TKO Group Holdings Inc (TKO) 2004 Q2 法說會逐字稿

Good day and welcome to today's conference. At this time all sites are on the line and in a listen-only mode and right now I'd like to hand the meeting over to your host, Ms. Michele Goldstein.

Thank you very much. Welcome today, everyone, to World Wrestling Entertainment's second-quarter earnings conference call. My name is Michele Goldstein. I'm the Vice President of Planning and Investor Relations here at WWE. Here the today is our CEO, Linda McMahon, and CFO, Phil Livingston.

We issued our earnings release earlier this morning and we will be referencing the presentation as part of our discussion. Both are available on our corporate website at wwe.com. As a reminder, we will be making several forward-looking statements today as part of these discussions. These statements are based on management's estimates and actual results will differ due to numerous factors. We have called out some of the estimates and assumptions on page one of the presentation.

So the format of the meeting today is that we will review our operating highlights, second-quarter results, the outlook for fiscal 2005, followed by a Q&A session.

So to start off by turning to page 3, we have summarized the second quarter and year-to-date financial results. Second quarter revenue of approximately 84 million compared to 94 million in the prior year quarter. EBITDA of 7 million compared to 29 million, and earnings per share from continuing operations of 4 cents compares to 25 cents. You should note that the second quarter of fiscal 2004 included the $5.9 million positive impact from a legal settlement.

So at this time, I would like to turn it over to Linda McMahon.

Thank you, Michele. Good morning, everyone. It is always a pleasure to be able to speak to our investors and talk about our Company; however, it is more pleasant to speak with all of you when all of our key business drivers have performed as we would've liked. That is not the case this morning. Some of our drivers did not meet those expectations but I would like for you to note that our management team is not satisfied with the results of the second quarter.

Our domestic live of attendance, our pay-per-view buys and television ratings are not at the levels that we had anticipated earlier this year when we communicated our full year outlook. Be assured that we are actively working on new programming initiatives that will drive viewership. We have also taken measures to reduce our promotion and production costs, and they are in place -- started in place even as we speak.

However, I am pleased that we are having positive results from our strategic initiatives that I spoke about during our first-quarter earnings release conference call. Those initiatives include international growth, the exploitation of our 75,000 hour programming program library and feature film production. As we will discuss in more detail, our revenue from international sources has increased to 22 percent of revenues compared to 12 percent in the second quarter of fiscal '04.

We will be monetizing the library beyond home video releases by way of our WWE 24/7, our subscription video-on-demand service. We are in active negotiations with many distributors and hope to release further information about that initiative shortly. And lastly, principal photography on our first two feature films will be completed during December. We anticipate that these films will have their domestic theatrical release next fall.

Let me speak now to our Live Events business and if you look on page 5 of the report this morning you will see those highlights. The highlight of the quarter was our European tour. Over 110,000 fans attended the 12 events and for the first time we produced both RAW and SmackDown! television shows from Manchester, England. We will have a similar tour in April of '05 that will allow our programming distribution, licensing, and retail partners the opportunity to promote up to and around the major touring offense.

Quite frankly we are referring to that combination of Live Event tours and television as power periods and we are dividing our year into power periods to address that international development. It worked so well. It accomplished what had hoped to, and we expect to follow that same series again as we come back in April.

Unfortunately North American events average attendance of 3800, that same level it was in first quarter of '05. In order to help reinvigorate this business we have given Kurt Schneider, our EVP of Marketing the additional responsibility of promoting and marketing Live Events. As he did a year ago for our pay-per-view business, he brings fresh and innovative ideas for the promotion of Live Events.

We are actually going to look at the United States in terms of power periods as well, although the total area to be covered is much greater. We will be flying into more hub markets, driving to those adjacent markets, scheduling promotions with our retailers around those events, much along the model that we've used internationally.

On page 6, we have displayed to the key drivers for the pay-per-view business. In total for the first 6 months of fiscal '05, we have had 2,254,000 buys, which is a decline of 7 percent compared to the same period of the prior year. The decline is driven by a shortfall in buys from events that occurred in prior years. As many of you recall, it takes approximately a year to settle on a pay-per-view event all the reporting in from all the cable and from In Demand. We are looking at a smaller number being reported to us for those out-of-period buys and we are looking into that as we speak.

