TKO Group Holdings Inc (TKO) 2007 Q2 法說會逐字稿

Welcome to today's WWE teleconference entitled the second quarter 2007 earnings release. (OPERATOR INSTRUCTIONS) I will now turn the call over to Mr. Michael Weitz. Mr. Weitz, you may now begin.

Thank you, and good morning, everyone. Welcome to World Wrestling Entertainment's second quarter 2007 earnings conference call. Joining me for today's discussion are Linda McMahon, our CEO, Michael Sileck, our COO, and Frank Serpe, our CFO.

We issued our earnings release earlier this morning and will be referencing a presentation as part of our discussion. These are available on our corporate website at corporate.wwe.com.

We will be making several forward-looking statements today as part of our discussion. These statements are based on management's estimates. Actual results may differ due to numerous factors, which are referenced on page one of the presentation and in our earnings release.

Today, we will review our financial results for the second quarter and will follow this review with a Q&A session.

At this time, I would like to turn the call over to Linda.

Thanks, Michael. And I reiterate Michael's good morning to everyone.

During the second quarter our core businesses continued to perform well and delivered an impressive 15% growth in revenue. That growth drew strength from all of our business units, with every one of them posting increased revenue.

The quarter was highlighted by the performance of WrestleMania, which set WWE records for both Pay-Per-View buys and ticket sales. We believe that the success of WrestleMania demonstrates our ability to create content with broad appeal.

During the quarter, our net income was adversely impacted by an impairment charge related to our feature film, The Condemned. As a consequence, our financial results do not reflect the favorable trends underlying our performance and the true strength of our business.

In the future, we expect to leverage this momentum, distributing our content in new and innovative ways. This includes exploiting our internet and mobile platforms and driving growth and profits over the long term.

Before turning the call over to Mike Sileck, I would like to take a few moments to address the tragedy involving Chris Benoit and his family. All of us at WWE were both stunned and saddened by this horrific event. There has been rampant speculation in the media about the role of steroids and our Company's position on steroids as a contributor or cause of these events.

To be clear, our talent is a critical part of our success and our health and well being is important to us, both personally and professionally. We are committed to doing everything we can to help our performers lead healthy lives. This includes continuing our strong stance against the abuse of all drugs, including steroids. To serve this objective and to benefit the health of our talent, we implemented a wellness program in February of 2006, which includes testing for steroids. We will work to maintain it as a state-of-the-art program.

We are grateful for our fans and business partners who understand that Chris Benoit's actions are not representative of the men and women who perform for the WWE. The continuing support of our fans and business partners is evident in our live event attendance and the sales of our consumer products, which have remained strong, even in the face of this tragedy.

Going forward, we remain steadfastly committed to ensuring the health of our talent, as we pursue our mission of creating compelling characters and story lines.

I will now turn the call over to Mike Sileck, who will provide some additional perspective from the quarter and update you on some of our strategic initiatives.

Thank you, Linda. I would like to start by sharing my perspective on our company's progress.

We posted a strong 15% increase in revenue, which was led by the solid growth of our live events business. Here our success continues to demonstrate the increasing popularity of our talent and their characters worldwide. As Linda mentioned, most of our fundamental operating metrics continued to improve during the quarter.

In addition to sustaining the momentum in our core businesses, we continued to make important progress on our digital media initiatives. Specifically, we achieved a 59% increase in revenue from the distribution of mobile content and the expansion of our online advertising sales.

As a reminder, in March we completed an important distribution agreement with AT&T Mobile. Under this deal, we make ring tones, graphics and video content available to AT&T's domestic cellular phone customers. With access to AT&T's 60 million subscribers in the U.S., the new partnership establishes a sizeable customer base for our mobile products.

During the quarter, we also signed additional deals in North America, representing a base of approximately 12 million subscribers. Our online advertising revenue increased 33% to $2.6 million, benefiting from a 31% increase in traffic to our website, www.wwe.com, which attracted an average of 20.3 million new visitors per month for the quarter.

