JAKKS Pacific Inc (JAKK) 2006 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the JAKKS Pacific first quarter results for 2006 conference call. [OPERATOR INSTRUCTIONS].

I will now turn the call over to Mr. Jack Friedman. You may begin.

Good afternoon, ladies and gentlemen, this is Jack Friedman, Chairman and CEO of JAKKS Pacific. Thank you for joining us to review our results for the first quarter ended March 31, 2006. With us today on the call are Stephen Berman, President and COO and Joel Bennett Executive VP and CFO. I'll provide an overview of the quarter, 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 and then we will open the call up to questions.

Before I would 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 2006 and forward-looking statements are subject to Safe Harbor protection under federal securities laws. These 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 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. First quarter sales met our expectations and the guidance we issued on our fourth quarter call in February. First quarter sales were $107.8 million, down from $134.7 million in 2005. As previously indicated, TV games accounted for the majority of the year-over-year variance, due to a difficult comparison with last year when we shipped large quantities over our hard core gamer titles as well as large sell-in of our popular classic and kid driven titles to refill retail shelves following the 2004 holiday season. The hard core titles as I said before in our calls have not been dropped, have now been dropped as we increase our focus on the kid-driven titles and we are pleased that our strategy seems to be on target within our expectations.

Net income for the quarter was $2.3 million or $0.09 per diluted share, down from the first quarter of 2005, mainly due to the lower sales volume as well as to increased stock-based compensation and investment in product development and acquisition accounting charges. Primarily acquired order backlog relating to our recent acquisition of Creative Designs. We continue to increase our investment in product development as we apply our innovation and expertise to developing new products and line extensions of existing products. We have some extremely exciting new products in developments later for introduction, later this year, and next year. We'll talk about several of these products later in this call, and we will look forward to sharing the details with you of many of others in the coming quarters.

First quarter's top line was driven by a number of products and brands with the largest percentage of sales coming from our traditional category. Areas of particular strength were WW action figures, Fly-Wheel vehicles, plug and play TV games, Doodle Bear Plush, Cabbage Patch Kids dolls, marketed under our Play Along division and the addition of Creative Designs. In addition, our writing instruments and pet products have picked up momentum with strong placement going into the spring.

During the quarter, we also received four prestigious vendor of the year awards for consistently demonstrating excellence in multiple areas including on-time shipping, creating compelling exclusive retail programs, managing consistent inventory levels, and more. Toys R Us has recognized our boys action team for its outstanding WWE action figures and Fly-Wheel vehicle lines and also our Play Along division for its exceptional product lines. Target bestowed a partner award of excellence for 2005 to our Creative Designs division. And Wal-Mart also recognized our CDI division as international vendor of the year. We're honored by this meaningful recognition from three of the nation's most important toy retailers.

Our financial position remains very strong. As of March 31, '06, our working capital was approximately $226.9 million including cash and equivalents of $123.7 million. In 2006, we are continuing to drive innovative product development / while simultaneously diversifying and expanding our product portfolio, increasing shelf space with our existing retailers and securing shelf space in new distribution channels as we position our companies for long-term growth.

We have got a number of exciting new products scheduled for launch this spring, summer and fall, including tel-a-story, our interactive reading system for preschoolers, our electron virtual pet game line that uses our plug and play gaming technology, and our Fly-Wheel XPV flying RC. JAKKS is growing. We are using all of our strength to continue to build and expend our shelf presence and all the categories we participate in. We have a great smart young team in R&D, marketing, sales and operations. We have the capital and the desire to create and distribute more and more products to consumers world wide. We are highly confident in our growth prospects and our ability to manage the process.

Before I get more into details about these products and other exciting growth opportunities, I would like to turn the call over to Joel Bennett, the Company's CFO for review of our financial performance.

Thank you, Jack, and good afternoon, everyone.

First quarter net sales were $107.8 million compared to $134.7 million in the same period last year. Net income for the first quarter of 2006 was $2.3 million, or $0.09 per diluted share, compared to net income of $10.1 million, or $0.34 per diluted share in the first quarter of 2005. Our overall topline performance during the first quarter was lower compared to the same period a year ago, mainly due to the expected decrease in our TV games line and a shift in sales reflecting varying seasonality in selling flows for several of our businesses.