Typically as I said it takes about a year for all those related buys to get reported to us. Buys from current year events have increased 3 percent. It is important point out that we've had 8 events in the current year compared to 6 events in the prior year.

Now let's focus on the core results. Buys of 1,132,00 or about 400,000 below the prior your quarter. The second quarter of '04 had 4 of the Company's established pay-per-view events, including Vengeance, which occurred in the first-quarter of '05; while the current quarter had 3 comparable events and a new format event called Taboo Tuesday, which is delivered on a week night as opposed to the traditional Sunday night airing.

Taboo Tuesday, which was our first interactive pay-per-view event, competed for viewers against the sixth game of the Yankee/Red Sox playoff series and achieved buys that were below our expectations but I thought were very respectable given the competition. Not only were we on on Tuesday night against the finals, but Monday night RAW, which was the lead-in promotional vehicle, was also against one of the playoff games.

So I think that was a combination that hurt that first out of the box interactive pay-per-view event. But I must say, given all of that we had over 4 million votes come in on our website for the interactive event. So we thought it was very successful from that format.

Once again we are pushing the boundaries of what our fans expect by having a pay-per-view event from Puerto Rico on January 9. This is a new event and is branded as New Year's Revolution. Live Event ticket sales which began last weekend are almost at about 63 percent at this point.

Page 7 provides household ratings information. In the second quarter we experienced the continuation of the first-quarter trend with both RAW and SmackDown! down about 0.3 and 0.2 rating points respectively. Some of the programming investments that we recently made include the television show segments that include the Diva Search in RAW and Tough Enough in SmackDown! I am encouraged to the ratings list we've experienced to date with Tough Enough. This segment has delivered the most viewers in the opening floor hour compared to the same period during the past 8 months for households and female demos. An additional benefit of these programming segments has been the ability to develop new talent.

As you will see on page 8, we continued to have a robust branded merchandise business. One of the benefits from the recent European tour is already demonstrated by the 87 percent increase in licensing revenue from international sources during the second quarter. International licensing revenue represented 28 percent of total licensing revenues. In fact, we are seeing this trend continue with higher sales to date in the third quarter resulting from a combination of factors including the awareness generated by recent live European events, the launch of the Italian website and mail-order catalog, and the enhanced profile of our shopping websites.

As I talk about our toy and videogame business, I am sure that all of you will appreciate the fact that I will be not commenting very much on our Jakks/THQ lawsuit. I think the lawsuit has been filed. I think our position is very clear in there; however, what I do want to reinforce is that during the pendency of this lawsuit both Jakks/THQ -- well all 3 Jakks, THQ and WWE will continue our business mode and performing under that contract as we have all been doing.

Several months ago Jakks introduced a new line of action figures that focuses on classic superstars. This line has been very successful for them. We will have 4 videogame releases in fiscal '05. The first release took place in the second quarter. We expect the performance, the PS/2 release of the PS/2 release RAW versus SmackDown! which occurred at the beginning of the third fiscal quarter to be strong and similar to how our past PS/2 releases have performed.

In fiscal '04 we had 3 games including a PlayStation II release in the second quarter. Our home video business continues to perform very well as it continues to reap the benefits of this 75,000 hour programming library. Last week we released another great example of our ability to monetize the library by releasing the Rise and Fall of ECW.

The other significant news in the quarter is the doubling of our quarterly dividend to 12 cents a share. Our Board took this action after considering our historical free cash flow, the state of our business, and the strength of our balance sheet. Prior to this action, Company's announced policy was to pay out 40 percent of our projected free cash flow. The business generates substantial cash and we have very little debt. As a result, the Board was comfortable doubling the dividend and returning more capital to shareholders.

The Board considered a special dividend as well as a large share buyback but did not want to eliminate the possibility of using the cash for an acquisition or other substantial investment.

That is kind of an overall view. I want to turn it over to Phil to really take you through some of the financial points and then as always, we will be happy to answer questions from you.