The explosive story line involving Mr. McMahon ignited record peaks in traffic to the site. The peaks proved that we can drive traffic and page views by creating unique web content that builds on our television story lines.

Notably, we continue to attract advertisers, who are now part of our developing sales pipeline. As demand builds across our businesses, management has placed a high priority on improving the performance of our Pay-Per-View business.

We recognize that, aside from WrestleMania, our Pay-Per-View buys have not kept pace with the growth in our other product offerings. To concentrate our creative and promotional efforts, we reduced the number of events in our 2007 schedule, eliminating the December ECW event, December to Dismember. We are now intensifying our focus on developing content with broader appeal and strengthening our marketing activities. We believe that by creating more compelling story lines that generate the unique buzz that only WWE can deliver, we can increase the level of our Pay-Per-View buys over time.

As Linda mentioned, our profits included the adverse impact of film impairment. As a result, our earnings do not mirror the growth in our revenue and key operating metrics.

We are endeavoring to reduce the risk associated with our film business. Looking ahead, we expect to maintain a more conservative approach to films, with a greater emphasis on direct-to-video projects. Overall, we remain excited about the positive momentum and growth opportunities developing across our businesses.

At this point, I will turn the call over to Frank Serpe to review our financial performance for the quarter. Frank?

Thank you, Mike. Revenue for the quarter was approximately $138 million, representing a 15% increase over the second quarter last year. Our top line growth was lead by our live events, television distribution, home video and licensing businesses.

As previously mentioned, a strong growth in the quarter was mitigated by a $15.7 million impairment charge associated with our feature film, The Condemned.

Excluding the impact of this charge, gross profit and operating income increased by 14 and 19% respectively over the prior year.

Page five of our presentation lists revenue and profit contribution by business unit as compared to the prior year.

Revenue from live events, including merchandise sales at these events, increased by $5 million, or 17%, led by the expansion in our international touring. This quarter's results include 26 international events, as compared to 17 last year, generating $3 million in additional revenue.

For the remainder of the year, our plan calls for 40 additional international events, compared to 33 events in the comparable period last year.

Our North American events also contributed to the growth in revenue. For the quarter, with average attendance increasing 19% to 6,900 fans.

Revenues from the distribution of our television programming increased 50%, or $3 million, primarily due to the rights fees associated with our ECW telecast, which began airing in June of last year.

Increased rights fees from international distribution also contributed to the year-over-year growth.

Turning to Pay-Per-View events, revenues for the quarter increased 4% for the second- - over the second quarter last year. Revenue reflected 24% increase in buys for WrestleMania and a 14% domestic price increase for our non-WrestleMania events of $5.00. That was implemented last June. These factors were partially offset by a 20% decline in buys for our non-WrestleMania Pay-Per-View events in the quarter. As Mike mentioned earlier, we are working to address this challenge.

In our consumer products segment, our home video business realized a 22% increase in revenue, to nearly $50 million. The growth reflected the shipment of 1 million DVD units in the quarter, which was 5% above the prior year period.

Shipments of our WrestleMania 23 release exceeded 300,000 units and was comparable to the performance of WrestleMania 22 in the same period last year.

Approximately 20% of the overall home video revenue growth came from international licensing agreements, particularly in the U.K. and France.

During the period, home video's profit margin benefited from lower production expenses and higher sell through rates than last year.

Our licensing revenue increased 48% to $2.5 million, or $2.5 million over the prior year quarter, led by strong sales of our toy and apparel products. The majority of this growth came from domestic sales of our action figures and tee shirts.

Increased licensing revenue from our international partners also contributed to the year-over-year growth.

Our digital media center- - our digital media segment, comprised of online advertising, ecommerce and mobile businesses, delivered combined revenue growth of 30%, compared to the year-ago period. Growth in this segment was driven primarily by our mobile business, including the impact of our new agreement with AT&T Mobile.

The quarter also saw increases in our online advertising and ecommerce businesses. For the quarter, online advertising revenues increased 33%, reflecting a comparable increase in traffic to our wwe.com website, which reached an average of 20.3 million unique visitors per month.