Earnings during the quarter were negatively impacted by higher product development costs of approximately $900,000, an increase of $2 million or $0.04 per diluted share in stock-based compensation, and $2.4 million or $0.05 per diluted share in acquisition accounting charges related to CDI. These accounting charges included amortization of acquired order backlog, licenses and other limited intangible assets. Turning to our sales by product categories, traditional toy sales, which include TV games, wheels, action figures, plush, role-play, dolls and promotional products were $71.2 million for the first quarter of 2006, compared to $97.6 million in the first quarter of 2005. Traditional toys represented approximately 66.1% of overall sales in 2006.

The primary revenue drivers in this category during the quarter were Doodle Bear, Cabbage Patch Kids, action figures, Fly-Wheel's and TV games which is still a nice contributor, and the addition of creative designs which contributed 8.9 million in sales this quarter. In our seasonal category, which includes Go Fly a Kite, FunNoodle, Storm water toys, and Junior Sports items, sales were $8 million in the first quarter of 2006, compared to $9.2 million for the first quarter of 2005. This represents approximately 7.4% of overall sales in the first quarter of 2006. We continue to face competitive challenges in this category, but we did achieve an increase in our core kite business, primarily due to an increase in sales to broader base of accounts and increased FunNoodle sales of the quarter.

FunNoodle sales were ahead of last year due in part of our regaining certain past business. We are seeing increases in sell-through in the second quarter as our kite and FunNoodle businesses are heavily driven by the Easter holiday, which this year fell in the second quarter. Art activities and writing instruments which consist primarily of our Syntech and Flying Colors divisions, had sales of $11.8 million in the first quarter of 2006, as compared to $10.3 million in the first quarter of 2005. These represent approximately 11% of overall sales in the first quarter of 2006.

We saw very good growth in our stationery and writing instruments lines as well as in some areas of our craft lines. We also saw increases at one of our largest retailers as well as in the drug and office super store channels. Some of the increases were due to the refill of initial--or fill of initial orders of new products going into planograms this year, and nice momentum of items on the lines including our mechanical pencils. These gains were offset in part by a reduction in the number of stationery items versus the same period last year, as well as the absence of last year's drivers including My Overstuffed Life and Hello Kitty.

In activities, our Dora the Explorer line continue to do well and many of the retailers supporting this license have also increased the shelf space allocated to it. We have expanded our channels of distribution with new placement in craft store chains, travel retailers and airport and truck stops, and we're optimistic that increases in exposure in these channels as well as our product development and focus on play patterns will all contribute to future growth in this area of business. Our international sales were $14.4 million in the first quarter of 2006, compared to 17.6 million in the first quarter of 2005. This represents approximately 13.4% of overall sales in the first quarter of 2006, and the decrease is primarily due to the decrease in TV games. We continue to strengthen our footprint abroad and leverage our distribution network to gain the larger share of the international market and are pleased with our overall progress of our international teams to date.

Gross margin for the first quarter of 2006 was 41% as compared to 40.3% in the first quarter of last year. The 70 basis point increase in gross margin is due to lower royalties offset in part by higher product costs as a result of the shift in the product mix. SG&A expenses in the first quarter of 2006 were approximately 41.9 million as compared to $40.5 million in the first quarter a year ago. During the quarter we incurred higher acquisition-related amortization expenses in connection with the Creative Designs acquisition, as well as higher stock-based compensation and product development costs.

The acquisition charges were anticipated in our forecast, however, due to a shift in the timing of the product--in the timing of shipment of order backlog, more hit in the first quarter than expected. During the quarter, we posted $757,000 in profits from the video game joint venture with THQ, compared to a profit of $150,000 for the comparable period last year. Cash used by operations for the first quarter was $7.6 million, compared to having provided 6.9 million in the same period last year. Our financial position remains very strong and we ended the quarter with $123.7 million in cash and this is after the CDI acquisition, and also working capital of 226.9 million at the end of the quarter.