Thank you, Linda. We reported revenue of 83.9 million versus 94.4 million in the second quarter of last year. That is a decrease of about 11 percent. I really want to start with the big picture by emphasizing that last year's Q2 was a really strong quarter that included 4 solid pay-per-view events and an unusual gain from a lawsuit settlement. We always expected this current Q2 to be a year-over-year down quarter. Nevertheless the current quarter as Linda said, was not strong and not up to our expectations.

The details of the $10.6 million revenue change are shown on page 10 of the presentation. Pay-per-view was off 6.2 million, almost all of which fell through to the profit differential. The 4 events produced in Q2 were SummerSlam, Unforgiven, No Mercy, and Taboo Tuesday. As Linda discussed, Taboo Tuesday was a newly formatted event.

Last year's Q2 included 4 events as well, but specifically Vengeance, SummerSlam, Unforgiven and No Mercy. Total buys for the quarter of 1.1 million were down approximately 410,000 buys with about 150,000 of that being the difference being the inclusion of Vengeance for 322,000 buys in Q2 of last year versus 174,000 buys for the new event, Taboo Tuesday, in the current quarter as the fourth event. The other events also slightly underproduced compared to last year.

Television advertising sales were impacted by lower ratings for the 4 shows that make up our cable package for SpikeTV. When the ratings underdeliver against our commitments to advertisers, we defer a portion of the revenue until we can deliver additional spots to make up the audience shortfall.

On the positive side, revenue from the international Live Event tours more than offset a decrease in total domestic attendance. We produced 15 events outside of North America versus 7 last year.

Page 11 summarizes the change in EBITDA year-over-year. Last year's Q2 EBITDA included 5.9 million from the favorable settlement of a lawsuit. That amount was included as a credit against SG&A, thus the decrease in normalized EBITDA is 15.7 million or 69 percent. This decrease is driven by the revenue shortfalls in pay-per-view and TV ad sales.

In addition we invested in the RAW and Diva Search in SmackDown! Tough Enough television features to bolster the talent rosters. These resulted in a negative short-term impact of $3 million of additional expenses. SG&A was higher year-over-year due to higher marketing promotions spend in support of the television initiatives as well as consulting and legal costs associated with Sarbanes-Oxley and litigation.

Page 12 summarizes normalized EBITDA adjusting for those items we think are unusual in either direction. Q2 normalized EBITDA totaled $7.2 million or 9 percent of revenue versus 22.9 and 24 percent of revenue last year. The reasons for the margin decline are summarized on page 13.

At the profit contribution level, our gross margin is the impact of the pay-per-view decrease. Pay-per-view is our highest margin product line with 56 percent margins in the quarter versus 62 for the full year fiscal '04. As pay-per-view goes down as a percentage of revenue, our overall margins decrease.

Free cash flow was a -6.3 million in the quarter versus 14 million last year. As Linda discussed, we are in full production in filming for 2 feature films. During the quarter we've spent 7.4 million on these projects. All costs associated with the films have been capitalized in accordance in accordance with film reduction accounting. Revenue associated with those projects probably doesn't start to flow until late 2006, possibly 2007 depending on the success of the releases.

Now let's turn to our outlook on page 15. At the halfway point in the year we are still targeting our budgeted EBITDA of 66 million. Revenue of 345 to 355 million and earnings per share between 46 and 50 cents. I want to remind investors that we post our key drivers on our website weekly. There you will find our weekly TV ratings, weekly Live Events, average attendance, and year-to-date pay-per-view buys. These figures give you the current information on the business.

The outlook given here is obviously forward-looking information and I reiterate the fact that there are many risks associated with delivering the results. We are counting on a successful second half of the year especially a successful WrestleMania XXI as well as cost savings to achieve these results.

Finally please note that we closed the deal to get rid of our lease on Times Square. We had a minor celebration here at the Company when we did that. The final costs were slightly less than we'd accrued so there is income from discontinued operations of 1.4 million in the quarter. Our annual lease costs on the property was almost $3 million a year, so offloading the liability was a positive for sure.

With that, I will turn it back over to Michele and we look forward to answering your questions.

Melissa, you can open it up for questions at this point.

Thank you very much. (OPERATOR INSTRUCTIONS) James Clement of Sidoti & Co.

