JAKKS Pacific, Inc.
Q4 2013 Earnings Call Transcript

Published: 26 Feb 2014

[Operator:]

Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific Fourth Quarter and Full Year 2013 Earnings Call with management. Today, JAKKS will review the results for the fourth quarter and full year ended December 31, 2013, which the company released earlier today. On the call today are Stephen Berman, President and Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will provide an overview of the quarter, then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to the opening up the call for your questions. [Operator Instructions] . Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share for 2014, as well as any forward-looking statements concerning 2014 and beyond are subject to Safe Harbor protection under federal security laws. These statements reflect the company's 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 forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC, as well as the company's other reports subsequently filed with SEC from time to time. With that, I will turn the call over to Mr. Berman.

[Stephen G. Berman:]

Good morning, everyone, and thank you for joining us today. We are pleased with our sales results for the fourth quarter of 2013, as we have exceeded our revised sales and earning guidance for the full year. Highlights of our fourth quarter sales includes Disney Princess Toddler and Baby Dolls and Dress-Up, including products from the blockbuster Disney animated feature film, Frozen, as well as Sofia the First Dress-Up and Role Play toys. Disney fairies fashion dolls and Dress-Up, Cabbage Patch Kids, Black & Decker boys Role Play, large-scale figures based on many top boys action entertainment brands, and our Pre-School Toys such as our foot-to-floor ride-ons, activity tables, amongst other products, were some of the stronger sellers throughout the holiday season. So down year-over-year due to financial struggles of some of our biggest distributors, JAKKS' international sales exceeded margin expectations of this year, driven by Smurfs, our large-scale figures and Disney Princess toddler and baby dolls, which were an international sales success story in 2013. We more than doubled our sales of Disney princess toddler dolls internationally year-over-year with the new markets we added to our license. More on this later in the call. For DreamPlay, we had a successful launch of our initial DreamPlay products and apps, using networks patented recognition technology, with the release of the Little Mermaid toys and apps and miWorld Toys and apps in the fourth quarter of 2013. Both toy lines experienced strong sell-through at retail, the launch of the apps and TV commercial and downloads of both apps continue to be strong and steady. We have a detailed launch plan for more new apps and products in 2014. We undertook a major restructuring and realignment of our business units during the second half of last year, which have resulted in lower operating expenses and increased productivity, the rightsizing of our business, elimination of SKUs that do not achieve specific margin requirements, elimination of underperforming SKUs, consolidation and reduction of staff, office space and other costs has allowed us to gain a strong financial saving going into 2014. In addition, we are starting the year on the right foot with low inventory levels at retail. We've recently completed our Hong Kong Toy Fair and Nuremberg Toy Fair meetings and are pleased with the response from retailers to our 2014 product lineups. We have a robust portfolio this year comprised of brand-new initiatives and innovation and the hottest licensed properties, along with our evergreen categories and brands and licenses. I would like to now turn over the call to Mr. Joel Bennett to review our financial results for the fourth quarter and full year of 2013, and then I will give a further update of our businesses this year and beyond. Joel?

[Joel M. Bennett:]

