TKO Group Holdings Inc (TKO) 2005 Q1 法說會逐字稿

Good day. All sites are now online in the listen-only mode. At this time, it is my pleasure to hand over your conference to your moderator, Mr. Wayne Rappaport (ph). Go ahead, please sir.

Thank you. Welcome to World Wrestling Entertainment's first quarter conference call. My name is Wayne Rappaport, Director of Planning and Analysis at WWE. Here with me today is Linda McMahon, our CEO and Michael Sileck, our CFO.

We issued our earnings release earlier this morning and we will be referencing this presentation as part of our discussion. Both are available on our corporate website at corporate.wwe.com. We will be making several forward-looking statements today as part of our discussions. These statements are based on management's estimates. Actual results will differ due to numerous factors as called out on page 1 of the presentation and in our earnings release. Today we will review our operating highlights and first-quarter results followed by a Q&A session. At this time, I'd like to turn it over to Linda McMahon.

Thank you, good morning everyone. I'm pleased to say that we are off to a terrific start in fiscal '06. Our international strategy of entering the market with a strong TV deal coupled with live event touring has yielded significant returns in revenues from our branded merchandise. This is especially true in Italy where we have seen a significant increase in the licensing revenues.

We're in the process of duplicating this successful model in other international markets. Our pay-per-view business had a great first quarter. Excluding the additional event produced in the quarter, buys were up 11% over prior year quarter with all of this performing at or above their '05 levels. Our 24/7 service has expanded into Canada on Rogers Cable, the largest cable operator in Canada. Rogers Cable puts considerable resources behind the launch of our service, including a media event attended by WWE legends, extensive radio promotions and a WWE Day at the Toronto Blue Jays baseball game.

Also in the quarter, we released the WrestleMania 21 DVD, which is currently projected to become the most successful DVD in WWE's history, having already surpassed 200,000 units sold.

Now let's look at our live event business, which you will find on page 5. We had a very successful tour in the UK in June, selling out three arenas in Scotland and England and drawing over 20,000 fans to stadium event in Dublin. The tour's success demonstrates the validity of our strategy of leading fans from one tour in this case, the 14-event European tour in April, to the next tour, while also creating the seal of a continuous WWE presence in the marketplace. We also toured Japan and Korea in July, drawing over 25,000 fans to three events. We're currently gearing up for a three-event Australian tour in October and a 16-event Europeans tour in November, our largest international tour to date. That tour will culminate with two TV events produced in the UK.

Our domestic events also performed well in the first quarter. The positive trend in attendance that began in the fourth quarter of fiscal '05 has continued into the first quarter with average attendance up 21% from the prior year quarter. We're in the process of putting into effect a new, more efficient routing and scheduling strategy for our North America events tours. We will be touring domestically utilizing a predetermined zone strategy that will provide longer leadtimes similar to what we have done in international territory. This new strategy will enable us to develop promotional campaigns with local media and retailers with the goal of driving ticket and retail sales.

On page 6, we have displayed the key drivers for our pay-per-view business. We had five events in the quarter which achieved 1.4 million buys compared to for events in the first quarter of last year with 1.1 million buys. Backlash was our first event in fiscal '06. Typically, this event falls into the fourth quarter. However simply due to timing, it occurred on the first day of our new fiscal year. We are pleased with our first quarter results and are very encouraged by the preliminary buy numbers we have received on Summer Slam.

Page 7 provides household rating information. First quarter RAW ratings are up slightly from the previously year with Smackdown! ratings remaining flat. As most of you know, in the coming weeks there will be some significant changes to our current domestic TV carriage. On September 9 which is this Friday, Smackdown! will move to Friday nights while remaining on UPN. On Monday night October 3, RAW will be premiering on USA Network. These changes provide significant opportunity for us and we look forward to reporting on there impact in the next quarter.

I am extremely proud to announce that our RAW show has now produced the most original episodes of any weekly fictional entertainment program, surpassing even the legendary Gunsmoke. The achievement of this prestigious milestone and the fact that we continue to be one of the most watched regularly scheduled programs on ad-supported TV reflects the dedication of our talent and staff and the passion and enthusiasm of our WWE fans and we look forward to entertaining for years to come.

