TKO Group Holdings Inc (TKO) 2007 Q4 法說會逐字稿

Good day and welcome to today's conference. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. Please note this call may be recorded.

And now, I'd like to turn the call over to Mr. Weitz. Sir, you may begin.

Thank you. And good morning, everyone. Welcome to World Wrestling Entertainment's 2007 fourth quarter and full year 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 we'll 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 fourth quarter in 2007 and will follow this review with a Q&A session.

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

Thanks, Michael. And thanks, everyone, for joining us on the call today. We completed our year with an outstanding financial performance in the fourth quarter. The quarter was highlighted by substantial growth in revenue and earnings with increases coming from each of our business segments. This performance reflects in part the successful expansion of live events and consumer products in international markets. Our performance was especially strong in the UK and Australia where we had very successful tours in the quarter and expanded our toy and apparel licensing. By capitalizing on opportunities outside the United States, we were able to generate a 25% increase in international revenue and profit.

For the full year, our international business accounted for nearly 40% of our profit growth. These results underscored the potential of our international strategy. During the second half of the year, we positioned the company to take even greater advantage of such opportunities by establishing a new international organization. This organization is currently focused on driving growth in Europe, Asia-Pacific, and our emerging markets, China and Latin America.

During the fourth quarter in keeping with our international strategy, we opened offices in Sydney, Australia and Tokyo, Japan, in addition to our office in Shanghai, China which opened in July. We strengthened our global television platform, launching distribution on a major national network in Brazil and renewing key agreements in Italy, Australia, Korea, Chile, and Argentina. Based on the remarkable ratings success of our program in China, our current broadcast in both Guangdong and Guangzhou areas has been extended from one to two hours per week. By strengthening our distribution in new markets, we intend to attract new consumers for our products and to enhance our long-term potential.

As we develop our audience around the world, we are also focused on the quality of our broadcast. During this past year, we laid the groundwork for producing our television and Pay-Per-View programs in high definition and initiated HD broadcasting in January of this year. WWE's investment in this cutting edge technology enables us to maintain our high standard of production quality and to meet the evolving standards in the media entertainment industry. It also enables us to present our characters and in-ring drama with greater clarity. And as a result, we believe it will heighten the experience of our fans.

Before turning the call over to Mike, I would like to mention our announcement last week concerning Smackdown. After a successful decade of airing Smackdown on both UPN and The CW, World Wrestling Entertainment and The CW have agreed to conclude our partnership. Since The CW's exclusive negotiating period expired on January 31, 2008, we've been contacted by and have been in negotiations with other networks. WWE Smackdown will continue to air on The CW until the conclusion of the 2007-2008 broadcast season. We are confident that given the strength of this brand, it will find a suitable home and continue to air beyond that period.

Now, I'll turn the call over to Mike, who will provide some additional perspective on our results and further update you on our strategic initiatives.

Thank you, Linda. I would like to start by sharing my perspective on the company's progress. For the quarter, we posted 23% top-line growth, reflecting increases from each of our business units. That growth resulted in record revenue of $485 million for the full year. Our record performance in a weakening economic environment demonstrates the strength of our business model. We believe the diversity and entertainment value of our product offering reduces our exposure to declines in consumer spending.

In 2007, we completed a comprehensive review of our businesses. Based on that review, we targeted average annual revenue growth of 10% and average annual earnings growth of 12% over the 2006 to 2011 period. The quarter marked important progress toward these financial objectives. As Linda described, we increased revenue and earnings from outside the US.

We also improved our Pay-Per-View trend and made adjustments to strengthen our online advertising. We believe we have now stabilized our Pay-Per-View buy rates after incurring a 12% decline in buys during the first half of the year. During the fourth quarter, our buy rates were essentially flat to the comparable events last year. We attribute this to an intensified focus on our storyline content. As a reminder, we have reduced the number of events in our 2008 schedule to 14, eliminating the January New Year's Revolution event. By concentrating on our creative and promotional efforts, we believe we can increase the level of our Pay-Per-View buys over time.

During the past year, we continued to advance our digital media initiatives. And in the fourth quarter, we saw continued growth from both the distribution of mobile content and online advertising. Regarding our mobile business, to date we have completed distribution agreements with AT&T Mobile, BSkyB, and other carriers. As a result, we have created a cellular footprint that reaches well over 100 million potential customers around the world. On online advertising increased throughout the year as we continue to attract new advertisers such as Colgate and more recently Yahoo to our site.

