TKO Group Holdings Inc (TKO) 2008 Q2 法說會逐字稿

Good day, and welcome to today's teleconference. Currently, all participants are in a listen-only mode. Later there will be an opportunity to ask questions during our Q&A session. At this time, I would like to turn the call over to Mr. Michael Weitz, Vice President of Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to World Wrestling Entertainment's second quarter 2008 earnings conference call. Joining me for today's discussion are Linda McMahon, our CEO, Michael Sileck, our COO, and George Barrios, 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 second quarter 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. Good morning, everyone. Let me start by sharing my perspective on the quarter. Overall, our second quarter results were highlighted by positive top line trends and strong profit growth from our international operations. To some degree, the impact of our creative marketing effort, the timing of WrestleMania and the recognition of a film impairment last year make it more difficult to discern these trends and the underlying vitality of our business.

What is important is that we continue to cultivate our global customer base. We managed growth in fundamental areas of our operations and strengthened our position for the future. In June, we carried out an innovative campaign, McMahon's Million Dollar Mania, to attract new viewers. For a period of three weeks, Mr. McMahon gave away a total of $1 million per week to loyal viewers watching Monday Night RAW. The $3 million sweepstakes, which was financed personally by the Chairman, Vince McMahon, exemplifies the commitment of our leadership and the creativity of our marketing efforts. Over the three-week period, the promotion increased RAW's total viewing audience by 25% to 5.8 million, and secured RAW's position as the top Monday night cable program among households, total viewers and various key male demographic categories. I should reemphasize that, while reported as part of our SG&A expense, the sweepstakes was actually financed by Vince McMahon and was reported as a non-cash charge to our second quarter results.

During the quarter, we also completed a new television distribution agreement, which extends our affiliation with Ten Sports in India and its parent company, Taj TV. The five-year agreement, which commences in 2010, poses economic advantages to WWE by providing higher license fees than our existing terms. Moreover, it provides an important platform for developing our audience in a region of the world which we believe has significant potential for growth.

Consistent with our goal of engaging fans at a younger age, we began publishing a kids' magazine in April and in July initiated the beta test of a new website, wwe.kids.com, dedicated to this audience. More recently, our domestic television partners- - USA, SCI-FI and CW Networks- - recognized the family-friendly nature of our programming and adjusted their ratings from PG13 to PG. Over the long term, we believe these initiatives will offer more advertising and sponsorship opportunities, while strengthening the loyalty of our fans.

A fundamental objective for the Company is to provide excellent returns to our shareholders. As we work towards that goal, we can do better in terms of bringing our top line growth to the bottom line. Although the rise in expenses broadly supports our revenue growth, we believe the relative faster growth in expenses is unacceptable. We are committing the Company to slowing the rate of growth in our cost structure. This will enable us to drive better near term results, while enhancing our strategic position.

I always like to be able to give kind of a broad strategic overview, but I like to be able to provide our listeners and our analysts with Mike Sileck, our Chief Financial Officer, and George Barrios, our CFO, to really walk through the different parameters of the different divisions of the Company and our performance. So, Mike, I'll turn it over to you, first.

Well, thank you, Linda. The second quarter of 2008 marked important progress in terms of our fundamental operating objectives. Our key operating metrics trended favorably, translating into significant increases in revenue and profits for our live events and home video businesses. More specifically, we increased revenue and profits from our international operations, maintained improved Pay-Per-View trends and continued to build the foundation for our digital media initiatives.

During the quarter, we capitalized on opportunities outside the U.S. and generated a 30% increase in international revenue and profits. This performance was led by successful live event tours in both the United Kingdom and Australia. In addition, the quarter benefited from the expansion of our video game licensing, particularly in Europe.

One particular area of success, which I would like to highlight, is the performance of our live event tours in Europe and Australia. Over time, we have worked to develop our global television platform with recent advances, particularly in Spain, France and India.

During the quarter, we supported this work with a step up in marketing and promotion, utilizing the power of our talent and personal appearances to stimulate consumer demand. We also worked to achieve certain logistical efficiencies in our touring plan. As a result, our European and Australian tours set regional records for attendance, revenue and profit. Combined, they attracted attendance of over 234,000 fans, generated nearly $20 million in revenue and produced gross profits of almost $6 million.

After establishing a new international organization last year, our second quarter results again underscore our potential to expand our business model and to drive growth in markets around the world.

The results of the quarter provide further evidence that we have stabilized demand for our Pay-Per-View programs. Pay-Per-View buy rates increased 6% in the second quarter and 4% for the first half of 2008 versus the comparable events in the prior year. This contrasts favorably to the 12% decline incurred during the first half of 2007.