The highlights of the branded merchandise business are on page 8. Branded merchandise businesses had an excellent quarter driven by licensing, home video and merchandise. Our licensing is up over 125% for the quarter, reflecting the growth in our international territory. In Italy, we had tremendous success at selling trading cards, temporary tattoos and back to school items. This success is another example of the enthusiastic demand our international fans have for WWE branded merchandise and demonstrates a real growth opportunity for us in the future.

We also are extremely pleased with the success of WrestleMania 21 video game and DVD. This truly shows the ability of each individual WrestleMania to stand on its own and become a significant merchandise revenue generator. The strong sales of the Greatest Wrestling Stars of the 1980's DVD and the Road Warriors DVD demonstrate the great interest our fans have in our past superstars which should translate into revenues through our Legends program. This is another successful example of our continued ability to monetize our extensive video library.

One final note before I turn it over to Mike, we are aware and sensitive to some shareholders' questions about the appropriate capital structure of the Company and the potential use of our cash balance. The Company is in the midst of a comprehensive strategic planning process focused on establishing the future direction of the Company. Upon conclusion of this process, we will communicate to the investment community our targeted corporate strategy and capital structure.

In conclusion, as I stated previously, I'm very pleased with our first quarter results. They confirm that the strategic initiatives we have put in place are having a positive impact on or financial performance. At this point, I will turn it over to Mike Sileck, our CFO.

Thank you, Linda. As Linda mentioned, our first quarter results were solid with most of our key drivers showing improvement over the prior year quarter. Our revenues for the quarter were $94 million as compared to 82 million in the prior year, an increase of approximately 15%. This increase is primarily the result of one additional pay-per-view event, increased buys for the comparable four pay-per-view events and increased revenues in both our home video and licensing business units.

Page 9 of our presentation lists revenues by business unit as compared to the prior year. The 1.4 million or an 8% decrease in revenues from live events reflect 19 fewer events scheduled in this quarter as compared to last year, of which three were international events. This was significantly offset by a 21% increase in average attendance. Of the 70 events in the quarter, seven were international events. The profit contribution for live events was virtually flat to last year at 3.7 million.

Turning to our pay-per-view business, revenues for the quarter were 21.6 million, up 4.7 million or 28% from last year. This increase is primarily due to the fact that we produced five pay-per-view events in the quarter versus four events last year. This additional event generated 4.3 million of increased revenues. The four comparable events in the quarter equaled or exceeded the buys recorded in the prior year quarter. This was somewhat offset by a reduction in prior year buys. The resulting profit contribution for pay-per-view grew 2.8 million, or 27% over last year.

In our branded merchandise segment, home video revenues grew 50% to $8.5 million in the quarter. This reflects an increase of approximately 227,000 units sold over last year. The increase is primarily due to strong sales of first quarter new releases, including WrestleMania 21, which sold 202,000 units; the Greatest Wrestling Stars of the 1980's, 95,000 units and the Road Warriors, which sold 84,000 units. Let me point out that WrestleMania 20 was released at the end of fiscal 2004 and sold only 60,000 units in last year's first quarter.

Revenues from the sale of our merchandise increased by $1.5 million, or 40%, up to 5.2 million. The bulk of this increase relates to WWE's shop.com, our merchandise web site, where orders processed increased from 15,000 last year to over 40,000 in the current quarter, an increase of nearly 175%.

Additionally the per capita sales at our live events increased $1.43, up to $10.59. Lastly, licensing revenues for the quarter were 7.5 million as compared to 3 million in the prior year, an increase of $4.5 million. This 150% increase reflects higher revenues from the toy, video game and novelty categories. It should be noted that 3.2 million of the increase was derived from international sources.

Profit contribution for branded merchandise grew 5.7 million or 80% over last year's first quarter. Our profit contribution margin for the quarter was 44% compared to 41% in the prior year. This 300 basis point improvement underscores the strength of the pay-per-view and branded merchandise businesses and the margin leverage inherent within the Company.

