TKO Group Holdings Inc (TKO) 2003 Q3 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. Welcome to today's third quarter fiscal 2004 earnings call. I'd like to turn the program over to your moderator Michele Goldstein. Go ahead please.

Good afternoon. Welcome to World Wrestling Entertainment's third quarter earning's conference call. My name is Michele Goldstein, I'm the Vice President Planning and Investor Relations here at WWE. Here with me today is our CFO Phil Livingston and CEO Linda McMahon. Today we will review our operational highlights, third quarter results, our full year outlook then open it up to Q and A. We issued our earnings after the close of business yesterday. And we will be referencing a presentation as part of our discussion. Both are available on our website at corporate.wwe.com. As a reminder we will be making forward-looking statements today based upon management's estimates. Actual results will differ from -- due to numerous factors as called out on page 1 of the presentation.

Now I would just like to point you to some quick highlights for third quarter results on page 3. Third quarter revenue of $79 million compared to prior year third quarter of 93 million. EBITDA of 15 million compared to 11.4 million, and earnings per share from continuing operations at 13 cents compared to 9 cents. Two significant items that impacted the quarter, I just wanted to call out quickly, were the third quarter 2004 had two Pay Per View events as compared to three last year and 2003 had $1.5 million litigation settlement accrual. At this time I'd like to turn it over to Linda McMahon.

Thank you Michele. I was very pleased. We did have a strong quarter which exceeded our expectations. We had improved operating results across our television advertising and home video business and we continue to focus and manage our overhead. Our earnings per share and EBITDA increases and increased margins I think are reflective of the management that is in place that we are looking to improve, you know, our proftability. While our revenues are down from last year, I think that the focus that we have on increasing our profitability is placed in appropriate area at this particular time.

So let's look if we could for a minute at our operational highlights during this quarter. We announced and were very pleased that UPN exercised its option to renew SmackDown! for two more years. You know a two-year renewal is pretty phenomenal in today's marketplace so we were quite pleased to have that option exercised which will keep us on UPN through September 2006. We very much enjoy our relationship with Viacom and enjoy working with both [Don Ostrof] and [Les Moonbase]. We had real highlight for our programming in December. We went to Iraq and Kuwait, we actually went to Camp Anaconda, we stayed on the base there at the Baghdad airport. Several of our, about 30 -- well, 15 of our super stars and 15 technical people went on this trip and it was an incredible experience for WWE superstars to actually perform and then record this show in Iraq which was aired on Christmas night on UPN. It was a very special highlight for us, and we continue to work very close well both the U S O and the armed forces entertainment to visit our troops and to give them support, both those who are outside of the United States and are on bases here in the United States.

During the quarter we also launched a second major advertising initiative. It's to promote RAW, our programming, with a new caption, Escape the Rules. This is kind of the attitude and the feel of RAW. You can tune in for a couple of hours and feel that you can escape the rules maybe that are around you a little bit and just kind of have fun with that whole program. Part of the initiative, to launch a marketing campaign for RAW, is followed by the one we launched last quarter, Smack Your TV, is to really continue to brand both of these two separate television shows, both RAW and SmackDown!. However, what we have found is that we are also having great success in doing that, but our research has shown us that we have about 70% of the people who watch RAW who don't watch SmackDown! and vice versa, so our goal now is in creating the co-promotions and strategies between these two shows now that we have firmly established the brand to increase those ratings for both shows and to drive folks to watch. So that's part of our focus and our goal as we continue to look at our television programming.

Our live event tours continue to expand in the international marketplace. In December we had three events in Seoul, Singapore, and Australia. In February we will be returning to Cape Town -- well returning to South Africa. We're going to be in Cape Town, Durbin, Johanesburg and East Rand, all of these events are sold out in February. In March we return to Europe to England and Scotland. Sales are very brisk. 75% were sold out in New Castle and Sheffield after second day of sales and boy, Scotland was really on fire. We sold out on the first day for both of those events in Scotland. In April we're going to go to Monterrey, Mexico, which is our debut in Mexico, and in May we're going to be returning to Europe and again very good on sale dates in Dublin, Ireland, I think I hold that very dear to my heart, being the Irish that I am. But we sold out in six minutes for the first date and in two hours for the second date in the same building. So I think that really bodes well for the success of our international tours.