Accounts receivable at the end of the first quarter were $67.8 million compared to 87.2 million at the end of the fourth quarter of 2005, the DSOs were 57 days, which is consistent with our historical seasonality and comparable to the 52 days for the same quarter in the prior year. The modest increases is due to inclusion of accounts receivable acquired in the Creative Designs acquisition.

Through ongoing working capital management and planning, inventory at the end of the first quarter decreased 7.3% to $62.2 million from 66.7 million at the end of the fourth quarter of 2005. Inventory turns were 106 days compared to 89 days at the end of the first quarter of 2005, so with the CDI-acquired inventory it, too, is consistent with our historical seasonality. Capital expenditures for the quarter were $108 million, and we expect capital expenditures for the full year to be approximately $10 million.

In summary, we're very pleased with our results this quarter and to put our results in the proper perspective, our sales and gross profit which will drive our profitability were well within the guidance range we previously gave, and the EPS shortfall adjusted for the timing of the CDI acquisition charges represents less than 0.2% of our planned operating costs for all of 2006. Based on these results and current sell-in and sell-through, we're very comfortable with reaffirming our prior 2006 earnings guidance which Jack will go through in his concluding remarks.

Thank you, Joel.

2006 is shaping up to be another exciting year for JAKKS Pacific. We knew the first quarter was going to be lower than the same period year-over-year. We also have enough visibility in our diversified business to know that with our stellar product portfolio, seasoned team of professionals in every area of business, and meaningful relationships with retailers in virtually every channel of the U.S., JAKKS Pacific is poised for some continued strong growth.

Our Fly-Wheel line of collectible wheels, radio control items and play sets continues to sell well. We expect to see more momentum from our flight segment in the second and third quarters as kids are playing outside more. We have a new item slated for the fourth quarter, our Fly-Wheel XPV, an amazing item, which flies on virtually any surface. We expect to see some competitive challenges with the item, but the opportunity is there for us and we believe we prevailed at something fun and unique and pretty amazing with XPV.

In electronics, our TV game line is focused, and although sales are not what they were last year, I discussed the call line of kid-driven titles continues to be an excellent contributor for us. We believe our strategy for maximizing the business seems to be on target and we will be introducing 20 new titles this year, Including Shrek, Super PacMan, Power Rangers, Scooby Doo, Bob the Builder, Thomas the Tank Engine and more. Retailers nationwide continue to dedicate large shelf space and we're working closely to manage inventory and the sell-in of our entire TV game portfolio.

Our new tell-a-story plug and play reading product is set to begin shipping at the end of second quarter as a virtual pet gaming system, which combine virtual pets with plug and play gaming is planned to begin shifting early in the third quarter. We are extremely pleased with the support we received on both of these items from the trade and will report back in later quarters where we're at with sell-through. DoodleBear continues to perform excellently. We added DoodleDoll and DoodlePets to the line and they exceeded our goal thus far. Doodle Bear remains one of the best selling plush categories that retail in the industry.

Our Cabbage Patch Kid lines continue to thrive and our feature doll, Magic Color Change Cabbage Patch is doing extremely well and we plan to carry this feature over to the fall to fill demand. These Cabbage Patch as a brand continues to perform extremely well and it is quickly reestablishing itself as evergreen. Our other lines such as Care Bears are picking up momentum at retail and we are optimistic that they are beginning to see nice increases in this evergreen category of business for JAKKS. We are continuing to distribute our classic Troll program throughout the specialty gift market, and we are looking forward to expanding distribution into the mass market this fall.

The highly anticipated new line from Play Along, Speed Stack will retail in the fall. The world championships of speed stacking which is the sport which we are manufacturing the official equipment for, just took place in Denver, Colorado, on April 8th, ESPN will be broadcasting the event in late August, and this will coincide with our product launch. Creepy Crawler Oven is creeping back to retail shelves in fall of 2006. This item will be featured in print ads and other promotional opportunities and Nickelodeon's new preschool property, Go Diego Go, will be launching early at retail based on positive ratings of the show. Our Go Diego line will join our Dora the explorer line at many of the retailers carrying our activity products.