SG&A expenses were 22.2 million in the current quarter, up 3.8 million or 21% from last year. The increase is due to a nonrecurring 2.1 million sales tax refund which reduced last year's expense and a current quarter charge of 1.4 million for severance pay related to certain restructuring plans that were implemented in this quarter. EBITDA for the quarter was 18.5 million versus 14.1 million in the prior year, an increase of 31%. Page 11 of our presentation provides the details of this increase, all of which I have just discussed. As is our practice, page 12 shows a normalized EBITDA adjusting for those items we consider to be unusual. And as you can see, there are no such items this quarter.

Page 14 of the presentation contains our balance sheet, which has not changed significantly since April 30, 2005. At July 29, we held $271 million in cash and short-term investments and virtually no debt. We have recorded $31 million in feature film production assets for the two films currently in production and we currently anticipate that these assets will total 32 million when the films are completed. These assets will be amortized on a pro rata basis with revenues in accordance with generally accepted accounting principles.

Cash generation was strong in the quarter as free cash flow was 21 million as compared to 10 million in last year's Q1. During the quarter, we spent an additional approximately $2 million on the production of our two feature films. We do not anticipate seeing any revenues from these projects until fiscal 2007.

The Company's outlook for fiscal 2006 is shown on page 15. Given our first-quarter results, we have increased the range of anticipated total revenues to 360 to 375 million. EBITDA is currently anticipated to be 55 to 60 million, income from continuing operations between 32 and 35 million and fully diluted earnings per share from continuing operations are between $0.46 and $0.50. Sell overall, it is a very good start to our new year and we look forward to the rest of the year. That concludes this portion of the call and I will now turn it back to Wayne.

Thank you, Mike. At this point, I'd like to open the call to questions.

(Operator Instructions). Robert Routh.

Hi, guys. Great quarter. Just a couple of questions. First I was wondering if you could comment at all on the status of the Rico (ph) lawsuit with Jack Pacific (ph) and THQ. I know it has been awhile since anything has been said about that and I know you're limited in what you can say, but I'm just curious if can give us any kind of update at all as far as where we stand in that process at all?

Hi, Robert, good morning. It is really slowly progressing through the courts. And that is really the only update at this point. There was a conference a couple weeks ago in the judge's chambers and he had asked for some information and it's just really the ball is in his court to (indiscernible) discovery (indiscernible) schedules and that sort of thing.

Okay, great. And second, given that you obviously the business it seems to have reached an inflection point and it's turning around for the better, it seems as though you are starting to stockpile cash again which is a good thing, but the question is what are you going to do with it. I'm wondering if management has any intention of increasing the dividend anytime soon, or if that is just part of this comprehensive strategic review that you're doing and you'll get back to us on that?

It's the latter. I would rather hold off on the comments on that until after this strategic review, and I expect at the end of our next quarter that we will give you that update that you are looking for.

Okay, great. Thank you very much.

Marla Backer, Research Associates.

Okay thank you. I am wondering if you could give us a little bit of color about the upcoming move to USA Network? That is scheduled to happen sometime later this month?

Good morning, Marla. It happens on October 3 and our live event that night will originate from Dallas. And so the move is, we are looking forward to it with great anticipation. We've had a great partnership over the last five years with Viacom being on -- first it was TNN and now it has changed to Spike, the network for men, and that has been a good partnership for us. USA is a bit of a go-home for us. We were there for 17 years before we moved to Spike. USA has a deeper penetration into households. They are putting together an awesome launch marketing plan for us across all of their platforms which income NBC, Bravo, Sci-Fi, and they are just really rolling out -- pulling out the stops to give us a big launch.

So they will be promoting the first event very aggressively?

Correct, and then continuing into the month really with a great push starting I believe it's the middle of this month and probably next week, we have commercials with them. They have been a lot of fun. We have our ID tags that they're already running for the move. We've seen a couple of those in other NBC programming, you will see them in NASCAR. I believe the title of the show, I'm probably going to get this wrong, is Joe Goes to College, but that is close. I don't think it's exactly it. But that really hits our demo. So that's the strategy. It's a really big push for the re-launch, if you will, coming home to USA Network.

Great, thanks. And then I have another question, and if you said this at the beginning of the call, I apologize. I dropped the signal for a few minutes. Are you -- do you have any dates now for the release of the theatrical release of the movies?