On our pay per view for this quarter we had two events instead of the three events that we reported in the same quarter last year. The event that did not make this quarter by just a few days was Royal Rumble. And we are looking at approximately 490,000 buys with about, you know, almost $9 million in revenue, and about $5.3 million in EBITDA so they are not included in the third quarter so the comparison to pay-per-view over last quarter is off by that. And also just an added note, [Satanta] Sports in the U.K. became our pay per view distributor begining with Royal Rumble so that the balance of our pay-per-view events in the U.K. for calendar '04 will be on [Satanta] Sports.

I think we had successful branded merchandise releases in our third quarter. WWE SmackDown! Here Comes the Pain, the video game on Play Station 2 sold 1.6 million units to date and we were the number one ranked game on Game Spot's top ten list for the year. We also released, under our Columbia Records agreement our first CD called WWE originals. We released that in January and to date the number is a little bit higher than we had first thought when we released these numbers. we're at 142,500 sales to date. Of course that's bleeding over into past the first quarter.

Stone Cold Steve Austin's book, The Stone Cold Truth was number 8 on the "New York Times" best seller list and remained on the list for 12 weeks. And our WWE Unscripted book also peaked at number 19 on the New York Times best seller list which is pretty amazing given its a $45 price point. Incidentally, on Stone Cold Truth, Simon and Schuster went back to press 11 times to reprint additional copies to satisfy retail demand during the very competitive release schedule during the Christmas holidays, so we certainly had a couple of good releases there under the Simon & Schuster banner. Our publishing, WWE magazine was rebranded in December to SmackDown!, and while we know that's going to take some while to catch on, the promotions that we had relative to buying both subscriptions, et cetera, I think bode well for positive results we can expect to see with the SmackDown! video -- I'm sorry, with the SmackDown! magazine.

Under our home video label I think we even mentioned in the last conference call the success we were seeing with the Ric Flair -- the three DVD set that spans his 20-year career. We sold 89,000 units to date, and it's just an amazing DVD for us. I think what this also speaks to is the first real monetization, if you will, of the WCW library which we acquired and expect to see more to come out of these acquired libraries.

Internally within our company, under our operational highlights we had an option exchange program which we completed in January. For those holders of options at a price of $17 and greater, the option was to exchange six options for one share of restricted stock. Our outstanding restricted stock units of 774,000 and stock options of 3.1 at an average exercise price of $12.60. So we'll take a total charge of 6.7 million over 24 months of which 900,000 was reported in our third quarter.

So if we flip the page to look at our operational highlights again we always focus on our key drivers. Live attendance, which is still soft for us. It is a focus of ours. Best live attendance in the domestic marketplace is still a focus for us. Live event touring, not only in our business but in other businesses is soft. The marketplace for live events is soft so we think we have great leverage to increase our attendance at live events, and that's clearly one of our main focuses not only for the rest of this fiscal year but certainly for upcoming fiscal '05, and that's one area of growth I expect to see. Of course, we did have fewer live events in this quarter than we had last year.

Our Pay Per View buys for third quarter as we talked about are less than they were last year, but again have you have to factor that Royal Rumble is not part of that number. And our TV ratings, we're very happy to say, have stabilized and remain consistent over the past year, but again as I mentioned we have that upside potential of just getting the fans now who are watching RAW or SmackDown! on thier individual nights now to tune in to both. And the leverage on that is part of the focus of the campaign with Escape the Rules and Smack Your TV. So we're moving forward with our marketing plans to drive those numbers and, of course, increased ratings are one of our key drivers and barometers to look at our other businesses. So Phil, why don't I turn it over to you now to look at some of our revenue numbers.

Okay. Thank you Linda and thank you Michele for good work in the investor relations area. I'm looking at page 9 in the presentation. I'm going to give you a little more color on the financials. Overall our quarter was better on a profitability basis than our expectations last quarter. Our revenue was right on in terms of total revenues we had live events were a little bit below our previous expectations but TV advertising was a little bit better, so we're pretty much right on line in terms of revenue versus our prior forecast. While revenue was right on our projections, it was still 15% below last year and page 9 really tries to explain to you what the difference is over last year. The bulk of it, as Linda described, the bulk of it was two Pay Per View events in this quarter versus three in the prior quarter. The Royal Rumble unfortunately - and the Royal Rumble was a terrific event, sold out house in Philadelphia and a lot of great buys on the Pay Per View side. It fell two days outside of the quarter. So that's the biggest part of the decline in the 15% decline in revenue year-over-year. A little bit in addition was caused by fewer international events and lower attendance domestically on the live event business.

