JAKKS Pacific Inc (JAKK) 2007 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the JAKKS Pacific third quarter conference call with management. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

I will now turn the call over to Ms. Rosenberg. You may begin your conference.

[TECHNICAL DIFFICULTIES/AUDIO SKIPS THROUGHOUT ENTIRE CALL]

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Corporate Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with JAKKS's management to review the results for our third quarter and first nine months of 2007, which ended on September 30.

On the call today are Jack Friedman, the Chairman and Chief Executive Officer of JAKKS Pacific; Stephen Berman, our President and Chief Operating Officer; and Joel Bennett, our Vice President and Chief Financial Officer.

Mr. Friedman will first provide an overview of the quarter and our operational results, and then Mr. Bennett will provide (technical difficulty) [additional] comments regarding our financial results. Mr. Friedman will then conclude the prepared portion of the call with highlights of our (technical difficulty) [progress] and current business trends prior to opening up the call for your [one-on-one] questions.

Before we begin, I would like to point out that any comments made about our future performance, events or circumstances, including the estimates of sales and earnings per share for 2007 as well as any forward-looking statements, are subject to the Safe Harbor protection under federal securities laws. These statements reflect our best judgment based on current market trends and conditions today, and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in our forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult our most recent 10-K and (technical difficulty) [10-Q] filings with the SEC as well as our (technical difficulty) other reports subsequently filed with the SEC from time to time.

With that, [I'll return] the call over to Mr. Friedman.

Good morning, ladies and gentlemen. This is Jack Friedman. Thank you for joining us this morning to discuss our results for the third quarter and first nine months of 2007. We issued our earnings this morning and with net sales increasing to (technical difficulty) [$318. billion]. We earned $47.3 million or $1.45 per fully diluted share for the quarter and we're extremely pleased with our results for the year so far. With just about two months to go until the holidays, we are confident that we will achieve at least the 2007 guidance we issued earlier this year of $800 million in sales (technical difficulty) [and] earnings of $75.8 million or $2.39 per diluted share.

Third quarter performance was in line (technical difficulty) [with] our internal expectations despite some challenges that our industry faced as a result of recalls by some of our peers. In the face of container shortages, port delays, labor issues and other issues in dealing with China, we still had an excellent third quarter and expect we will have excellent full year results when we announce them this coming February.

We are very excited by the opportunities presented by several areas of our business for this year and in the future. Most especially, the Disney Tween pop star Hannah Montana and our Hannah Montana product line. The star of the show is Miley Cyrus, a remarkable, hard-working young woman that has become America's dolly. And we are proud to be partnering with Disney consumer products for the Hannah Montana property.

USA Today identified rock star themed merchandise as a major trend for this holiday season and (technical difficulty) [prominently] featured our Hannah Montana line as part of their findings. Toys "R" Us also put on a trend release including our Hannah Montana dolls and our Toys "R" Us exclusive Hannah Montana Tour Bus Playset [which is] perfect for fans who have been clamoring for tickets to her sold-out stadium arena concert tour; [the] top news story for weeks now.

And many of our Hannah Montana toys including the fashion dolls, our Secret Celebrity Backstage Closet and Concert Stage Playsets have all been awarded top holiday honors by multiple hot holiday toy lists for this year including eToys' Holiday Hot List, Toy Wishes, Hot Dozen, Toys "R" Us Top Holiday Toys, KB Toys' Top Holiday List, and the Toy Insider.

We are looking to more new Hannah Montana toys, playsets, electronics and role play products for 2008. We have developed and previewed recently at the Dallas Fall Toy Preview. Buyers were extremely positive about our execution on this brand and it seems (technical difficulty) [Hannah Montana] is definitely on fire.

But Hannah [Montana] is just one component of JAKKS's business for this year. Other toys that drove sales in the quarter include Beautiful and Magical, Disney Role Play and Dress-up toys. WWE and Pokemon action figures, Special 25th anniversary collectible Care Bears plush, XPV (technical difficulty) products and Plug It In & Play TV Games, the notable of which has been our EyeClops Bionic Eye.