Our WWE business is quite strong and we remain committed to maximizing the potential for this line, which is to say business as usual for us. We are excited to announce today on this call that we have just signed a comprehensive license agreement with Disney to develop and market a line of pet products based on Disney's most beloved classic characters. We will keep you updated on progress in the coming quarters. Our JPI pet division has been busy laying important groundwork in several directions. We're generating sales with a multi faceted approach utilizing several teams working in tandem. We benefit from the season Pet Pal team and their expansive knowledge of their industry and we are simultaneously working on sales to maximize opportunities in pet, grocery, international and other channels.

We have fantastic exposure at the Global pet expo in Atlantic City pet show, and will be at the food marketers international show in Chicago. The main trade show for grocery buyers. And in 2006 and Germany, apparently the largest international pet show is there.

We are very optimistic about our white brights oral care treats for dogs that clean teeth and freshen dog's breath. White brights were designed by an industry leader and pet treats and was specifically developed to be highly safe, digestible, and extremely palletable for dogs. Clearly consumers are in an area of business with great deal of potential with 73% of all house holes in America giving their dogs at least one soft chew treat every day according to industry stats. We enjoy this type of sales with our AKC line of premium treats and are adding a line of organic line of cat food and treats and marketed under the CFA line. These are in addition to our licensed pet toy and accessory businesses for which we recently announced our new dog line, which has been well received by consumer press nationwide.

We're laying groundwork for some momentum for other licensed pet products, based on Marvel, Bratz, and Disney characters, all of which we feel add innovation to this fast growing area. Our distribution has increased dramatically within the last few months with Wal-Mart and Sam's Club now buying our JPI pet division products as well as many new supermarket outlets. We believe our Creative Design acquisition will be a gem. There are many wonderful lines within CDI and we're elated with CDI's received prestigious nod from Target as vendor of the year. Disney is the key license for our CDI line, with product lines based on full gamut of DIsney Fairies, Princess and Ariel. Disney dress up and roll play offering is wonderful. The magical line consists of box dress-up sets, fairy dresses, tea sets, mobile phones and other role play staple. The Ariel line, the key driver is in that the Ariel underwater beauty salon we will feature on TV and it has been sold to many of our major retailers. Other significant licenses in the CDI line include builder the bear workshop and more.

In 2006 we are using our license expertise to expand our role-play portfolio by adding our first boy's license property, Black and Decker, we're also leveraging our leadership in the role play category by bringing Black and Decker kids tools to boys 3 to 6. The key driver will be the power tool workshop. It will be supported by individual power and hand tool offerings. We will be rolling out this product line in Q4 and are currently working on several strategic partnerships outside the traditional channels of distribution. These product offerings will have presence in all the major accounts domestically. Turning to guidance, we are reaffirming our previously issued guidance of $825 million in net sales, for 2006, which excludes any potential acquisitions and net income of 82 million or $2.63 of earnings per diluted share.

Keep in mind this guidance reflects non-cash charges of 8.7 million for stack-based compensation including the expensing of stock options pursuant to statement of financial accounting standards. Our business is tracking as expected. And as we enter the second quarter, we remain focussed on brand management and growing each area of our business to insure that JAKKS Pacific remains profitable all year round. We are excited about our diversified product line and are looking forward to new product launches targeted for extensive mass and specialty retail and distribution network.

We continue to expand many of our categories and brands by reinvesting in our diverse portfolio of products and through acquisitions as we position our company for continued long-term growth. As we look at the remainder of 2006, we plan to expand our long-term growth with introduction of several new leading license and non-licensed products throughout the year. We believe that JAKKS Pacific has grown to become a major consumer products company and we are extremely excited about our near and long-term opportunities. We look forward to continued growth throughout 2006 and beyond.

With that, I would like to open this conference call to questions and answer session. Thank you, all.

Our first question comes from Arvind Bhatia from Sterne Agee. Please go ahead.

Good afternoon, guys. Couple of questions, first is on getting some help in reconciling the earnings that you reported, can you talk about how much of stock based comp you had in your numbers that you guided for the first quarter, and also how much you had for the acquisition-related cost so that we can get an apples to apples number for the first quarter?

On the stock-based comp it was about 2 million, and for the acquisition accounting it was about 1.2 million versus 2.4 million.