Looking at page 10, now in the presentation, an analysis of why EBITDA is up so much, if you're an investor out there and you look at our numbers you ask why is revenue down and why the EBITDA up so much we tried to hit those questions head-on with this analysis. The quarter produced 15.1 million of EBITDA, which is up 32% even off of lower revenues that it talked about in the prior page and I wanted to highlight a few of the items that drove that. We did have a negative impact, you know, the increase is even after a negative impact of about $4 million of EBITDA profit that's in for Royal Rumble, that's in last year that's not in the current year. In addition to that we had as we transitioned between B Sky B and Satanta for a new international Pay Per View deal in the U.K. we didn't broadcast Armageddon on Pay Per View basis in the U.K. and that hurt us in the quarter a little bit too.

On the plus side we've add reshaping of our agreement with UPN where by they pay us a rights fee and they sell the advertising. While that hurts us on the revenue side, it helped us significantly on the profitability side during the quarter. In addition, our book deal with Simon Schuster, Linda talked about a lot of the great book products that came out during the quarter, but our book contract with Simon and Schuster produced a couple million dollars of contractual revenue in the quarter that added to the profitability. And the largest single item on this page you see plus 26% is, you know, watching our overhead more carefully, lower professional services, headcount management and reduction in some advertising costs in fiscal '04.

Looking at page 11, we try each quarter, because there's always some unusual things and we try to be very -- as objective about it as we can but to try to normalize EBITDA for you on page 11. And you see that we've added in -- tried to normalize it by adding in Royal Rumble which fell a couple days out and when you add that back you see that we get the Q3 EBITDA would have been about 21.3 million versus 12.9 million in the prior year up 65% on a normalized basis as a result. Year to date we try to back out some of the unusual positive events year to date. We had the Lumar settlement of $6 million and a recoup of bad debt expense that we recorded, and when you adjust the full year, the nine months to date, you end up with $49 million of EBITDA versus about 26 last year, up 89%.

Page 12 just kind of addresses the margins and costs, some specifics on the costs. Margins were obviously better during the quarter to have lower revenue and have higher profitability we obviously had to have higher margins. We had lower TV production costs. The UPN agreement change contributed to the added profitability and we had better merchandise, better home video margins as well. As Linda said we did complete our stock option exchange in the quarter and as a result we have some stock compensation costs. We've started to break that out as a separate line item on the income statement so that you can see that as clearly as possible. During the quarter we executed that tender offer to employees that had underwater stock options priced at $17 and above. Employees turned in 4.1 million of those options and received in exchange 500,000 shares of restricted stock and more junior employees had the opportunity to take cash and we incurred a charge in the quarter. We expensed all that - paid and expensed all that in the quarter for $800,000 worth of stock compensation in the quarter.

Page 13, couple highlights on EBITDA. You see there our margin got to 19%, more in line with where it should be for our business, is terrific, versus 12% in the prior quarter. Free cash flow was $15.2 million in the quarter. I did want to highlight that you'll see in our press release we paid off a lease, we paid off $20.1 million on a synthetic lease we have on our corporate jet. We own one jet, and acquired it in 2000, and we really wanted to eliminate -- it was done under a synthetic lease in 2000, it's the only synthetic lease we have, we wanted to bring that asset on to our balance sheet, eliminate the off balance sheet financing, so we just paid it off. With $270 million in cash and the net financing costs by paying it off and financing it ourselves, basically, will be a positive to our income statement, it cleans up the balance sheet some, too.

Page 14 is our balance sheet. The balance sheet obviously is still strong, cash is actually - at this period was $267 million at the end of the period and accounts receiveable are down and in good shape as well. I think those are the only highlights. Pretty clean, pretty straightforward balance sheet.

Page 15 is a summary of our cash flow. We've had during the nine months we've had $49 million of cash from operations versus 16.2 in the prior years. A simple way to look at our cash flow - we generated $49 million through the nine months from operations. We used $19 million to execute a share repurchase in Q1. We've paid $8 million out of dividends during the year, and we paid 4 cents a share, I think the yield is about 1.2, something like that, at today's stock price, our dividend yield. So we paid out $8 million on our dividend, we used $20 million to pay off the jet lease and we've incurred $6 million in property, plant, equipment, kind of normal capital acquisitions in some film libraries, too, that we did early in the year.

