TKO Group Holdings Inc (TKO) 2004 Q1 法說會逐字稿

Good day. All sites are now in the conference line in a listen-only mode. And at this time, it is my pleasure to turn the call over to Ms. Michele Goldstein.

Thank you, very much. And welcome to World Wrestling Entertainment's first quarter earnings conference call. My name is Michele Goldstein, and I'm the Vice President of Planning and Investor Relations here at WWE. Joining me today is our CEO, Linda McMahon; and our CFO, Bill Livingston. We issued our first quarter earnings release earlier this morning, and we will be referencing a presentation as part of our discussion. Both are available at our Investor Relations website at wwe.com.

As a reminder, we will be making several forward-looking statements, today, as part of our discussion. These statements are based on Management's current estimates. Actual results will differ due to numerous factors, as called out on Page 1 of the presentation. So today we will review our operating highlights, first quarter results, and the outlook for 2005, followed by Q&A session.

So I'd like to start off on Page 3, where we summarize our financial results for the first quarter. Revenue of approximately 82 million, compared to 75 million in the prior year. EBITDA of 14 million, compared to 6 million. And earnings per share from continuing operations of 11 cents, compared to 4 cents in the same period in the prior year. Please note that the first quarter of 2004 had 4 pay-per-view events, compared to 2 in the prior year. And at this time I'd like to hand it over to Linda McMahon.

Thanks, very much, Michele, and good morning. We are very pleased to be announcing our first quarter results. It was a good quarter for us. I'd like to start off by updating you on our strategic initiatives, all of which are organic to our business, and I'll begin on Page 4.

As we've discussed in the past, our 75,000-hour programming library includes not only WWE hours, but we did also acquire the libraries of WCW, ECW, AND AWA. Most of this library has never been exploited after its initial airing. The result is not only one of the most extensive owned and controlled video libraries in television, but also the world's largest dedicated to our unique genre. We are now in the position to capitalize on this asset. In fact, titles such as Hard Knocks: The Chris Benoit Story, which was a key contributor to our success in home video in the first quarter, is a good example of our exploitation strategy. Other upcoming releases that I'm excited about are Cheating Death, Stealing Life. That's the story about Eddie Guerrero, who recently lost his WWE Championship to John Bradshaw Layfield at The Great American Bash. And The Rise and Fall ECW is also on tap to be a good release for us. As well, WWE 24/7, our soon-to-be-launched subscription video on demand service is great opportunity for us to repackage classic footage. We've been very active in discussions with cable operators, and hope to announce further information to you shortly.

One of the milestones of our international expansion strategy is approaching. We have a 12-date tour in Europe, including the taping of our RAW and SmackDown! shows in Manchester, England on October 11th and 12th. Bringing our TV shows to Europe will provide our local fans with the full WWE experience, and allow our licensees to have a showcase. We are in active discussions with several large television renewals, and will announce more information to you shortly. I will give you one bit of information that we are -- we are pleased that we have finally negotiated our renewal with [Inaudible] which will take place starting on January for a new 5-year deal. More of those details will be announced shortly. Recently we hired a new Vice President of International Marketing to expand our business presence in the U.K. and other territories around the globe. We expect both the library exploitation and international initiatives to drive demand for classic merchandise product lines, and further licensing-growth opportunities outside North America.

Lastly, the first of our feature films is in preliminary stages of production, and we plan to commence principal photography in the early fall. The second film will soon follow -- will follow right after that, as a matter of fact, because principal photography will overlap on the 2 films. We are taking a conservative approach to this business. The production budgets for these 2 films, combined, will be approximately $20 million. We have distribution deals in place for both of the movies, 1 with 20th Century Fox, and the other with Lions Gate. Additionally, advantage we have in the film business is the ability cross-promote these movies on our 9 hours of weekly television programming, our internet, and in our publications, not only here in the United States, but on a worldwide basis. By placing some of our rising superstars in films, we hope to expand their recognition to the broader public.