Thank you, Stephen, and good morning, everyone. Net sales for the fourth quarter of 2013 were $137.7 million compared to $133.5 million reported in the comparable period in 2012. The reported net loss for the fourth quarter was $16 million or $0.73 per diluted share, which included a restructuring charge of $5 million or $0.23 per diluted share, and a credit of $6 million or $0.27 per diluted share, related to the reversal of a portion of the Maui earn-out. This compares to a net loss of $119.5 million or $5.45 per diluted share, reported in the comparable period in 2012, which included one-time noncash charges totaling $91.7 million or $4.18 per diluted share related to the impairment of deferred tax assets. Net sales for the full year of 2013 were $632.1 million compared to $666.7 million in 2012. The reported net loss for the full year was $53.9 million or $2.46 per diluted share, which included charges for licensed minimum guarantee shortfalls of $14.4 million and inventory impairment of $14.9 million and the restructuring charge and Maui earn-out reversal. This compares to a net loss for the full year of 2012 of $104.8 million or $4.37 per diluted share, which included $91.7 million or $3.83 per diluted share for the deferred tax asset impairment charge. Worldwide sales of products in our traditional toys and electronic segments, which includes Dolls, Action Figures, Vehicles, Electronics, Plush and Pet Products were $76.7 million for the fourth quarter of 2013 compared to $80.6 million for the fourth quarter of 2012. And sales for traditional toys were $320.6 million for the full year of 2013 versus $367.2 million for the full year of 2012. Sales this quarter in the segment were led by our Disney Princess dolls, Disney Fairies dolls, Cabbage Patch Kids and foot to floor ride-ons, so sales overall were down this quarter due to declines in Monsuno and Winx Club. Worldwide sales from our Role Playing, Novelty and Seasonal Toys segment, which includes role play products, novelty toys, Halloween costumes, indoor and outdoor kids furniture and outdoor activity and pool toys were $61 million in the fourth quarter of 2013 compared to $52.9 million for the fourth quarter in 2012. And sales for Role Play, Novelty and Seasonal Toys were $312.4 million for the full year of 2013 versus $299.5 million for the full year of 2012. Disney Princess Dress-Up and Role Play, Sofia the First and Frozen, and activity tables and chair sets dominated sales in this category this quarter, driving the category to an overall increase this quarter. Included in the category numbers are international sales of $14.2 million for the fourth quarter of 2013 compared to $22.5 million for the fourth quarter of 2012. International sales for the full year of 2013 and 2012 were $108.7 million and $132 million, respectively. Smurfs, Disney Princess Dolls and large-scale figures drove fourth quarter sales in the international market. The year-over-year decline is due primarily to the decline of Monsuno and Winx product lines. Gross margin for the fourth quarter of 2013 and 2012 was 28.1% and 23% of net sales, respectively. And gross margin for the full year of 2013 was 24.6% of net sales compared to 29.7% of net sales in the full year of 2012. The increase, as a percentage of net sales for the fourth quarter of 2013, is primarily due to fewer closeout sales and markdowns than in 2012. The decrease, as a percentage of net sales in 2013 for the full year, is primarily due to charges taken in the second quarter for license minimum guarantee shortfall and inventory impairment on underperforming product lines. SG&A expenses in the fourth quarter of 2013 were $54.8 million or 39.8% of net sales as compared to $62 million or 46.4% of net sales in 2012. SG&A for the full year of 2013 was $200.3 million or 31.6% of net sales compared to $211.2 million or 31.7% of net sales. The percentage of net sales for the full year of 2013 was comparable to 2012 due to lower direct selling expenses, offset in part by lower net sales and a restructuring charge of $5 million, taken in the fourth quarter, though offset in part by the impact of the restructuring. Operations provided cash of $67.8 million for the fourth quarter of 2013 compared to providing cash of $43.5 million in 2012. As of December 31, 2013, the company's working capital was $136.4 million, including cash and equivalents and marketable securities of approximately $117.3 million. Depreciation and amortization was approximately $4.5 million in the fourth quarter of 2013 compared to $2.7 million for the fourth quarter of 2012. And for the full year, D&A was $21.4 million and $22.5 million for 2013 and 2012, respectively. In 2013, other income included a credit of $6 million for the reversal of a portion of the Maui earn-out based on the 2013 results. Capital expenditures were $2.1 million for the fourth quarter of 2013 compared to $1.3 million for the fourth quarter of 2012. For the full year, capital expenditures were modestly lower than expected at $10.1 million compared to $13.1 million in 2012. The accounts receivable, as of December 31, 2013, were $101.2 million, down from $105.5 million at the end of the fourth quarter of 2012, resulting in DSOs in 2013 of 66 days, a decrease of 5 days from the 71 days in 2012. Inventory, as of December 31, 2013, was $46.8 million, down from the December 31, 2012 level of $59.7 million, as we continue to manage inventory level, resulting in lower DSIs of 52 days in 2013, down from 66 days in 2012. Turning to our 2014 guidance. We anticipate net sales for the full year in the range of $633 million to $640 million, with earnings in the range of $0.30 to $0.40 per diluted share and EBITDA in the range of $41 million to $43 million. For the first quarter ending March 31, 2014, we expect net sales in the range of $72 million to $75 million, with a loss in the range of $0.77 to $0.81 per share. The smaller loss in the first quarter and the overall profitability for the full year reflect the benefit of our restructuring initiatives and other revenue enhancement initiatives we have undertaken. Lastly, based on the traction we're getting on the turnaround with cost savings and other margin enhancement initiatives and product flow, we're very happy to announce that we've entered into a commitment letter with GE Capital for a credit facility to provide up to $75 million, which will give us financial flexibility to execute on our strategy. With that, I will return the call back to Stephen Berman.

[Stephen G. Berman:]