As I mentioned, we just completed the industry's first fall toy preview (technical difficulty) [held] in Dallas and we had a terrific exhibition of our 2008 lines. It seems throughout our organization (technical difficulty) and diligently working to develop a stellar portfolio of new products for 2008 and we are energized at the reaction we receive from the trade. We certainly know we have much work to do but with this initial feedback, we are buoyed to further strengthen the line and make 2008 the best year yet for JAKKS Pacific.

Our financial position remains extremely strong with working capital of approximately $342.2 million including cash and cash equivalents of $186.6 million as of September 30 this year.

Before I get more into details about our products' performance in the past quarter and our outlook for the future, I would like to turn the call over to Joel Bennett for a review of our financial performance for the third quarter and the first nine months of 2007.

Thank you, Jack, and good morning, everyone. Third quarter (technical difficulty) [net] sales for 2007 were (technical difficulty) [$318.4 million] compared to (technical difficulty) [$205.8 million] in the (technical difficulty) [same] period last year. Net income for the third quarter was $47.3 million or $1.45 per diluted share compared to net [income] of (technical difficulty) [$40 million, $500,000] or $1.26 per diluted share in the third quarter of 2006.

Net sales for the first nine months of 2007 were $572 million compared to (technical difficulty) [$526.1 million] for the first nine months of last year. Net income for the nine month period was $55.6 million or $1.75 per diluted share compared to net income of $49.2 million or (technical difficulty) [$1.57] per diluted share in the first nine months of 2006.

Now for (technical difficulty) [sales] by product category. As a reminder, our international sales are spread amongst these product categories [and] broken out separately. Sales of traditional toys, which include action figures, vehicles, electronics, plush, role play (technical difficulty) dolls and promotional products were (technical difficulty) [$286.4 million] for the third quarter of 2007 compared to $265.6 million in the third quarter of 2006.

The first nine months of 2007, sales have (technical difficulty) [traditionally] always represented (technical difficulty) [$498.5 million, $448.2 million] in the comparable period last year. [Traditionally] always represented approximately (technical difficulty) [9.3% and 87.2%] of JAKKS' overall sales in the third quarter and the first [nine months] of 2007 [respectively] versus approximately [89.8%] and 85% of JAKKS' overall sales third quarter the first nine months of 2006.

Sales in the quarter were driven by our Action figures, dolls and pretend play products based on WWE, Pokemon, (technical difficulty) [and Pop] Disney licenses. Our (technical difficulty) [current] activity (technical difficulty) products, which consist [primarily of] our Pentech and Flying Colors product lines [had] sales of $12.2 million in the third quarter and $14.5 million in the first [nine months of] 2007. This compares to [$32.9 million] and $42.7 million respectively in the comparable periods of 2006. This represents 3.8% of the total sales for the quarter and 5.7% of the sales year-to-date versus 4.9% of the total sales [for the] third quarter [and 8.1%] of sales [for the] first nine months of last year. Next year we will have [several] activities [and] (technical difficulty) products featuring Pokemon and other [new innovative] features we expect will increase sales in this category.

(technical difficulty) [Sales of] our other products including seasonal outdoor products and pet products branded under Funnoodle, Go Fly a Kite, Hair Creations, XPV and JAKKS Pets, sales [were] $18.7 million in the third quarter and $40.6 million for the first [nine months] of this year. [This] compares to $15.7 million for the third quarter [and $36.1 million] for the first nine months of 2006. This represents a (technical difficulty) [5.9%] and [7.1%] of overall sales in the third quarter year-to-date periods respectively in 2007, as compared to 5.3% and 6.9% of overall sales in the same periods in 2006. Sales in this category was led by AKC licensed products [and] XPV Flying Toys.

Gross margin for the third quarter of 2007 was 39% compared to 38.2% in the third quarter of last year. For the [first nine] months gross [margins were 37.6%] as compared to 39.1% [in the first] nine months of 2006. The [increase in] gross margin [in] the quarter was due to our product mix which included [higher margin] products and lower (technical difficulty) license advances in 2007. We expect to see gross margin (technical difficulty) third quarter [2007] (technical difficulty) in the fourth quarter and into [2008].

