Marvel Releases Q1 Numbers - Flat, But Beats the Street

Marvel today released its Q1 2009 numbers, and its profit beat market estimates due in part to the strength of the licensing segment of the company and, according to Marvel, continued demand for DVD versions of Iron Man and The Incredible Hulk, which Marvel produced.

First-quarter net income for Marvel fell to $44.5 million, or 57 cents per share, down from $45.2 million, or 58 cents a share, a year earlier. Revenue rose 75 percent to $197 million. According to Reuters Estimates, market analysts were looking for earnings of 37 cents a share, excluding exceptional items, on revenue of $138.2 million.

Publishing revenue for the quarter decreased $0.7 million to $25.8 million, down from $26.5 million a year earlier.

From Marvel’s Q1 report:

Marvel Entertainment, Inc. (NYSE: MVL), a global character-based entertainment and licensing company celebrating the 70TH anniversary of its founding in 1939, today reported operating results for its first quarter ended March 31, 2009. Marvel also today raised the low end of its financial guidance for 2009, reflecting a stronger than expected first quarter performance in its licensing and film production segments and a decline in the anticipated full year tax rate.

For Q1 2009, Marvel reported net sales of $197.0 million and net income of $44.5 million, or $0.57 per diluted share, compared to net sales of $112.6 million and net income of $45.2 million, or $0.58 per diluted share, in Q1 2008. The year-over-year increase in net sales is principally the result of $90.4 million in film production segment revenues associated with The Incredible Hulk and Iron Man feature films released in Q2 2008 and also reflects a stronger than anticipated licensing contribution in Q1 2009. Q1 2008 benefited from $19 million in settlement payments from two licensees.

Marvel's Chairman, Morton Handel, commented, "Strong Q1 results in our licensing and film production segments reflect the power of our corporate and character brands and solid demand for Marvel-branded consumer products and the home video versions of our Iron Man and The Incredible Hulk feature films.
“Further evidence of the broad appeal of our characters is reflected in the recent success of two new Marvel character entertainment projects. This past weekend, Twentieth Century Fox’s X-Men Origins: Wolverine generated approximately $158 million in worldwide box office receipts including an estimated $85 million in domestic box office, the largest domestic opening weekend of 2009 to date. In addition, our new animated television project, Iron Man Armored Adventures, recently debuted as the most watched series premiere ever on Nicktoons. The debut of Iron Man Armored Adventures marks the third Marvel character animated series currently airing on domestic television. This tremendous launch demonstrates the popularity of the Iron Man brand which will be further developed by the release of Iron Man 2 in 2010. Our Marvel Studios division recently commenced principal photography on this project which will be supported by a comprehensive global marketing, promotional and merchandising campaign. While contributions to Marvel from X-Men Origins: Wolverine and our animated projects are relatively modest, their strategic value lies in the brand recognition they create with a growing global fan base, providing a foundation to further develop these and other brands in the future.”

Licensing Segment net sales of $80.8 million were higher than anticipated primarily reflecting strength in interactive games and royalties from better than anticipated worldwide licensee sales. As anticipated, Licensing Segment net sales declined versus Q1 ’08 reflecting a $24.5 million decrease in sales from the Spider-Man feature film merchandising joint venture with Sony as well as lower Marvel Studios entertainment licensing revenue than in the year-ago period. These declines were substantially offset by higher contributions from Domestic and International Consumer Products which in aggregate rose by $30.3 million compared to the prior year period. Licensing Segment operating income was $58.9 million in Q1 2009 with an operating margin of 73%. Q1 2008 Licensing Segment operating income and operating margin benefited from $19 million in settlement payments from two licensees in connection with the termination of their respective interactive license agreements that were recorded as other income.

As anticipated, our Publishing Segment net sales decreased by $0.7 million to $25.8 million in Q1 2009 from $26.5 million in Q1 2008, principally reflecting lower levels of advertising revenue, offset in part by a modest improvement in the Mass Market channel and higher average selling prices initiated in Q4 2008. Marvel’s major publishing events for 2009 will take place in the second half of the year. Operating income declined by 29% on a year-over-year basis to $7.0 million in Q1 2009, reflecting $1.0 million in investments made in Marvel’s digital media initiatives as well as the reduction in advertising sales. As a result, the Publishing Segment operating margin was 27% in Q1 2009 versus 37% in Q1 2008. Marvel continues to target Publishing Segment margins in the range of 31%-35% for the full year 2009.