On Page 5 we've displayed the pay-per-view buy results for the quarter. As mentioned earlier by Michele, we had 4 events in the quarter, compared to 2 events last year. The Great American Bash was a first-time event, while Vengeance is one of our established brands. But last year, Vengeance fell into the second quarter, simply because of the timing of the prior quarter-end close. However, if you make the comparisons on an apple-to-apple basis, in other words, including Vengeance in the prior year, you will see that current year buys of 949 thousand compares to 844 thousand in the prior year, and in total, buys of 1.1 million are relatively flat. The difference is due to the amount of prior year buys recognized into the quarters. As many of you are aware, we received from our distributors a final reconciliation of pay-per-view buys, typically within a year of the event. Coming up is another new event for us, Taboo Tuesday, will take place on Tuesday, October 19th. This will be WWE's first interactive pay-per-view event. Fans will vote online at wwe.com to determine specific events that will happen at Taboo Tuesday. This is an unprecedented event, and will be promoted heavily on WWE's flagship program, Monday Night RAW, the night before Taboo Tuesday airs, as well as during aggressive national marketing campaign, both at cable operator level and to the consumer.

Now let's talk about our Live Events business on Page 6. We're exceptionally pleased with the success of our live events business outside North America. In the first quarter, we held tours throughout Europe and Japan at almost all sold-out arenas. By scheduling live events overseas, we are able to take advantage of greater attendance at higher ticket prices,as well as greater profitability. One of the challenges in booking international events is a much longer lead time than our domestic market. There are fewer facilities and they are in great demand. With our international focus, we are now booking much further in advance, which gives us the ability to secure venues, arrange sponsorships, and work closely with our international licensing partners for advanced promotion and product sales. Pleased to announce it's all working. We're also optimistic that the North American market will soon turn the corner. We've undertaken some very specific marketing efforts to address this issue, including partnerships with local UPN affiliates and third-party promotions, as well as more advanced booking in this market, as well.

Page 7 provides households ratings information. Both RAW and SmackDown! are relatively flat quarter-over-quarter. Developing creative story lines and talent that resonate with our fans are the key to growing ratings. We are currently investigating expanding our talent development training camp system in order to attract more of the best talent available. With ratings virtually flat, we were pleased with our up-front selling season, securing price increases in the mid to high single-digits. We are pleased that all of our advertisers from last year returned, and we added several new advertisers. Like -- 1 of the new advertisers -- I'm sorry -- our returning advertisers that we were pleased to announce were Nike, Sony, Burger King, and Masterfoods, part of our flagship group. Our ability to efficiently deliver key demos, 12 to 34, remains attractive to advertisers. We've highlighted on Page 8, several of the key contributors to the increased branded merchandise revenue in the quarter.

Important to note, again, and I will say it again, is that we are beginning to see some very positive results in our investments in tape libraries. We've been patient and thoughtful with the rollout of DVDs and programming, and our plan is clearly on track, as is evidenced by continued growth in home video. Not only are our current and classic feature performer titles being well-received, but we are enjoying substantial increases in our pay-per-view home video unit sales. WrestleMania XX has sold over 180 thousand units. To Be the Man, by Ric Flair is another example of the leverage in our business model. The Ultimate Ric Flair DVD, released last November has sold over 100 thousand copies, and his biography has been on the New York Times best-seller list for 7 weeks, peaking at Number 5. Some other exciting opportunities for us include the fall releases of our video games by our licensing partner THQ. By way of example, last fall we released SmackDown! Here Comes the Pain for PlayStation 2, which to-date has sold 2 million copies. As well, we have entered into a new licensing agreement with Mattel for its upcoming launch of its personal media players designed for tweens called Juice Box.

Let me just briefly summarize. We're on course with our strategic plan, we've already made investments which are beginning to capitalize on with our libraries. We're expanding our international business, which is paying off already in live-event increases. We're investing in our television production with different content, i.e. the Diva Search and Tough Enough. So, giving you that strategic overview, let me turn things over to Phil Livingston, our CFO, who will give you the financial results of the quarter.

Thanks. Thanks, Linda and Michele, and thanks to all of you for tuning in and continuing to be good shareholders. And like to give you a few financial highlights of the quarter. I'm starting on Page 9 of the presentation. We had revenue in Q1 up about 9% to 81.6 million. As detailed here, this increase came from 2 key sources, our home video business more than doubled in the quarter, reaching $5.7 million and continuing the trend that we saw last year. Home video had 57% profit contribution margins, and helped drive profitability in the quarter, as well. The pay-per-view business contributed incremental revenue of about 3.1 million in the current year, due largely to the timing of Vengeance, as Linda discussed extensively a little earlier. Live event revenue was essentially flat year-over-year. Our success with the international events offset the reduced attendance at domestic dates. In addition, our licensing revenues were up across all major categories, including the important video game and toy businesses. I'd note that there was a clear improvement in our toy royalties after, kind of a -- an extended period of decline. Our licensee, Jacks, is having a success -- is having success with a line of classic action figures.

