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By DCWD40
May 6, 2008

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The conference call was interesting. At the beginning of the studio presentation they mention the good Iron Man reviews being reported on Rotten Tomatoes. Surprisingly, they also mention that New Line had the rights to Iron Man for many years but it took the current Marvel team to "crack the puzzle" and get it into theaters. I wonder who at Time Warner is shaking their head at this missed opportunity at New Line?

The point was remade that by having the movies in-house, characters can now interconnect. There are no rights issues if Iron Man shows up in The Hulk (which does happen). It is an interesting thought but I am not sure what it means in telling a great story. Since the characters can interact in the publications I think they are saying that the in-house studio gives the company a product opportunity to show the characters as their readers see them interacting. This is all eye candy to me. I guess Marvel fans will see more in this and can explain why this was important enough to mention in the conference call.

Hulk: Universal says the Hulk trailer out now is the most viewed internet trailer ever for a Universal film. The TV ads start May 19 (four weeks ahead of the film).

The studio did take the time to update the "illustrative model" they presented to shareholders. Production costs are higher than those used in the model for the first two movies. The participation fees, shows as being between 0% and 7.5% will be at the low end of that range because of how the first two movies have been structured. The 5% gross fee still is in place. It was not said but the bottom line looks like the operating income estimates will be lower than those presented.

The Q&A went like this:

Caller #1: Marvel said the negative economy is having no impact on the company. Not having a movie in 2009 is designed to maximize returns because the summer is Marvel's sweet spot. Rushing a movie into 2009 was not thought to be wise. Also, to maximize returns, the company is having Thor after Iron Man 2 because they feel Iron Man can help with the marketing of Thor (e.g., having the Thor trailer before the showing of Iron Man; maybe an Thor cameo in Iron Man 2).

Caller #2: This caller focused on the "illustrative model" numbers. He asked if the breakeven point is now $130 million. Marvel declined to comment and did not respond to how much EPS Iron Man might produce. The caller also asked about a Hulk sequel before 2011 (the year for the last movie introduced today). Marvel said they would comment about Hulk after it is released but hinted he might be in one of the other films on the slate.

Caller #3: Spider-Man was not on the schedule. When will the next one be released? Do the rights revert to Marvel if Sony does not do something in a period of time? Spider-Man 4 is in development. Sony has not announced a release date. There is no reason to assume the rights will returned to Marvel since there are many ways the rights can be extended through use (e.g., by appearing in TV animation, etc.).

The caller also asked if Robert Downey Jr. would return as Iron Man. To my surprise, the studio said they hoped he would. [There is another call on this later.]

Caller #4: Will the movie make money in the theatrical frame and when can we expect the see them available for sell-through? Marvel does not know "what they will get paid for when." The company will not see any cash, expect for their gross fee, until Paramount covers their film and DVD expenses. So, Marvel will not see any cash immediately. The company warned analysts to make sure they are very careful with their 2008 estimates. Marvel expects the bulk of the revenue for Iron Man to occur in 2009. [So much for the theory that 2009 is going to be a dud of a year. Iron Man and Hulk profits are going to be booked there! What this does for the stock, since reported earnings will be delayed, remains to be seen. Obviously, film revenues will be visible -- but not very quickly on Marvel's books. Yikes! The distribution and loan agreements look like accounting nightmares for cash flow to Marvel...]

Caller #5: How do merchandise sales look for Iron Man and Hulk? There is nothing available on games but sell-through for Iron Man toys is "excellent." It is too early to see anything on Hulk.

Caller #6: This person asked for a review of when cash can be pulled out for the LLC. Marvel started by mentioning that the deals were worked out years ago. The 5% fee is Marvel's quick cash. It comes out regardless of what the film does. The merchandise and games are similar (i.e., not part of the deal) and allow Marvel to get cash early. This structure gave Marvel cash while providing the large cash needs (the loan) at a very favorable rate and very favorable terms. [If you want to see how cash can be extracted, they recommended reading the SEC-filed documents (i.e., the documents Tim Beyers provided us this morning).]

Caller #7: Asked if there was upside in the international participation fees. There are. Also asked how soon will Paramount start spending cash for the DVD. Marvel declined to answer the question although they mentioned Paramount is stating to enter that phase. His final question was on which films Avi will be involved. He was used for Iron Man and Hulk. There has been no decision for future films.

Called #8: This person asked why it has been reported by the director that the actors are under contract. Marvel stated the company has "options" for the actors. The caller also asked about marketing costs. They do not include the spending by Audi, 7Eleven, Sega, etc. that are in addition to anything Marvel or Paramount spend. When asked about gaming, the company mentioned they expect it to be a big growth area and that the ability to use multiple Marvel characters in a game will be as important as they think it is for film. While the company will continue to license console games, other less expensive gaming methods might be done as a JV or other ways.

Caller #9: Ask for clarification of the 2-picture option with the Iron Man actors. It is as we thought. It is a "studio option" where the studio has the right to rehire the actor at a preset cost. The "free TV" deal are not part of the loan deal and was signed a month ago with the Fx network -- who own the rights to Iron Man and Hulk and the three next movies. The deal is designed to pay a fee based on the films gross -- not a set fee. Marvel said they were very happy with this deal. The caller also asked about international box office cash that will come in Q2. Marvel basically said they hadn't done the work yet so there wasn't anything to report (and it sounded like there was not much money here). The callers final question was about the number of SKU's Hasbro had for Iron Man. The company said there was a "modest number" and that reflected Hasbro and the retailers being realistically conservative. Marvel seemed to be happy with the current line and thought the sequel would be much larger. The company refused to answer the question if Iron Man and Hulk's production budget were about the same size.

Final Caller: Would the company do 3 Marvel movies in a summer (when considering Spider-Man 4 hasn't been placed)? Marvel basically said they will produce the best movies possible and that each movie builds momentum (my word) for the others. So, there may be more than two tent pole Marvel movies in a summer.

Those are my notes.

W.D.