Good morning. In film Linda, I wonder if I can ask you a question. I know you alluded to your guidance which looks like it has remained unchanged compared to 3 months ago. And, Phil you briefly alluded to perhaps some cost savings in the second half of this year that you guys hope to achieve. I guess I would love you to perhaps elaborate on your relative degree of confidence in the guidance that you have maintained here after what by your own admission was a quarter that was a little bit worse than you had originally anticipated?

I think the guidance we have given here is realistic and we do have some work to do on the cost side but I think it's realistic and I think it's achievable and everybody on the team at WWE is committed to making it happen. Vince is especially committed to making it happen. He feels strongly that we ought to strive to hit the $66 million of EBITDA. Linda, do you want to add anything to that?

No. I think that it is a concerted effort. We have already taken a look at some of our production costs with television. They have already been unadjusted. It is ironic. You can make some changes in production costs for instance just by eliminating some of the expensive lighting grids. We've taken one to two trucks off the road that travel for our Live Events and not only do you have the rigging savings in those costs but also you have transportation. So we are looking at all of the aspects of their business that don't really -- if you will -- make a difference in looking at the quality of the programs but are those cost-saving measure that perhaps we haven't scrutinized as thoroughly as should in a while.

So that is just one example of how we are looking at all things across the board, but I also want to stress that we also are looking at strong pay-per-views especially towards the very end of this year. WrestleMania comes at the very end of our year and we expect the events going into that to be very strong. With our new deal with Sky that begins in January, we have pay-per-view events there that we have not had before one of which is WrestleMania. So we are looking forward not only to an increase in our domestic but also in our international pay-per-view buys.

So we are still very bullish about the balance of the year and we are looking at those areas of cost savings across the board to contain SG&A.

If I could ask 1 quick follow-up question and then I'll let somebody else get on, what is the fiscal '06 schedule looking like in terms of number of international events? Could you maybe compare that to the number that you expect this year as well as maybe last year?

I don't have a number in front of me. I think it's probably about 50 Live Events that we will look for internationally for last year. As I explained, we are looking to on a quarterly basis move internationally for what we are calling our power periods and that is the repetition of what we have done this year with this first tour that we did in the UK. That is we had 12 Live Events split between SmackDown! and RAW which culminated in the production for the first time ever of our television events outside of the United States.

We're going to return in April to duplicate that and some of the absolute positives that we had from that tour, let the just note a couple of these. Woolworth's, that was an incredible sponsor for us is now -- they have already shown there immediate interest in the repeat of the promotional activity in April. AFDA, which is Wal-Mart over there, has it's like taking in product that they haven't taken in before.

In Italy the Jakks distributor has already ordered 30,000 stunt action rings in local packaging for Italy. We are seeing the results all across our licensing and our retail partners which is exactly what we had hoped to see and we expect that to do nothing but increase. We stood back for a minute after we were putting this plan in place internationally in continuing to look at our domestic business to see how could we really look at it differently. And as I mentioned in my opening comments, really looking at the United States divided into 6 or 7 segments and booking and touring in much the same way that we are looking to do internationally, integrating that vertically with international and domestic touring.

I think we will see the results, but it is not going to be immediate. But we are going to start seeing those as we put those plans into place. So I am very bullish and very excited about that new view of our domestic Live Event business.

If I just might add one more thing to this long-winded response for which I apologize is that the international marketplace, the lead times for promotions, for securing dates and buildings is so far out that we are now really in the balance of '05 calendar and beginning of '06 starting to line up the dates in those buildings to make those power periods bookings possible. So I am very pleased about those developments.

Thanks very much for your time. I'll let somebody else get on.

Jamie, I'd just summarize on your point about -- I think we did 31 last year, 43 to 45 international events this year and we are thinking 50 in the year out there. So, and we've increasing those as the products obviously hot internationally. So it's obviously to fish where the fish are, so we've been increasing those dates. Thank you for the question.

Thanks a lot.

With just his little brief follow up also then rests the domestic market, there is more to increase that demand.

(OPERATOR INSTRUCTIONS) Dennis McAlpine with McAlpine Associates.

Thank you and good morning. Given the somewhat lackluster buys on the 2 new pay-per-view events, I noticed obviously that you're adding another one in January. But can you run through what you think is going on with those pay-per-view events, whether there is something that can be done to increase those, or are they just out of cycle?

