TKO Group Holdings Inc (TKO) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's World Wrestling Entertainment Conference call. (OPERATOR INSTRUCTIONS.) It is now my pleasure to turn the call over to Mr. Michael Weitz, Vice President of Investor Relations with World Wrestling Entertainment. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to World Wrestling Entertainment's first quarter 2007 earnings conference call. Joining me for today's discussion are Linda McMahon, our CEO; and Michael Sileck, our COO; and Frank Serpe, our CFO.

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 website 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, which are referenced on page one of the presentation and in our earnings release.

Today, we will review our financial results for the first quarter and will follow this review with a Q&A session.

As a reminder, we have changed our fiscal year to a calendar basis. As such, the discussion of first quarter 2007 and 2006 results refers in both years to the three months period ending March 31st.

At this time, I would like to turn the call over to Linda.

Thanks, Michael. Good morning, everyone. Thanks for joining us today.

We had a strong first quarter, which provides a favorable start to the year. Over the past few quarters we have intensified our focus on creating content with broad appeal. This focus reflects our belief that developing great content and distributing it across a multitude of platforms is the primary driver of our business. As we have sustained growth in almost every key measure of consumer demand, we believe these efforts are working.

The success of our WrestleMania PAY-PER-VIEW is a testament to the creative drive of the Company and demonstrates our ability to execute our content strategy. Preliminary reports from our cable and satellite partners suggest that WrestleMania generated approximately 1.2 million buys, representing an increase of about 15% over the average WrestleMania buys for the past three years.

As demand builds across our businesses, we are also increasing our focus on execution. For example, management has placed a high priority on improving the performance of our PAY-PER-VIEW business. We recognize that, aside from WrestleMania, our PAY-PER-VIEW buys have not kept pace with the growth in our other product offerings. We attribute this to several factors, including a tighter scheduling of events, price increase, and the growth of alternative forms of entertainment.

As part of our response to these challenges, we are being more vigilant in selecting the talent and story elements that generate increased interest among our fans. In a moment, Mike will discuss some of the other measures we are taking.

Consistent with our focus on execution, we are also thinking creatively about the ways in which we sell our content. We are expanding our partnerships, such as our new agreement with AT&T Mobile, and broadening our business horizons. In short, we are working hard to leverage our momentum and to drive growth over the long term.

Regarding our films initiative, we released our first feature film, The Condemned, just last Friday. To date, the film has generated approximately $4.4 million in domestic box office receipts, which is below our aspirations for the film. Of course, these early results reflect less than one week of theatrical performances. Accordingly, we will continue to update our financial projections as new data becomes available.

I will now turn the call over to Mike Sileck who will update you on other strategic initiatives.

Well, thank you, Linda, and good morning, everyone.

I'd like to start by sharing my perspective on our Company's progress. We delivered solid results in the quarter, which positioned us well to meet our full-year financial objective. We posted a strong 13% increase in both revenue and gross profit, which was led by the robust growth of our licensing business. Here, our success is a direct reflection of the power of our characters and their popularity with consumers worldwide.

As Linda mentioned, most of our fundamental operating metrics continued to improve during the quarter. Average attendance at our North American live events grew 15% on a year-over-year basis. Gross DVD shipments increased 59%, and online traffic, as measured by unique visitors to our wwe.com website grew 25%. We believe these metrics are key indicators of the overall positive trends continuing across our businesses.

In addition to sustaining our momentum, we made important progress on our digital media initiative. Specifically, we increased our ecommerce revenue, widened our distribution of mobile content, and continued to strengthen our foundation for online advertising sales.

In our ecommerce business, WWEShop, we continue to improve our sales operation. During the quarter we strengthened our buy rates by about 20% as traffic to the WWEShop website increased by 35%. Our continuing success in monetizing the website's high level of traffic reflects our careful management of targeted online promotion. These promotions are actively monitored and modified to optimize sales. As a result, ecommerce revenue in the quarter grew by 54% on a year-over-year basis.

As our ecommerce grew during the quarter, we strengthened the foundation of our wireless or mobile platform. In March, we completed an important distribution agreement with AT&T Mobile. Under this deal, we will make ring tones, graphics and video content available to AT&T's domestic cellular phone customers. With 60 million subscribers in the U.S., the new partnership establishes a sizeable customer base for our mobile products.

Regarding our online advertising business, we have continued to increase our sales force, opening a sales office in Chicago and expanding our direct sales staff in New York and Los Angeles. Over the past few months, this new organization has made strides in selling unique and supported content. As a result, we have been able to attract new advertisers, such as Colgate, and have begun building a sales pipeline.

As I said on our last earnings call, we are working hard to realize the value of our digital media businesses. Overall, I believe our ability to execute has improved and will continue to strengthen over the coming quarters.

To address the operational challenges in our PAY-PER-VIEW business, which Linda described, we recently announced that all of our future PAY-PER-VIEW events will be tri-branded. This means that our PAY-PER-VIEW events will feature talent from all of our brands, RAW, SmackDown and ECW, rather than from just one brand. This change in strategy reflects what we have seen over the past two years; namely, that our PAY-PER-VIEW have higher buy rates when more than one WWE brand is involved.

In addition, we have decided to remove the December ECW PAY-PER-VIEW event titled December to Dismember from our 2007 schedule. The change is intended to address the tight scheduling of events as we believe the occurrence of five events within three months is simply too much.

Overall, we remain excited about the positive momentum and growth opportunities across our business. Our comprehensive strategy review is underway and we are done -- when we are done refining our global vision, we'll share our sustainable multi-year growth rates with you.

At this point, I will turn it over to Frank Serpe to review our financial performance for the quarter. Frank?

Thank you, Mike, and good morning, everyone.

Our revenue for the quarter of $107 million, which represents a solid 13% increase over last year, was led by a strong performance of our licensing business. Our top line growth also reflected increases from our live events, ecommerce, television distribution, home video, and WWE 24/7 businesses. This growth was somewhat mitigated by increases in our production costs for both television and other media. Page five our presentation lists revenue and contribution by business unit as compared to the prior year.

Revenues from our live events, including merchandise sold at these events, increased by $2 million or 9%, led by an increase in the average attendance at our North America events, which improved by 15% year-over-year to 6,900 fans per event. The current quarter included 8 events in international territories, as compared to 11 events in the first quarter of last year.

The current period events were all staged in emerging markets for the Company, including New Zealand, Guatemala and Mexico. These events had fixed guaranteed revenue. The prior year had a comparable level of event in emerging markets, but also included events in more established markets of Australia and Japan. Overall profit contribution for live events increased by $1.3 million, or 22% over last year.

Turning to our PAY-PER-VIEW business, revenue for the quarter declined 8% from the first quarter of last year. Revenue reflected a 14% domestic price increase of $5 per event. That was more than offset by the decrease in buys. Buys for the three events in the quarter declined 12% from the prior year. As Mike mentioned, the Company is focused on addressing operational challenges in this business.

In our consumer product segments, our licensing business delivered an impressive 55%, or $77.3 million in revenue. This significant revenue growth reflected higher sales for our video game and toy products. Unit sales for our SmackDown vs. Raw 2007 video game title increased by 46% to nearly 4 million units for the first quarter. Sales benefited from the launch of this game on the Xbox 360 platform. The quarter also reflected strong sales of our toy products which, led by the domestic sales of our action figures account for approximately 25% of the year-over-year growth in licensing revenue.

On video revenue, it increased 8% to over $13 million, reflecting the shipment of 1.1 million DVD units in the quarter; nearly 60% above the prior year period. Sales of titles from our catalog increased approximately 185,000 units to total 450,000 units for the quarter. Approximately half of the revenue growth in home video came from international licensing agreements, particularly revenue from Germany and Japan.

During the period, home video's profit margin was impacted by higher production expenses and sell-through rates that were somewhat lower than last year's unusually high levels.

Our digital media section, comprised of online advertising, ecommerce and wireless businesses, delivered revenue growth of approximately 43% compared to the year-ago period. Revenues from the sale of merchandise on our internet-based storefront, WWEShop, increased about $1.4 million or 54% compared to the prior year. This mirrors a 64% increase in the number of orders processed to 82,000 in the current year.

Revenue from other digital media businesses increased 30% to $3 million, reflecting growth primarily from our wireless business. Our online advertising revenue was essentially flat to the prior year.

For the quarter, we averaged 17.5 million unique visitors, and 43 million video streams per month as compared to 14 million unique visitors and 54 million video streams per month in the first quarter of last year.

Also included in Other on page five of our presentation is our WWE 24/7 Video on Demand business, which increased in revenue to approximately $1 million as compared to $300,000 in the prior year. The increase is attributable to subscriber growth, primarily at Comcast, as well as the recent launch of the service with Cablevision and Chart. WWE 24/7 is now available in over 75% of the VOD-enabled domestic cable homes.

Our profit contribution margin for the quarter was 36%, on a par with the margin in the first quarter of last year. Operating income increased 44% to $20.6 million, reflecting a 32% increase in gross profit and essentially flat SG&A expenses. As a result of the Company's operating -- as a result, the Company's operating margin increased 19% from 15%, demonstrating the operating leverage inside the Company.

Page 14 of our presentation compares year-over-year results and provides a summary of changes by business. It should be noted that our effective tax rate decreased from last year. This decrease reflects greater tax exempt income that resulted in the lower 35% effective tax rate as compared to 45% in the prior year. The prior year also reflected reserves for state and local tax examination. In the future, we anticipate an effective tax rate of approximately 35%.

Page 15 of our presentation contains our balance sheet, which remains strong. On March 31st, we held $255 million in cash and short-term investments, with virtually no debt. To date, we have recorded $54 million in future film production assets. And as we have stated in past calls, these assets will be amortized in accordance with generally accepted accounting principles on a pro-rata basis as revenues are recognized.

As a reminder, we do not anticipate realizing any revenues from our feature films until the latter half of this year.

For the quarter we generated free cash flow of $23 million as compared to $15 million in the prior year. The primary -- the increase primarily reflects the improvement in our operating results, as well as favorable changes in working capital and tax positions. As mentioned in our last call, the Company has targeted 2007 EBITDA growth of approximately 12%, with a payout of management bonuses. This increase assumes continuing investments to support our strategic initiatives.

That concludes that portion of our call, and I will now turn it back to Michael.

Thanks, Frank. To insist our investors with the change in the Company's fiscal year, we have posted various information as a reference on our website. Both the summary of our historical financial results, as well as our expanded monthly operating metrics can be found at our corporate website, corporate.wwe.com.

Operator, we're ready now. Please open the line for questions.

Thank you. (OPERATOR INSTRUCTIONS.) Michael Kelman of Susquehanna Financial Group.

Thanks. I have two questions. First one's on margins and the second's on the film division. First with margins, it looks like Pay-Per-View margins actually ran a little bit higher this quarter, despite the fact that the buy rates were down a little bit.

And second, with the TV rights fees, they look like -- they seem to run a little bit lower and I wanted to see if that's reflective of any potential investment in upgrading to HD, or should we start to see that in the CapEx line at some point?

And then the second question will be on the film division. I wanted to see if there's any other pictures or projects that you have in the pipeline now that you've complete -- that you've now theatrically released all three of your films that were in the can?

And then maybe you could talk a little bit about the revenue recognition, particularly since you're through the -- at least part of the home video window of the first two films.

First with the margin, I'll take that one. As far as the margin on Pay-Per-Views are concerned, the primary reason for that slight increase is we actually spent slightly less this year on advertising and promoting those events. That's the major reason for the change in the margin.

The second -- I apologize. I didn't catch the second part of that question?

It was with regards to TV rights fees. It looks like the margins there are running a little bit on the lower side. And I wanted to see if that is reflective of any investment in upgrading to HD?

The margins are running a little bit lower there really reflects the introduction of ECW and the production costs involved in getting that show on the air. So, it is not HD yet. HD will be forthcoming probably the early part of 2008.

Okay. And that will probably be more in a CapEx line as opposed to operating margins?

That'll be -- exactly right.

Okay. Great.

Alan Gould with Bleichroeder.

Thank you. On the video side, I noticed you said that there were a lower buy rate of the videos this quarter versus a year ago. We've seen what some of the other large entertainment companies, less video rentals, more going to video on demand. I know you're now breaking out 24/7. But, are you starting to see some of that shift, where more interest in video on a video on demand basis or on a download basis?

I believe what we're really seeing is that the last quarter we had several significant titles that way outperformed what we had anticipated. And this quarter, while we still had solid revenue and solid titles, we probably are now selling through more at what would be the industry norm. So, I think it isn't so much that we've deteriorated, if you will, we've just come down off an exceptional quarter that's going to be hard to duplicate.

Okay. And then a question for Linda. Linda, does the results on The Condemned give you a little bit of pause here? And does it change or make you rethink the strategy on the film side of it?

Well, we kind of were disappointed with the first weekend out on The Condemned. We had hoped for a higher return for that particular weekend. And we're looking at the reasons why that might be. We had great confidence in the film. We do think that it's probably going to do pretty good at the video level. And also, we're holding theaters for the second week out.

So, we're still looking at it. But, it is disappointing. We think that there is -- the R rating had an effect potentially on WWE audience, given the strength of our teen market, that maybe there weren't as many of the WWE viewers to go. But, our analysis and research on that will continue.

Basically, our strategy relative to films is, overall, we believe sound from the beginning of how we structured our film business, which was as you might recall from other phone calls, being the absolute focus on building a film industry based on theatrical releases, also based on direct to video, utilizing our talents and other films.

So, we've done -- we've utilized some of our superstars in other films that we didn't produce and now we have released three theatrical movies which we felt was very important for us in this theme of getting into the film business, of establishing a film studio and brand. And it was a way for us to focus our attention on our superstars and to expand the brand just outside of our television, all of which I think we have done well. John Cena is really a globally recognized star, as are -- I think Steve Austin also will be in The Condemned with some different distribution.

However, having completed now this particular traunch of our film division, we are now able to move more into the direct to video production. And that will be the focus that will be coming up next. We have a couple of scripts that have been looking at for that, have gone down to rewrite positions on those particular scripts.

And so, I think our philosophy relative to our films still is strong and holding because we are moving in the direction that we thought we were from the beginning. We've put out three films. We're an independent film company. We've kept the budgets low. Overall, these three movies will make money, or at very worst break even, and we think that's an incredible way to invest in a new division, especially in the film division.

So, we think that philosophy and our program for films is strong. And now, we will focus again on direct to video business, and we don't have another theatrical production at this particular point. However, our film office will continue to receive scripts. We will continue to look at projects. And if we feel that one is really right for theatrical distribution, we will proceed to develop it, etc.

We have looked at our overall film business in a couple of other ways as well. I think we referenced on the last call that we were investigating the potential of sharing the load of debt for the film production, and we have moved in that direction. Michael Sileck, our COO, has had conversations already relative to that. And we also are in negotiations with a major studio. I won't reveal that at this time because I'd rather for the negotiations to be finalized. But, negotiations with a major studio for distribution on a first flip basis.

So, we think we have all the components still steady and ready for our film development business. We're conservative. We protect the downside costs on these films. We're not looking to release a ton of projects. We're going to be very thoughtful in the way we do it. But, I think you will see an increase in the direct to video business for our films.

Okay. If I can just ask one final thing. When you see how strong the SmackDown vs. Raw video title was, can you give us any sort of an update on the Jakks lawsuit, Jakks/THQ lawsuit?

It continues to be slow moving, which is frustrating for us. However, this week the two components of the case, one the [Homer Valen] toy, the other was our licensing agent at the time, were sentenced in court here in Connecticut, both of them receiving both a prison term and fine -- not fines, but a compulsion order for restitution.

So, we felt that there was -- clearly that action is movement in the case. The case still seems to be held up primarily in the court in New York. It's been about 2.5 years or more since that case was filed. It seems that progress is very slow on that.

In the meantime, while I think that there are some opportunities that we do give up because of the lawsuit ongoing, our business does continue to be strong with THQ and Jakks because we both are performing under the terms of the contract.

So, there's not been a lot of movement in the cases except that we have now filed in Connecticut for what we believe was a breach of the contract from Jakks/THQ Group and we've now amended that to include a couple of the complaints that we had filed in New York with the hope that it will get attention.

And we do already have a court date established in Connecticut, which will be in October of '08. So, the discovery process now has been advanced and those things will be moving along. And we hope that the action in Connecticut now will spur the case along in New York, especially with the findings and the please that have come already from two of the people heavily involved.

[Jim Schwartz] with [Harvey Partners].

Hi. On paper you do -- the 1.2 million buys, does that translate into around 24 or 25 million of revs roughly?

About 26.

Okay. Great. And then in licensing, video games still roughly 40% to 45% of the total?

Approximately. Somewhere in that area.

Okay. And then just sort of bit picture. What are your guys' European sort of the Eastern European opportunity that you've spoken about before, just curious what the progress is there, or what the thoughts are?

We look at -- Europe is a very interesting place for us. We just got -- we just wrapped up a very successful tour there that hit many of the Western European countries that we do very well in, including the UK, in Italy and Germany. We seem to be seeing a resurgence in German at the moment, which is very encouraging. We've upgrading our television there, as we've told you in the past, and that's starting to bear fruit for us.

As we continue to sort of look eastward, we are looking at specific countries there, including Poland, and looking at -- even further into Russia. But, those will be -- those are interesting markets to break into and you want to be very thoughtful as you enter into them. So, we're doing our leg work now. We have a specific executive assigned to that. And you'll be hearing from that as we further develop our strategy.

But, the overall -- from an international front, and particularly in Europe, we feel very good about the progress we're making there.

James Clement with Sidoti and Company.

Good morning. Of the remaining international events for the year, do you know approximately how many are structured as buyout deals?

We're trying to find that for you. It's not -- it's not jumping out at--.

Yes, we've got it.

Well, I guess another -- let me ask -- another way of sort of asking the question is, as you look at 2007 as a whole versus 2006, how many developmental new markets are you going to be performing in this year versus last? Like, what's the increase roughly?

Would have been (inaudible) five or so?

Yes. We're doing more Mexico this year.

Yes. We've been developing Mexico as an important market for us and that's moving along well for us. Some of the things -- Singapore and Bangkok in terms of our Asian markets are developing for us. And as I've -- Belgium continues to be an important one for us and is developing. And then as we've said Mexico. We've had good success in Mexico and we're going to try to continue to capitalize on that.

Can you talk a little bit about some of the markets that you entered maybe a year or two or three years ago? After a couple of years have gone by, how has merchandise been moving in those countries? Are you getting web orders from those countries? Is there any trend that you can sort of talk about, about how once you visit a country then what happens to the rest of your business derived from there?

Yes. It's interesting. The markets, particularly -- let's say the Caribbean, which has been an area that we've tried in the past. And the result of that has been limited, frankly. We go in there and we will do some good shows and generate interest. But, the residual effect from that has not shown up at this point.

Japan is a market that we've had mixed success with in the recent -- in recent history, and one that, from a -- particularly from a digital standpoint and from a merchant -- and hopefully then from a merchandising standpoint, we'll be able to develop.

And as I mentioned before, if you take a look at the -- our home video business, it has grown dramatically. A large portion of that reflects international distribution that we do on a licensing basis. And that is expanding as we expand both our TV presence and our touring presence in these countries.

Okay, thank. That's very helpful. Thank you.

[Dan Kilmery] with UBS.

Hi, guys. Congratulations.

Thanks, Dan.

Could you give me some color on the toy figure license and how long is the duration on that? When it's potentially subject to renegotiation?

The toy license expires at the end of 2009. And we are -- we enjoy a good -- we're enjoying good sales with our action figures now in the marketplace. The international sales of those have increased as well.

But, we are planning, as any good business would, if we did not even have a contractual dispute with Jakks or THQ. Clearly, the time is now to start putting feelers into the marketplace for other bids on that license and how it would work. So, we are in the process of doing that.

Okay, terrific. And then, Linda, I'm sorry -- I apologize for doing this, but could you again explain. You mentioned that a court date was established in October of '08 in the state of Connecticut. What specifically is that related to?

That's related to the break of contract provision that we filed against Jakks/THQ, whereby they had a distribution right, but they turned it into a licensing right, in Japan primarily. Anyone else speak up if I'm not describing this as well as it should be.

Non-authorized.

It was a non-authorized sub-license which they were not allowed to do, which we therefore felt to some measure cut into the revenue that we would receive since were receiving a percentage then on a license deal which they had determined instead of one that we had licensed directly.

So, it's -- that was the principle case that we filed in Connecticut. And then, we brought in a couple of the components from the federal case in New York relative to the bribery scheme. It was the two individuals who did plead and were sentenced this week.

So, I think that there will be -- there could be potentially other amendments to this case, but we'll have to see as we go forward.

Okay. Terrific. And then one last question, sort of along the lines of I think what Alan was asking earlier. In terms of your feature film business, would you ever consider looking at the business a little differently and possibly licensing or -- your stars to the major studies to use in their films, and almost acting as a talent agency where you could have economic benefit to that but allow the major studios to actually take your stars and put them in bigger budget films to the benefit of you and the shareholders?

Well, we have done that already and would consider doing that again. In fact, it's not -- just recently -- while it's not a major role, one of our new talents, Kahli will be in the new Get Smart film. Stone Cold Steve Austin was in the last -- is it 100 yards?

Longest Yard.

Longest Yard -- thank you -- movie. And then the Rock, of course, was a preeminent figure for us in Scorpion King. So, that is clearly something that we are always willing to consider when the script is right. And we've said that that was one of the tenets of our film business. To the extent that we would do that exclusively, we don't think that's the best development for our film division, but it is certainly one way we would look at it.

We are investing in our own IP. When we get ready to do a film, we're not renting, if you will, a superstar from another studio or -- for instance, Zoe's certainly popular. Brad Pitt would not be something that we would do. We're investing in our own property so that, when our films are done, our content is built, we have now broadened the expansion and resell side of our own base for these stars. And we think that's a good move to do, provided we follow the rules that we have of keeping the budgets low, having our distribution deals in place prior to production, and all of the conservative measures that we have taken in our production.

Got it. Thank you very much.

Thank you.

[Frank Bisque] with Pilot.

Yes, hi. Good morning. Nice quarter. I just had a question on the home video segment. Could you just explain -- it looks like you sold over a million DVDs and it looks like your DVD price is $16. So, if you multiply that you get something like $17 million and you report $13 million. Can you just clarify that?

Well, I think some of it -- it's a bit of a mix. There were certain DVDs that we've done on a specialized basis for, let's say a Wal-Mart or something like that, where the actual selling price is somewhat less than our average selling price. On a special promotion, Wal-Mart I think did a pallet campaign for us. And those might have gone in at a -- as I recall, went in at a slightly lower than normal selling price.

So, this effective DVD price has nothing to do -- what does that mean, that $16? Is that -- I'm not sure what that means then.

It's the gross price.

That's the gross price.

Okay.

Yes. And our numbers are always adjusted for returns, reserves as well.

Right. Okay. Thank you.

Michael Kelman with Susquehanna Financial.

Thanks. Most of my questions have been answered regarding the film division, but I did have one follow-up, just to try and understand. You made a comment that you would expect the film revenue to start flowing through in the latter part of the year.

Could you help us understand mechanically how that should work and sort of where you are with regards to recouping the P&A and distribution costs to distributors so we have a good idea, particularly given that the home video window of the first two films have already begun.

Well, the home video numbers that we have are much -- have been reported to us on See No Evil. We have yet to get our first report on The Marine that actually contained a DVD. But, the basic flow through would be that on See No Evil we are getting close to the point to where they should have recouped their P&A and we should start seeing some distributions.

From The Marine, I think that might take us a little longer because, as I say, we have yet to see a report that included the DVDs. Once we see that, I think we'd have a better handle on exactly when we would anticipate seeing revenues on that.

Is that reported on a lag basis then?

Yes. They report every quarter or every--?

Every quarter.

Every quarter, yes. So, by the time the DVDs get out and they get reported back to the studio, and the studio then in turn reports back to us, you wind up with effectively a six month lag.

It appears that we have no further questions at this time.

Thank you very much. It's been a very wonderful call. If you have any question, please call Michael Weitz, the Investor Relations VP. My phone number is 203-352-8642. Thank you very much.