Turn to Page 10, now, where you see that EBITDA increased 148% to 14.1 million, again driven by home video, the contribution of the additional pay-per-view events in the quarter, as well as the change in our rights fee and advertising sales arrangement for SmackDown! on UPN to a net rights fee payment. We've talked about this change extensively in the past. On Page 11 you'll see normalized EBITDA, which adjusts for significant non-operating items and timing. We do this at a high level. Don't try to adjust for a lot of insignificant items, but we try to give you a clear picture, here. During the current quarter we concluded a sales tax appeal process, receiving about $2 million, net of expenses This represents taxes paid in prior years, and is an unusual item in the current period. Last year, we had some unusual items that we talked about in the past, but adjusting for those and the timing of Vengeance pay-per-view last year, our normalized EBITDA comparison would be $12 million in fiscal '05, and $8 million in fiscal '04, up 50%. EBITDA margins in the current quarter were 15%, a healthy 15%.

On the next page you'll see some discussion about the sources of this margin improvement. In the live and televised segment, margins were up, due to a higher proportion of pay-per-view revenue and the changes in our UPN distribution agreement. Margin improvement in the branded merch segment came from the increasing amount of home video revenue and higher licensing revenue, which was obviously very profitable. Overall, SG&A was down about 3% year-over-year, as well, another positive.

Let's now flip to Pages 14 and 15, where we summarize our guidance for the full year. We had a good first quarter, out-performing our internal budget. However, we're leaving our guidance for the year unchanged. We feel, at this point, it's a little too early to revise our guidance, and we prefer to wait another quarter and get a better picture of the ratings, attendance, and pay-per-view buys before making any [Inaudible] changes. It's just a little early. We also expect that some of the current quarter out-performance will be spent in upcoming quarters on investment and television production features for our shows and pay-per-view events, aimed at driving the ratings and the buys. And with that, that will end my financial review, and Linda -- and Michele, I'd like to turn it back over to you to conduct the Q&A session.

Operator?

At this time, if you do have a question, press the star, and 1 to register your site. Once again, if you do have a question, press the star, and 1 at this time. We'll go first with Mario Cibelli with Marathon Partners.

Yeah, hi. When you talk about the library, you're mostly talking about the stuff that's not -- as it pertains to potential future video on demand, right?

Video on demand, Mario, as well as the releases for DVD. I mean --

So you're enjoying the benefits of some of the labor already, I guess, is my point.

Oh, absolutely we are. You know, as I said, it's been a -- we've been in the acquisition mode, some of our current stars were part of other organizations, so we're able, now, to take that library and package with it the footage that we have relative to the stars, ala Chris Benoit, and make a package that nobody else could have delivered. And I think that's what's really, you know, propelling the interest in these DVD's, you know, for the superstars who are current, and as well, you will see other DVDs coming out, and other 24/7 footage that, you know, hasn't been seen on classic superstars in a long time. I think the success can actually be a little bit, you know, a portion of the success is what Jacks has seen with the release the classic of action figures, you know, Sergeant Slaughter, you know, and some of the other guys that have come out have been great sellers for them. And we believe that that -- that it's portent to us of an increased merchandise business for, you know, for our classic fellows, as we roll out 24/7, as well. So we're coordinating all of those release dates.

I'm going to be breaking up, I apologize. Is there anything planned for The Rock, specifically, a big, blockbuster DVD that you'd be waiting for, you know, a different point?

We don't have a specific DVD, or anything like that right now, relative to The Rock, but the Rock will continue to make appearances within our show. And he will -- he will continue to be part of, you know, our roster, albeit, he's a -- he's not a fully active participant on the roster.

Okay. And lastly, wondering if you have any comments about -- you know, I'd, personally, be a big fan of seeing a -- as much as we could with the lower share price.

He's talking about stock buybacks. And I think our position -- we've got some Board meetings coming up, and we're thinking about -- we said -- last quarter we said we're thinking about the buyback opportunities, and we're thinking about special dividends as possibilities. So, we continue to debate that and look at the viability of those strategies. We -- last year in this quarter, we bought back $20 million of stock in a block, but we haven't bought any back so far this year.

All right. Thank you.

Go ahead.

That's it. Thanks.

Okay. Operator, another question?