SG&A expenses in the third quarter of 2007 [were $59 million] or 18.5% of net sales (technical difficulty) as compared to $54.7 million, also [18.5%] of net sales in the same period last year. [For the] nine month period, SG&A expenses were $140 million or 24.5% of net sales compared to [$136.9 million] or [26%] of net sales in the same period last year. This decrease as a percent (technical difficulty) period is due to lower marketing costs in 2007.

Depreciation [and amortization] was approximately $6.2 million in the (technical difficulty) quarter and [$18 million] for the first [nine months of] 2007 compared to $5.9 million and $17.3 million for the comparable periods in 2006.

Stock-based compensation for the third quarter and the first nine months of 2007 [was] $1.5 million and $5.2 million respectively as compared to $1.1 million and (technical difficulty) [$4. million] respectively in (technical difficulty) periods last year.

Operating margins for the third quarter and first nine months of [2007] were 20.4% and [13.1%] compared to 19.7% and 13.2% in 2006, respectively. This is [primarily] due to lower [margins] offset in part by the decrease in direct selling expenses.

[During the quarter] we posted $900,000 in profits from the videogame joint venture with THQ, bringing the JV contribution to $3.1 million for the first nine [months of this] year. This compares to a loss of $200,000 and profit of [$700,000] for the comparable periods last year. WWE SmackDown vs. Raw 2008 is scheduled for a North American release on November 13; (technical difficulty) [Sony] PlayStation's 3, PlayStation 2, [TSB] handheld is (technical difficulty) and a Wii console, [DS handheld] and Xbox 360 console. The wireless version of the game is slated to launch on various mobile carriers worldwide throughout (technical difficulty).

Cash provided by operations for the third quarter was $13.8 million compared to (technical difficulty) $20 million] in [the same period] last year. [First nine] months of the year operations provided cash flow of $30 million compared to $7.5 million in 2006. Our financial position remains very strong and as of September 30, 2007, our working capital was approximately $342.2 million [including] cash and equivalents of $186.6 million.

Accounts Receivable at the end of the third quarter were [$209.1 million] compared to [$182.8 million] at the end of the third quarter of 2006. This is consistent [with] higher sales in 2007. DSOs were 59 days, (technical difficulty) higher than the 56 days in the same period in 2006.

[Inventory] was $93.8 million at the end of the quarter, up from [$6.7 million] at the end up the comparable period in 2006. DSIs increased slightly higher to 52 days from 50 days at the end of the third quarter of 2006. Capital expenditures for the quarter and first nine months were $6.1 million and $13.8 million, respectively, and we expect capital expenditures for the full year to be approximately $18 million.

Based on [our] current financial position and third quarter results, we're comfortable with (technical difficulty) our prior 2007 earnings guidance and expect to achieve at least $800 million in [revenue] and earnings of $75.8 million or $2.39 per diluted share.

With that, I will return the call to Jack Friedman.

Thank you, Joel. As [we've] mentioned, we are feeling great about our line-up for this holiday season and next year is well underway as well. There are [a number] of products that are tracking at or ahead of expectations for this year and many of our drivers have been topping the industry's hot holiday toy lists, keeping JAKKS Pacific and our products in the spotlight. Our EyeClops Bionic Eye (technical difficulty) [extended] the Plug & Play category for JAKKS and kids are discovering new (technical difficulty) [with] EyeClops, both at home and in the classroom.

New York Times writer [Warren Buck] (technical difficulty) recently said EyeClops is our favorite 2007 educational toy. This product might be sold in toy stores, but don't be fooled; EyeClops is a powerful microscope that can transform a TV screen into a world of wonder. We are [extremely pleased] with our sales of EyeClops thus far and we are working on line extensions for next year as well.

Our PacMan Gold TV games, also featured in the New York Times recently, and is the perfect stocking stuffer for nostalgic gamers. Our 1 vs. 100, Jeopardy, Deal or No Deal and other game show TV games as well as kid-driven titles based on Dora, Sponge Bob, Star Wars, Hannah Montana, are also well placed for the fourth quarter. For next year, we will [bring] our original Atari TV games back into the assortment along with High School Musical and TV games featuring new technology that we expect will again expand on our Plug & Play category.

