and then again as a multi-billion-dollar brand in the late '80s and early '90s. Play Along will be distributing this line to specialty and gift retailers throughout North America, beginning in January.

Last quarter, we acquired Pet Pal, which we are now marketing under JPI. We believe this small acquisition will give us entree into the fast-growing pet products category and we've been working to develop a product line that we believe will shake things up in that segment of the industry. We are adding innovation and creativity to a stagnant consumer products category with loads of (ph) potential. We have secured several marquis character licenses, highlighted by MGA's Bratz and Marvel Universe of Super Heroes, and will apply them in a way that has never been done before. We will be previewing the line to our major customers next week in New York and are extremely excited.

In addition to the new items, the jewel of the line is AKC, American Kennel Club, which has become a strong brand at retail but successful in line and in-cap (ph) placement at Target and Petco in 2005. In 2006, we will continue to expand distribution of the AKC license.

TV Games began several years ago as a retro gaming category of plug-and-plays, led by Ms. Pac-Man, Pac-Man, Activision and Atari. Well, it has since evolved into a kids and adult huge-fun category. In the first half of 2005, we released eight new titles, Batman, Mortal Combat, Star Wars, Fantastic Four, Dragon Ball Z, Nicktoons, WWE and Bass Fishing. All of these titles have been a success except Mortal Combat. Batman alone was over 1 million pieces.

After some extensive research, we learned why titles such as Mortal Combat and the previously released EA Sports and Poker did not meet our sales goals. Our core consumers are ages four to nine years old and adults who like to play board games, as an example Monopoly/Scrabble. The hard-core gamer does not fit into our customer profile.

This year, we faced the challenge of the three games selling under expectations and selling quantities of Mortal Combat, EA Sports and World Poker caused an inventory problem at retail, as the sell-through was below our expectations and our retailer expectations. These domino effects led to two results; some retailers didn't order sufficient quantities of the newer titles because of the need to drive sell-through to the overall TV Games existing inventory. The bottleneck of poor selling titles crowded the shelf space for the existing good sellers, as well as new titles to be released. Many competitors trying to get into this category suffered as their titles did not perform well, and many competitors are moving out of this business as their strategy with hard-core game titles did not work. To stimulate sales at retail, various retailers rolled back the prices of certain games, with others expected to follow.

Consequently, we fast-track new titles to fit our consumer profile. Younger themes licenses, like Dora, Nicktoons, SpongeBob and Disney Princesses, movie-related properties such as Star Wars, Spiderman, Batman, Fantastic Four, Superman, continued retro titles Pac-Man and Ms. Pac-Man, and leisure titles, example Wheel of Fortune and Jeopardy.

In the first half of 2006, we will launch multiple new titles, including Winnie the Pooh, Scooby Doo, Power Rangers, Disney 2, Shrek, Over the Hedge, Bob the Builder, Superman, X Men, Sesame Street and Ghost Writer. All of these titles fit our core demographic described above. In addition, we have extremely strong titles from fall, 2005 carrying forward such as SpongeBob 2, which has sold -- SpongeBob has sold in the millions of pieces -- Disney 2, and Dora, to name a few.

In 2006, we will continue with our TV Games support at retail, as JAKKS has dedicated dramatic real estate space at retailers. We currently have end caps up to 16 feet of JAKKS TV Games and up to five different demonstratable TV set-ups in stores.

Our success extends beyond traditional toy mass retailers. We continue our support to get support at GameStop, Kohl's, Foley's (ph), Circuit City, Best Buy, Rite Aid, Walgreens, RadioShack, Lord & Taylor's, (indiscernible), as well as over 50 other retail outlet chains.

We launched game key expansion packs as bundled packs at retail for fall, 2005, and we will have the full launch at retail of individual game key expansion packs arriving on stores early in 2006.

Additionally, our competitive environment has also changed. Many have already dropped out and retailers are reporting back to us few competitive introductions.