Thank you, Joel. As we enter into 2014, we could not be more pleased with the performance of our broad range of JAKKS Disney Frozen products from Toddler, Baby Dolls, Dress-Up and Role Play products, just to name a few. We are currently chasing the upside at retail to ship additional inventory in time for the March DVD release of this hit movie. We are working closely with Disney to create special programs that will secure additional promotional space for fall with innovative new items, including an ice castle vanity and a featured toddler doll, just to name a few. Given the extreme box office success and the aggressive retail efforts, we expect sales to continue to gain momentum well past the DVD release and into fall 2014 and beyond. On another exciting note, our Sofia the First Dress-Up and Role-Playing products continue to perform at retail last year and has well exceeded our original expectations. We had a strong promotional program through fall and we're included in many key accounts, hot toys list for the holidays. We have additionally secured rights in Latin America, Australia, China, Taiwan and Hong Kong for our Sophia large doll lines under our Tollytots division. This will begin shipping in spring 2014 and has the potential to significantly grow our doll business in North America and internationally in 2014 and beyond. For 2014, we're launching an innovative new look for our Disney princess toddler and baby dolls with new sculpts and royal reflection eyes, a patent pending, internally developed invention. Our new look dolls received great reception from retailers at our Hong Kong Toy Fair and Nuremberg Toy Fair this year. The Little Mermaid Diamond Edition Blu-ray DVD launched in October and a sell-through of our Light-Up Dress and Under The Sea Ariel feature doll is exceptionally well. We launched our DreamPlay Ariel's music surprise app to enhance the play interaction for a number of our Little Mermaid dress-up and role play products that bring them to life. The app was featured in our TV commercial that aired in October and November, which resulted in and continues a steady increase in downloads. Tech sites such as Tapscape, BestAppsForKids,, OnTheApps, Apps Playground reviewed our Little Mermaid DreamPlay app and across-the-board sentiment was extremely positive, both on the quality of the toys and the functionality of the app. Tapscape, one the largest app sites, gave Ariel's Music Surprise a 9.3 out of 10 ranking. BestAppForKids, a top children's app review website, gave it a 5-star review deemed it Editor's Choice. The reviewers highlight the incredible graphics in the app, the DreamPlay toy technology and the child friendliness of the app. We are also currently working on updates for the Ariels' Music Surprise app for fall 2014. Another exciting launch with DreamPlay in December, we launched our miWorld line of many playset environments based on top girl brands like Claires, Sprinkles and OPI, which also featured the compatibility with the miWorld DreamPlay app. We are launching an Android version for the Google Play store in spring 2014 and we'll be updating this app to include new fall playsets for 2014. Sprinkles cupcake stores, OPI nail salon and Claires have all taken miWorld DreamPlay sets to sell either in-store or on their website. We have also signed 2 new licenses for the fall for top girl brands, Justice and Skechers. Justice will offer miWorld Justice set that we create exclusively for them to sell at the Justice stores, in time for the holiday season, along with other main line miWorld items. We also plan to launch Skechers miWorld DreamPlay playsets, which will also be sold in Skechers stores. For our Boys business, our 31-inch large-scale figures, featuring many top licenses, has an extremely strong sell-through at retail, setting the phase for a great business in 2014. We were the first to retail with 31-inch figures with Dark Knight in fall of 2012 and since then, have launched Darth Vader, Clone Troopers, Man of Steel and Power Rangers in 2013. Some of the new properties we're launching in 2014 include Godzilla, Teenage Mutant Ninja Turtles, Star Wars Rebels, DC Universe and Nintendo's Super Mario Brothers. We have expanded our rights for Star Wars with new product launches in the fall, including products tied to both classic Star Wars and the new animated series Star Wars Rebels. We are introducing new scales at 18-inch and 21-inch figures as part of our big, big line, and further expanding line offerings of 31-inch -- such as 31-inch Storm Trooper and a 31-inch Inquisitor. We have placement in all major retailers in North America and abroad. Our Black & Decker line of product outpaced our expectations in 2013, with more placement at retailers and new channels than ever before, targeted to line for the first time and exceeded expectations. We recently recognized with the outstanding performance in licensing in 2013 award by Black & Decker at the annual Stanley Black & Decker Summit. We credit the brand's success with a diverse and innovative line that we have invested in making a unique and stand apart from competitive items in the marketplace today. We're continuing this trend in 2014 with new introductions of Black & Decker outdoor. Now we get to finally see the world of Nintendo come to retail shelves in spring 2014. For the first time ever, Nintendo of America has granted rights to one partner for all brands within their portfolio of classic games and entertainment. We have a full worldwide placement of our Nintendo line, including figures, plus a remote-control vehicle and a motorized ride-on. To further capitalize on the way kids are playing today, both with physical and digital applications, we're launching a new line of Hero Portal plug-and-play game consoles, which capitalizes on popular and established play patterns of collectible figures that interact with an all-in-one videogame console. Hero Portal is similar to Activision's Skylanders and Disney Infinity play patterns, but meant to appeal to a budget-conscious consumer. And we have exclusive rights to key boy properties like Teenage Mutant Ninja Turtles, DC Universe and Power Rangers Super Megaforce just to name a few. We have support at all of our major retailers in North America for fall 2014, including Walmart, Target, Toys"R"Us, Kmart and Walgreens, just to name