Online sales of merchandise saw a 5% increase in the average size of our orders to $51, and a 3% increase in the overall number of orders processed in the period.

Included in other on page five of our presentation is our WWE 24/7 Video on Demand business, whose revenue has more than, has doubled to $1.3 million, compared to the prior year. The increase is attributable to increases in subscribers from, primarily from Comcast, as well as recent launches on Cablevision and Charter. WWE 24/7 is now available to over 75% of the VOD-enabled domestic cable subscribers.

Our profit contribution margin for the period was 27%. Excluding the impact of the film impairment charge, our profit margin would have been 38% on a par with the second quarter of last year.

Improved margins from live events, digital media and home video were offset by increases in Pay-Per-View and television production costs. These costs stemmed from the staging of WrestleMania 23 in a large outdoor stadium, increased promotion for that event, and from producing four television shows from international locations, compared to only two such events in the prior year.

For the quarter, we reported operating income of $9.7 million. Including the impact- - excluding the impact of the film impairment, operating income increased 19% to $25.4 million.

SG&A expenses increased 9%, or approximately $2 million, primarily due to increases in staff-related expenses.

Page 14 of our presentation compares year-over-year results and provides a summary of changes by businesses.

Page 15 of the presentation contains our balance sheet, which remains strong.

On June 30th, we held $266 million in cash and short term investments, with virtually no debt.

As of the quarter end, we had $39 million in feature film production assets. As we have stated in past calls, these assets will be amortized in accordance with generally accepted accounting principles on a pro rata basis as revenues are recognized. We expect to begin recognizing revenue from our feature films in the third quarter of this year.

For the current quarter, we generated free cash flow of $23 million, as compared to a deficit of $900,000 in the prior year. The improvement reflects increased cash from operations, including reduced cash requirements associated with the Company's investment in feature films.

That concludes this portion of our call and I will now turn it back to Michael.

Thanks, Frank. Operator, we're ready now. Please open the lines for questions.

(OPERATOR INSTRUCTIONS) We will take our first question from the site of Michael Kelman from Susquehanna Financial Group. You may begin.

Thanks. Good morning. I have two questions for you. First, with regards to TV rights fees. This quarter's results were up significantly, even on a sequential basis. So, I was just trying to get an understanding of what was the main driver for this, if there was any one-time event outside of the Sci-Fi carrying ECW. And the second question is with regard to Pay-Per-View margins. Could you dig a little deeper into that, help us understand why margins were down significantly? Whether it was an increased investment in marketing as well? And whether or not you're going to have to continue to step up your marketing efforts, given the competitive environment in that business?

As far as the rights fees go, the primarily item in there, as you mentioned, is ECW. That was in for the entire quarter. If you look back for last year it was only, ECW only aired for I believe three weeks in the prior year quarter. So, the big mover there certainly is ECW.

There were some renewals on international, but that was to a much less degree. And we had a couple of specials on USA, which also brought in additional rights fees.

As far as the production costs go, a significant portion of that was simply attributable to the venue that we play. In doing an outdoor facility, such as Ford Field, things need to be constructed over the ring, trusses need to be put up to support lights and things of that nature. The sets need to be larger, because the physical space they occupy is much larger than it would be in an indoor arena. And the amount of time required to set up and dismantle is significantly greater. So, there's more cost for free lance, for the crew and keeping them in hotels for maybe double the length of time we would normally do. We don't envision that being an ongoing, unless we wind up in similar situations with additional outdoor arenas.

As far as the promotion goes, I think that was because of the nature of the event. We did in fact spend a little more promoting WrestleMania than we might have in other years. But, we thought, you know, the feeling was it turned out to be the case, judging by the buys, that we did in fact have an event worthy of making additional investment. Not something I believe that we would plan on doing to the same degree going forward.

Okay, great. Thank you.

Thank you. We will take our next question from the site of Dennis McAlpine from McAlpine Associates, LLC. You may begin.

Thank you and good morning. Would you talk about the apparent change in philosophy on the film business and what your goals are, if you go to a direct, to TV, or direct-to-video approach? And tied in with that, would you discuss what the remaining capitalized costs are running up against?