Furthermore, on a year-to-date basis, Pay-Per-View revenue has increased 6%, as strong current year performance has more than offset the absence of New Year's Revolution in our 2008 schedule. By concentrating on our storyline content and promotional efforts, we have achieved overall growth and revenue within six months of streamlining our 2008 calendar.

Turning to our digital media initiative, we saw a year-over-year decline in revenue, as a rise in e-commerce was offset by lower sales of premium services, mobile content and online advertising. The performance of our webcasts and other online services was adversely impacted by the timing of WrestleMania and the benefit of some compelling content in the prior year.

As a reminder, the explosive story line involving the Mr. McMahon character ignited viewer interest and resulted in internet traffic, which was 28% higher than the current quarter.

On a sequential basis, compared to the first quarter, internet traffic, as measured by page views, has increased by 9%. This reflects our efforts to broaden and involve our content. At the onset of the quarter, we launched our first official community site, WWEFanNation. In addition, we revamped the wwe.com site to offer more video content and to provide easier navigation.

We believe these efforts are working. To realize greater returns as our traffic grows, we have recruited an experienced sales executive and better aligned both our sales and e-commerce organizations. These steps enhance our product offerings and our ability to realize the full value of our digital media initiatives.

Overall, for the first six months of the year, we achieved 19% revenue growth, with increases from nearly all of our business units. Our top line performance in a weakening economic environment provides reassurance that we can maintain a path towards our long term financial objectives. This means average annual revenue growth of 10% and average annual earnings growth of 12% over the 2006 through 2011 period.

To date, we have made investments across the Company which support our revenue growth. We recognize, however, that achieving our financial goals requires additional effort to manage our expenses. This includes reassessing our spending across the entire company, being smarter about how we conduct our current business activities and making difficult decisions regarding how we prioritize investments.

At this point, I would like to turn the call over to George Barrios to review our financial performance for the quarter. George?

Thanks, Mike. For the second quarter, we reported a 44% increase in profit contribution and a 6% decline in revenue. These results, however, were impacted by the timing of WrestleMania, as well as the recognition of a film impairment in the prior year.

Excluding the impact of these items, revenue increased 22% and profit contribution increased 24%. We estimate that less than 2% of this revenue growth was attributable to changes in currency exchange rates.

In terms of our profits, strong growth in our live events business was partially offset by increases in television production costs, which were incurred primarily to produce our programs in high definition.

During the quarter, our profit growth was also offset by a non-cash marketing charge and increases in staff, legal and talent-related costs. These costs were incurred to promote our brands, to establish our infrastructure, as well as to protect both our talent and intellectual property. Spending in these areas served to strengthen our content creation, marketing and distribution capabilities, which are critical pillars of our business.

While pleased with our top line growth in a tough economic context, there is work to be done in terms of our expenses. In the short term, this means slowing the rate of growth and headcount in other expenses. Looking further ahead, this means managing our expenses to reflect a more appropriate proportion to the revenue we generate.

For a more detailed review of our performance in the quarter, let's turn to Page 5 of our presentation, which lists the revenue and profit contributions by business unit as compared to the prior year.

Starting with our live events, including merchandise sales at these events, revenue increased by $5 million, or 14%. The strong performance of our international events more than offset the timing of WrestleMania in the prior year.

Average attendance at our international events grew by 52% year-over-year to 9,100 fans per event. Our 20-event European tour attracted paid attendance of over 170,000 fans, generated $14.4 million in revenue and became the highest grossing international tour in WWE history.

The quarter also benefitted from an expansion of international touring, with 31 international events, as compared to 26 last year. Our 7-event tour in Australia produced over $5 million in incremental revenue.

Live events held in North America attracted average paid attendance in line with the second quarter last year. However, excluding the impact of WrestleMania, average paid attendance increased 19% to 6,900.

As anticipated in our last earnings call, the timing of popular venues in the second quarter more than offset first quarter decline in attendance, excluding WrestleMania. On a year-to-date basis, attendance at our North American events has increased approximately 1% to 7,000. Overall, with a focus on realizing increased efficiencies in our touring, our live events achieved year-to-date increases in attendance, revenue and profitability.

Revenues from our Pay-Per-View business declined $21.9 million, or 55%, due entirely to the timing of our WrestleMania event, which added $24.6 million in revenue to the second quarter of last year.

Excluding the impact of WrestleMania, Pay-Per-View revenue increased 18%, driven in part by a 6% increase in buys for comparable events.

As mentioned in previous calls, the Company has focused intensely on addressing the operational challenges to our core Pay-Per-View business. As a reminder, we reduced the number of events in our 2008 schedule to 14, eliminating the January New Year's Revolution event. The change was based on our belief that streamlining the Pay-Per-View schedule would allow us to concentrate our creative and promotional efforts and drive increased buys over time.