a few. Like we've done years past with TV games, taking great properties and great licenses and making gaming fun and inexpensive for all, Hero Portals does the same, allowing children to play with figures and interact with a game system for a very low inexpensive price. In our MXS line, we are investing in a new innovation for the line in 2014, with the new MXS extreme stunt ramp as the key driver in the line. The playset features top writers, such as Ryan Dungey and Travis Pastrana, and has confirmed placement at all major retailers, alternative and specialty channels. Now onto Pre-School. Daniel the Tiger was successfully launched at Toys"R"Us in the fall and given the success and the introduction, we will be expanding distribution in 2014. Ratings for this PVS show continue to be extremely strong and the number of episode downloads is record-setting, over 40 million a month. The outlook for sales is very positive for 2014 and we will continue to broaden our exposure to the line and established Daniel the Tiger as an evergreen Pre-School brand. Our Moose Mountain division, a leader in great evergreen Pre-School products such as foot-to-floor ride-ons, inflatable ball pits and arcade games had another great year with year-over-year growth, with our Fisher-Price foot-to-floor ride-ons, finishing very strong and solidifying their dominance and market share at our major retailers. Sales soared due to year-long and cap at Toys"R"Us, new fall business at Walmart that resulted in double-digit increases over the last year, weekly rotos, and a holiday toy book feature at Target and a great everyday business at Kmart. Our Kids Only! division also had a solid year with performance of their co-branded big wheels, with their other licensed activity tables, which continued to be a steady evergreen business at all of our major retailers. We have completed the consolidation of the Kids Only! business into our Moose Mountain division and now, the combination of these 2 areas of businesses allow us to have more efficiencies and to be a leader in the foot-to-floor ride-ons, indoor play environment and kid licensed furniture, stools and outdoor play products. For Seasonal, our Disguise Halloween business finished the year with top licenses, including Disney Princess, Jake and the Never Land Pirates, Sofia the First, Doc McStuffins, Iron Man and many, many, more. We renewed our license agreements with Hasbro to produce Halloween costumes and accessories based on top Hasbro brands, including their theatrical property Transformers, Age of Extinction, as well as Hasbro's classic brands, including My Little Pony, Transformers and Mr. Potato Head, just to name a few. We also renewed our partnership with Saban and will continue to produce classic Mighty Morphin Power Rangers costumes, as well as all new styles from the current and upcoming Power Rangers seasons for children and adults. Despite challenging weather, our innovative Maui toys seasoned products did solid business at retail in spring and summer, with Wave Hoops and Sky Ball as the highlights of their 2013 offerings. For 2014, we're looking forward to launching new iterations of Sky Ball, Sky Bouncers and new fun noodle, fun foam forts and others. Now I'd like to turn our attention to JAKKS' international business. Outside of the decline of our Monsuno products and financial weakness of a major international customer, our international business finished on par with expectations. The top products leading the way included our Disney Princess toddler and baby doll, 31-inch Giant Action Figures and Smurfs. A big year is expected this year, with Princess Toddler Dolls, Sofia the First, Disney Frozen and large-scale figures and Nintendo. New distribution in Spain and Germany should lead to increase sales for Europe and Latin America sales forecast are up. Our JAKKS International team was recently awarded with the best girls and tweens licensee for 2013 by the Walt Disney company U.K. and Ireland arm at the inaugural Disney 2013 licensee award gala in London, England. Our Disney Princess large dolls, which is doing strong business in other countries outside the U.K. such as France, Russia and the Nordics is a significant part of JAKKS's continued growth on our international business beyond traditional North America markets. We are expanding rapidly internationally and expect growth this year in 2014 with broad distribution and penetration in our current territories, as well as opening up new markets for distribution. We are deeply focused on maximizing opportunities and growing our international business. As to date, it has represented approximately 15% of our annual sales, while our major competitors have international sales of approximately 45% to 60% of their annual sales. We are extremely excited and with regards to the expansion of our DreamPlay offerings. We are doubling our DreamPlay offerings for 2014 and preview the 2014 line to our retailers and partners over the last 2 months. We are looking forward to launching more products and experiences that push the boundaries of technology-based play patterns to integrate with physical and digital play. Our 2014 offerings will include products targeting both boys and girls and range and ages from 2 to 14, with a mix of JAKKS' own IP products and licensed products. Our line will capitalize on various relevant play patterns, such as nurturing play, fashion play, humor and imaginative play. For new toy plus app initiatives, with the DreamPlay technology, it will include boys battling app tied to a consumer product activation will involve key boy play buttons. We are also expanding into standalone apps, with one standalone app launched in ultimate virtual pet, to increase our offerings and presence in digital play space and working to build a strategy to monetize our offerings. 2014 is looking very solid and strong. Our inventory levels with our retail partners are in very good shape. Our long-standing relationship with key license stores and retailers, coupled with our commitment to product innovation, focusing on operating efficiencies, working capital and capital expenditures, along with margin improvement initiatives should position us for a well profitable 2014 and beyond. Thank you for your time. And with that, we will wrap up the prepared portion of the call and open it up to Q&A.

