TKO Group Holdings Inc (TKO) 2006 Q3 法說會逐字稿

Welcome to today's teleconference. At this time, all participants are in a listen only mode. Later there will be an opportunity to ask questions during our Q & A session. I will now turn the call over to Mr. Michael Weitz. Go ahead, please.

Thank you. Welcome to the World Wrestling Entertainment year end conference call. My name is Michael Weitz, Vice President of Investor Relations and Financial Planning at WWE. Here with me today are Linda McMahon, our CEO, and Michael Sileck, our newly appointed Chief Operating Officer. We issued our earnings release earlier this morning and will be referencing a presentation as part of our discussion. These are available on our corporate web site at corporate.wwe. com. We will be making several forward-looking statements today as part of our discussion.

These statements are based on management's estimates. Actual results may differ due to numerous factors, as called out on page one of the presentation and in our earnings release. Today we will review our operating highlights and financial results for the eight-month period ending December. This review will be followed by a Q & A session. As a reminder, in June we announced our Boards decision to change the company's fiscal year into a calendar basis beginning with calendar year 2007. This change resulted in an eight month period through December, which we refer to as our 2006 transition period. At this time, I would like to turn it over to Linda.

Thank you, good morning, everyone. And as always we appreciate you joining us today. I'm pleased to report that we completed our 2006 transition period and achieved our revenue and earnings target for our eight month period. We also generated top-line growth. This growth drew strength from the favorable trend underlining our live event home video and e-commerce businesses. Growth in these areas more than offset the anticipated absence of $13.7 million in domestic television ad sales.

We also increased investment in the production of television content, which we subsequently repurposed for a variety of other products. As previously indicated, we anticipated that the sunset of television advertising, increased investments, and a $3.4 million benefit last year from a legal settlement, would have a direct negative impact on our earnings growth. So while we posted earnings just above an outstanding prior-year period, the increase in our earnings does not fully reflect the underlying health and positive momentum of our businesses. This positive momentum can be seen in the performance of our domestic live events business as well as our home video and e-commerce operation. Excluding the impact of ECW, average attendance at our northern American live events increased 27% year over year to 5,700.

Similarly our home video DVD shipments and online merchandise orders both increased by over 50%. We believe these metrics are important indicators of the overall positive trends developing across our businesses. During the transition period we accomplished several operational objectives that we believe will help us take advantage of these trends. We completed a new home video distribution agreement with Genius Products, which became effective in November. The transition from our previous distributor has been executed smoothly. We believe this new partnership will enhance our revenue potential by leveraging Genius' strong relationship with retailers. In addition, we expect our three-year agreement will pose economic advantages to WWE, by providing better terms than the deal it replaced. In order to monetize our video library, we also extended the reach of our 24/7 video-on-demand service.

This summer the service was launched on Comcast and became available to over 10 million potential subscribers throughout their systems. In addition, we secured distribution on Cable Vision, and in this past January, made the service available to their 2.4 million digital subscribers. We expect to continue to increase both the reach and penetration of this service in 2007. This addition to these operational achievements, we made important progress on our broader strategic initiatives. During the period we executed an ambitious campaign to relaunch ECW as a new brand. We secured television distribution on the Sci-Fi channel through December, 2007, of 38 non-televised live events, and produced two Pay-per-view events. As a result, ECW contributed incremental revenue of more than $5 million and surpassed break-even results within the first six months of its startup. We believe that the ECW brand will provide a positive economic return over the long term. We have also expanded our presence outside the United States. As a result, our revenue and profit from international sources increased by nearly 10% on a year-over-year basis. This growth was led by the expansion of home video distribution in Germany and Italy.

It also reflected the increasing value of our worldwide television platform, including the licensing of our programs in Spain, which represents a new market. In our digital media segment, we increased revenue from our web site and continue to develop a global platform for our content securing distribution partners in Europe and Asia. During the eight month transition period, revenue generated by our e-commerce business, WWE shop, grew by 50% as traffic to our web site increased by about 60%. Our success in monetizing a high level of traffic to our web site reflects the impact of targeted marketing campaigns and the short sales cycle in this business. While our e-commerce activity has been strong, the development of our online advertising business has been ongoing. Over the past few months, we made important organizational changes. We expanded our sales force and realigned our activities under an experienced senior executive.