I did not cover that in the time that you were out. We expect that probably within the first six months of calendar '06 that our movie will be released. We're in the process now -- even though we finished principal photography, we're in the process now of the final editing, the musical scoring, all of the special effects that has been put in. We did shoot a couple of new scenes over the past week and a half for the Marine because as we went for our MPAA PG-13 rating, we did have to take a couple of things out. And so we've replaced them at the suggestion of Fox, which also give us a little bit more time with the movie. And we've been working very closely with Fox on the final stages of the movie. So it's all progressing as planned and we are looking forward in the next hopefully two to three weeks for Fox to commit to the release date as well as Lion's Gate.

Great, thank you very much.

Alan Gould, Natexis.

Thank you, good morning. Linda can you drill down a little bit more on the new media areas -- how many SVOD homes you're in front of, what sort of buy rates you are starting to get? And it looks like the Web site is starting to generate some nice incremental revenue, if you can give a little more detail there.

Relative to subscriber numbers, et cetera, we actually have some confidentiality provisions in our contract that would limit us at this time from talking about those. But we're in a really good rollout. For instance, as I commented earlier about Rogers Cable up in Canada, they had a big media launch and actually the subscription rate and speed of subscription in the thousands was surprising not only for Rogers, but it was even higher than we had anticipated. Let me share with you that we are in front of all of the major systems (ph). We have announced Cox and we have rolled out in several of their systems, though it's not on a nationwide basis at this point, but we expect hopefully by the end of the year to be in a lot of their -- most of their major systems. We are having good take rates. The churn rate is what is most impressive in that as we are turning some subscribers out, we're continuing to increase our subscribers on all of the systems where we have launched. So it's all good news for us relative to the acceptance by our fans of SVOD the platforms. They are watching all of the constant we're putting up. What we're hearing more and more is, can you increase the amount of hours that you have on the first rollout. So that is all good news and good positive indicators for us.

And they're paying, what, about $5.95 an event a month? I'm not sure.

The average price is running about to $6.00 to $8.00 I believe and it's on a revenue share with the cable system. And then the other thing that you mentioned was the Internet, and yes, we are seeing some good generation of revenue, which is an indication of not only an increase in the unique visitors that we have, but the conversion of more of those visitors especially to our shop area. I think we're recording some of those numbers this morning more than doubled, almost tripled really from last year's orders by packaging offering I think a better assortment of merchandise. But it really gets down to again that we have spent a great deal of time developing our superstars and those superstars really are taking hold and merchandise is selling well. And I think coupled with our improved marketing and just improving the site in general, we're starting to see the results of that.

Thank you.

James Clement, Sidoti & Company.

Good morning. Linda, I wonder if I could ask two quick questions. First would be on The Condemned. Where does that stand with regard to potential production calendar, that sort of thing?

Wall first of all as you know, it's our plan to always have a distribution partner in place and we are negotiating and I think we're in the final stages of negotiation I don't want to say today with which our distribution partner but we're very close. Again, it is one of the major studios. Once that is completed, we will proceed with our preproduction, continuing our site surveys, et cetera. The soonest that we would go into any kind of preproduction would be early in '06, calendar '06.

Okay, another quick question just about the pay-per-view results for the quarter. The number of that sort of jumped out off the page was the results of Vengeance this year versus last being up substantially. Can you give us maybe a little bit of color about how you guys might think about that event in terms of what went right this year, maybe what went wrong the year before?

It was really as we have discussed many times before, it really is dependent upon storylines, upon the stars that are part of that storyline. We saw a great mix this year of legends versus some of our new talent. And I think that that is -- what we are seeing is the surprise of that legend and it's a great match, it was a hell of a sale. We cannot always just determine -- it's not necessary of what works and what did not work, it's really the culmination of the storyline and creating the interest leading into the pay-per-view. So we just had great interest going into that pay-per-view.

In looking at the October quarter, I think last year I believe one of your pay-per-view events may have run up against a World Series or maybe a Yankees/Red Sox game or something like that. Generally when you look back to last year's October quarter, would it be fair to say that the pay-per-view results were probably not what you would have hoped for?

I'm sorry, did you say last year they were --?

Yes, I was looking back at last year.