In addition, we are excited to be debuting at the International Toy Fair in New York next week our next dramatic line of our successful Plug It & Play TV Games called Tell-A-Story. Tell-A-Story interactive books connect directly into a standard TV using plug-and-read technology and served as a fun introductory, educational reading guide for preschool-age children. We expect to partner with many various book publishers and entertainment content holders. We think this is really exciting. The Tell-A-Story system is book-shaped, plugs directly into the AV jacks of any standard TV and creates an engaging interactive reading and learning experience that will help in the fundamental reading development of young children. Individual mini-book cartridges based on popular children's books are inserted into the Tell-A-Story system so that children can build their own Tell-A-Story libraries and collect their favorite books as they grow and master reading. By pressing the large colored buttons on each Tell-A-Story, kids can interact with the story and make the characters come alive on their TV screen while also giving them the option to read at their own pace and with assistance. We are finalizing a number of exciting licenses for Tell-A-Story and will be sharing news of our partners in the coming weeks. We think this is going to be just great for JAKKS.

In activities, we spent a good amount of time in 2005 identifying weaknesses in line and redeveloping many items to reflect the most successful play patterns for the category, as well as making improvements t packaging, to make the packaging part of actual kit and to make items really pop off the shelf. For example, we have moved away from our plastic rolling cases and made soft cloths and vinyl cases that are more related to each property. Dora the Explorer continues to be a top-selling license property for girls, and our Dora activities are following in suit with sales above our forecast.

We also have internally developed If You See (ph) (indiscernible) line, which was chosen as a Toy Wishes all-star. This line was sold into our major retailers with sales reports coming in well.

In stationery, we saw our traffic at our retailers for back-to-school decline between 5 and 7%. Notwithstanding, we feel confident about our new back-to-school line and are currently showing our 2006 offering to the buyers for this category. We've spend the last 18 months repositioning the line, investing in innovation and packaging, and hope to see good results in 2006.

In seasonal, we expect to see growth in our sales of Funnoodles. In addition, we've added Spiderman and Ms. Spider to the Funnoodle line as well as other new line extensions.

Our boys action division has been performing particularly well, highlighted by our action figures and Fly Wheels vehicle line. Fly Wheels toys introduced earlier this year and has broad placement at our retail customers beyond the traditional toy retailer. The success of the line gives JAKKS the foundation for growing our Road Champs division. At the recent Toy Wishes magazine holiday media preview, that group of industry experts predicted that our Fly Wheels line would be a top-seller for this holiday season, and our reports at retail support that as well. We have a wonderful radio-controlled Fly Wheels items that retails for under $20 and also, we have a large play set that is a Toys R Us exclusive, along with a growing line of basic wheels and launches to which we have recently added skateboard wheels.

For spring 2006, we are expanding the Fly Wheels line and expect to continue with the full line, capitalizing on the increasing shelf space and fan base we secured in year one. We are also seeing continued strong sales of our MXS IR racers and trucks and trailers, all of which have become staple products from our Road Champs team.

There are lots of changes going on in the toy industry, and it has been a tough industry for some companies over the past few years. There have been a number of management changes and many companies that have not been able to innovate and make the profit changes have gone out of business. But JAKKS has remained focused and has been about to innovate and make the proper strategic business decisions that have grown our top line and has helped us to increase profitability when many companies were not able to do so.

Despite challenges that face our industry, we continue to deliver quality products at low price points to both our retail partners and diverse customer base.

As we look to 2006, we feel really good about our business strategy. The JAKKS Pacific product portfolio is rich. Our diverse line spans many categories of trade, including traditional toys such as dolls, plush, vehicles and action figures, (indiscernible) electronics, stationery, arts and crafts, kites and floats, and an array of interesting products in the pet world. We're just getting started. We believe we are truly unique in that our diversity and determination position has us looking good for the future. We look forward to the year ahead of us.

With that, we will open the call to questions.

(OPERATOR INSTRUCTIONS). Arvind Bhatia with Southwest Securities.

Congratulations on a good quarter.

You could have said "great", Arvin.

(LAUGHTER). Great quarter. A few questions here, the first one is on the growth drivers for 2006 that you mentioned. With the new TV Games line that you're talking about, it sounds exciting. Are you competing directly with people like Leapfrog, or do you think your product is going to be different enough and you will have a niche market? TV Games as a category, if you can give us some sense on where that is today, versus last year, and how you expect that generally perform next year.

Then the second question is World Wrestling. A lot of talk about that product line and how dependent you are or not on that product line. I don't know if you can give us some sense of what that is as a percentage of your revenue or earnings currently.

The let me take one at a time, Arvind. Firstly, regarding our new Tell-A-Story line, we are at much lower price points than competitors in that category. We are creating a new category. Retail for a book, which will come with two or three books, will be in the low/mid $20, and retails will probably be about 10.95 to 12.95. So it's a brand-new category -- never been done by anyone, Arvind.