We've begun to attract new advertisers, but there's still more work ahead of us in terms of building the right infrastructure to support this business. Rest assured, we are working hard to realize the value this business which has the potential to leverage strong growth trends. Finally, regarding our films initiatives, we have released two feature films, See no evil" and "The Marine." We are delighted that after grossing more than $18 million in domestic box office receipts, the "Marine" DVD has debuted in the number-two position on video scan sales charts and with the number-one rental title according to "Home Media" magazine. See no Evil and the Marine continue to stay in line with our profit projections for these films. We are looking forward to the release of our third feature film "The condemned" starring Stone Cold Steve Austin, which is targeted for release in April. Overall, we are excited about the positive momentum and growth opportunities in our businesses.

We believe the distribution of our content on digital and other new media, as well as international expansion, holds the greatest potential for long-term growth. To realize this potential I'm delighted to announce the appointment of Mike Sileck as our new Chief Financial Officer. In this role, Mike will be responsible for managing all of WWE's global business operations. We are confident that his financial savvy and operational experience will help us execute WWE's strategic vision and build enduring value for our shareholders. In addition, we have appointed Frank Serpe, an experienced WWE financial executive, as our acting Chief Financial Officer. At this point, I'll turn it over to Mike, who will give you the review of our financial performance, and to discuss our business outlook. And congratulations, Mike.

Thank you very much, Linda. As Linda has mentioned, we delivered a solid 6% increase in revenue to $263 million during the eight month period. Revenue growth in our live event, home video, and e-commerce businesses more than offset the anticipated absence of domestic TV advertising. The period reflected a $9 million reduction to profit from the absence of domestic TV ad sales. In addition, the eight month period last year reflected a $3.4 million benefit from a legal settlements. During the period, our strong top-line growth was mitigated by increases in our production costs for television and other media, as well as increased investment in various initiatives including magazine publishings.

Page 5 of our presentation lists the revenue and profit contribution by business unit as compared to the prior year. Revenues from live events, including merchandise sales at these events increased by about $12 million or 24%. Led by an increase in the average attendance at our North American events, excluding the impacts of ECW, average attendance at our North American events increased 27% on a year-over-year basis to 5,700 attendees. The current eight month period reflected 34 live events in international territories, compared to 25 in the comparable period last year. Of the nine incremental events in the current period, eight were staged in emerging markets, including the Dominican Republic, Panama, Mexico, and the Philippines. These events have fixed, guaranteed revenue. Overall the product contribution for live events increased by just over $4 million from last year.

Turning to our Pay-per-view business, revenues for the period were essentially flat to the eight-month period last year. Revenue reflected a 14% domestic price increase of $5 that was more than offset by a decrease in buys. Buys for the 10 Pay-per-view events that were produced in both periods declined 8% from the prior year. We attribute this result to several factors including the price increase, a tired scheduling of events, and the growth of alternative forms of entertainment. Going forward, we will continue to be vigilant in selecting talent, matches, and storylines that generate increased interest among our fans both domestically and internationally. In our consumer product segment, our home video business continues to deliver strong revenue growth.

Home video revenue increased 26% to $35 million, reflecting the shipment of 3.3 million DVD units, 55% above the prior-year period. Sales were led by our "Wrestlemania 22" release, which became the best selling DVD in WWE history, with more than 425,000 units shipped. During the period, home video revenue and profitability were impacted by sell-through rates that while still much better than the industry norm, were below a year-ago levels. As Linda mentioned, we expected our partnership with Genius Products will enhance our relationship with retailers and facilitate greater operating efficiencies. Revenues from our licensing activities of $14.7 million were essentially flat to the prior-year period, with lower royalties earned on video games and novelty products.

Following a decline in the July quarter, international sales rebounded in the remainder of the eight month period. Also of note, we released the 2007 version of our "Smackdown vs. Raw" video game to critical acclaim in November. Sales of these games which have been strong will be reported in the first quarter of 2007. Our digital media segment comprised of online advertising, e-commerce, and wireless businesses delivered revenue growth of 34% compared to the year-ago period. Revenues from the sale of merchandise on our internet-based storefront WWE shop increased about $4 million or 50%, compared to the prior year. The number of orders processed increased 54% to 244,000 in the current year. Revenues from our other digital media businesses increased 24% to $7.3 million, reflecting growth from both our online advertising and wireless businesses. We continue to build our online ad sales and content infrastructure in order to monetize our high level of internet traffic.

For the period we averaged 16.4 million global unique visitors and 42 million video screens per month compared to approximately 10 million global TV visitors and 32 million video streams per month in the comparable period last year. Our profit contribution margin for the period was 40% compared 44% in the prior year. The four percentage point decrease verses last year, primarily reflects the absence of high margin, domestic TV ad sales. Our profit margin was negatively impacted by this change in our product mix as well as by increases in our television production costs. SG&A expenses were $61 million in the current period. Up 7% from last year, which benefited from $3.4 million in legal settlements. Excluding these settlements, SG&A expenses were essentially flat to the prior-year period. Operating income was $39.2 million compared to $44.2 million in the prior-year period.

Page 14 of our presentation compares the year-or-year results and provides a summary of changes by business. It should be noted that our effective tax rate decreased from the comparable period last year. The decrease reflects greater tax-exempt income, increased tax benefits from domestic production activities, and the favorable settlement of income tax examinations that resulted in a lower 31% effective tax rate compared to 39% in the prior year. In the future, we expect an effective tax rate of approximately 35%. Page 15 of the presentation contains our balance sheet which remains strong. On December 31, we held $248 million in cash and short-term investments with virtually no debt. To date we have recorded $54 million in feature film production assets. As we have stated in past calls, these assets will be amortized on a pro rata basis as revenues are recognized in accordance with generally accepted accounting principles. During the current period we incurred approximately $17 million of production costs for our third feature film, "The condemned," which is scheduled for theatrical release in April, 2007. We do not anticipate realizing any revenues from our feature films until at least the second quarter of 2007. For the eight month period we generated free cash flow of $14 million compared to $61 million in the prior year.

The decline primarily reflects changes in our tax position, increased spending on the production of feature films, and other changes in working capital. Business outlook: We believe by managing the company for the long term and by continuing to sustain our substantial dividends, we will build enduring value for our shareholders and encourage long-term ownership of our stock. As such, we have committed to complete a comprehensive strategic review with the objective of identifying sustainable multi-year growth rates. We expect to communicate our over-arching financial objectives, within the near term. The company has decided not to provide specific guidance on near-term results. In lieu of providing such financial guidance we are expanding the depth of our business metrics.

To reflect the evolution of our business model, we have added performance measures for our home video, WWE.com, and e-commerce businesses, and eliminated the presentation of domestic television ratings. A revised set of business metrics will be updated on a monthly basis and can be found in our key business drivers documents in our corporate web site, corporate.wwe.com. As a specific point of reference, the company has targeted 2007 EBITDA growth of approximately 12% over the prior calendar year for the payout of management bonuses. This increase assumes growth from each of our business segments.

You should expect continuing investment to support our strategic initiatives including the expansion of our video production capabilities and increased capital expenditures associated with the implementation of high-definition broadcasting. I will now turn the call back to Michael Weitz.

Thanks, Mike. As a reminder, we have changed the company's fiscal year end to a calendar basis beginning with the 2007 calendar year. For your reference, we have also posted a summary of our historical financial results and key operating metrics for the three year period from 2004 through 2006. This information can also be found in our trending schedule at our corporate website at corporatewwe.com. Operator, we are ready now. Please open the lines for questions.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our first question from Michael Kelman with Susquehanna Financial Group. Go ahead please.

Thank you. Hi, the first question is on the international live event strategy. It looks like in calendar 2006 you had about 61 international live events, up from about 48 in 2005. I wonder if you could talk a little bit about where you see the number going in 2007. And with that how many could you realistically do under your current infrastructure and then maybe you could also discuss how the ECW brand might fit into the mix?

Go ahead.

Thanks, Mike. Relative to that, the -- you're correct, we did 61 international events in calendar 2006. As we look to 2007, we anticipate in the range of 68 events or so. You have some growth in there. And again, we do try to find the right balance between returning to our existing markets and also opening new territories. And we'll continue to find the right balance in 2007. As you look farther out, relative to the way we are currently configured, I think you can reach a point of in that kind of 70 to 75 events on a given year, but not to pin it to an exact number, but I think to your point, you reach -- there is a upward limit as we are currently configured as to how many international events we will do. And of course when we are touring internationally, those are days that we're, currently configured, we're taking away from domestic dates that we would be playing. So we'll continue to try to fine that right balance.

Great. And I guess a question on the outlook or guidance next year. Once you're done with the strategic review process, will you be instituting guidance similar to how you used to provide or will you no longer be providing that and just give us an update on the strategic direction of the company?

What we hope to do is to provide investors what we feel would be attainable, multi-year growth rates, both top and bottom line, and those would hopefully guide the investment community as to what the long-term potential of the assets are. And we will not be giving specific near-term guidance in the future.

Great. One last question, can talk a little bit more about the buildout of your online sales force and how that's progressing and whether are you starting to see some traction with the advertising community yet?

We are very pleased with the buildout. We have now structured under a seasoned executive and online sales. We have increased our sales force from four to 12 people. We now have representation in New York, Chicago, and Los Angeles. We have four people on the support staff. So we feel really good about the group that we have. And we still have about five open positions that we're looking to strategically add to the sales force. So we are bringing in new advertisers and we think we are now geared to fully employment that sales initiative. That's been one of my -- It's really been a pet peeve of mine over the last call, that we didn't have the sales force in place and I think we made great strides over the last couple of months to shore that up and to put in the sales force that's going to deliver results for us.

Thanks, very much.

Thank you. We'll take our next question from Alan Gould with Bleichroeder. Please, go ahead.

Hi, yes. Thank you. I've got a number of questions here. First, Linda can you tell us some sense on if you've seeing any competition from the Ultimate Fighting Championship International Fight League. I mean, I know your North America attendance seems to be doing well, so I'm not really seeing it, but I get that question a lot? Second, if you can give us any update on the Jacks THQ suit because Shenker pleaded. And then third, can you give us your thoughts on public sector, if you would think of doing more direct videos in the future as opposed to video films.

On the Martial Arts group, the Ultimate Fighting Championship, there that's a group that's growing. They happen to have a good product and they have good presentation on Spike. As I've mentioned before, it is a real sport with competitions that we think is kind of stepped in to replace, not totally replace, but it takes the place for fight fans. It is -- we do see some similarities in demographics for people who watch us and MMA Our live events do continue to grow, as you mentioned, which is key to us because the live events attendee is the person who has watched television, and is really mostly our diehard fans reaching into their pocket to go to a live event to buy our merchandise. So, we think those are all very good indicators. Is there, some relative effect on Pay-per-view? I really don't think so. Maybe one or two. I think, MMA's business is growing in Pay PerView, just as boxing did, but I'm not really seeing a degradation in our business as a result of Ultimate Fighting Championship. And I'm glad to see them doing well. Relative to THQ, the suit is progressing at slower than we would like pace, but we can't control the judicial system. Stanley Shenker, who was the agent for us and licensing business did plead last month guilty to giving kickbacks to our former employee, Jim Bell. Which we think certainly is convincing evidence along the lines that we've been presenting that there was certain issues to be looked at as we laid out in our public disclosures before. The case is moving clearly much slower than we would like to see. But I think these are the pieces that are coming to the place that do prove our point. In the meantime as I've said before, we are proceeding with both THQ and Jacks under our contractual agreement to do business together. And that business on an ongoing basis is good. You know, in our video games we've shipped about a million more games this year than we did for the same period last year. The timing issue comes into play. With the xbox 360 and Playstation 2, I think we have a good opportunity there. The business is good. Unfortunately, we just have this baggage hanging around relative to the lawsuit. Then I think your third question was relative to production with films. We are definitely looking at producing direct to home video. You know, we are talking to different studios and distributors about that. But we are pretty much maintaining our schedule of one to two films a year, potentially two to four direct to video productions on an annual basis. But I think we are right on track with our philosophically in the business development in films. So we are good to go on that.

Can I follow up, when you say one to two films per year, is there anything green-lit past condemned or are you continuing to do more live action past condemned?

We have projects in development. We've not green lit a shooting date. We're doing some due diligence and site surveys in other areas for another production. But again, we have not -- we don't have a definitive distribution deal. As you know, that's our criteria of getting our distribution in place before we commit dollars to production. But we are on pace to do those -- to do another film. As I've said we have one in production. We have two or three other scripts that have been submitted. They are live action. And we're excited about them.

Okay. Thank you very much.

Thank you. We'll take our next question from James Clement from Sidoti. Go ahead, please.

Good morning. Question for Michael. Michael, with the changing of the fiscal year end, was there any costs that hit you, let's say in the last 60 days that might normally have hit you in the April quarter in years past?

Well, part of the cost of sort of transitioning to the new calendar year was that we basically had to do two audits in a less than 24-month period. So, it was sort of condensed. We absorbed those costs throughout this transition period. Going forward, Jamie, those costs are $1 million, $2 million, whatever it is, Is something that will now we will only incur of course on an annual basis.

Okay. From like a management bonus perspective or anything like that, I mean, was that pushed forward this year as a result of the change in the fiscal year?

The bonuses, we moved everyone to a calendar year end. And for this short period, we're doing pro rata bonuses for that shortened period.

Okay. Very good. And Linda, if I can ask one more question, are we to assume that -- I believe you have Steve Austin under a three-picture deal. Correct me if I'm wrong. Would it be fair to assume that you might be looking at doing another "Stone cold Steve Austin" movie sooner rather than later? Would that be something that is under consideration?

It is. One of the scripts we're reviewing now, it is being read also by Steve. And, you know, we think that that's definitely a potential. And we think he's going to have good star power. I'm very excited, as we looked at "The condemned" already, I think it's going to be -- it's a different movie. I think, not only to Steve Austin fans, but to movie goers in general, they're going to be very impressed with his star power.

It's just another follow-up. Is his character in "The condemned" one that you think is sort of franchisable going forward, or is it likely that any future movies starring him he would just play another character?

The second movie that's coming out is not a franchise of a character. But it is the typical Steve Austin, if you will, persona. He's a rough and tough, no-nonsense guy, but he does have a heart. He's very honorable. But he's clearly an action/adventure star. And that's how he's best cast. And we want to put him in those productions that will deliver the best results in box office and for our home video.

Okay. Thanks very much for your time.

Thank you.

Once again, if you would like to ask a question, please press the star and one on your touch-tone phone. We'll take our next question from Meredith Fisher with Jefferies. Go ahead, please.

Hi, thanks. Good morning. Just a couple of questions. A followup to the Genius Products deal. Can you tell us if there is a co-production or co-financing agreement as parts of that deal. And then secondly, just going back to the international markets expansion for a second. If you can comment on your thoughts on any potential new markets that you'd be considering entering near term? Thanks very much.

My recollection is that -- is I think -- Mike correct me if I'm wrong, the Genius sale at this particular point does not have a co-production component. It is the straight distribution deal. However, we have been in conversations with Genius for other productions going forward that we might do co-production financing, but that is not part of the deal that we have with them. Certainly, the Weinsteins have good experience in both the DVDs and theatrical release business. We have good conversations with them, and appreciate their input and their counsel with us. There are other projects that we'll pursue but nothing test tentative at this point.

Okay. Thanks. And then you had a questions--

Relative to the international markets, we're going to open -- of the nine incremental events that we will play this coming year, all but seven or eight of them are too new and open markets including Panama and Mexico and others. So we hope to continue to open those new markets kind of as we move forward.

Going forward, are you looking to do more sort of in Latin America or Asia? Can you comment, or Eastern Europe, can you comment specifically on which region you're interested in.

Yes, we're definitely looking at Asia, particularly in China and other parts of Asia. And we also have -- that's a high priority for us. And we're also looking at sort of far Eastern Europe and into Russia.

Okay. Thank you very much.

Okay.

We appear to have no further questions at this time.

Thanks, everyone. We appreciate you listening to the call today. If you have any questions, please do not hesitate to contact me, Michael Weitz at 343-326-2342. Thank you.

This concludes today's teleconference. Thank you for your participation. You may now disconnect at any time.