Mike, why don't you address the second part of that first?

The current capitalized cost, as I mentioned before, approximately $39 million, the bulk of that pertains to both See No Evil and The Marine, where we still feel that, given our current projections, we will recoup all that investment.

The balance, if I recall correctly left on The Condemned after the impairment, is only something in the neighborhood of approximately $2 million, so there's very little left there. And, again, that reflects our forecasted revenue.

Relative to the change in philosophy, really what- - just to give a little background. When the Company decided to get in the film business several years ago, we really thought the best place to start was on the, from a theatrical standpoint. We thought that was the best vehicle to really establish our strategy. We have made three films, two were successful, one less successful.

As we look forward, direct to home video projects had always been sort of in the mix, but now is the appropriate time to start executing those. And we may do them on our own or with a partner. The point is the risk profile is much different for those projects. The cost to produce those is in the $3 to $5 million range per project. And also the marketing costs associated with it are much lower. So, the overall risk profile to that strategy we feel will be lower.

Now, the reality is the upside potential is also potentially lower. You don't generally have the breakout hits in direct-to-video that you might otherwise get in the theatrical business. So, we do think that this kind of the, this is the appropriate path for us to take going forward. We do not rule out doing theatricals in the future. And if we have the appropriate project with the appropriate distribution agreements, we reserve the right to do those in the future.

Hopefully that answers your question.

Is that in line with the thinking of the guy that you just hired to run the film business?

I'm sorry, Dennis, I'm not quite sure what you mean by that. We've had no change in our personnel relative to film. At this particular time Joel Simon has been the head of that office since we first opened the film division, so I'm not, I'm a little confused.

Okay. The other question I had, there seems to be a lot more competition from the other wrestling-type leagues. Are you seeing any impact from them and do you think that is starting to get into the Pay-Per-View?

Dennis, I think that perhaps, and correct me if I'm wrong, you may be referring to the mixed martial arts league. Is that what you're referring to?

Dennis McAlpine. Yes. And then there seem to be more of them sprouting up all over the place.

Well, yes, what's happening in mixed martial arts is frankly what we viewed would happen, which is there is a lot of competitors sort of jumping in there with their product. What we think that does is dilute down the entire category. And if you look at the television ratings of those, they're doing pretty poorly.

Alternatively, though, the USC in all fairness has had some success in the Pay-Per-View arena. We think that has revitalized, along with boxing, the entire category and we think actually that benefits us over time. We have proven, with WrestleMania, that we can draw a huge audience to the Pay-Per-View category and we endeavor to come up with the appropriate story lines to continue to generate the sort of buzz and media attention that we deserve in there.

So, we actually think the mixed martial arts area, relative to the category, has actually helped the entire Pay-Per-View category, and that that will benefit us.

Thank you.

Yes.

Thank you. Our next question comes from the site of Alan Gould from Bleichroeder. You may begin.

Thank you. I've two questions. First, with respect to home video, you seem to be bucking the industry trend in having nice increases in home video. And also, the margins were up pretty substantially this quarter. How much of that was due to WrestleMania this quarter? And how do you keep, do you expect to keep having these nice increases in home video? And secondly, could you drill down a little bit more on the Pay-Per-View buy rates for the non-WrestleMania? I mean, in aggregate, the other four I think had 20% down buy rates. Besides getting rid of December to Dismember or what else can you do to try and get the buy rates back there? Thank you.

Taking them first, I'm glad you did point out that we are bucking the industry in terms of home video, because that's exactly correct. And that's been going on now for a year or two.

We had tremendous success with WrestleMania 23 in the quarter, similar to the success we had with WrestleMania 22 in the year-ago quarter. And it's interesting. I've been doing these calls now for a couple of years and almost on every call the question is can you continue the momentum that you have in this category, and we've done that. We continue to pick the right content and market it accordingly, so that this area continues to grow.

So, we look for over time this, the relationships that we've been able to develop with our distributors, namely Walmart and others, has really helped us drive the success. And those relationships continue to improve.