[Operator:]

[Operator Instructions] Our first question comes from Linda Bolton-Weiser from B. Riley & Co.

[Linda Bolton-Weiser:]

I was wondering if you could -- very good news about the credit facility. Do you have any information on the potential timing of the closing of that agreement? And then also, can you give even a rough kind of range for the potential interest rate regarding that? And then secondly, I guess, I've had some questions, and I was wondering if you could give clarification to help people understand the likelihood or probability if there would be any more write-off in 2014 regarding any license guarantees. You had taken some in 2013 that were quite large. And if you could clarify, again, what those write-offs were for, which brands are licenses. And then does that sort of take care of that type of write-off regarding those brands, or is it possible there could be more write-offs in the future? Those are the key things.

[Stephen G. Berman:]

Okay. As far as the timing, we would certainly expect in the coming weeks, but couldn't really speculate any further on that, to get to the commitment level. There was a lot of diligence on the part of GE Capital. So having said that, we're happy to have entered into it. Interest rates are in the LIBOR plus 300 bps range. But just watch for releases in the coming weeks on that. But now that the earnings release is done, we'll be moving full steam ahead to get the line complete as quickly as we can. As far as the license write-offs, it's a typical process each quarter to review the status of all of our licenses. We have an upwards of 1000 different licenses. What was unusual about second quarter, certainly, was the magnitude. Some of the biggest included Winx, which was a big initiative for us a couple of years ago. But it's not expected to be on that order of magnitude. But it's an ordinary course review. And each year does have some amount of shortfalls.

[Linda Bolton-Weiser:]

Great. And then, can I just ask on the DreamPlay line? I think you said a doubling of -- so would that be a doubling of the SKUs on DreamPlay from 4 to 8?

[Stephen G. Berman:]

There was more than 4 SKUs that were launched in DreamPlay in 2013. It's doubling the offerings because within each of the segmentations, there could be 1 to 7 SKUs, so we're doubling the amount of SKUs and categories in which we are launching for 2014. We've had a very strong positive sell-through reaction from both retail and Disney with our Little Mermaid and our miWorld experience that we launched in fall. December, actually, we launched the app, 12/1, and the product got on shelf a little bit late. We've had extremely strong sell-through beyond our expectations. So we have been prepared for the last 6 months in development and showed our retail customers. So it's doubling the offerings in the categories, and some of it will allow itself in doubling of the SKUs.

[Operator:]

Our next questions comes from Jeffrey Thomison from Hilliard Lyons.

[Jeffrey S. Thomison:]

On that note, I was hoping you could elaborate as to what gives you the confidence in the DreamPlay outlook for 2014 and how, in retrospect, do you view its debut in 2013? Did you learn anything that you think you may have done differently if you knew about it and how that could help you next year, or this current year?

[Stephen G. Berman:]

Well, actually, first, it's a terrific question. The first part of 2013, or the launch of it in 2013 fall, we're really more focusing on seizing the technology, it's a brand-new technology and we see how kids are playing both with physical and digital. So we launched it with, obviously, a strong brand, which was Ariel and the DVD release with Disney, which helped enhance the product itself, the physical product, allowing a digital portion to be available. And going forward, we did learn a lot. We learned an exceptional amount throughout the year. The ages of the kids range that were utilizing the technology ranges from 2 to 14 years of age. We are focusing now on the freemium model, which we are -- it's a free app with an in-app purchase. We will start implementing the in-app purchases in some of our apps, and that's something that we have learned by partnering with the correct people. And another great launch that was done through the DreamPlay consumer products was, recently, it's called the Disney Magic Timer by Oral-B and Disney powered by DreamPlay, and you can go in the iTunes Store, Google Store, pull it up, and you'll see it's launched in America, and I believe, in 6 territories, utilizing this recognition technology to enhance the brushing experiences for children from 0 to 6. So it's an adoption period, and it's a long adoption. But using the -- as you see Disney working with us, the Procter & Gamble work with DreamPlay, consumer, it's a very strong build, and we couldn't be more pleased. One of the big things is it's an enhancement to the physical product, which we want to make sure everyone understands that people play with physical and they also are playing with digital. And combining both of them are kind of allowing the kid to make a choice when they feel so and it has proven, both with the Ariel Disney and with our own proprietary product, which is miWorld.

[Jeffrey S. Thomison:]

Okay, great. And then just switching gears on another topic, on the Hero Portal product line. Did you guys talk about the timeframe for that? Is that holiday next year or earlier?

[Stephen G. Berman:]

That's holiday this year.

[Jeffrey S. Thomison:]

That's what I meant.

[Stephen G. Berman:]

There are 3 strong licenses, extremely strong licenses that we are partnering with. And what it's allowing and what we did years back with the actual launch of TV games, to have a console an Xbox or PlayStation, so it's quite expensive for the norm and it's not a easy purchase. But what we're allowing is extremely strong licenses, with a very similar game play is what you would have with the Activision Skylanders and with Disney Infinity, but we're allowing it to have really fun game play at inexpensive price to hit a lot more consumers both in the U.S. and abroad.

[Operator:]

Our next question comes from Ed Woo from Ascendiant Capital.

[Edward M. Woo:]

I had a question about the retail environment. What are you seeing out there? And do you think there's any -- going to be any changes for holiday 2014?

[Stephen G. Berman:]

I would say, the retail environment, as I talked first, U.S. versus North America and Europe, is a unique environment, not just for toy, just in general, for appliances and so on. Many people -- our online business has grown dramatically through our major brick-and-mortar customers, so as Toys"R"Us or Target, Walmart, both the store level, we are seeing strong sales and we're seeing strong sales online. I think the biggest change is, they're selecting and buying less product from less vendors than in the past. So the vendor -- the vendors that were out here in the past 5 years, there's many less vendors, big larger vendors today, so they're buying more product from less vendors. And they're just being cautious on inventories.

[Edward M. Woo:]

Great. And then, I'm looking forward to growth in international, will you be making significant more investments, or have you already made those investments?