Okay. So if we start with that assumption, then we're getting back that from the numbers and get to an apples to apples number, okay? Secondly, TV games have obviously done really well for you in the last few years. You were introducing tell-a-story and that will--and from what I can tell that looks like a pretty strong line. But just looking at the other SKUs that you mentioned and the TV games category, directionally can you tell us how you expect that line to do up flat or down? And also if you can comment on CDI as a percentage of sales after you've looked at it now for a little bit, how does that look like from a sales perspective, what you expect for the year?

The first part of your question, Arvind, if you include tell-a-story and iPets, our sales for that category should be up for the year. We certainly lost the revenue we said as many times and I think we'll stop talking about it in the future, the hard-core gamer stuff did not sell. We have about a 98% market share of this product line. We're getting huge shelf space.

Every major retailer is lined up. They aren't buying in one swoop the way they used to, when it was call it "hot" and you couldn't get enough of it, or we didn't have enough goods to fill the marketplace. People wanted to buy it in big bunches, now it's become evergreen which happens quickly in the toy business, and the retailers are buying it from month-to-month, and giving us their forecast for the year, and our sales team are doing their forecast. It is really a safer, better way for us to do business and it is going along fine. Sales year to date retail on kids' games are up over last year.

Look at that as a carrying a full category, tell-a-story and TV games and --

For the future of the year.

Yeah.

JAKKS electronics we expect to be up overall for the year.

Got it. And then CDI, I mean, are there any surprises there, I guess? Maybe another way to ask it, positive or negative surprises?

I would say the only surprise is how well it is doing and what wonderful people they are to work with.

Okay.

If you call that a surprise, it is a nice upside. You shouldn't expect anything less but it is always nice to get what you expect, and more.

And what do you think that will represent as a percentage of your business? Given the margins are very similar, in that business?

They actually have a larger number of private label and sort of health products, so their overall products are lower than the JAKKS blended margins and they're expected to deliver in the range of about 15% of our overall sales this year.

Okay. And then with oil prices going up, do you think you expect any impact on the cost of goods for you down the road, any impact, you think?

Our costs are pretty well set with our vendors for the year and those costs, along with our selling prices, which are that is it for the year, margins are looking similar to the past. Our aim is always to be around the 40% margin, depending upon product mix it could bounce one point one side or the other.

Even if--well this year you don't have to worry about that.

I don't believe so. I mean, it went crazy to $150 a barrel or something, I'm sure it would be some then quite frankly if that happened we would raise prices to accommodate it along with it, as well as everybody else would. I don't want to get stuck in that. We don't look at it as a real issue to us.

Last question, for this Christmas, Jack, anything industry-wide that you think will drive traffic, is there something that you're watching very closely for this year?

You're not speaking about JAKKS, you're speaking about the toy industry?

Both for sales you talked about some of the products that maybe started there and talk about what--

We think that our XPV has huge potential, we don't forecast anything until it's a reality and the same for iPet, the take on it by the industry and people that are seeing it think it's great. The industry overall, I don't think there are any one or two break-out categories. You have, Bratz and Barbie competing the overall fashion doll business is considerably up putting the two together. Junior electronic products are selling, and the toy industry right now is pretty quiet good.

Retailers are selling products that not one specific product driving people into the stores. I would think that the stores would be able to get a little extra margin this year. They have less give-away products.

Okay. Thanks, guys.

Thanks, Arvind.

Thank you. Our next question comes from John Taylor from Arcadia. Please go ahead.

Thanks. I got a couple of questions. Let's see, could you talk about in a normalized year, in other words, where you have all your business mix for the full 12 months, how the seasonality is likely to be different given the CDI business and the pet business, as that is ramping up. I'm trying to get a sense of you may have varying cycles going on and how that will impact seasonality and I think one of your goals is to take down a little bit. Talk about that a little bit. And where are you classifying the pet business revenue?

Actually it's--it was an omission on my part. Contributed 2.3 million for the quarter, and it's a separate category.

Okay.

So we made it a note to make sure we include that in the future calls.