What was your next question?

On World Wrestling -- I guess on TV Games, generally.

TV Games in general, which we have said in the call, Arvind, we were wrong along with our retailers in one of our guesses, that hard-core gamers would buy things like EA Sports and Mortal Combat, etc. They didn't; the consumer decided that's not what they want. They want to buy a $50 video game when they have that interest. So we've pushed our way through it. There were some closeouts; we had to throw away some chips because we didn't want to spend the money and take the risk in building up inventories, but we did have to buy the chips in advance. We've disposed of those chips that we didn't need; we've allowed for that in our P&L. Some retailers have done rollbacks. We've helped them, in some cases. Based on our sales of the last few weeks of our retailer sales, we think that the market on those weak titles will be cleaned up by the end of the year.

The kid business and part-time player like the people who buy Pac-Man, etc., is doing great -- no problems at all with that business. We are delighted with it. As we said in the call, we're going to do more and more titles. We think we have a dramatic share of the business. We introduced a total of 23 titles in '05, some of which was the aforementioned that didn't sell well. In '06, we will have a minimum of 29 new titles. We are very enthusiastic about it. We created something; it happening; it's happening for our retailers; it's one of the best-selling categories in the industry right now.

Your next question was regarding wrestling, Arvind?

Yes.

The question was --?

Basically if you can give us a sense of the percentage of your revenue or earnings that come from World Wrestling -- that license that you have.

Yes, wrestling toys are up for the quarter and for the year. Right now, they're running about 6 to 7% of topline sales. With the JV, it's approximately -- well, it's low teens in terms of our profit.

Low teens, okay, great. I will let somebody us ask questions. I will come back later.

Tony Gikas with Piper Jaffray.

Good morning. It's Steph (ph) for Tony. Just a couple of questions -- I think a follow-up to Arvind's question on the TV Games segment. Your pricing is down pretty sharply on even the newer products, those that you didn't mention were struggling. Are you helping with some of the rollbacks on the pricing of those to remain competitive with some of the weak titles? Are you seeing a pick-up in some of the sales of the new products that you mentioned at the beginning of your call, Jack?

I will answer the second part of your question. Some of our new entries, particularly the kid-oriented ones, are selling excellently to our standards.

As far as the pricing, I think some of the retailers, such as Wal-Mart, have picked this out as a hot category and want to be price leaders. Other retailers, as I'm sure you know, over the last couple of years have followed suit and matched prices such as Target and Toys R Us. We have not reduced our prices. If they want to take a lesser margin, then we have no control, no control over that whatsoever. As we mentioned earlier, we have moved out of the hard-core game titles, such as Mortal Combat, etc.

Okay, thanks. Just a couple of others, a couple of housekeeping -- the royalty expense in the quarter was slightly below what we were looking for. Anything changing in terms of your contracts, specifically, on TV Games?

No. It's primarily a result of the mix, and it does also include a number of -- some of the titles that weren't working, you know, the write-off of guarantees and any advances that we haven't recouped. So that is pretty much on the high side. But as far as royalties on products sold, it was probably 1 point less than what we are showing.

Then just last, on the selling expense and some of the SG&A leverage you saw on the model in the quarter, if you could provide some additional color around some of the specific line items within those categories that may have benefited the quarterly results?

It was about $3 million different on the stock-based compensation between the option comp and the restricted stock expense for the quarter year-over-year. In addition, in the third quarter of last year, we had about $2 million in legal settlements unrelated to the WWE that we had accrued at that time. So, for the quarter, I think the total was about 7 million, so there was an additional 2 million of leverage in addition to the two call it one-timers.

Derrick Wenger with Jefferies & Company.

Yes, I may have missed it. What were capital expenditures for the third quarter? What is your estimate for this calendar year and next?

$2.6 million for the quarter and we expect it to come in at $8 million for the year.

Okay, and next year, any plans for CapEx yet?

It should be approximately the same. We've historically had -- or we've had lower amounts than we've had historically because of the changing product mix more cut and so in the stuffed dolls and plush lines. But we would expect it to be in the 8 to $10 million range, and we will finalize that when we give our guidance for '06 in February.

Okay, thank you. Good quarter.

Edward Woo with Wedbush Morgan.

All right, that was a great quarter. My question is what was that 1.4 million of other expenses in the income statement? The last question I had is is the raw material cost reflected in your 2006 pricing? Thanks.