Year-to-date Pay-Per-View revenue has increased 6%, as improved current year trends have more than offset the absence of New Year's Revolution, validating our strategy.

Revenues from the distribution of our television programming increased by 3%, or nearly $1 million, primarily due to increased domestic and international rights fees. These increases, however, were offset by incremental costs, primarily to produce and broadcast our programs in high definition.

In our consumer products segment, our home video business delivered an impressive 25%, or a $3.7 million increase in revenue. This revenue growth reflects the shipment of over 1.3 million DVD units in the quarter, 25% above the prior year period.

Shipments of titles from our catalogue increased by about 137,000 units to 310,000 units for the quarter. Approximately 15% of the overall home video revenue growth came from international licensing agreements, particularly from Australia, the UK and Germany.

Our licensing revenue increased by 17%, or $1.3 million, over the prior year quarter, led by higher sales of our video games. Unit sales of our SmackDown versus RAW 2008 video game title increased by 75% to over 700,000 units for the second quarter. Sales benefitted from the launch of this game on the PS3 Wii and Nintendo DS platforms. The addition of these game platforms aided our international expansion.

Sales in European markets, such as Spain, counted for the majority of the year-over-year growth in video game and licensing revenue.

Our digital media segment, comprised of online advertising, ecommerce and wireless businesses, generated $7.9 million in revenue, representing a 4% decline from the prior year quarter.

Revenue from our premium services, such as Pay-Per-View webcasts and online advertising, were adversely impacted by the timing of WrestleMania and the extraordinary peak in traffic that occurred in the prior year.

Traffic to our wwe.com website declined 22% to an average of 15.8 million unique visitors per month. Despite the decline in traffic, ecommerce orders increased 4% to approximately 71,000 orders and the average revenue per order increased 4% to about $53.00, reflecting improved product selection, placement and promotion.

During the quarter, WWE Studios recognized revenue of $2.6 million and profit of $2.2 million, predominantly from continued DVD sales associated with our portfolio of films.

In terms of our film slate, we completed production of both our direct-to-video project, Behind Enemy Lines - Columbia, and our feature film, 12 Rounds. These will be distributed by our film partner, Fox, beginning in 2009. As of quarter end, we had $33 million in film assets.

Our overall profit contribution margin reached 41%, which was in line with the second quarter last year, excluding the prior year impact of WrestleMania and the film impairment. Improved margins from our domestic and international live event operations were offset by increases in our Pay-Per-View and television production costs. These incremental costs stemmed in part from our implementation of high definition programming.

SG&A expenses increased to $37.6 million, compared to $25 million in the second quarter last year, primarily due to marketing, staff related and legal costs, which I discussed earlier. In addition, the increase reflected additional costs for our Talent Wellness and development programs.

As a reminder, the current year includes a $3 million non-cash charge related to the marketing promotion, which was funded by our Chairman. In addition, the prior year benefitted from legal settlements totaling $0.9 million.

For the quarter, operating income increased 24% to $12 million. It should be noted that other expense recorded below operating income in the quarter included a revaluation of certain [warrants]. In aggregate, non-cash charges in the quarter that we've discussed today resulted in a reduction of $2.7 million to net income and $0.04 to EPS.

The effective tax rate in the current quarter was 40%, as compared to 37% in the prior year quarter. Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business.

Page 15 of the presentation contains our balance sheet, which remains strong. On June 30th, we held $218 million in cash and investments, with virtually no debt.

Page 19 shows our free cash flow. For the quarter, we generated a free cash flow deficit of $17.9 million, compared to positive free cash flow of $22.9 million in the second quarter last year. The change reflects our increased investment in feature films, as well as changes in our working capital.

Capital expenditures increased $4.7 million, primarily associated with our investment in high definition broadcast equipment.

We are currently in the planning stages for an expansion of our media production facility. Recognizing the rise in material costs since our planning began, zoning requirements and other factors, we have revised our preliminary estimate of the total project cost from a range of $65 million to $75 million to approximately $100 million. This capital expenditure will occur primarily over the 2009 through 2011 period.

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

Thank you, George. Jill, we're ready now. Please open the lines for questions.

Yes, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Richard Ingrassia with Roth Capital. Please go ahead.

Thanks. Morning, everybody.

Morning.

Linda, this is the third quarter in a row now you've moved opposite the weakness in overall U.S. consumer product spending. And in the Q2 numbers I really only see a slight decline in per capita event merchandise that conflicts there. Are you seeing any broader signs that indicate the change in your counter-cyclical strength?