Anytime we see them decline a bit, they're not as good as what we had hoped for. But it did, that was Taboo Tuesday, which is the first launch of that pay-per-view. It did get right in that same week with the World Series Playoffs. And you know, it was a hot Series last year. And so that doesn't impact what we're doing.

Thank you very much for your time.

(Operator Instructions). Dennis McAlpine.

Thank you and good morning, and Linda don't worry, the Red Sox will be back in the World Series again this year.

I'm just hoping the Yankees are.

Going back to Marla's question on the moves of the TV shows, can you talk about what the change in -- or what the change means in terms of HUD (ph) levels, i.e., Friday night versus Thursday night? And then also USA versus Spike?

Let me speak to Smackdown! first. That will launch this Friday night the first premier. And unfortunately with Hurricane Katrina creating the havoc that she did and everyone trying to respond to that, the major networks are doing a very admirable telethon this coming Friday night from 8 o'clock to 9 o'clock which cuts short our Friday night premiere from our normal two hours to one hour. So we certainly felt that that -- it was unfortunate the storm came through. I wish the telethon were on a night other than Friday night, but that was the network's choice for the telethon.

We will have the first hour of Smackdown! telecast on the Web. So this will -- we will be promoting that more that you can see the first hour on the Web and we will be promoting to UPN then launch and from here on Friday night out of our Web show. So HUT (ph) levels on Friday nights are not as strong as they are on Thursday nights where we have been traditionally, but I think that we have an opportunity to grow for UPN and our fan base. You know new viewers on Friday night and our tagline is changing the way TV is on Friday night, that's how Smackdown! is viewing. So I think there's good opportunity for us there.

The first four weeks that we're on, we are in baseball playoffs so we will see some impact to the ratings. I think those first four weeks it's probably going to take us to the middle of October to get back to the times we were seeing on Thursday nights right at the end of this particular season before we are being preempted so often.

So that is a bit of a negative. I think it will speak to the strength of the brand and our product that we will be able to attract our fans in spite of those preemptions which are in four of the major markets. They're in Boston, New York, Hartford and Washington. But then after the Playoffs, then we will be fine on Friday nights. USA, I don't think that HUT levels are where they are going to be on Monday nights. HUT levels are strong and good on Monday nights and with USA's stronger penetration on just their basic cable penetration, I think we're going to reach a stronger base of our households. So we look for it to be very promising for us for an uptick. Dennis, did I lose you?

I just missed the first part of it on the move from Spike to UPN -- not Spike -- Thursday night to Friday night.

Okay, maybe -- I was pretty long-winded on that. Maybe you can catch it on the download on the Web.

Okay, I will catch it there. In the last thing, in looking at your guidance, in the last fiscal year, the last three quarters, you had basically $0.43 in earnings. If you add that to the $0.16 of your first quarter, that gives you $0.59 if you were flat in the next three quarters. Obviously your guidance is significantly below that. Realizing that you are a very conservative person and all of that, is that what we attribute this to, or are you expecting some down quarters in here?

The only thing I would point out to is as we've previously discussed when we move to USA Network, we will no longer be selling the advertising time within those shows as we're currently doing now within Spike. So as a result of that in the back half of the year, there is some negative results as a result of that change. So I think when you do the math, that's a good bit of the reason for how the numbers will play out in the back half of the year and then for the full year.

Okay. In the second right half, is it right you have no advertising at all?

It's very de minimus, that's correct.

And can you update us on the status of the suits with Jack's Pacific and the various people related there?

Yes, and Robert Roush had asked about that as well. And so just to repeat, we really have that now in the hands of the courts and it is moving along at, as far as I'm concerned, it's now (indiscernible). But that is just how things move through the courts. So conferences with the judges, he'll discover the schedules (ph), et cetera.

Okay. And any expectation on increased penetration or acceptance of VOD or SVOD?

We are moving along as we have planned. I think that we are in front of all of the major systems. We're having good a take rates and good subscriber growth across the board with that.

When you say you're in front of, have the other -- major MSOs other than Cox signed up yet?

Not signed, we're in conversations with them.

Good. Thank you.

Mike Wallace, UBS.