All right. We'll go next to Robert Routh with Jefferies.

Yeah, good morning, guys. A few quick questions. Given the numbers that you posted, it would seem as though the new strategic initiatives are really starting to kick in as the core business is kind of flat, to, kind of, just, steady-state. I'm just wondering, how far down the road, internally, you think you are with those new initiatives, and how much more growth we can see coming out of them as we go forward, especially on the home video side and the international side?

Well, in terms of the international, I think you're aware, and as we announced, I think, in our prior conference call, you know, and alluded to this morning, as well, one of our key initiatives for international strategy starts this October with a 12-event tour in Europe that will end with the production of our RAW television show and our SmackDown! television show from Manchester in England. That's -- that's new for us. This will give our licensees an opportunity to showcase. It also gives us an opportunity to bring in sponsorships, though, the lead time for sponsorships, I expect, we won't see that fruition, probably, until next year. But international mix, it would then be 6 months from the October date to return to Europe with another schedule of live-event tours, coupled, again, with television production Intermittently we will be in Japan, we'll be in Australia, again, with the same philosophy of producing television from those markets, which we believe will increase the international fans' appetite, you know, for our product, drive ancillary business sales for, you know, for all of our products. So that is, clearly, on the move. It just takes a bit of advanced planning to book the international marketplace because, as I -- as I mentioned in my comments, the venues are much more scarce, they're in greater demand, and we have to get farther out, which means all of our domestic touring has to plan a bit around that. So it's a bit of a jigsaw puzzle. I think we're getting a good handle on it, though.

Okay. Great. And could you tell us what percentage of your library has already been mined, in terms of the home video opportunity?

Oh, it's negligible.

Yeah.

I mean, it's -- It's really negligible. I would -- I mean --

Monday Night Wars and Ric Flair used some of it, so --

And Chris Benoit.

Mm-hmm.

But you'll see, coming up, The Rise and Fall of ECW, which we plan to release, I think it's around November of this year. That'll be, I think, another real boost for us. So, you know, it's just starting to roll out. So we've made the investment, the course is set, and now it's the implementation and the execution against that course. I think we're on path to do that.

Okay. Great. And, just one follow-up. I mean, obviously, you've got your video-on-demand initiative, the home-video initiative, international initiative, you know, all seems to be going, you know, working and going fine. Do you, internally, have any other new strategic initiatives? I'm not asking what they are. But that the Company is considering implementing over the next 12 to 18, to, kind of, buttress the existing businesses that you've already -- you've already got?

Well, let's not forget we couldn't have all of those things but for, you know, our core business. So, you know, while domestic live events are still, you know, dragging a bit, they're profitable, they provide us with the forum, you know, for our television programming, and are still our ability to get to the grass-roots marketplace. So, very vital to us. However, we have done a very soft launch, you know, on the internet with some subscription service that we've not promoting, and we're seeing that -- we're seeing that being, you know, well-received, I think, without the promotion that -- behind it that would really drive it. It's a subscription basis for individual match streaming, there's a monthly subscription and an annual subscription. But, again, a very soft launch, really, in the test market. Also, as I mentioned, we will have the, you know, the first interactive pay-per-view coming up. And this is really the first out-of-the-box for interactivity that you will see, following in October on our RAW television show, in which we will have, you know, more activity between the fans and the television show, which I think, it will also drive advertising. So, I think those things are moving well, and also in September or October, we will introduce our first fantasy game on the Internet. So, I believe these are all good initiatives that are, you know, they're pretty much in the test market, as is our auction site, but they all bode well. They have good indicators, and we're pleased with their launch, so far. Small, but we think they're good indicators.

Great. Thank you, very much.

Sure.

Next question.

All right. We'll go next to Eduardo Labush with Zimmer Lucas.

Hi, guys. Congratulations on a good quarter. Wanted to ask you, in terms, we're talking about -- about the dividend and the Board meetings coming in the near future. I mean, do you have any projects in the pipeline that have the size of return that would inhibit a meaningful dividend increase or special dividend during the next Board meeting? Is there something there that, you know, might not -- make this not happen?

I think we have the cash to -- we don't have anything else, besides the films that we've talked about, the $20 million of films, I haven't heard anything that we're contemplating that would -- that make me, you know, hesitate on that. We have talked in the past about our Spike deal, and our Spike distribution deal being up for renewal, and that we have -- we are in negotiations with Spike, and so that continues to evolve. So, but -- but there're no other big projects that wouldn't allow -- wouldn't preclude us, specific to your question, from making a significant buyback or special dividend, and being able to afford the ongoing projects that we have and still have a substantial cash reserve on hand. We just -- we're -- we generate a lot of cash, as well, on a current basis from our current business. So that should answer your question.