During the fourth quarter, however, both our online advertising and e-commerce businesses were impacted by a 6% decline in unique visitors. To address this challenge we are broadening and evolving our content. This is consistent with our ongoing practice of monitoring and responding to changes in online behavior. As a result, we expect to maintain WWE's position as the pre-eminent wrestling-related destination for our fans.

Looking ahead, we're also targeting higher sales of premium advertising inventory. We expect to succeed in this area by packaging our internet ad buys with promotions in other WWE products and with media assets of our key partners. Overall, we are excited by WWE's opportunities and the steps we are taking to ensure our progress. We have proven in 2007 that with prudent investment and proper execution we can grow revenue significantly. We look forward to continuing to execute our strategy in 2008 and beyond.

For 2008, we expect our financial performance to be consistent with our long-term objectives as previously stated. You should expect increased expenses associated with our international expansion and our implementation of high-definition broadcasting. By managing the company for the long term and by paying an attractive dividend, we are determined to increase returns and create value for our shareholders.

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

Thank you, Mike. Good morning, everyone. Revenue for the quarter was approximately $133 million representing a 23% increase over the fourth quarter last year. Our top-line growth reflects a solid performance by all of our business segments. Gross profit increased by 32%, reflecting the growth in revenue.

Page five of our presentation lists revenue and profit contribution by business unit as compared to the prior year. Revenue from live events including merchandise sales at these events increased by $6.7 million or 23%, led by our international events which benefited from a 19% increase in the average ticket price to over $83. Our North American events also contributed to revenue growth. Excluding the impact of our ECW events, North American events yielded a 12% year-over-year increase in average ticket price to nearly $41 and a 16% rise in the average attendance to 7,100 fans per event.

Our home video business realized a 41% increase in revenue to nearly $20 million. During the quarter, we released 12 new titles compared to eight in the prior year quarter. As a result, new title release shipped nearly 1.1 million units in the quarter compared to about half a million units in the prior year quarter. Releases in the quarter were led by titles featuring John Cena and Shawn Michaels, which shipped about 201,000 and 178,000 units, respectively. For the full year, we released 31 new titles as compared 30 in the prior year. Total shipments reached just over 4 million units, which is flat to the prior year. During the quarter, home video's profit margin increased to 57% from 44%, reflecting a lower duplication cost and the impact of certain promotional sales programs in the prior year quarter.

Our licensing revenue increased by 49% to 3.1 million over the prior year quarter, led by strong sales of our toy, apparel, and novelty products. The majority of this growth came from domestic sales of our action figures and t-shirts. International licensing of these products increased by more than 60% and accounted for $1.3 million of the year-over-year growth.

Our digital media segment comprised of online advertising, e-commerce, and mobile business delivered combined revenue growth of 8% compared to the [year-ago] quarter. Growth in this segment was driven primarily by our mobile business and the impact of our agreement with AT&T Mobile. In addition, the quarter benefited from a 9% increase in online advertising as compared to the fourth quarter of last year.

Revenues from our magazine and publishing increased by $2.7 million or 82%, reflecting higher newsstand, subscription, and advertising sales. In addition, we published one additional special in the quarter as compared to the prior year. As you may recall in July of 2006, we combined our existing publications, SmackDown! and Raw into a single men's lifestyle magazine titled "WWE Magazine." Since then, circulation has increased 50% to 300,000 copies per issue.

Turning to our Pay-Per-View business, revenues for the quarter increased 6% for the fourth quarter of last year. Revenue reflected higher proportion of domestic buy which generated higher revenue for buy than international buys. Domestic markets represent a 63% of total buys in the current quarter as compared to only 58% of total buys in the prior year quarter.

During the quarter, WWE Films recognized $3.1 million predominantly from the continued sales of "See No Evil" DVD in our domestic markets. Our WWE Films recorded break-even results as revenue growths was offset by the amortization of capitalized film production costs and the write-off of certain development costs.

Overall, profit contribution margin increased to 42% compared to 39% in the fourth quarter of last year. Margin expansion was led by our live events, home video, and magazine publishing businesses.

For the fourth quarter, we reported operating income of $24.7 million, representing a year-over-year increase of 41%. SG&A expenses increased to 28.8% million compared $22.3 million in the fourth quarter last year primarily due to increased staff-related costs and legal and professional fees.