Puppy in My Pocket line [for our] Play Along division has been performing ahead of expectations so far this year, and we have new Puppy in My Pocket accessories and playsets at retail for the holidays, with kitties and ponies joining the line next year. Sweet Secrets mini-dolls and our special 25th Anniversary Silver Care Bear with real Swarovski crystals in its eyes are [well positioned] for the holidays and been trending to our expectations. We [launched the] Silver Care Bears Plush on September 25 in New York City and expect to sell out of the collectible anniversary bear by the holidays.

New Cabbage Patch Kids Little Sprouts has been doing well and we are gearing up for Cabbage Patch Kids 25th Anniversary in 2008 with the focus program celebrating the original kids. Geico Insurance has been running a very (technical difficulty) [funny] television commercial now (technical difficulty) which is a Cabbage Patch Kids doll and has been getting attention for the brand.

Another doll line [we're excited about] is based on the Disney Tween group, the Cheetah Girls. The Cheetah Girls sold out an 80 city concert tour and one of them, Sabrina Bryan, has caught America's attention [recently while] competing on the TV show Dancing with the Stars.

Our action figures are doing great with strong sales of our WWE and Pokemon (technical difficulty) is positioning JAKKS with two of the [top five] action figures lines at retail. Internationally, WWE also (technical difficulty) one if not the [strongest] boy's property in both the UK and Australia. Our new Pokemon Diamonds and Pearls figures playsets and accessories are also doing very well with [the] new generation of kids catching (technical difficulty) and embracing the new Pokemon characters and play (inaudible). We [had] terrific expansion for both properties planned for 2008 including new WWE four-inch figures and the largest scale ring ever, as well as new plush figures, stationery and playsets we will ship for Pokemon fans around the world.

A line of XPV Xtreme Performance Vehicles also shipped to retail in the quarter including our RAD, Mini RAD, Mini XPV and Super Terranator, and we have new XPV items in development for 2008. Our Laser Challenge has [been] doing well internationally and a new version that we previewed in Dallas should do well for us in the 2008 year both domestically and internationally.

Small (technical difficulty) toys, interactive large playsets and classic role play toys based on popular Disney and Nickelodeon licenses [as] well as our non-licensed brands from our CDI division are all [doing] excellent at retail. In Child Guidance, our Bonnie line hit Toys "R" Us and KB Toys stores during the quarter, supported by [Igmoney] bus tour, (technical difficulty) Sweepstakes and a promotion with American Airlines and Kiwi Magazine.

New phone playsets in our Child Guidance line [KnockWood] and Gorilla Blocks also hit Toys "R" Us and KB Toys stores in the second half of this year. For next year, we will add the Wiggles and other popular preschool properties to this line-up. We also have extensive new initiatives for our girls activities and stationery areas for next year that are both licensed and non-licensed. Fancy Nancy, the new Nickelodeon programs, Pokemon stationery products and a new craze with writing instruments that we will introduce to kids similar to how we [added] speed stacks to the masses last year. We will be updating you [more on] those programs [on] our year-end call.

American Kennel Club pet products have been doing great. We shipped a new product in the quarter called AKC Travel Convenience Meals launched this week at Petco stores nationwide. The AKC meal packs are basically a week's supply of single-serve meals and throwaway dishes for no-mess portion controlled meals for on-the-go pet owners. This is a soft launch but if it takes off, it could be a nice business for JAKKS.

Pet Halloween costumes, White Bites with Arm and Hammer and toy based on Cat Fancier's association and other popular licenses for dogs and cats are on-shelf and selling through nicely. We are pleased with the growth of this area since we acquired it and expect more for 2008.

[In] recent weeks we have announced a number of [new] initiatives that we believe will lead to exciting opportunities for growth in 2008. We have two new master toy agreements with Nickelodeon and Viacom -- Neopets and SpongeBob SquarePants. Neopets is the largest global youth-focused virtual world with more than 40 million registered users. 54 species of Neopets, 16 [lands] and hundreds of characters, stories (technical difficulty) [will] utilize our collective strategy to create a plush line that we believe [is] highly appealing and which will ship to retail for next year.