Mike, I missed it, too, our new deal with Genius. I think it's made a big difference in our distribution throughout all those areas.

That's an exactly correct point. They have. Genius has been a great partner for us and has helped us enhance the relationships that we have had and also bring some new relationships to us. So, that combination of many factors, I think, has led to the success of that business and we hope for it to maintain. Whether each quarter will show the kind of growth that we've just shown, you know, it is title-specific of course, but over time we feel as though this category can continue to grow.

Mike, how about the, it looks like 63% margins this quarter versus 48% a year ago. What drove that?

Some of that is actually Genius. Some of that is the fact that the make up of the units that we ship in any period varies in terms of the number of discs. The mix this quarter happened to be to more single and double discs and future triple discs. Those two things were part of it.

Genius not only helped, correct me if I'm wrong, Frank, in our distribution, in reducing our distribution fees, but also they were very helpful in getting better production deals and lowering the costs of production.

Yes, yes. That is true. And it's helped the margin, yes. All of that has contributed to helping the margin.

And then on Pay-Per-View?

Right. Relative to the Pay-Per-View buy rates, again, I'll reiterate, WrestleMania was terrific for us, both domestically and internationally. And the other event, so we're very proud of that. And if any one's going to be big, you want that one to be big. That's our highest profile event.

Beyond that, we have not been satisfied with the buy rates on the other events within the quarter. As we've mentioned, we've gone to a tri-branding of each of those events. And quite frankly, the creative that it takes to execute those can be, it can be challenging and I think it takes a little while, frankly, for the entire creative team to sort of get in the rhythm of doing those on a month in and month out basis. I do think they're getting better. And early indications for the Great American Bash that was held a week and a half ago are that we are improving, that we had actually an up event relative to the prior year. So, that's a good trend.

And again, we continue to try to find the right mix of compelling story lines and proper amount of marketing and promotion to drive those buys. So, it's, there's no more important issue, frankly, in the Company for us right now. We are focused on it. Everyone is focused on it. And we hope that you'll see improvement sort of as we move throughout this year and into next.

And in addition, we continue to want to drive activity to our website. One of the things that I think we really were able to capture, we mentioned in our remarks, is that the joining together and the connectivity between the story lines that you're seeing on television and drawing those, and carrying those story lines over into our web content, really helps not only drive obviously audience to both vehicles, but also provides us an additional promotional vehicle to help drive our Pay-Per-View buys. So, I think all of those things are very important to us and we continue to work tirelessly to improve.

Thank you.

Thank you. Our next question comes from the site of James Clement from Sidotti. You may begin.

Good morning.

Good morning.

Hi, Jamie.

Mike, could you? I know that over the last two years, you all have invested pretty heavily in building up your digital media infrastructure if you will. Can you give us a sense or a little bit of an update on how you feel about the sales force? What's been the nature of what's been going on behind the scenes in that unit? Because obviously another great quarter there. So, can you just give us a little bit of an update on what's going on behind the scenes?

Absolutely, Jamie. It's something that I think the company is very proud of. You know, when we sat here a year ago, we really didn't have much of a sales force to speak to. And now a year later we have a sales force of 15 to 20 people, including sales support. And those people are continuing to develop still a pipeline of clients and develop relationships.

We had a sales seminar, first time in a long time that the Company did it, where we had 20 people from all over the country in a single room where they were talking about sales strategies, et cetera. And while that may sound sort of commonplace at many companies, it's sort of a new thing for us here. And it was really invigorating. Had a lot of light of the young people with bright ideas who really understand the web and its nuances.

So, I feel very good about the progress we're making. It's staring to show up in the numbers. We told everyone it would take a while to show up in the numbers, but now I think it's starting to.

The other important piece of that, Jamie, is we also have hired a new general manager of digital media, Brian Kalinowski. He came over to us from Lycos. He was the COO at Lycos. And he's been with us a few months now and we're really starting to get some traction there in terms of having the correct, being able to get on the site, the correct content which will then drive the traffic numbers, which then enhances the sales opportunities. So, it's all connected and I think we're really starting, I feel really good about the progress we're making. It's not there yet, of course, but I think we're moving along the spectrum quite nicely.