Hi, two question. First just looking at the average attendance in the first quarter being up so much, I'm assuming a lot of that is because an extra pay-per-view or larger venues. Could you just talk about domestic attendance and how it has been trending? If you strip out the extra pay-per-views, is there a way to look at it apples-to-apples? Is domestic attendance getting stronger or weaker or flattening out and talk about any trends there?

Second question, I know with the changes that the advertising will go away and it's all going to be in the right phase, but is there anything in your contracts with the networks that if there is a material change in the ratings over six to 12 months or whatever when you make these moves if they get materially better or worse, would that have any financial impact on your TV contracts?

No. We benefit obviously from an increase in ratings by I think driving all of our other businesses. Clearly, the networks benefit from it because they're selling the time. Their CPMs are probably going to go up and they'll benefit from that score. I think we have the biggest benefit again just in developing and driving our base business.

And the first part about domestic attendance?

Oh, I'm sorry. Domestic attendance is up. We're showing just an upward trend. Our average attendance is just up on our domestic as well as our international business. And I was just, we were just looking at the numbers because the way you posed question, the pay-per-view increment is very, very small.

Okay.

It's just a good trend that we're seeing. We are playing into fewer events domestically, we're increasing our events internationally. The growth is internationally. I think we noted in the press release are much greater in profitability (ph), and that does rest (ph) the domestic market a bit and gives us an opportunity then to come back into those areas fewer times and I think with stronger results. So it's a good plan. We've been working on it now for about a year, we're sticking to it and it's showing the results that we had hoped for.

Thank you.

(Operator Instructions) Robert Routh, Jeffries & Co.

Just a few quick follow-ups. Linda, you had mentioned about the number of hours of programming that you have. I'm wondering if you could comment on exactly how many hours of programming WWE currently has, what percentage of the library has been mined for home video? Because it would seem to me that you would still have a tremendous amount of titles that you could mine for the DVD and the home video market. And when it comes to library acquisitions in the wrestling genre, if you could comment on -- are there any out there and if there are any out there, is there anything that you guys would consider looking at currently, or is that something that right now you're just focused on the Smackdown! and RAW tours?

Let me go in reverse order. There are, there's one kind of large library that we're really down the road with negotiations in evaluating it at this point. There are a couple of smaller ones that are out there that we are clearly interested in as well. But I think that we relative to this genre, we want to be continue to have the lead and be the place to come for this particular industry. Relative to the use of our library, we have only just scratched the surface. Again, the starts of the 80's, the Road Warriors and part of our television program at this point is kind of a reincarnation of the Road Warriors utilizing one-half of the original team and then the other half or the second member of Road Warriors is a new fellow that we've been developing over the past year called Heidenright (ph).

So that coupled with now going back and showing the original footage -- one of the Road Warriors died this past year. So I think there is clearly nostalgia there, but there is a great deal of support for the reincarnated team, if you will. So that's showing good promise for us. But again, we just really started to really mine this library and we are seeing continued results from that because the Legends program coupled with continuing to mine the library and the Legends program as I talked about before is I can't remember how many we've signed, but it's over 60 or 65 at this point of Legends, former stars of WWE. We're coming out with action figures, games, they appear for us at live events on sale dates, they have great fan interaction and some current research that we have seen has shown that there is clearly that nostalgic feel for the superstars of I would hate to say yesterday, but those that are not so much in front of the radar screen. And then your first question was about our hours of television, Robert, correct?

Yes ma'am.

In terms of moving to USA, we will reduce the number of hours that we're producing by two each week. We're going to produce RAW and a weekend show. We did have five hours on cable, so that will be reduced -- no. Let's see, we have three hours less on USA. I think that's right. I'd have to go back and add them. But really, the programs that are going to be on USA are going to be RAW on Monday nights and a weekend program, which is going to be on Saturday morning. So those are the hours that will currently be on cable as opposed to the number of hours that we have on there today. And we're also not going to continue to syndicate programming. We're going to focus really more on developing original programming for the web and for 24/7.

Okay, great. Can you give us a sense of the size of your library?

Yes. We have in excess of 75,000 hours and we add to it every week.

Okay, thank you very much.

Thank you.

At this time, I'm showing no further questions, ma'am.

We thank everyone for tuning in this morning and we look forward to bringing you more good results next quarter.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time.