SpongeBob SquarePants is still number one television show [for] kids six to 11. In 2008, we will lay serious groundwork with our line of plush figures and playsets for the property (technical difficulty) [that] currently generates [$1 billion] annually in consumer products, leading up to 2009 when SpongeBob and Nickelodeon celebrate its 10th anniversary.

The portfolio (technical difficulty) we have developed and nurtured along with our relationships with retailers, licensors and consumers has positioned us well for this year. We are working hard to execute on our strategy on behalf of our shareholders and are excited about the opportunities that lie ahead for JAKKS Pacific.

With that, I will open the calls to questions.

(OPERATOR INSTRUCTIONS). Arvind Bhatia.

Arvind Bhatia, Sterne, Agee & Leach. Good quarter, guys. My first question is in general, you touched on the toy recall aspect of the industry today. Would like to get your take on what you're hearing out there from retailers.

And then second, if you could comment on the acquisition environment. Obviously, that's going to be one of the things you're going to consider with your cash situation. And my third quick one is on licensing deals. What are you seeing out there in terms of royalties, et cetera? Is there any change in what the licensors are asking for in terms of rates, et cetera?

I'll take it, Arvind. I'll start with your third one and go backwards. We're (technical difficulty) [finding] royalty rates pretty constant; no dramatic increases. Everything is a case-by-case but it's pretty consistent. I think licensors [generally] know that there is a limit to what you can add to the retail value of a toy with a license on it. It doesn't seem to be an impediment in moving forward with our business.

Number two, in terms of acquisitions, we are always looking at acquisitions. We did find [in] last year or year and a half with private equity jumping over stuff that values were excessive to our valuations on companies. We're starting -- it might be a (technical difficulty) [hopeful deal] that valuations are coming down a bit and there aren't that many people jumping over opportunities. Our eyes are getting a bit bigger in terms of as we grow our working capital and as we grow the management team at JAKKS, that we would be in a position to do larger deals than we've done in the past.

In terms of recalls, we've all read the same thing (technical difficulty) from day-to-day in the newspapers. (technical difficulty) been a number of recalls. We do know that for us and other companies that there [are] more and more careful inspection. And we hope that it slows down any recalls for the whole industry.

And in terms of how retailers are reacting to other toy companies outside of Mattel, just would like to get your take on the reaction there and --

Okay. I do think -- I can't say it's a specific statement from any retailer, but I think that [that's] going to get more difficult for the small guy than to do business with the big retailers. If the small guy is selling particularly on a letter of credit basis to retailers and there is a recall, that small guy might not be able to stand behind -- wish to stand behind and might just pull a bankruptcy and walk away and leave the retailer stuck. So that might add to our acquisition strategy, there might be a number of small companies that wished to get out of the business and walk away before they get into trouble, not being able to do business with the big retailers.

And my final question is, you indicated you expect to at least hit your guidance out there. From where we were in terms of our expectation, you certainly did better in this quarter. Walk us through kind of your thinking in terms of not raising guidance out right -- is that just the environment or is there anything else that you're kind of taking a look at and holding back?

No, we're just taking a conservative approach. So far our deliveries are okay, we don't expect any slow down in that. Our sales at retail are right on schedule so far. It's just a conservative approach.

Great. And I hope the fires out there are not affecting you guys.

No.

Jeff Blaeser.

Thanks for taking my question. One, on terms of profitability, specifically Hannah Montana and Pokemon, can you give us an idea where they fit in the larger scheme versus other products that you sell?

They're pretty consistent with our margins. Some of (technical difficulty) generic products like our [Foam] products are lower margin but they're consistent with our margin criterias.

Okay. And do you receive any sales when Hannah Montana, the Cheetah Girls and the Wiggles go out on their concert tours? Is that an additional distribution channel for you? And is there any change in the matrix selling in those venues if you do?

No, not at all. And if they were viable -- and those (technical difficulty) it wouldn't mean very much business to us. It would be negligible sales.

Okay. And finally, looking at your '08 line, it certainly looks to be more expansive than those in the past. Any expense impacts in the third quarter or going forward with this more robust rollout expected?