Okay. And just another question, changing gears a little bit. Linda, I don't know if I'm wrong about this, and I very likely could be, but seems to me, have you guys over the last quarter or two, been hit by some injuries at a higher rate or more important stars than you typically have? I don't know if that's accurate.

No, you're absolutely correct. Several, I think we have three or four of our really top stars who were injured, one of whom is Triple H. He will be returning at Summer Slam. But we've got Rey Mysterio out. We've had Shawn Michaels out. And now just happened a couple of weeks ago, Edge, who's one of our top stars, has a torn, I think it's triceps or shoulder injury. So, he's going to be out for several weeks. So, yes, it sometimes happens that you will have some of your top stars go out, but to have this, you know, all of these go out at one time, that does, we're in the human being business. So, when you have those guys come out, you fill in, you change story lines, you do all of those things. And it does have an impact.

And the reason I asked that was, with the tri-branding of the Pay-Per-Views now, do you think that that will give you a little bit more flexibility from a story line perspective? To be able to kind of shift things on the fly a little bit more? I don't know if that was one of the reasons for doing it that way, but I was just curious to your thoughts.

Well, primarily the reason for our doing the tri-branding Pay-Per-Views was to be able to promote across all three programs to drive viewership to a particular Pay-Per-View, instead of splitting the promotional effort of our television and our web efforts. So, that was really the primary force in doing that.

I think it does give us a bit more flexibility, obviously, because you've expanded the talent base a bit and you have more convergent story lines that you can flip around a little bit. So, that does add to it as well.

So, while there is a plus side on the one hand from the creative standpoint, sometimes there is another in trying to maintain that convergence. So, it's something we always have to be involved with, but I think our creative staff is stepping right up to that challenge.

Okay. Thank you very much for your time, as always.

Thank you, Jamie.

Thank you. Our next question comes from Ross Haberman from Haberman Funds. You may begin.

Morning and how are you all?

We're great.

I've got two quick questions. I'm new to the story. Could you explain what sector you guys generate a lot of free cash flow? What sector or what areas most of that excess cash flow going to be funneled into over the next year or two? And related to that, do I understand you adding back the movie write down that you want to exit the feature film business and only go into the direct-to-video business?

Let me take the first part of that. As far as where we're going to be putting the cash, in addition to the fact that, you know, we have a fairly hefty dividend, we do have some other projects coming on that are going to consume a lot more capital than we normally see. Primarily, we are converting our TV production facility or our content facility to HD. That will be happening over the next few months and that will consume a significant chunk of capital.

Secondly, that facility at the present time is kind of bursting at the seams, so that we are exploring right now expanding that facility and that would be another significant use of the cash.

Relative to films, as we stated, we are changing our emphasis away from theatricals to direct-to-video projects and that will be our focus. But we do not, we still reserve the right, however, to do a theatrical project as the proper project and script is presented. So, we are deemphasizing theatricals, if you will, but we remain the right to still do theatricals over time.

Could you just, on the direct-to-video, I think you said your average expenditure for that is going to be a couple of million dollars versus, it looked like, I don't know, 10 to 15 million or more you were spending on the feature film project?

Right. I mean, the typical budget for a theatrical is in the $20 million range. We did do a horror film for $10 million and then two action-adventure films for $20 each. The direct-to-video model is significantly less, with production costs in the $3 to $5 million range. So, there's a significantly lower investment level on a per-project basis. Thank you.

Ross Haberman. Thank you. The best of luck.

Thank you. Our next question comes from Daniel [Kilmery] from UBS. You may begin.

Morning. Couple of quick things. On the digital media front, could you spend just a minute talking about, maybe give us some sense of the sequential numbers on the advertising side and, based on the work you're doing, how do you feel the trend- - obviously the trend here is positive, but just trying to frame the opportunities here. If you could help a little bit on that. And then also, interested in the capital projects you're talking about. You used the term, you know, significant amount of capital needed for the production facility. Could you help us with what significant means?

