Marvel Enterprises, Inc. reported its financial results for the third quarter today with results that topped its twice-raised 'guidance.'  In spite of the fact that sales for Q3 2003 were only slightly better than Q3 2002 ($84.5 million vs. $84.4 million), profits reached $63.1 million versus $6.7 million a year ago.  With the inclusion of a one-time $31.5 million gain from the tax implication of an asset on the balance sheet, Marvel registered a gain of 85 cents per share, more than double the amount forecast in Marvel's most recent guidance (see 'Marvel Raises Q3 Estimates').  Licensing revenues, which included some $13 million in 'overages' (payments made by licensees whose sales have exceeded the levels set for their guarantees) for the quarter, continued to drive Marvel's profitability.  For the first nine months of the year, licensing revenues are roughly triple what they were in 2002.  It follows quite naturally that the major corporate initiative announced during Marvel's conference call was the expansion of the company's licensing operations under Tim Rothwell, who will oversee new Marvel licensing offices in Europe and Japan.  According to Rothwell, foreign licensing only accounts for 5% of the company's licensing revenues -- and he thinks it has the potential to make up 25-30% of the licensing stream.

In spite of Marvel's strong financial performance, Marvel's stock dropped about 7% in the wake of the report.  The market may have focused on Marvel's lack of sales growth, but if so, it may have been a major mistake.  While licensing revenues were way up and publishing (thanks to JLA/Avengers, 1602, and Supreme Power) demonstrated a nice gain (from $15.3 million in Q3 2002 to $19.5 million in Q3 2003), toy revenue fell from $44 million to $23.3 million.  This is not the result, as some Internet sites have suggested, of stagnating sales for Marvel characters such as Spider-Man and the Hulk, rather it is the result of Marvel's outsourcing of its toy business.  Last year's toy sales reflected the enormous popularity of Spider-Man toys, the sales of which were credited to Marvel's toy division.  This year, though the Hulk toys were designed by the Marvel Toy team, Marvel licensed the manufacturing and Marvel's share of the revenue from the sales of Hulk toys went to the licensing side of the ledger.  Marvel  President and CEO Allen Lipson was actually ecstatic over the sales of Hulk merchandise, which he indicated far surpassed the company's expectations.

Looking forward, toy revenues should increase in Q4 thanks to the LOTR: Return of the King toys, one of Marvel's toy division's last 'manufacturing' projects, but this will only be a temporary effect, which will probably only last through Q1 of 2004.  Because of its strong financial performance Marvel will have to deal with a high tax bracket starting in Q4 of 2003, which will have a dampening effect on profits.  But Marvel's strong financial position will mean that the company will be able to rid itself of its once onerous debt load when it pays off the last of its senior notes in June 2004.  With a full slate of movies set for 2004 (see 'Marvel Movie Outlook') and expanded international licensing opportunities to offset lower toy sales and higher taxes, revenues may not show any dramatic increases in 2004, but profitability should remain strong.