In addition, the fourth quarter of last year reflected favorable adjustments in legal and professional fees and the recovery of a previously written-off bad debt. These two items totaled approximately $2.8 million. It should be noted that the effective tax rate in the current quarter was 23% as compared to 26% in the prior year.

Page 14 of our presentation compares quarter-over-quarter results and provides a summary of changes by business. Turning to the full year, revenue grew 17%, reflecting increases from across our business. Operating income increased 4% to $68.4 million and EBITDA increased 5% to $77.8 million. These results reflect the growth in revenue partially offset by increased SG&A costs. SG&A expenses increased 14%, primarily due to higher staff-related costs as well as increases in legal and professional fees. The current year financial results were also impacted by a $15.7 million impairment charge for our featured film "The Condemned." Excluding this impairment charge, EBITDA would have increased by 26%.

Page 15 of our presentation contains our balance sheet which remains strong. On December 31st, we held $266 million in cash and short-term investments with virtually no debt.

Page 19 shows our free cash flow. During the quarter, we generated $14.9 million of free cash flow resulting in nearly $18 million of free cash flow for the full year. A strong cash generation for the year reflects improved cash flow from our operation and lower spending on featured film production partially offset by increased capital expenditures. Capital spending reached $18 million primarily due to our investment in high-definition broadcast equipment. Despite this investment, our free cash flow of $80 million was approximately three times level in the prior year.

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

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Rich Ingrassia with Roth Capital Partners. Please go ahead. Your line is open.

Thanks. Good morning, everyone.

Good morning.

Obviously, the weak retail holiday had little to no impact. But you touched on the consumer spending point. So, maybe Linda or Mike, if you could give us a little perspective, perhaps drawing on your experience with the company in 2001 -- say, from 2001 to 2003, what expectations do you have going into what might be a lightyear for discretionary consumer spending?

You know, we have weathered the storms before. Certainly, nothing makes our company recession proof. What we have found as we looked through our numbers and how we have performed in prior years, we did weather those storms well because I think of the diversity of our revenues across all of our platforms of live events, Pay-Per-View, consumer goods, et cetera. So, we're not just so heavily tied to the retail marketplace. I think also our international growth and the company's perspective on that will help us weather this storm very well. And so far, we're strong in the mix.

Okay. And what can you say a little more about what The CW was thinking by walking away from a renewal here?

You know, it's -- I really don't know. We've had a really good relationship with CW and UPN. I really can't speak for them as to what they're thinking was. I think they are gearing their programming towards a particular demographic. So, it was just really a mutual decision and we've been very pleased with the response that we have had once that announcement was made. We've had lots of contact and so we're in the [throes] of good negotiations which we're very pleased at this point.

What was CW maybe more sensitive to pricing, given ratings and maybe expectations there for 2008?

I can tell you, they really didn't go into so much of reasoning. We did have -- we had negotiated when this deal went into place in particular option. They elected not to pick up the option, and did talk to them about the economics of their entire network. So, I would have to leave that up to them to respond to.

Okay. Thank you.

Thank you. Our next question will come from Ali Mogharabi with B. Riley & Company. Please go ahead.

Thanks. Quick question regarding the live events. What is the -- can you give us a little bit more detail? What's the reason behind the higher average ticket prices as a favorable exchange rate play, [I pardon that]?

You know, a lot of the higher ticket prices, some of it was impacted internationally, and the exchange rates were favorable from that standpoint. But also probably even more impactful was the -- our ability to sell out many of our domestic events, particularly around the -- in the December time period and around the holiday, the Christmas holiday. And as a result of that, we were able to generate higher ticket prices. But, you know, other overall demand has been very favorable for our live events. And I think that's reflected in the numbers.

Got you. So, the exchange rate didn't have that much of an impact?

It had about a 10 to 15% impact.

Okay. Not much. And then finally, I saw some growth in Pay-Per-View. Do you see that continuing -- I mean, have we seen a turnaround in this?

You know, it's -- we like the trend as far. You know. We were not pleased with that business in the first half of the year. We did not -- we weren't pleased with the trend. But as we've been discussing, we've really tried to focus our energies and make each one of those Pay-Per-View events very special, both from a creative standpoint and from a marketing standpoint. And I think the back half of the year, certainly, in this last -- in this fourth quarter, it appears as though we have turned that corner. So, we are optimistic. And you know, looking ahead into 2008, early results for the Rumble are good. You know, it's still very preliminary at this point. But hopefully, that trend will continue.