Sure, I'll take the first one. In terms of the growth rates, Dan, digital was, the way it's working is, because of a significant amount of our sales inventory is sold through what we call remnant, we basically get credit for all impressions that come to the website and we turn that, and we sell that.

As we saw an increase in traffic to the website around the McMahon story line, so sort of late May, into June, we saw an increase in traffic to the site. In fact, I believe in June, we actually averaged nearly 25 million unique visitors in that zone for the month of June, which was very significant.

So, as you get those higher impression levels, you generate more ad revenue, because of the way we have it set up. So, it sequenced up kind of throughout the quarter and then, frankly, though in, looking ahead in July, we're not able to sustain the same levels that we had in June. Part of that is we are sort of revamping story lines, which will start to build here over the next several weeks and several months. So, we anticipate the web traffic to kind of grow accordingly.

So, it's still in the early stages. We take, you know, the growth rates are very nice. The base business is still relatively low, as you know. So, we look to see increases kind of sequential increases we hope over time. But there will be some traffic fluctuations along the way. I hope that helps.

Okay. And the kind of costs of the capital projects on the production facilities?

Yes, our home HD project is probably somewhere in the range of $15 to $20 million over one to two years.

Got it.

Far as the building goes, expanding the building, we're still in the process of sizing that out. We're not exactly sure. That number could be anywhere from $40 to $60 million, because of the nature of the space. A lot of it's technical space. But we haven't really fleshed all that out, nor have we at this point decided, considering the shape of our balance sheet, whether we would simply carry that our finance that expansion.

Okay. And then one last question, because you'd all be disappointed if I didn't ask it, my obligatory quarterly what's going on with the lawsuit?

The Jakks THQ lawsuit.

Yes.

It is, well, it's just pretty much status quo at this point. You know, we're, we just keep our fingers crossed that we're going to have some action, if you will, from the courts in New York. In the meantime, I think I mentioned on the last call we did file in Connecticut and we did have a court date in '08. The judge has given a couple of month's extension to those fellows to bring some of their information forward.

It's, to say it's frustrating is beyond how we feel about it. It is just totally frustrating. I have never known a case of this kind to go over two years before any kind of rulings come down and it's just incredibly frustrating. But, we don't have control over that.

Yes. Thanks, Linda. Thank you.

Thank you. Our next question comes from the site of Justin [Smolkin] from Merrill Lynch. You may begin.

Good morning, everyone.

Morning.

Just wanted to follow up on a few questions. First, just in terms of the capital spend with HD, you guys still feel comfortable with your dividend policy as it currently is and don't feel any need to change that?

That's correct. We are satisfied with the dividend policy at this point. You know, over time we hope to raise it, frankly. But at this point, we're satisfied with it.

Okay, great. Second question, just to go back to the digital media and dotcom, it looked like you achieved about 59% margins on that business. Is that something that is sustainable you think, or how should we be thinking about that going forward?

Just so I heard you correctly, you're talking about the digital media business?

Exactly. Just on dotcom specifically, that component.

Right. We've said all along that that's a high margin business, that's why it's so attractive to us. And it leverages up very nicely. So, over time we hope that those margins will be sort of in the 50 plus range over time. You know, it depends obviously as we increase investment for infrastructure, et cetera. But we think it's definitely a 50% margin plus business.

Great. And my last question. You guys reiterated the 12% EBITDA margin, or EBITDA growth. It seems that it will probably be difficult, given the write down. Can you just talk a little bit about that and will there be any impact on the G&A line because of that?

I mean, you're right. It's going to be hard. It's hard, given the write down to achieve those numbers. But, we continue to strive to do that and we're not going to give specific guidance, because we've chosen not to do that. But we do think we're going to try to make up as much of it as we can kind of in the back half of the year.

Great. Thanks so much.

Thanks everyone. We appreciate you listening to the call today. If you have any questions, please do not hesitate to contact me, Michael Weitz, at 203-352-8642. Thanks for listening.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time. Have a great day. 11