I'm not 100% sure what you mean by that. In terms -- our product development is done primarily internally. And we haven't been adding headcount in that area; supplementing where we need. So our cost structure hasn't changed from an internal perspective. Certainly (technical difficulty) volume increases. We do more samples. We do have a bigger presence in Toys "R" Us, et cetera, but it's proportionate to the increase in sales. So we're not expecting any out-of-the-ordinary increases in that area of any consequence.

Gerrick Johnson.

Question on the Pets business. Can you, perhaps, break that business out for us for the third quarter and probably perhaps discuss any new channels of distribution for that business?

We don't break that out specifically, but it's still a small division for us but consistently growing. And it does offer us additional distribution to the big box pet retailers as well as new sections in our major retailers.

Okay. You've seen nice growth in your traditional toys. How about addressing some of the other categories, specifically arts and crafts? What's holding that division back and how can you extract similar performance from that segment of the business?

We do expect better performance from it next year. We do have a -- for the most part -- a new team in place to manage that division for us. We're delighted so far with the reaction from the Dallas Toy Fair with some of the new initiatives actually within that division. Two of the most popular offerings came out of that division. So it looks like a very bright future.

Okay. And finally, a comment was made at a recent competitor's conference about cash and use of cash and perhaps building up a cash cushion. Perhaps you might just explain exactly what you guys meant by that comment?

We didn't make a comment --

No, a competitor to me -- Joel, you made the comments, actually.

Oh. I'm sure it was (technical difficulty) --

It had to do with the lawsuits.

No. What we are accumulating cash [flow] is for acquisitions and funding our other initiatives, continuing to get licenses. And [on the] call this morning we indicated there are at least two master licenses. We're investing in development. But we're not retaining any cash for anything outside of our normal business at this point. There's a three point strategy in acquisitions, new [licensing] (technical difficulty) [and in] internal development (technical difficulty) the context of the comment, but that's basically what I would have (technical difficulty) --

This is Jack Friedman. I would add to that we do on a regular basis meet with our Board and discuss the possibility of a stock (technical difficulty) --

Cheryl Cortez.

Congratulations on your quarter. I was just trying to figure out, just in store checks seeing a lot of Hannah Montana toys fly off the shelves lately. Have your retailers already fully placed their orders for the rest of the Christmas season? Is there still room to make more toys and have them delivered in time for Christmas? And how would that sort of affect your margins, if at all?

Good question. The retailers generally continue to place orders or change their forecasts up or down based on the west matrixes that they use, as well as the ones that we use. [Hannah Montana] products was less than 10% of our revenue in Q3. And going into Q4, we have ramped up production on it and we are prepared to ship a bigger portion of Hannah Montana in Q4 [end] and product for spring '08.

Thank you very much. I'm glad to know everyone in the JAKKS family is safe from the fires.

Sean McGowan.

I have a couple of questions. First, could you talk a little bit about the performance of some of the brands that were strong last year, which have continued to be strong and which have not? I don't mean individual items as much as the overall brand, like Care Bears, Cabbage Patch, Speed Stacks, et cetera.

I would say that (technical difficulty) anticipated disappointment which was a disappointment this year. We did see a slowdown in [Q4] last year of our Doodle Bears Line, which continued into this year. Our estimated sales on it are in line but it has not made a turn on the upside. That would probably be our only downsized brand for this year. I can't think of any other.

Okay. I think Stephen might have made the comment at Dallas that -- to the effect that rather than spend money on an acquisition, money has been put into developing all these organic brands. Is that to say that you would not expect to see an acquisition in the next six months?

Not at all. Maybe that was misinterpreted. What Steve meant by back, while we're looking for acquisitions and don't find the proper ones, we are using our capital to internal development but that wouldn't prevent us at all from going into an acquisition. I did mention it earlier, we're even looking at potentially doing larger deals than we've ever done before with our capital on hand, our access to credit and our internal management team that we could take on more.

Okay. And final question then, can you give us an update on the status of the arbitration proceeding with THQ and basically just say, why is that taking so long?

I can't -- any kind of legal process seems to take forever, like our WWE lawsuit; it's been over three years now since it's began. (technical difficulty) basically nowhere in the process. There have been arbitrator's names put up. It hasn't worked out and it's gone to the courts for choosing an arbitrator. And as soon as that process is in place, it will get done. We look forward to it. We think that the marketplace for high powered videogames is extremely strong, maybe stronger than ever. And we look forward to the arbitration and getting it behind us and look at it as a positive note for JAKKS.

So there's no arbitrator named. Has there been any indication from the court as to when that arbitration -- when an arbitrator could be named?

Well, actually, one had been named but he had some conflicts. So we sort of go back to square one. I guess it turns out it's a small world out there with people expecting to have ongoing business in the industry. So there's a lot at stake so they want to be careful about -- we want to be careful how we proceed.

Of course. Okay, but Joel, as far as your best guess, then, once the arbitrator is named and agreed on and in place, does that start another clock that could be very long? Or should that be a pretty quick process then?

I wouldn't expect it to be an extended period of time. I'm sure we're both preparing. But identifying the arbitrator is key at this point. But once -- I can't expect that it would be an extended process once he or she is identified.

Okay. And then back on the WWE, just on the -- has any kind of trial date or anything been set?

No, we're still waiting to hear the judge on the motion to dismiss that was poorly argued back in September of 2006. And in fact, it was the (technical difficulty) [three year anniversary] of the original filing of the suit. So while a lot of --

I'm sure the lawyers are having a nice cake -- if they get paid for this. Okay. Well, thank you very much.

Steve Epstein.

Two questions. First, is the 40% gross margin that you mentioned for the second half during the last call, is that possible for the second half still? And if you could discuss the drivers of the gross margin improvement that you mentioned for the fourth quarter in 2008.

The drivers are (technical difficulty) the product mix, it'd be the proportion of new products. In third quarter, we didn't quite make it, in part because of the better than expected contribution. And part of that was timing from the (technical difficulty) [CDI fines] which have a number of lower margin [or a] generic private label product. So it was a benefit overall, but there was [a little] pressure on the margins. But it was more than (technical difficulty) --

(technical difficulty) we sell a greater proportion of those generic products it brings down our marketing expenses because they don't require marketing.

Okay. And the roughly 40% margin that you had previously referred to for the second half, is that possible?

Well, we hit 39% in third quarter and right now we would measure it individually. So we believe we'll be there for fourth quarter but we didn't get there for third. On average we probably will be shy of the average of 40% for the second half. So we hit 39% for the third quarter. We'll probably be closer to the 40% in fourth. And because of the relative volume, it will be somewhat less than the 40 (technical difficulty).

Okay. And then a follow-up to Cheryl's, a broader version of Cheryl's question. You have a number of large top sellers and the revenues are exceeding expectations on those products. Is there a risk of broader product shortages for you guys at retail during the holidays? And how does that translate into pent-up demand for 2008?

Well, as we head to the holiday season, we believe with our production capacities that we will be able to reasonably meet the demand of the most exciting products that are out there. We, in working with retailers, kind of tell them what we can make and what they can expect to get. And we usually are able to come to a satisfied level with our retailers. And there is nothing right now to throw that off. That being said, could a Hannah Montana, if you will, take off even further when she starts her concert tour and [her new] albums are out and we wouldn't be able to meet that demand? Yes, that could happen. In a sense it would be a good problem, but we do like to supply our retailers with product.

But all of our plans and those hot issues look like they'll go very nicely into 2008. The Hannah Montana show we would expect to continue to be a very, very important show on the Disney channel. Pokemon seems to be expanding. Wrestling is doing quite well. Our Disney Princess line is doing well. Our Black & Decker line is doing well.

So just about all of our areas we expect to -- hope to grow in 2008. Usually there are a few hiccups, something doesn't go the way you anticipate it, that's part of the industry that we're in. But overall, things are great. We're producing goods on a regular basis. I'd complement the operational team at JAKKS. I think they've done a great job over a labor shortage and shipping problems and everything else to get the goods out there and hit a record quarter for us, and expect a good fourth quarter.

Okay. Thank you.

I thank you all very, very much for being on our call today. And we look forward to another great call in February. Thank you all very much.

This concludes today's conference call. You may now disconnect.