And then you mentioned the subscription video-on-demand. Given the nostalgia craze, it seems to be pushing sales of old WWE wrestlers. I would think that that would be an extremely popular thing but it seems to be taking a long time to get started. Can you go through what the timing is on that and what sort of carriages you've got? And lastly, now that you're almost through your first 2 movies, are you going to do any more?

Three-part question, Dennis. We got that.

I thought you could skip one of them.

Let's start with pay-per-view. In our first edition of this year, the Great American Bash in the summer performed very well for us. And if you remember we look to add these pay-per-view buys relative to being brand specific. I think a story line from one brand is a little stronger than the other. We saw those results I think with our pay-per-view.

Taboo Tuesday was a total experiment. It was on a week night and we used RAW as the platform because Taboo Tuesday was also a RAW pay-per-view event and it was our first interactive Live Event. It was incredibly received by the fans and the online voting was very, very strong. However, as I mentioned, both RAW the night before and the night of Taboo Tuesday were competing against the Red Sox and the Yankees, and I think anything suffered competing against those playoff games this year.

The Puerto Rican event that we are adding, New Year's Revolution, we feel very good about that event especially from the Live Event perspective. Time will tell how the pay-per-view goes for it. As we explained last year we were adding these additional pay-per-view events being brand specific to test the marketplace, to test the appetite for that. I think that it's helped to keep our overall pay-per-view buys up. We won't know till I think the end of this year whether in our next planning fiscal year we will want to keep those 2 evens and move forward or we'll just evaluate them at the end of time.

So I think they've been good for us in expanding the brand and the storyline, but we will evaluate that more at the end the year. I forgot the second question.

24/7 I think basically, and carriages on that. Wasn't that the question, Dennis?

The subscription video-on-demand.

Thank you. We have agreements out to probably over 21 systems at this particular point and I hope to have some announcement on those coming back soon. That is slow build. We've invested a lot of time. We've spent a lot of time launching it, a little bit more time than we anticipated getting all the technical aspects right. Data, making sure every clearance we had was right, that all the content was clean and ready to push not only on this subscription platform but also then it will be ready to push into our other pipes of broadband, of our other Internet. And also then as we look at other platforms that are available for distribution we're getting not only great response here in the United States but outside of the United States now we're starting to get unsolicited inquiries relative to SBOD (ph) from some of the countries that we're in and we are ready for this particular distribution.

So I think 24/7 is going to be very good for us but we're not going to start to see any of the return on that investment until probably more towards the end of this fiscal year and on into next year. I think we have -- are just moving incredibly well. The programming we have produced is excellent. We're getting good response from the couple of systems that we've have soft launches on and we are creating a demand for it, so that's -- we are excited about that.

Do you have an official launch date for that?

Soon, and really it really is hinging, we are waiting. We have I think 3 or 4 key agreements we would like to get in so that when we make the announcement it would be -- it will get some attention. So I think we are very close to that.

And relative to the movies, we will finish principal photography by middle of December on both films. They are looking good. One is titled the Marine, will be distributed by 20th Century Fox. The other one is called -- The Good Night (ph) Film. It had a title. I'm hesitant on it because we had to change it. So it had the working title of Ice Cream Man, and that will be distributed by Lions Gate probably towards fall of '05.

Yes I do think we will definitely continue to produce more movies. This has been a good experience but we have 2 more scripts that we have acquired. We're looking for other personalities with WWE which have scripts that fit. We've actually developed a script for a particular personality. So we will look in '06 to produce at least 2 with probably an optimum number at any given year of 4. Again, along the same formula that we've talked about before, that we are protecting our downside with not expansive budgets and looking for the ancillary businesses that go around films to really capitalize on our fan base and drive those revenues.

Could we expect to see you starring in one of the movies?

God, I hope not. For the sake of everyone.

Thank you.

There are no further questions at this time. So I would like to hand it back over to our presenters.

Thank you everyone for participating this morning. Should you have any questions, please feel free to follow up with me. Thanks. So long.

Thank you very much for joining us today, ladies and gentlemen. Thank you and have a very good day. Goodbye.