Anticipating--this is Jack speaking--we anticipate our pet division ramping up quite well as we go through the year. There are certain numbers we don't know in it yet, not being in it that long, we just don't know what the upside of what prepared to ship a lot of it but we don't know the upside. CDI ships a lot of goods in Q3 on an FOB basis, and some of our new product entries this year like XPZ and i Pet, aren't shipping until the late second or third quarter, even into early fourth quarter, so I think as this year our revenue will be more slanted in third and fourth quarter than in past years.

Okay. Great.

Does that answer your question?

Yeah, pretty much. Back to the pet thing, though. I know when you were doing your due dili on the pet business in general, we know the impact at Christmas and Easter and Back to School and out to school has on the toy business, are there any big pet holidays or is there anything that dramatically shifts seasonality for our furry friends?

You have different segments of it. The food, the food and breath fresheners, that type of stuff is year-round. The license kind of pet toys are amazing, you wouldn't believe it, but it is fourth quarter as Christmas gifts to their dogs and pets.

In terms of your mix, could you hazard a guess as to what percent might be kind of annual maintenance as opposed to gift-driven?

I don't think we know that yet as we're developing so many new products in both categories. I don't think we know that, yet.

Yeah. Okay. And then on the TV games segment, have your terms of trade shifted at all? You still doing those things pretty much FOB?

I would say a similar mix depending upon the retailer that we're dealing with. It is pretty similar mix.

Okay. But it's a more normalized regular flow kind of thing.

Much more so.

Okay. Great.

Thank you. Our next question comes from Tony Gikas from Piper Jaffray, please go ahead.

Hi, Tony,.

Hi, guys, good afternoon.

Hi, Tony.

Just a couple of housekeeping questions, first. The $0.09 that you reported for the quarter, could you just reconcile that? It looks to me like it calculates to $0.07. Is that the real diluted number or is that a non-diluted? You can check that in a second.

We'll address it now. The $0.09 is a fully diluted number.

Okay. When I take that net income number and divide it by the share count.

No, you need to add back the interest expense on the convert. We include 4.9 million shares related to the convert so you add back the interest.

Got it. Thank you. Second question, is the guidance that you've given for the year, the 263, that's based on the $0.09 you reported for the quarter?

Yes.

Okay. Are you planning any pricing increases for the year?

As Jack mentioned, the pricing is pretty well set on the products that we've already shown at the toy fairs, and also our factory costs on the same items are locked, so from that perspective the margins are pretty well set.

We pretty much, Tony, this is Jack, don't have price increases, we change the product mix and how we create a product and not to upset the retailers and not to upset the retailers, and in the our mix and forecast as we see our business breaking out for the year. We can be off by a point or so, depending on the sell-throughs, not every product is the same margins as I'm sure you know.

Okay. And then could you be a little more specific on the TV plug and play business, how that performed during the quarter for you and maybe your estimate of how it performed for the overall category?

Yeah, I think that--well, I know that the kids' games has sold through very well, comping to last year, and looking to the future with new titles it looks very bright. The hard core game stuff is gone, some of that is still being filtered through the retail channels that reduced prices. It doesn't seem to be interfering with the sales of the regular price goods. I think I'm answering what you asked me, Tony? It's looking good, and then when there's virtually no competition in it, and I think when we add in tell-a-story and reactions to it our own feelings about it and add in iPets is I think the whole category grows for us.

It will be a growth category.

I believe so.

Double digits?

Hard to say. It's hard to truly forecast, and in our numbers for both iPet and tell-a-story, we don't have high, high numbers, we don't want to get caught up in that until we see what happens at retail. So we have conservative numbers built in with higher expectations and every single retail that I know of is running both of those project lines and in some cases giving it huge support with endcaps and ads, couponing, et cetera. They both look very exciting, Tony. But if you took that out of it, the hard core, the hard core gamer titles, last year probably represented close to half of the revenue in that category.

Okay. Was there any impact in the quarter from foreign currency exchange?

Just a couple of hundred thousand , it's really not significant. UK sales, the sales to UK, U.S. dollars and the local expenses in Hong Kong, are in Hong Kong dollars, which has been pretty flat, so we don't have too much exposure to that.

Okay. And then last any direction on sales numbers for the second quarter and any update on the WWE complaint?