Sure. And, when is the next Board meeting?

It's in September. But don't look to be -- you know, this is an ongoing dialogue that we have in our Company, and we'll talk about it at the Board meeting, as we've talked. So don't -- don't take -- don't read anything in too specifically to the comment about a September Board meeting. Okay?

Okay. Thank you.

Next question.

All right. We'll go next to Bobby Melnick with Carrier Partners.

Hi. I think you had said recently that this is the first year -- full year we'll Wal-Mart selling home video sales, I think you said that at the 21 Club road show. And I'm wondering how much of the incremental 3.2 million was, sort of, pipeline fill at Wal-Mart, if you will?

I don't have that specific answer as we sit here. They certainly have made a difference, but I don't -- I don't have the percentage break down for that, sorry.

Yeah, and also, Bobby, we take a pretty hefty -- hefty returns allowance, as you can imagine, in the home video business, and then we monitor their inventories. So I don't think there's -- you know, these titles in the home video business are -- there is a difference year-over-year, in that we got Wal-Mart in there this year, and we don't last year, so -- but I don't expect that there was a major bump, just due to inventory load there, you know what I mean?

Okay.

But I also would tell you that I hope -- you know, we're working on other significant retailers, too. The trends all in that business continue to be excellent.

Good. And just a comment. I don't know whether you want to reply or not, but as an owner of the Company, I find it a little frustrating, if you will, that the Company has taken a step down the path of giving an outlook, in terms of whether you refer to it as budget or forecast or outlook or anticipated results. And the reason is, in your first quarter, in this commentary, you said that you exceeded whatever that descriptive word is, let's call it budget, in the first quarter. And yet arithmetically, by saying that the Company anticipates 66 million in EBITDA for the remainder -- or for this year, arithmetically, that says you're expecting the subsequent 3 quarters of the year to be cumulatively down 16% in EBITDA. That's just math. And, as an owner, I -- I'm not sure that that's true. In fact, I don't believe that's true. But, a lot of people, I suspect, are reading into this that, you know, the Company is going to have a down second, third, and fourth quarter. Maybe you will, maybe you won't. But in times gone by, you've made these types of pronouncements, and they've been wildly low. In times gone by, perhaps you've made them and they've been wildly high. But the reality is, as you guys have tried to point out, time and time again, that investors in WWE should be looking at exactly the sorts of traits that you've put out. International development, the development of some of the library monetization, [Inaudible] all the things that you guys, operationally, have done really well and were up 50% on this quarter, which is a stupendous performance. And yet, the owners seem to be focusing on a number that really is much less significant and much less meaningful. How you get around this, I'm not sure. I'm just expressing sort of a puzzlement or a frustration as an owner.

Well, I think you stated the case very well, Bobby. I don't know that I could really add much to that. You know, we don't have a crystal ball as to how pay-per-view events are going to come in. You know, I bet NBC would love to have been able to have predicted that their ratings were going to be higher, you know, than they thought. And possibly their sales are going to come in better. When you're in the ratings and in the business we're in, you know, you post your trends, you give as good information to the marketplace as you can, you work every day to drive your business. I think we're doing all of those things. We had a great quarter. I would -- I would hope that the rest of the year is going to bode well for us, too. But we're conservative. We continue to be conservative. Look, we like better to deliver, than to promise, and I am fully bullish on our Company and our business as we stick to our strategic development.

Well, I think there's a lot of information you guys give out in your quarters that you update weekly, you do it terrific, website for this presentation, which all of us can follow, it's very detailed and voluminous, in terms of information. I guess, my only comment would be: Why not limit your disclosure to information that is relevant, because candidly, your viewpoint on the future EBITDA has been, historically, completely irrelevant. And, you know, there's enough good information out there, that you shouldn't necessarily dilute it with information that is, I mean, is really just a swag. That's all. Thanks.

Well, thanks, Bobby, we'll take that under advisement.

Operator? Are there any more questions?

It looks as though we have no further questions.

Do you want to open up to -- okay. Thank you, very much. Thank you, everyone, for participating today. Should you have any additional questions, please feel free contact me. Thank you.