Page 16 is usually a focus point for our investors. Here's our full-year outlook. We have increased our guidance. The key changes here, the revenue guidance is only -- we just tightened the range given that we've only got Q4 remaining. We obviously have very clear visibility on what the full year is going to look like. The year ends April 30th. WrestleMania is coming up March 13th. That's obviously a big event in our Q4, so there's some variability around WrestleMania but we think we have a pretty conservative forecast in there on the Pay Per View buys, but WrestleMania is obviously a big high point, its our Super Bowl of the year, and its big potential on the Pay Per View side. So anyway, our revenue forecast is now 335 million to 350. No real increase to the top of the range but we've brought the bottom of the range up. We did increase the EBITDA guidance by about $2.5 million. Now expecting EBITDA of 57.5 to 62.5 million. That will put normalized EBITDA up between 22 and 34% year-over-year. We come in at those numbers. We're expecting earnings per share of 48 cents to 50 cents. Our previous guidance was 45 to 48, and that earnings per share will be more than double last year's earnings per share as we have fewer shares outstanding, we have much better interest income this year and obviously much higher operating profitability.

Page 17 gives you a little bit of detail on that outlook. I'll leave that for you to read. In summary I'd just say we add really good quarter. Employees continue to do a great job of putting our fans first. We're watching costs on behalf of our shareholders and we continue to have high confidence in our revenue and profitability projections. With that I think I'll -- unless, Linda, you think of anything else you wanted to add?

No, I think we should just open up for questions.

Okay. Operator, are you with us?

Yes, sir. At this time, if you would like to ask a question you may press star and 1 on your touch-tone phone. To withdraw your question at any time you may press the pound sign. If you are listening on a speakerphone you will need to pick up your handset before you press the star and the 1. Once again if you need to ask a question or make a comment please press star 1 on your touch tone phone now. We will pause for a moment while sites register for their questions. Once again, please press star and 1 on your touch-tone phone if you would like to ask a question. As a reminder please take your - pick up your handset before you press star and 1 if you are listening on a speakerphone. We'll take our first question from Dennis McAlpine with McAlpine & Associates. Go ahead.

Thank you. Good afternoon. Two questions. One simple one, are you anticipating that The Rock will be at WrestleMania, and what sort of impact in terms of buys do you think that represents if he is or is not there? And then on a more global question, you're getting sort of mixed signals here in terms of TV ratings being roughly flat, live attendance down, Pay Per Views up some months, down some months. What do you internally view as the key indicators as to when the decline is stopped, when it is turned around, and when you start to see continue - or renewed growth coming?

Hi, Dennis, it's nice to hear from you again. Let's look at the second question first. I think while our ratings are flat, flat at this point I think is good for us because we did have the brand split. Our ratings were sliding last year. They've stabilized, they're holding, and we're actually, you know, even though we're averaging about the same ratings we did this time last year we're starting to see some of those quarter hours and weeks that we have, you know, higher ratings, and I think that bodes well for our talent development, it bodes well for our creative story lines for both RAW and SmackDown!, so I'm encouraged by that rather than looking at it as a flat with no growth. I think it offers the opportunity, you know, for growth.

In terms of our pay-per-view buys we are clearly seeing the increase there, and again, noting that, you know, the first stand-alone brand Pay Per View was last June with RAW and now moving forward and seeing that we're not only holding, but doing better than we did on the stand-alones with combined brands for that same time frame I think that's all very encouraging. And we've got a real good buzz going into WrestleMania, so those are all looking good. Our international growth, I know I keep talking about that, but we're really seeing those results, and really focusing on, you know, more live events outside of the United States. And with some of our new television deals, for instance, we are on Italian-Uno, obviously in Italy, and what we have seen is the retailers there now buying our licensed product especially the video games, in fact they have reordered the first shipment of video games because they had sold through so well so those are good indicators for us that the formula of television followed, you know, by live events and licensed products is clearly the right way to go and we're sticking to our game plan with that. Now, relative to any guest celebrities at WrestleMania, Dennis, you know you just have to stay tuned.

You have to buy the event then. Sold out.

Thank you.

All right.

Operator, question?

Yeah, I'm sorry. Our next question comes from Bobby Melnick, Interior Partners. Go ahead.

Question. But it is, in fact, intriguing, I mean there's a 12% drop in live attendance which would suggest maybe that there's a lack of popularity for the product, then when you look at your ratings and Pay Per View, that isn't the occasions and I guess not being as familiar with the lengthy history of the company and the product I'm just wondering whether you've seen that before. Linda, you touched on it in your preamble about how you think the overall market for touring product such as WWE is soft in general, but this really is pretty a big disconnect, just wondered if could you maybe elaborate on it. I mean, are there historical precedents in which this sort of thing goes? Does it suggest maybe that 37 to $40 is maybe the wrong pricing? And obviously supply-demand would suggest maybe if we priced it less expensive we'd drive -- I don't know, I'm asking. I'm just curious because it's odd. i mean your product is popular, yet it's less popular in the live events.