We're not going to break it out quarter by quarter Tony, regarding the lawsuit with WWE, outside of our previous press release regarding the lawsuit. It's business between the companies as we keep saying, it is business as usual. We did issue through our attorneys and we have no more to say on it.

And then any sort of guidance on Q2 for sales?

No.

Okay. All right. Thank you, guys.

Thank you.

Thank you. Our next question comes from Edward Woo from Wedbush Morgan and Securities. Please go ahead.

Yeah, good quarter, guys. I have a couple of questions, is your accounting for CDI acquisition done? Do you think there are any additional charges coming out this quarter. And wrestling seems to be on a little bit of a uptick, you seem to be doing good on the toys, what is your outlook heading into the holidays?

I'll take the second part first and Joel will take care of the financial part. WWE toy sales are looking up, as well as internationally as well, and the video games are looking like they're up as well. WWE kind of cycles. It doesn't have huge peaks and valleys, but it has peaks and valleys, but it is certainly looking on the uptilt right now.

Regarding the purchase price allocation on CDI, there will be charges throughout the year actually over the next three or four years based on the life of the particular assets. What occurred in the first quarter is that with backlog orders, we basically have all of the profit stripped out from there and more shipped in that shorter window during the first quarter than we had originally expected, so that will actually bleed out in the second quarter and the charges will be less from the third and fourth quarter on. We are having a third party assistance in the allocation which is in process, but we're not expecting any significant changes from the preliminary numbers.

Great. Thanks a lot.

Preliminary evaluation numbers, the numbers that we've presented today are final, I'm just referring to the what we'll call the preliminary evaluation numbers on the allocation.

Thank you.

Thank you.

Thank you. Our next question comes from Sean McGowan from Harris Nesbitt. Please go ahead.

Hi, Sean.

Two questions, Joel, could you reiterate what your comment was on CapEx? I think you may have miss spoken the number for the first quarter, I thought you said 108 million.

I said 1.8 million. And then 10 million for the year.

1.8. And then--I hate to go back to this question in this order backlog but I haven't heard this before, so can you just take me through exactly what--how the order backlog affects the timing of the charges? I'm not familiar with this accounting.

Basically, when the--when we close a deal, any order backlog that they have we put a value on, and basically strips out all of the profit or most of the profit on the sales, and it bleeds out over the time period that you ship those sales. And with that FOB sales you received orders as much as 60, 90 or 120 days out, and we have an estimated flow on the backorder which, as it turns out 75, 80% of the backlog was shipped in that 6 week period that we had owned them.

Make sure I understand this. Are you saying that you are going to pay them the money of these backlogs.

No, no, no, we have to--basically we capitalize the order backlog and we amortize that over the period that those orders are shipped. So in effect you can't buy profit.

Okay. I got it.

Yeah, it's just shifting from goodwill to backlog and it basically runs through the P & L currently.

Okay. So it just came out sooner than expected.

Correct. The amount didn't change. It's the timing.

Okay. And to tie back to an earlier comment then, if it comes earlier than expected, where do you see the reduction in expenses? Is it the second quarter or later in the year?

It would be the second quarter. We fully expected it to bleed out within six months, but it's probably more like four. So the balance will be in the second quarter. About $800,000.

Okay. So the quarter then that will show up with less of that expenses the second half of the year?

Correct.

Okay. Thank you.

Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. We have a follow-up question from Arvind Bhatia from Sterne Agee, please go ahead.

Yeah, one clarification, TXU just came out, and hey were lowering guidance and one of the reasons for that was the effect from the I guess of the development strategy change with respect to the WWE game, wanted to see if you guys could provide any perspective on that.

Not really, Arvind, no. We have our forecast for the year for our part of it and no other comment on it.

Okay. Thanks.

Thank you,.

Thanks, Arvind.

Thank you. [OPERATOR INSTRUCTIONS].

Thank you, all, for your courtesy and patience. It was a long call. We look forward to having a great year and speaking with you and others at the end of second quarter. Thank you very much.

Thank you, ladies and gentlemen. This concludes the JAKKS Pacific first quarter results for 2006. We thank you for your participation. You may disconnect at this time.