The Film Production Segment recorded sales of $90.4 million in Q1 2009, roughly two-thirds of which related to revenue from sales of The Incredible Hulk DVD released October 21, 2008. The balance of the revenues are principally related to sales of the Iron Man DVD. Against these revenues, we amortized capitalized film production expenses of $71.0 million (based on Marvel’s estimate of each film’s expected “ultimate” performance), contributing $15.5 million to operating income. Marvel had no film production revenue and a $2.0 million operating loss in Q1 2008, primarily reflecting non-capitalized film-production expenses.

Under the category All Other, we had operating losses of $7.8 million and $5.8 million in Q1 2009 and Q1 2008, respectively. All Other in Q1 2009 included no revenue or operating income compared to $1.5 million in revenue and $0.7 million in operating income in Q1 2008 related to our in-house toy operations which have been terminated. Corporate overhead in Q1 2009 and 2008 was $7.8 million and $6.5 million, respectively.

Balance Sheet and Cash Use Update:

As of March 31, 2009, Marvel had cash and cash equivalents of $83.3 million, restricted cash of $131.3 million and no outstanding borrowings under its $100 million line of credit with HSBC Bank. Aggregate outstanding film-related borrowings declined to $61.9 million at March 31, 2009, from $213.0 million at December 31, 2008, reflecting the repayment of film slate facility debt using Q1 2009 cash receipts primarily related to The Incredible Hulk and Iron Man DVD sales in Q4 2008 and Q1 2009. During Q1 2009, the Company repurchased 694,235 shares of its common stock for a total of approximately $16.4 million ($23.63 per share). The Company has $111.3 million remaining under its share repurchase authorization.

As they do with each quarterly report, Marvel announced its lineup of media projects:

Films:

Iron Man 2 – May 7, 2010

Thor – May 20, 2011

The First Avengers: Captain America – July 22, 2011

The Avengers – May 4, 2012

Animated Television Series:

Super Hero Squad - 26, 30-minute episodes in production; scheduled for Q3 2009 release on Cartoon Network

The Avengers: Earth’s Mightiest Heroes - 26, 30-minute episodes in production; scheduled for Q3 2011 release

Marvel-Produced Projects:

Spider-Man 4 – May 6, 2011

Animated Television Series:

Black Panther - 8, 30-minute episodes in production; scheduled for Q2 2009 release on BET

Fantastic Four: World’s Greatest Heroes - 26, 30-minute episodes airing internationally and on Marvel.com and Marvelkids.com

Iron Man: Armored Adventures - Currently airing in the U.S. on Nicktoons and on various networks internationally

Spectacular Spider-Man - Currently airing on Disney XD in the U.S. and on various networks internationally

Wolverine and the X-Men - 52, 30-minute episodes. Episodes 1-26 are currently airing on Nicktoons in the U.S. and are on air internationally. Episodes 27-52 are currently in pre-production.

Broadway:

Spider-Man, Turn off the Dark - February 18, 2010 opening

Video Games:

The Punisher: No Mercy / Zen - Scheduled for May 2009 release

Marvel vs. Capcom 2 / Capcom - Scheduled for June 29, 2009 release

Marvel Ultimate Alliance 2 / Activision - Scheduled for September 2009 release

Marvel Super Hero Squad / THQ - Scheduled for October 2009 release

Iron Man 2 / Sega - Scheduled for April 2010 release

2009 Financial Guidance:

Marvel today revised its 2009 financial guidance to reflect a stronger than anticipated Q1 2009 operating performance and a decline in its anticipated full year tax rate. Marvel has raised the low end and high end of its net sales guidance and the low end of its net income and diluted EPS guidance ranges to $450 - $485 million, $86 million and $1.10, respectively.

Primary Assumptions for 2009 Financial Guidance:

• The Licensing segment is expected to contribute net sales of approximately $200 million - $215 million in 2009 with an operating margin of approximately 66 - 70%.

• The Film Production segment is expected to contribute revenues of approximately $135 million - $145 million in 2009 and to generate an operating margin of approximately 12% - 18%.

• The Publishing segment is expected to contribute net sales of approximately $115 million - $125 million in 2009, with an operating margin of approximately 31% - 35%, reflecting approximately $6 million in ongoing investments in digital media initiatives.

• Corporate overhead is expected to approximate $34 million in 2009.

• Marvel anticipates a 2009 effective tax rate of 37.5%.

• Marvel’s guidance is based on 78.2 million diluted shares for 2009 and does not reflect any future share repurchase activity.

Marvel cautions investors that variations in the timing of licenses and entertainment events, the timing of their revenue recognition, and their level of success result in variations and uncertainty in forecasting Marvel’s financial results. These factors could have a material impact on year-over-year annual and sequential quarterly results comparisons as well as on Marvel’s ability to achieve its financial guidance.

Click here to read the full report with tables.