Yes. Actually, I was out there. It was soldout. And the crowd was pretty enthusiastic. On the online advertising side, I saw some weakness as you said due to lower unique visitors. Could you give us a more detail what you, guys, are doing to improve this? And also I mean, looking at the overall market, there is uncertainty about the growth rate of the online ad market. Are you seeing any advertisers being more hesitant these days?

You know, it is a multi -- it's a complex issue. On the one hand from a traffic standpoint, we are trying to address that by evolving our content and enhancing the content. The nice thing about the web is you can -- it's very measurable. And you can tell on your sight where the activity is and where people don't care as much about the content. So, we really try to take that into account and adjust the content on an ongoing basis, which is what we're doing. And the early results from that are positive.

And then, the other thing is that you try to balance the user experience in terms of -- they're looking at the content and balance that with monetization of content, right? So, you want to make it as good of a viewing experience as possible for the consumer while at the same time getting paid from the advertiser. So, it's a balance act that we continue to work with and work on.

In terms of the overall health of the online advertising market, I would say that indications are -- that it's probably not quite strong as it had been in the past year. Although those are -- we only really look at it from our pool of advertisers which is more narrow, frankly, than the overall universe for online advertising. So, I think from an overall standpoint, the traffic issues and in terms of the improving and enhancing the content is really where we're focused.

Got you. Thanks. Good quarter, guys.

Thank you.

Thank you. Our next question will come from Jamie Clement with Sidoti & Company. Please go ahead. Your line is open.

Good morning.

Hi, Jamie.

Mike, can you remind us of where we are on the high-def infrastructure spend? Is that something that hit your CapEx in a meaningful way in the fourth quarter? How much more of that should we see?

Yes, the overall spend for the high-def conversion is $20 million. And we incurred about $10 million of that in the fourth quarter, Jamie.

Okay.

We have about another $10 million to go here in 2008.

Okay. Linda, if I may ask, internationally, you've always been able to get much higher ticket prices for your live events. You know, Pay-Per-View in certain areas where your product is available. I mean, it seems like the market isn't where the U.S. domestic market is there. Are there any signs that your customers abroad might soon be willing to pay more for the right to watch your Pay-Per-View shows at all?

[You know], it's a good trend. But here's what happened, just as a reminder. Before Pay-Per-View technology was so well-distributed [particularly] in the UK where we have such a strong market, our Pay-Per-Views were specials that were on the cable networks. The distributor paid more to us carry them. But the consumer did not spend any more to see our Pay-Per-View events.

As Pay-Per-View technology then expanded and as those events morphed from being a special that was paid for by the distributor to being paid for by the consumer, there was a little education necessary in doing that, as well as not charging as higher price in those markets as we're able to have domestically because it really was a transition for -- they now had to pay for something that they had been getting for free. So, I think what we're seeing now is more maturation in the marketplace and more of a willingness to spend a bit more. But it's still a transition period.

Okay.

You know, for [full] Pay-Per-View. But it's -- you know, it's evolving more around the world. But it's still more of an education and transition period.

Okay. Fair enough. And Linda, the last question. You all obviously generated a whole heck of a lot of free cash flow in 2007. You've got obviously a lot of cash and investment [sitting] on the balance sheet. With respect to a potential future dividend increase or share repurchases or anything like that. I mean, are you watching like the election, are you watching the legislative environment before making a decision on that? Or is there something that the Board would be willing to consider sooner rather than later?

You know, each quarter when we have our board meeting we discuss our dividend. And so, I assume it will always be a topic for discussion. When we raised our dividend last time, where it was with the thought that we would grow into funding that dividend with our cash flow, and we're there. We thank that we've made good progress. We're doing what we wanted to do. And we actually did it earlier.

Uh-huh.

So certainly, those options are always open for consideration and always discussed.

Okay. Fair enough. Thank you very much for your time.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question will come from Alan Gould with Natixis. Please go ahead.

Thank you. I've got a few questions. First, I know your Raw license fees are substantially higher than what you've been receiving for Smackdown. Do you anticipate in your new negotiation that you'll receive higher license fees for Smackdown than you're receiving in the past from CW? And does it make a difference if you're on a broadcast versus a cable network?

Well, first of all, the Smackdown is on broadcast and Raw is on the cable network. So --

Right.