Regarding the other expense, we've written off our investment in a Chinese joint venture that we don't expect to get the value from going forward.

As far as the cost of -- could you restate the second part?

Sure. I was wondering what was your outlook for 2006 raw material costs and whether you were going to follow some of your competitors' lead in terms of raising prices for 2006?

In general, yes, we've calculated material increases and labor increases into any -- (technical difficulty) -- items, and we plan to stay constant with the margin criteria that we set up. This goes for all items that we develop.

On existing items, many of the cost of goods are locked in by the manufacturers.

Regarding domestic freight, you know, we have contracts with our trucking companies to ensure consistency with the pricing. Most of our domestic shipping is freight collect, so it's actually picked up by our customers.

All in all, we believe that we have, to the best of our ability, planned, based on the economic impact to all of the different areas of the business, both inputs and output.

All right. Thanks a lot.

Sean McGowan with Harris Nesbitt.

A couple of questions, if I may? This is probably for Joel. Can you talk a little bit about Accounts Receivable reserves? You know, they don't appear to have gone up as much as receivables themselves, so if you can talk a little bit about that? Thank you.

In general, they will go up only if the accounts are old or if the accounts are in question. So, the mere fact that they are going up, if it's to grade A accounts, a lot of the business is Wal-Mart, so we are not reserving that. We do reserve on all deductions and things that we have related to programs that we have, so you wouldn't necessarily see that go up. What does go up, based on overall volume, would be the reserves for allowances, which are more volume-driven.

Right, then that is on the liability side?

Yes.

So, if you're talking about adjustments in pricing to help clean out some of that inventory, why would that not have gone up more in the third quarter? You know, you said you had allowed for that, so I would expect then, on the liability side, that the reserves would be higher.

Well it also -- what affects the reserves is, as they take the deductions and more so in the last couple of years rather than waiting until the end of the year, a lot of the deductions are taken as they go. So it's a dynamic account in that we will accrue for programs and markdowns that we might grant, but at the same time, it goes down as they are taken by the accounts, which is actually sooner than they have historically taken them.

Right, so you are not just waiting until the items actually sell?

No.

Okay, another question -- could you just comment directionally on U.S. shipments of TV Games in the third quarter versus the same period a year ago?

U.S. meaning domestic sales or FOB versus domestic?

No, I meant domestic sales.

We don't break it out.

I don't think Sean is asking whether it be domestic or an FOB sale; I think he is referring to sales in the U.S.

Yes, that's right, Jack.

I got you.

I know you don't break it out, but on the last call, you just said directionally whether it was up or down. I think you indicated that it was down in the U.S. Whatever it is (indiscernible) it was pretty clear that it was down a little bit in the second quarter. I'm just wondering if you've got a recovery -- (multiple speakers).

The best light that I could give on that -- I would say that, because of the failure of the hard-core gamer stuff, sales overall would be somewhere in the range, likely as we get through Q4, will be similarly in total to last year's. In other words, more good kids titles and less of the hard-core gamer, and Pac-Man and Ms. Pac-Man sell beautifully but cannot live up to the introductory stage of it. But by having 26 new titles out there, most of which are doing wonderfully for us overall, I would say, through Q4, sales will be pretty similar in total to sales of 2004 in the U.S.

Okay, thank you. The last question I had is on stock-based compensation. Assuming that -- it's not a forecast, but assuming at today's stock price, what would the impact be in the fourth quarter versus last year for that expense line?

About $1 million in '05, compared to 5.1 million in Q4 '04.

Okay, you mean so a benefit of about 4 million?

Yes.

Okay, thank you, and thanks for taking the questions.

Tony Gikas with Piper Jaffray.

Just one follow-up on guidance -- I'm wondering, Jack or Joel, if you could speak to some of the assumptions in the fourth quarter, given that you have outperformed expectations by roughly $0.15 to $0.20 to date. Anything behind that fourth-quarter guidance?

I think -- this is Jack speaking. I think that we are in a conservative mode, in a tough economy, with all the variables that are out there. Our position is to be comfortable with our given forecast for the year and to stay with it. We feel very comfortable and feel that it's proper for us to stay at the same 2.28 for the year.

Thank you.

Thank you.

Thank you all very, very much. Thanks for your attention. We hope to continue and expect to continue to prosper as a company and for our shareholders. For those of you who will be at the Toy Fair, we look forward to seeing you. Thank you all very much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect.