TKO Group Holdings Inc (TKO) 2007 Q3 法說會逐字稿

Welcome to today's WWE teleconference entitled the third quarter 2007 earnings release. (OPERATOR INSTRUCTIONS) I will now turn the call over to Michael Weitz, Vice President of Investor Relations for World Wrestling Entertainment. Mr. Weitz, please go ahead.

Thank you, and good morning, everyone. Welcome to World Wrestling Entertainment's third quarter 2007 earnings conference call. Joining me for today's discussion are Linda McMahon, our CEO, 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 third quarter and will follow this review with a Q&A session.

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

Good morning everyone, and thank you, Michael.

During the third quarter, our businesses continued to perform well, delivering strong revenue growth. A period of adversity for the Company, we maintained the support of our fans and business partners, demonstrating the tremendous strength of our brand. Most importantly, for our shareholders we made progress on positioning the Company for the long term. Specifically, we completed a comprehensive review of our businesses and their growth potential. This review confirmed our belief that most significant opportunities lie in our international expansion, and in the distribution of our content to new and emerging platforms, including digital media. Mike will provide you with an update on our digital media initiative momentarily.

On the international front, until recently our business outside of North America has been supported by the presence of a small office in the UK. Since 2002, when that office opened, our international revenue has grown at an average annual rate of more than 20, reaching more than $100 million in the 2006 calendar year. While we are pleased with this growth, in our view it represents just a portion of what we can achieve.

During the quarter, we positioned the Company to take advantage of our international opportunities by establishing a new global organization. Led by Shane McMahon, this organization is focused on driving growth in Europe, Asia Pacific, and our emerging markets, especially China and Latin America.

To develop these areas, we have recently opened an office in Shanghai, China and announced plans to open offices in Sao Paulo, Brazil, Sydney, Australia, and Tokyo, Japan. We believe that by establishing a local presence in these key markets, we can more effectively expand our television distribution. This will enable us to contract new consumers, providing a platform for our live events, digital media, and consumer products. We're very pleased that we've already completed a new TV distribution deal in Brazil, and a consumer products licensing agreement covering Latin America.

Of course, as we develop our audience around the world, we will continue to focus on trading compelling content. By developing new markets and by finding new ways to distribute this content, we will accelerate our growth and build enduring value for our shareholders over the long term.

I will now turn the call over to Mike Sileck, who will provide some additional perspective on the quarter and update you on our strategic initiatives.

Thank you, Linda. I'd like to start by sharing my perspective on our Company's progress.

We posted a strong 16% increase in revenue, led by our films business, which benefited from the continuing sales of The Marine DVD. Relative to box office results, we expect The Marines DVD sales to continue to outpace the industry norm. Our success with this DVD demonstrates the power and potential of our television platform in promoting all of our businesses and product offerings.

Most importantly, the quarter marked significant progress on key initiatives, including strengthening our Pay-Per-View business and driving increasing revenue and earnings growth from digital media. As we discussed last quarter, Management has placed a high priority on improving the performance of our Pay-Per-View business. After a 12% decline in Pay-Per-View buys during the first half of the year, we intensified our focus on developing content with broad appeal. During the third quarter, we saw an uptick in buys from two events; Great American Bash and SummerSlam.

This suggests that the downward slide in Pay-Per-View buys may have stabilized. We believe that by creating more compelling story lines and by enhancing our marketing activities, we can increase the level of our Pay-Per-View buys over time.

To concentrate our creative and promotional efforts further, we are reducing the number of events in our 2008 schedule to 14, eliminating the January New Year's Revolution event.

Regarding our digital media initiatives, we achieved a 31% increase in revenue from the expansion of our online advertising sales, and the distribution of mobile content. The growth in our online advertising revenue benefited from a 6% increase in traffic, better inventory utilization, and the attraction of new advertisers, such as NASCAR, and the Starz Cable Network to our site.

Looking ahead, we will continue to drive traffic and Pay-Per-Views by creating unique web content that builds on our television story lines.

In our mobile business, we are continuing to expand our cellular footprint. In September, we completed a distribution agreement with BSKYB, which will make our video content available to their 50 million subscribers in the United Kingdom.

Our services are available to a growing subscriber base worldwide, and we remain optimistic about our ability to further monetize our mobile content.

As Linda mentioned, we completed a comprehensive review of our businesses, and evaluated WWE's most significant growth opportunities. Based on that review, we are targeting average annual revenue growth of 10%, and average annual earnings growth of 12% over the 2006 through 2011 period. We expect that growth will be led by international expansion, exploitation of our digital media opportunities, and the strengthening our core businesses, especially Pay-Per-View.

Overall, we are excited by WWE's opportunities and the steps we are taking to enhance our long-term revenue and earnings growth. The Company's business model remains strong, as evidenced by our generation of $65 million in free cash flow year-to-date.

As we look ahead, our priorities for utilizing our cash include funding our dividend, funding our production capabilities, and pursuing acquisitions that are an appropriate fit for the Company. We certainly believe we are on the right path.

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

Thank you, Mike. Revenue for the quarter was approximately $108 million, representing a 16% increase over the third quarter of last year. Our top line growth was lead by our film, live events, licensing, and digital media businesses.

Gross profit increased by 17% reflecting the growth in revenue.

Page five of our presentation lists the revenue and profit contribution by business unit as compared to the prior year.

During the quarter, WWE Films recognized revenue of $12.8 million, predominantly from the strong sales of The Marine DVD in domestic markets.

Capitalized film production costs of $10 million were amortized based on the revenue recorded, yielding approximately $2.8 million in profit.

As of quarter end, we had $29 million in feature film assets remaining on our balance sheet.

Revenue from live events, including merchandise sales at these events, increased $2.3 million, or 11%, led by an expansion in our international touring. This quarter's results included 15 international events, as compared to 8 events in the prior year, generating more than $3 million in additional revenue.

In the quarter, we staged 63 domestic events, as compared to 94 in the third quarter of last year. The prior year included 27 stand-alone ECW events. However, in the current quarter, our ECW events have been co-branded and included as part of our SmackDown events.

In the fourth quarter, our plan calls for 26 international events, bringing the total to 75 for the full year.

Our licensing revenue increased 31%, or $2.2 million over the prior year quarter, led by the strong sales of our apparel and toy products. The majority of this growth came from domestic sales of t-shirts and action figures.

Our digital media segment comprised of online advertising, e-commerce, and mobile businesses delivered a combined revenue growth of 31% compared to the year-ago quarter. Growth in this segment was driven primarily by our online advertising business, which increased revenue by 68% in the quarter.

Traffic to our wwe.com website increased 6% to an average of 17.2 million unique visitors per month. The quarter also saw an increase in our mobile business, due in part to the impact of our new agreement with AT&T Mobile.

Included in other, on Page 5 of our presentation is our WWE 24/7 Video-On-Demand business, whose revenue increased to $1.4 million, compared to $600,000 in the prior year. The increase is attributable to subscriber growth, primarily at Comcast, as well as the recent launch on Cablevision and Charter. WWE 24/7 is now available in more than 28 million -- available to -- 28 million subscribers, representing more than 75% of the VOD-enabled domestic cable subscribers.

Partially offsetting the growth in these areas was a 50% decline in home video revenue as compared to the prior year, reflecting changes in our third quarter slate of new releases. There were, in fact, no new titles released in the quarter other than our monthly Pay-Per-View events. As a result, DVD shipments declined 40% to 542,000 units. We expect to see a resumption of our year-over-year growth in the fourth quarter, as we return to a more typical pattern of releases. The current schedule anticipates 6 major releases in the fourth quarter, including Retrospectives featuring WWE superstars Rey Mysterio, John Cena, Shawn Michaels, and The Undertaker, as well as the Best of RAW compilation to celebrate the program's fifteenth anniversary.

During the period, home video's margin increased to 67% from 61%, benefiting from lower production and distribution costs.

Turning to our Pay-Per-View business, revenues for the quarter decreased 5% from the year-ago quarter. Revenues reflected an overall 7% decline in buys for three Pay-Per-View events that were produced in both the current and prior year quarters. Buy for Great American Bash and Summer Slam were essentially flat to prior year, with Unforgiven underperformed as compared to last year's event.

Our profit contribution margin was 41%, in line with the third quarter last year. Improved margins from live events, digital media, and licensing were offset by the impact of WWE Films, which generated a 22% margin. For the quarter, we reported operating income of $13.4 million, representing a year-over-year increase of 7%, as the increase in profit contribution was partially offset by higher SG&A expenses.

SSG&A expenses increased to $28.9 million compared to $23.7 million in the third quarter last year, primarily due to increased staff-related costs as well as higher legal and professional fees. These included approximately $2 million in fees related to the Chris Benoit tragedy and the review of our Talent Wellness Program.

Page 14 of our presentation compares year-over-year results, and provides a summary of changes by business. It should be noted that the effective tax rate in the current quarter was 40%, as compared to 35% in the prior year quarter. The increase reflects the impact of approximately $800,000 of realized investment losses, which were not deductible for tax purposes.

Page 15 of our presentation contains our balance sheet, which remains strong. On September 30, we held $269 million in cash in short-term investments, with virtually no debt.

For the current quarter, we generated free cash flow of $19 million compared to $10 million in the prior year. The improvement reflects increased cash flow from our operations, and reduced cash requirements associated with the Company's investment in Feature Films.

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

Thank you, Frank. Jerry, we're ready now; please open the lines for questions.

(OPERATOR INSTRUCTIONS). Rich Ingrassia, Roth Capital Partners.

Hello?

Good morning Rich.

Mike or maybe Linda, could you say a little bit more about the Internet business results and strategy? Obviously, AT&T made a nice contribution there, but straight ad revenues were also up pretty strong. Are you experiencing growth there in both CPMs and volumes, and to what extent do you think video advertising, or video sponsorship like what Castrol is doing will contribute there in '08?

Sure Rich; the, as we look at that business, we've been trying to be very thoughtful in terms of maximizing the strong inventory that we have, and what we found is that by creating content specific for the Internet that there's been a real interest from sponsorship and from advertisers wanting to be associated with that. And we also are just getting a lot smarter in terms of the flows of the traffic that we have. You know, certain days of the week are stronger than others, and we're now just able to take advantage of that and attract more advertisers who want to take advantage of those kinds of peaks in our traffic.

So we really overall, as we've been saying all along, we've been developing our sales, our professional sales staff, and they're starting to get some traction out there in the marketplace, and we're starting to hear from them what sort of content and programs that the advertisers are interested in . So it's an overall process that every day we get smarter and every day we attract better people into the organization to help drive that. And that will result in higher CPMs over time, and we are starting to see that.

So it's a long process for us. I think we are able to demonstrate that we are making progress along the way, and hopefully as we evolve to the rest of this year and into next year, we'll continue to see that sort of growth.

Mike and just to add a small piece to that too, with our folks that we have been hiring on and more expertise in our media, we are redesigning our site, which will also give us more opportunities for ad space. So I think you'll see some increase there as well.

I was going to follow on there; are you able to say that what percentage of available, of your avails are in Remnant or inventory or otherwise available to capitalize on; for example, the run to the site when you posted John Cena's OR pictures?

Well right now Remnants represent more than 50% of the revenue that we're generating, and I won't get any more specific than that. But certainly the goal over time is to be less reliant on Remnant, although they've been very good partners for us and we very much appreciate the business. Over time, we hope that --

(audio interrupted)

--increase to the profit line this quarter, and with the high percentage of international events that were structured as buyouts, is that a driving factor, because I actually thought that might have driven it the other way? So I know there are a lot of moving parts, but can you kind of help us understand why you saw the margin improvement there year-over-year.

Jamie I apologize; I missed the first part of that. If you could repeat it, I'd sure --.

Sure, you know basically your revenue in live events in venue merchandise was up about $2.3 million, and your profit was up $2.1 million, so you drove virtually all of the revenue increase to the profit line, and I was just, with some of the deals with the preponderance in the international deal structured as buyouts, I might have actually thought that it would have worked the other way. And I know you've got a lot of moving parts, but can you help us understand why the margin was so much better in that business year-over-year?

Yes, that's a good point. The margin -- we are, that is one area of the Company that we just have done a terrific job in getting smarter at, and being much more efficient in how we tour. And in terms of booking less expense, you know more efficient travel, in terms of production at the live events, etc., we've just gotten a lot more efficient at it.

So I think that's what you're seeing relative to that. Frank, anything else on that?

I can't think of anything else other than that. I mean we are getting more efficient. The fact that there are buyouts don't necessarily mean that they are less profitable from a percentage standpoint than the ones that are not, which is the other piece I would add.

Okay, but does it mean that they aren't necessarily more profitable either, that it's just on an event-by-event basis?

Exactly; it always boils out to where we are and what the deal is and why we're doing the deal in that particular locale.

Okay, all right; moving on, with respect to SG&A, and obviously there were some unfortunate circumstances during the quarter, are some of the costs that you absorbed with respect to assessing the Wellness Program, are those costs that are going to be with you going forward? Like did you have to beef things up a little bit?

We don't necessarily anticipate -- the costs incurred to review the plan are not necessarily going to be incurred going forward. The enhancements that we are making to the plan itself are actually pretty modest in terms of from a cost standpoint, important, but modest from a cost standpoint.

Okay.

The overall SG&A increase, about -- we kind of look at that as about half of it will probably be ongoing forward, which is primarily staff-related cost, but the rest of the increase kind of being a one-time in nature is our current view.

Okay fair enough; thank you very much for your time.

Marla Backer, Soleil.

Thank you; I have a question about WWE Films, and forgive me if I'm asking something you already addressed. I got on the call a couple of minutes late.

Can you talk a little bit now about what your strategy is going forward, because I think at one point in recent quarters, you have talked about possibly redirecting to focus more on direct to DVD and direct to TV, and in light of the pretty solid number that you posted this quarter, can you talk a little bit about what the strategy will be going forward and whether you view additional vehicles as potential ways to highlight John Cena again?

Sure Marla, thank you. Our strategy relative to Film has been pretty consistent with the thought, as we mentioned last quarter, that most of our focus now would be more on new direct to video related films. I think in our current slate, we have one theatrical that's kind of in pre-production; we're looking at three direct to videos of, one of which is supposed to be a partnership with one of the studios and we'll be more prepared to make that announcement I think shortly.

So our focus really is on direct to home video, we think or direct -- yes direct to home video rather than theatrical release. And we will continue to produce both as makes sense for us to do. We think there is still a great opportunity for us in creating that content as long as we control the costs, we make good deals, and we're mindful of our overall strategy in the film world.

Thank you, and getting back to something we were talking about a few moments ago, about the Wellness Program; I think that you had stated recently that as of November 1, any violations of the Wellness Program would be made public. And I'm wondering between the time of making that announcement and now, when you actually will start to go public, have there been any infractions in terms of the Wellness Program, and do you anticipate any changes now that your policy will change a little bit?

Well certainly had there been those kind of infractions that we would need to report, we would have because we said we would do that. I mean, is today the first?

Today is the first.

I have no announcements to make today. Of course, that will, it will always depend on when tests are administered. You don't get -- it's not like you test one day and you get results the next day because the process of testing takes sometimes more than two to three weeks just by virtue of volume and all of the technical aspects that the tests go thorough.

But our Wellness Program, we think is first-rate, it's top-notch, and we're very pleased with the results that we have had relative to all the programs that we've implemented. But let me add that just as we look at our men and women who are part of our Super Stars and our talent base as our primary assets, our goal is to protect their health and wellbeing and we will continue as we move forward, as we learn more about the Wellness Program, we added a cardio factor to it, we have the drug-testing factor in it. There may be other aspects that we'll add as well as we review it over time. So we expect it to be evolving but the cost pretty much, as Mike had stated earlier, we think the major costs of this are pretty much part of what we're reporting now.

Okay thank you.

Ali Migharabi;B. Riley & Company

Thanks, actually most of my questions have been answered. Just a quick one though; just want to make sure you are, you guys are now expecting year-over-year revenue growth in consumer products in Q4, is that correct? I thought I may have heard that on the call.

Yes we are; we're expecting home video to perform above obviously what it did this quarter because of the number of new releases that we're looking at; licensing has been strong through the year and we expect that to continue into the quarter, so the answer to that would definitely be yes.

So year-over-year, correct?

Yes.

Okay great, that's it thanks.

Bobby Melnick, Terrier Partners.

Page 17 was very uncharacteristic of the Company to step out and give a forward-looking view, but you've limited it to the income statement; you gave nothing about the balance sheet or the cash flow. Could you discuss what the likely balance sheet and cash flow implications would be for the sort of growth rates you're talking and whether international expansion, exploitation of visual media can strengthen any of the core business, especially at Pay-Per-View would require you to dip into the $270 million of cash you currently hold?

Hey Bobby, how you doing? Relative to the long-term view on our balance sheet, the cash needs sort of over the next couple of years for things that we've already discussed, such as including the build-out for high definition, which we're right in the midst of right now which will be completed in January, February of next year. That's $20 million over that period of time.

And then additionally, we are going to build out our production facility so that we can continue to produce all the fine content that we are producing, not just for television but for our multiple platforms. That will be over time, over next two to three years a total of about $60 million of spend, in that ballpark.

Beyond those -- and those are significant capital expenditures, obviously, for our Company -- but really positions us appropriately and well for the future. Beyond that, the business will continue to be extraordinarily cash generative as we've been able to demonstrate thus far this year. And you know, we would expect over time that the cash position, other than the, other than that for the capital expenditures that I just mentioned, that the cash position will continue to grow.

With the view being as we move along that as we have excess cash, we will look to over time hope to increase the dividend over that period of time. But again, it's all based on how well we're able to grow, but that's the current view Bobby. Hopefully that's helpful.

Is that it Bobby?

Yes.

Jerry let's take the next question.

Jamie Clement, Sidoti & Company.

Hi again, just a little bit of a follow up to that question; I mean is the dividend policy something that might be up for review next year? I mean since you doubled the dividend I guess it was in December of 2005, your cash balance is really only down about $9 million despite investing in the movies and despite returning an awful lot of money already to shareholders in the form of a generous dividend.

So you have the money there; is it something for you to re-evaluate in 2008?

Absolutely, and it's an issue that we always discuss with our Board in our Quarterly Meetings because we've had about a 6% o 6.5% return on our dividend, and as we do maintain those good cash balances, we definitely review that to return more value to our shareholders.

Great, thanks very much.

(OPERATOR INSTRUCTIONS).

Alan Gould, Natexis.

Thank you; I've got two questions. First, Mike could you give us a breakdown of how the CapEx look like they're going to be for '08 and '09, because it sounds like they'd be more front-end loaded in these five years. And a question for Linda, when you think of the dividend returning cash to shareholders, do you take into consideration the potential changes in the tax laws, and would you consider one-time dividend if you thought that the tax rates were going to be increasing?

Well, it is always top of mind to look at what the changes in laws are gong to be, and I think it would just be a little bit premature at this point to speculate on that. But we would discuss it with our Board, and we are open to that kind of reflection clearly.

And then Alan, relative to the cash, while it's still nothing finalized at t his point, we would look for, if the production facility is call it $60 million over time, we would anticipate about $20 million of that spend in the upcoming year '08 with the balance over '09 and '10. And then HD is going to be about for '08 about $10 million of the $20, we will have incurred approximately $10 million of it this year with the balance being in '08, okay?

Okay thanks a lot Mike, thank you Linda.

(OPERATOR INSTRUCTIONS).

And it looks like there are no further questions; I'll turn the call back over to your Mr. Weitz. Thank you.

Thank you Jerry, and 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 203/352-8642.

That concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.