You know, we -- there was clearly a difference in the two feeds. I suspect and certainly I'm hopeful and that is what we are negotiating toward our higher fees for new carriage of the program and early indication - negotiations would lend that direction without my being -- my speaking too much this morning. So, we're pleased about that. I think it depends on the broadcast network that you're on, and the -- you know, their rate per hour of broadcasting is what they'll pay. So, we'll just have to see how that pans out. But we're very optimistic.

Okay. And your North American attendance, it had gone up every quarter for seems like three years. It was flat in the September quarter, and bounced back up nicely 16% or so this quarter. Should we extrapolate any trends from that? The popularity of the sport, the storyline, the competition versus mixed martial arts, anything?

Well, the one thing we would say and we've been saying it consistently now for well over two years is that the trend in the live event business is very good as you point out. And also we think that that's good indication for the overall health of the brand. As we've said, it's not inexpensive to go to our shows and see our superstars in person. And particularly when you go to these shows, you see a lot of families there who were taking their kids, which is really a neat experience.

But it really does underscore I think the underlying strengths of the brand. and then, you see that as a base business, and you look at the strength of our licensing businesses which I think furthers that the direction of the business. So look it, every quarter, it seems like we get the questions. Is this trend? Is this going to continue? And I will say that there's a strength of the brand that will continue. And then I also think we're getting smarter internally in terms of how we execute these live events. We're very -- we're more selective in terms of where we play and how often we play. And I think all of that effort is also paying off, as well. I think it's a multi kind of pronged approach, and I think it's heading in the right direction.

Okay. And Frank made a comment that there was a write-off of some development costs in the film business. Can you update us on your strategy in the feature film area?

Yes. In terms of the strategy as we've said that we want to have a multi kind of tiered approach, predominantly focusing on direct-to-video products and projects. And we are in the throes of a couple of those projects, and then also balanced with a theatrical of which we will be begin principal photography very soon. So, we're trying to balance the project. There will -- it is not assumed -- it is assumed that there will not be any releases in 2008. And the work we're doing will all be released in 2009. And then, the only other thing to point out is that in at least one of these projects we are doing a co-financing deal with the studio. And I think, that's one more example of how we want to try to spread the risk and share the risk in these endeavors. Linda, anything else?

No. It was really good to point out about sharing the risk a bit. I think that is something we continue to look at to do.

So, Mike, if the old ones were to say roughly $20 million negative, should I assume that you might have a $10 million exposure on a new one.

Well, the theatrical -- again, there's one that will be going into production. That will be in the $20 million range in terms of the negative cost.

And that's not a co-finance deal.

And that's not a co-finance deal. The direct-to-video projects of which one of -- at least one of which is a co-finance deal. Those are in the $4 million to $5 million range in terms of production costs.

Okay. And any update on the JAKKS-THQ case?

Slowly. It's just moving slowly. Even though the Federal case was dismissed in New York, we were not precluded from refiling in State Court in Connecticut, which is the direction that we were taking anyway. And so, it's slow. It just slows our -- the charges still stand. We still feel confident about the case that we have presented, just as a long time coming. The wheels of justice have turned slowly relative to this case.

Okay. And my last question, you covered your free cash flow -- you covered the dividend in 2007. It benefited from lower film production. In 2008, it sounds like there's an extra $20 million of film production costs. I'm not sure what CapEx is going to be in 2008 versus 2007. But it sound like 2008 might be a little bit short of covering the dividend. Is that a fair assumption?

That is potentially a fair assumption. That's correct.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS) Meanwhile, we'll move to the side of Bobby Melnick with Terrier Partners. Please go ahead. Your line is open.

Could you discuss the viability of streaming Smackdown on wwe.com, please?

Hello, Bobby, how are you? In terms of, you know, we look at all different platforms in terms of how best to distribute our content. As you know, we have been putting considerable resources behind the content that is showing up on wwe.com and that will continue.

I think at this point, though, in terms of Smackdown, I think our first look is to have that on a television platform for the wide distribution that that is able to generate. I do think over time, it is not inconceivable that we could create a new piece of content if you will that could be exclusive to the web. That is not out of the realm at all. But I think currently as we think about Smackdown, I think our first choice is to have that on a television platform.

Operator, are there any more questions?

At this time, we have no further questions.

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. Thank you.

Thank you, this does conclude today's conference. You may disconnect at any time and have a great day.