[Stephen G. Berman:]

We are -- currently, in our numbers, we have investments for international, and we will continue to further invest. It's an area that we are experiencing, I would say, some very strong growth. We have acquired, or in the process of finishing off international licenses that allow us to further expand in many other territories outside of Western Europe and Eastern Europe. We've just finished off a major trip abroad. We have some great partnerships. So I'd say international is, for the first time, we have a abundance of products that are appropriate for the territories. So from our own IP, like Spy Net, Covert Ops, to licensed products like our 31inch figures for Frozen, we're having more products to enable us to grow internationally than ever before.

[Operator:]

Our next question comes from Drew Crum from Stifel.

[Andrew E. Crum:]

Stephen, I want to make sure I'm interpreting your comments correctly on Disney Princess and Sofia the First. So are you saying that you do expect it to grow in 2014? And then related to that, I think in the past, you've said that new content is important for that business. Is there anything new that Disney is launching in 2014 that drives that business further?

[Stephen G. Berman:]

So Frozen, actually, is a Princess, as they categorize it at Disney. And I don't think we've seen something since Toy Story or Cars that has become more of a perennial so quickly and has caught on from a franchise. And Frozen, just on the current product lines that we have offered, both in the U.S. and abroad, is growing expeditiously. So the Frozen has actually helped pushing alone gathered the other Disney Properties. So Sofia the First ratings are -- I don't have them available, but have been growing an extremely strong. So Sofia the First is a continual growth area for us, both in, the North America and in Europe. It's really just starting out for us in Europe. And Disney Princess, depending on which category of businesses that we're in, are always a very strong area of business. We do a large amount of business in our Role Play, in our toddler dolls. So we see, there's a variation of Sofia the First as brand new comes out of the gate very strong and is on the build. Frozen is truly an amazing anomaly. The song itself, the princesses, and people are watching the movie 2x, 3x when the DVD launches. We're doing pilot programs with Disney into different categories or retailers that normally don't take, call it, DVDs and so on, we're doing our products with Disney. So we're not just adding products to the existing shelf space. We're adding through pilot programs and getting new shelf space. So it's a really strong area of business that you always have areas that grow or areas that shrink, depending on the property. But we see it as an overall business of growth. I hope that answered your question, Drew.

[Andrew E. Crum:]

Got it, okay. And Joel, shifting gears to the direction expense, it was one of the lowest numbers we've seen in terms of dollars in the fourth quarter, it was down more than 40%, down 29% for the year. How are you thinking about direct selling expense in 2014, and confidence around that and your ability to grow top line if you're selling expense was down year-on-year?

[Stephen G. Berman:]

Yes. It's -- part of the restructuring we're focusing on is about overhead and other product associated costs. So it's refining our plans, our marketing plans with each product line. And again, it was a very detailed undertakings, and we are confident at the level of expenditures that we've reduced the business to. And we expect it to be effective to drive growth. The forecast is up to $640 million in 2014 and we're expecting support, all of our lines to the level that we need to drive the business.

[Operator:]

Our next questions comes from Gerrick Johnson from BMO Capital Markets.

[Gerrick L. Johnson:]

I was just hoping you'd talk about the $6 million reversal with Maui, I think it was in a little bit more detail. Then I have a couple DreamPlay questions.

[Joel M. Bennett:]

Certainly. On the accounting rules of that, you assess the likelihood of the earn-out at the time of the acquisition. So we actually booked the earn-out to goodwill at the time of the acquisition. And as they didn't achieve their earn-out, it actually gets reversed. So it's a other income item, when we determined that it hasn't been met.

[Gerrick L. Johnson:]

Okay, on DreamPlay, you incurred a good deal of cost in 2013 to get that up and running. Do you anticipate further development cost in 2014? Or is that pretty much behind us?

[Stephen G. Berman:]

No, we will actually incur additional cost in building DreamPlay. It's not a short-term build, it's a long-term build, but it's built into our current forecast. And so it's a long-term build over the years. It's not just something that we incur once like a product that you make a tool and you can amortize. It's from what we've gone through in the app world, and also, with the recognition technology. You're always looking at statistics, you're always looking at game play, game functionality, and you change the actual play patterns of the app during periods of time that you see people are more encouraged in certain areas of game play. So you enhance it in that area, so it's an ongoing process to where you see people are attracted to within any type of app.

[Gerrick L. Johnson:]

Okay. And one last one on DreamPlay. Last year, I bought the Ariel's Musical Surprise set, but I noticed, nowhere in the box was DreamPlay mentioned, no branding or anything like that, nor did it mention on the box that there's any sort of app available that would bring these things to life. What happened there? Has that been changed and how are you branding the DreamPlay on your products?

