Playboy Enterprises, Inc. ( PLA)

Q3 2010 Earnings Call Transcript

November 9, 2010 10:00 am ET


Martha Lindeman – SVP, Corporate Communications and IR

Alex Vaickus – President

Christoph Pachler – CFO, EVP and Principal Accounting Officer

Scott Flanders – CEO


David Bank – RBC Capital Markets

David Miller – Caris & Company

Martin Pyykkonen – Wedge Partners



Good day and welcome to the Playboy 2010 third quarter earnings call. Today’s conference is being recorded. All lines are in a listen- only mode. It is now my pleasure to turn the conference over to Martha Lindeman. Please go ahead.

Martha Lindeman

Good morning, everyone, and welcome to the third quarter 2010 conference call. If you need a copy of our press release and earnings supplement, you can look on our website at or you can call Brian at 312-373-2432.

During the call today, we will be making forward-looking statements pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act. These statements reflect our current beliefs and plans. They are not guaranteed and involve risks and uncertainties that could cause our actual results to differ materially from those discussed today. We are under no obligation to update these statements. I refer you to the Safe Harbor language in today's release as well as the risk factors in our Securities filings, which describe some of the factors that could cause our results to differ materially from today's discussion.

On the call today, we have Playboy's CEO; Scott Flanders, our President; Alex Vaickus, and our Chief Financial Officer; Christoph Pachler. I will now turn this over Alex who will describe our operating results in a little detail.

Alex Vaickus

Good morning, let me start on a very positive note with the licensing group results. Licensing revenues grew 24% to $10.9 million primarily due to increased sales in Asia and to a lesser extent in Latin America. Even more importantly we are signing new deals and launching new initiatives with significant future potential. As we have discussed over the past few quarters, our strategy has been to find larger partners is who can work with us either in a major category globally or regionally across multiple types of products. Our grooming and fragrance licensee, Cody, is a great example of the benefits of that kind of deal. Their initial product, a line of men's fragrances marketed globally continues to do very well and Cody has become one of our most important licensees. Based on that success, Cody has just launched three variants of a line of the women's fragrances which are now on sale in Western Europe. The early results are very impressive and we anticipate product rollouts in additional markets.

China has been a major market for our brand since 1990 and during the quarter, we signed a major licensing deal there that we believe will significantly accelerate revenue growth. Under the agreement, Shanghai Glory Rabbit [ph] our new licensee now has exclusive rights in mainland China to a wide range of product categories. Including Playboy branded men's and women's apparel and a line of home textiles, which will be marketed under the Playboy Mansion label. This is one of the largest single licensing deals we have ever done. Under a separate agreement, our new licensee opened a 2500 square feet Playboy store in Taipei last week. While this is a significantly smaller project to the deal I just described, it demonstrates our ongoing commitment to the region and to building an even larger brand presence there. Turning to our location-based entertainment business, we expect to see two properties opened this month. The 12,000 square feet Playboy club Macau is on track to celebrate its grand opening a week from Saturday in November 20 and the Playboy club Cancun property is scheduled to open the following week. Licensing segment income rose to $6.2 million in the third quarter, up 11% compared to last year. The sharp among you will notice that we did experience a modest deterioration in operating margins which was primarily a result of agency expenses stemming from our IMG deal and unanticipated expenses primarily bad debt.

We are pleased with the licensing opportunities that IMG is bringing to us. I believe they can help us move faster and grow our revenue base more quickly than we could if we were operating on our own. The resulting top line growth was more than offset the modest increase in our expense structure resulting from their fees. The Print/Digital group also reported improved year-over-year results with segment income nearly tripling to $1.3 million, despite a 5% decline in revenues. Playboy magazine's was primarily responsible for the group’s profit improvement in the quarter. This year, we published three issues of the magazine in the third quarter versus two last year, which contributed to a 21% growth in third quarter 2010 circulation revenues and a 31% improvement in advertising pages. On the cost side, we are benefiting from both a planned reduction is in the magazine's rate base which were always production and distribution expenses as well as the agreement with AMI and the outsourcing to them of various business operations. As a result, the magazine was essentially breakeven in the quarter.

Looking ahead, we are closing the fourth-quarter advertising now and we estimate that ad pages will be up 7% in the quarter compared to last year, but ad revenues down approximately 35% reflecting the lower rate base. Let me talk for a minute about our digital business and specifically our largest revenue stream of paid sites. These include both Playboy and adult sites, the latter of which have become an increasingly commoditized business. The Playboy brand gives us a unique platform concept and we have focused on building a robust Playboy site through investments in content and marketing which are beginning to pay off. We recorded modest growth in online subscription revenues in September and October, our first year over year improvement since 2008. I also want to update you on our initiative we mentioned in August, which was the launch of TheSmokingJacket. The safer work advertiser supported site.

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