You know, It's a bit of a quandary for us as well because typically live events is the -- is one of the leading indicators for us. And when we look at live events we can see that it is strong in the marketplace. This is a bit of a disconnect for us as well which is why we are really focusing on the live events. We did in fact, try a decrease in price. In fact, if you look at what the average ticket price is compared to the same quarter last year the average ticket price is down. We did try price decrease but did it not spur the live event attendance.

But I think what Phil mentioned that we are starting to see come back, which you would imagine, would be the Pay Per View live events, and they are selling out. We were just sold out this past Sunday in San Francisco for the SmackDown! stand-alone, No Way Out, and so that's a good indicators for us. I think the next following for that would be the television live events for RAW and SmackDown!, then followed by just our regular live events that are not televised, so it's a bit of a good indicator for us on the Pay Per View and the television side but it's still soft. And as I - you accurately point out, this is not something that we've seen before. I'm happy to say that Pay Per View and television ratings are up, in spite of the softness there, and I do expect that we will see that come back.

Thank you.

Operator, do you have another question?

We have one more question from James Clinic at Sidoti and Company. Go ahead.

Good afternoon. Phil, I had a question. Looking at your slide that sort of attempts to sort of rationalize revenue in the quarter, the international live events line, you know, it looks as if you had only three events in the quarter, this quarter, as opposed to seven last year, yet revenue would have been only sort of, you know, that level would have only accounted for, you know, a loss of 2% on the top line, and obviously the way the percentages work out I'm not really sure. But that leaves me a question, like, what does pricing look like in terms of ticket - average prices for international events versus what you guys can get in North America?

Its substantially higher in international events. And we will end up this year -- this quarter is a bit of an anomaly in the year, but we will end up over 30 events internationally versus 20 so we're still on that strategic initiative of increasing the number of international events. We get about $65 on international event tickets, average international. That's year to date - that's our average price year to date, and what is it versus the domestic number? The domestic number without the --.

[inaudible] 35, 38.

35, 38.

Okay, alright thanks very much. I appreciate it.

Thank you for your question.

We do have a follow-up question from Dennis McAlpine.

Okay, Dennis?

Yeah, would you talk about the sustainability of the SG&A level? You've done an excellent job of cutting that down, but can you keep it at that level, or is that going to start to increase?

You know, as long as you factor out - like the Lumar settlement is netted in there, Dennis, and we try to pull out, in that normalized EBITDA slide, we try to like -- there's the Lumar settlement that was positive favorable and the bad debt recovery that was positive favorable, so if you adjust that out I, you know, I feel like we should be able to - and as the CFO I'm going to try to keep it at that level of SG&A. Yeah, I don't think there's anything -- we've not done anything draconian, I can tell you that. And we continue to do business at a normal level at the SG&A level. Does that answer your question?

Yeah.

Okay.

Also, at the various times in the last few years, you've sort of gone astray into things like football legues and casinos. Where do you stand as far as an appetite for looking at things like that, that are a little bit off the beaten track from what you are doing?

Dennis, we look at potential acquisitions all the time, and we've been to them, we'll talk to their CEOs and CFOs, and eventually I think there will be the one that will make sense for us to do. We're clearly focused, you know, on our internal investment at this point. We expect to produce two movies during this calendar year. I'm not sure what the release dates will be but they will be, you know, as I've mentioned before, in partnership, you know, with the studio or one may be totally on our own. That's just a - it's a lower budget that might go direct to home video. So while it's not great amounts of cash, we still are investing in ourselves but always with an open eye and open mind towards an acquisition that makes sense for us.

That just prompts me to remind people on the Friday night before WrestleMania, must be March 12th, is that right? We're showing the first WWE films production of WrestleMania movie, is that right?

That's right.

Its not by our films unit out in - but its under our WWE films. On - is it UPN?

UPN.

UPN on Friday night. There's a great --.

one-hour special.

It was shot in film, and its a great film about last year's WrestleMania, behind the scenes, and it's terrific. I'd encourage everybody to check it out. Okay, do we have another question, operator?

I'll just remind participants one more time to ask a question please press star and 1 on your touch-tone phone now. It appears there are no more questions at this time so I'll go ahead and turn the program back over to the speakers.

Well I just wanted to say thank you everyone for participating. And please give me a call should have any additional questions. Thank you. So long.

Thank you for participating in today's WWE earnings call. The conference is concluded. You may now disconnect your lines. Have a great day.