[Stephen G. Berman:]

On the products that actually were approved and where we've launched in the App Store, there are a couple of products that actually had certain levels in the game that we could not -- we're not able to get through the Apple approval process in time, so we didn't have the appropriate stickering that had to be on shelf due to the timetables of getting through the Apple Store. So as it was a late launch, those have been addressed, and they're just normal updates that occur in an app, as you see when used on your phone, it says, update your app. So those are completed now and being put in production for further orders. In addition, on the Ariel app itself, we had -- we'll have several updates throughout this year in 2014. But on the miWorld product and the miWorld displays, we had it prominently focused on the packaging and on the pilot programs to where I explained that, that was utilizing the specific technology, DreamPlay. So that was -- we had a little bit more time and that was launched 12/1 at retail and 12/1 in the App Store. So you did see it on those products appropriately.

[Gerrick L. Johnson:]

Okay. So in 2014, anything that has DreamPlay capability, we should see some sort of branding on the packaging.

[Stephen G. Berman:]

Yes. It will be -- also, you'll see DreamPlay, you'll see, probably, some areas that you'll be able to do ID try-me at retail. So there's a lot that will be launched throughout 2014. And I had actually referenced for you to go to the Procter & Gamble, the Disney Magic Timer by Oral-B powered by DreamPlay, so you could see the technology being used by, obviously, a Fortune 100 company, Procter & Gamble. And you'll be able to see further expansion in that area.

[Operator:]

Our next question comes from Steph Wissink from Piper Jaffray.

[Stephanie S. Wissink:]

Just a couple of questions for us. First, if you could talk about the international markets a bit more. I'm just curious if you can stratify Europe versus Asia, maybe some of South American markets where you have some exposures. Has there been any kind of a derivation between some of the key markets? And then secondly, just on the licenses, how should we think about that line item in the P&L? You had expanded as a percentage of sales in part because sales had compressed, but is there a normal rate of percentage of sales that we should think about in terms of the cost of utilizing those brands?

[Stephen G. Berman:]

Okay, I'll start with the international portion and I'll have Joel talk about the license portion. So International is something that we've been growing for years. The only big issue that we've had is we needed content more so to drive the sales overseas. Each territory has a uniqueness to where some products work better than others in specific territories. For instance, Smurfs, which is in a Belgium property, which is called Schtroumpf, works throughout Europe versus in America, it doesn't work as well. The emerging markets or more than just emerging markets, Latin America, China, India, Hong Kong, Eastern Europe and so on. Those markets are actually growing expeditiously. As long as we have the appropriate product for those territories. When we enter into China, we have 2 of probably the best partners a company can have, working with one another. The timeframe with China is there's a very long testing process, approximately 4 months per each SKU, and we've got to make sure that we have the right SKUs for that territory. We've shipped, I think, our Disney toddler dolls, we're on our fourth reorder in that territory, and we've expanded now, not just with Disney, but with our own products itself. And the markets that we are entering have very strong growth appeal. Now we have a really abundance of product that allow us to enter these markets as a whole versus doing one-off SKUs. As for Western Europe, the U.K. still is extremely strong. France has been extremely strong, Germany has had some difficulties and we've had difficulties in the Italian market through one of our main distributors that have some financial problems that actually, not just distributed in Italy but abroad. Russia, it's a very big growth market. So we're -- while there's some areas that have been, I'd say, depressed or had some concerns, we've grown outside of those areas, as the same as you've seen from competitors in the U.S. as the U.S. market has slightly slowed. So what we have done is we've expanded our distribution in the U.S. to where you see us selling at Journeys, you see us selling at Sketchers, a lot of the drug trade, the sports outlets. So our distribution is expanding in the U.S., plus our distribution at our normal retail. We had a tough year last year. It's actually generating a better shelf presence in the right areas because we have the right product as Frozen, as Sophia, as Disney Princess, the 31-inch figures, our Halloween business. So we've kind of settled, and now we know where the growth aspects are in our business, and that's where we're focusing on. As far as the licensing, we have an upwards, like I said, of a 1,000 licenses from concepts to character licenses, royalty rates range from 1% to 16%. But in general, across -- if you consider the amount of licensed properties that we have, a normal rate of net sales would be about 11%.

[Stephanie S. Wissink:]

And so you expect to be at that normalized rate in 2014, or is that something that you're looking to achieve over time?

[Joel M. Bennett:]

No, that's actually something that we're expecting in 2014. It ran a little bit higher in '12 and '13, in part, because of the underperforming licenses. But we're through a lot of that at this point. In fact, some of the write-offs were for licenses that expire over the next couple of years, so we'll have less headwinds in that area. So the 11% is a realistic number for us.

[Stephanie S. Wissink:]

And if I could, guys, just one follow-up. With respect to how you think now about the SG&A structure, what do you feel like the right level of just total expense loads to operate the businesses? We're expecting that it sounds like you're doing some things in marketing that might allow you to leverage that line a bit more aggressively. But what is the appropriate expense structure that you think is realistic for this level of revenue?

[Stephen G. Berman:]

In the mid-20s, $25 million to $27 million is going to vary by quarter dramatically because most of our sales occur in the third quarter. And that's followed by most of the advertising that occurs in the fourth quarter. But the seasonality should track similar to prior years, but just at a lower overall level.

[Operator:]

Our next question comes from Sean McGowan from Needham.

[Sean P. McGowan:]

I have a bunch of questions that are clarifications or maybe technical, Joel. But just circling back on the this question earlier on the credit line. What's the length of that expected to be, the length of time that you'll have that line?

[Joel M. Bennett:]

It's anticipated to be a 3-year term.

[Sean P. McGowan:]

Three year, okay. And considering the guidance now has back into profit range, can you help us out on what should be the diluted share counts, given everything going on with the convert, and assuming that you don't buy back more than anything between now and November when that has to be paid off, help us how the quarterly share count will go on a diluted basis?

[Stephen G. Berman:]

Sure. It's about $22 million in the first, second and fourth quarter, and about $36 million in the third quarter.

[Sean P. McGowan:]

Okay. And if you make your target for the year, will that be the level for the year?

[Joel M. Bennett:]

It should be the $22 million. Basically, in last quarters, it's the lower amount. We don't show the converts as converted. And the 2014s are due in early November. So that will be out there for most of the year.

[Sean P. McGowan:]

But with your target for the year, would that trigger a diluted share count or...

[Joel M. Bennett:]

It's sort of right on the cusp.

[Sean P. McGowan:]

So either way.

[Joel M. Bennett:]

So it would be the lower amount. What -- we have to actually do the calculation both ways because either in a loss period or in a lower income period, the converts are anti-dilutive. So we were looking to lower share count. But right now, we're expecting first, second and fourth, with the lower end for the full year, the lower amount.

[Sean P. McGowan:]

Switching back over to DreamPlay, a couple of questions there. One issue, I think, last year was that if you were in the store and you wanted to download the Ariel app, it was too big to download if you didn't have Wi-Fi. Have you given any thought of making those apps smaller in size, maybe with some streaming to offset that?

[Stephen G. Berman:]

What you'll see this year is it'll be, where, I'll call it -- the title is called ID to try me because you really, within a story, you really can only download about 10 megabytes to get it quickly downloaded. There's no way to download the depth of the actual app, unless you're not at an area that actually is being pulled from many directions. So the -- about the time, and you could see it when you pull up the PNG DreamPlay Disney app in-store versus home. You always have that disconnection. You won't be able to do a -- there will be an in-store try me, but you'll never be able to download the complete app unless you take the product home, and open it up and download it at home. That's just because the amount of megabytes for the games, and how rich and in depth the environments are.

[Sean P. McGowan:]

A lot of other companies handle that by having a small client and then they do a lot of streaming and that's another solution. Question all about the accounting, in the app world, very, very common to have deferred revenue if you have an ongoing service that you're providing, is that something that you're facing yet?

[Stephen G. Berman:]

Not at this point. When we get into more of the freemium model, there could be some implications. But right now, they are launched in tandem with the product. And we haven't had in-app purchases as yet.

[Sean P. McGowan:]

Okay. Back to Stephanie's question for a second. That SG&A target, when you said mid 20s, were you talking as a percentage of sales?

[Stephen G. Berman:]

Yes. Percentage of sales.

[Sean P. McGowan:]

And then, the last question is really about the guidance. It sounds like you've got a lot of momentum in Frozen and Sophia, and maybe some of these 31-inch figure things, you didn't really have that much last year that was humongous that you're going to have to be cycling again. So why would you not have more confidence in showing greater growth, especially in the first quarter when you have Frozen and Sophia that are incremental that have so much retail momentum?

[Stephen G. Berman:]

With Sophia, we launched last year as well. But I'd say, the cautiousness that we're taking is due to the weather that we've seen. Right now, we're taking an approach that we believe we will achieve the numbers that we set forth. And while Frozen, and not just those, but many other items are doing well. Chinese New Year just got completed and everyone is just ramping up for production. We also have Easter that is in May -- April, late April this year, I think the 21st, versus having Easter earlier in 2013. I think it was late March. So it's just those combinations more than anything else.

[Sean P. McGowan:]

Okay. I just remembered, one other one for Joel, on the reversal of the earn-out, had that earn-out accrual ever gone through the P&L, the portion that's now being reversed, has that gone through the P&L before?

[Joel M. Bennett:]

No, no. Basically, we accrued -- we put up a liability and recorded goodwill, so it's just an accounting convention. So the goodwill...

[Sean P. McGowan:]

Like impairment -- it's effectively an impairment of that portion of the goodwill?

[Joel M. Bennett:]

No, not impairment. And because the cash flow is underlying, the business are still supporting the levels of goodwill. It's just that it reverses through the P&L. It's kind of an odd thing. But it's the accounting convention.

[Sean P. McGowan:]

So your earn-out was added to goodwill, and that's the part that's being reversed with the rest of the goodwill?

[Joel M. Bennett:]

That stays. The part that's being reversed is the liability. So the goodwill is still on the books. It's just that the liability don't stay, and that creates the income.

[Stephen G. Berman:]

Well, I'd like to thank everyone for the call. We appreciate the time and we're looking forward to getting through the first quarter and having our next conference call, which will be the start of, we believe, a strong year for JAKKS in 2014 and beyond. Thank you, all.

[Operator:]

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.