Well, actually I'm going to defer to Mike on that one.

Richard, what we are seeing- - if I think I understand your question, is we are kind of going against the trend and the market for our services is increasing in a time of economic weakness. Yes, that- - that trend is one that has differentiated our brand over the years. And as we've said in past sort of recessionary times, this brand has held up very strong. We are more sensitive sort of to the popularity of our superstars and the popularity of our on-going story lines. That's more important over the long term than the economic sort of ups and downs.

That said, we are very- - we're keeping a very close eye on that trend. And I will say one thing, we are starting to see is some weakness in the United Kingdom. We talk a lot about what's going on here in the United States. We are starting to see some slowdown in the United Kingdom. Not anything of any severity, but we are being aware of that.

Hopefully that answers your question.

It does. Thanks. And I'll stay with you, if that's okay, for a few more questions. And then one for George.

Can you say a little more about the website launches and redesign? Not so much the physical changes, if you will, but how those changes might give you more variety and revenue units, for example, more sponsorships and beyond display advertising alone.

Absolutely. Really two things going on simultaneously. One is, as we've noted, we've launched what we are terming our WWEFanNation, which is really a community site to attract interest from all things wrestling. As we had stated before, we noticed that fans were going elsewhere to sort of get rumors and other news related to the world of wrestling. We want to capture all of that interest and all those eyeballs. And there will be requisite increase in traffic as a result of it, which will allow more ad impressions to be had.

Beyond that, however, we are working continuously to make more compelling video on the site. We've upgraded and will upgrade our video player to make the viewing of video on the site more compelling and also to increase the ability to insert ads in that experience. So, we hope to improve that overall viewing experience with this revamping of the site.

I'll tell you, if you look at the site today from where it was six months ago- - and for those of you that haven't done it, I urge you to please do so- - it's a vastly improved site. And we've been able to accomplish that while doing day-to-day business, sort of on an ongoing basis.

So, it's a combination of increased community attributes, while also embedding a longer form and more video content. We believe that will provide just more overall ad impressions, which should drive revenues.

But also we are working very hard to enhance our sponsorship opportunities around the site. One thing I'll call out was we did a Slim Jim promotion here within the last few weeks where there was a significant ad buy that we were able to reap, and that was a combination of assets on the website and also some integrations into our television shows. So, that's one example and one model, if you will, that we want to do more of. There's high margins in those sort of deals and we just- - we are improving our competency of delivering those sort of promotions.

Great. Thanks, Michael. And on broadcast, I know you don't give specific figures, but maybe in order of magnitude or some sense of the upside in the MyNetworkTV contract that begins this fall versus the old CW deal?

Yes, I mean, I won't give specifics, but on an annual basis it's millions of dollars incremental. And that drops pretty much to the bottom line.

Okay. Finally, then- - thanks, Michael. And for George, can you say a little more about cash inflows and outflows in the quarter? How much went into production assets? How much into HD enhancements? And can you detail a little bit more of the additional CapEx you just cited there over the next couple of years?

Sure. Let me take the first part of your question. The quarter free cash versus last year was- - there was a $40 million difference. Roughly half of it, or about $18 million, was for our film production. About $5 million was CapEx, primarily on high def. The rest was a balance of AR and tax payments. So, we had a settlement with the State of Connecticut in the quarter, around $6 million. And then our AR in the quarter, combination of the trailing 12 months revenue being higher than in the previous year, as well as the heavy mix of international revenue, which tends to be slower paying. Those are the components of that free cash flow variance.

Regarding the second question, which was the media center expansion, we have previously talked about it being a project between the range of $65 million and $75 million. We've increased that up to $100 million. And essentially, it's been the progression of our planning efforts around the project and the big drivers were material costs, which are roughly about 40% of the increase. The remainder were what I describe as deeper planning- - zoning requirements being a big driver of that. The way, because of it being a 24-7 facility, the kind of phasing of the project and what that means in terms of the need for additional space and so on to accommodate folks as we need to move them around, be able to do the build out. Those are the three primary drivers of the increase.

Okay. Thank you.

Yes.

Our next question comes from Arvind Bhatia with Sterne Agee.

Thank you. Good morning.

Good morning.

Morning.

The first question is on the film side of the business. Wonder if you could provide some color on how to think about it for the rest of the year. Should we look at the second quarter as a kind of a guide for the balance of the year?

And then, of the films that are in development right now, the impact of those, should we be thinking '09 or 2010? That's my first question on the film side.

And then, on the SG&A, I think, George, last quarter you guys were talking about first quarter, the $32 million run rate and sort of we had to think about the rest of the year. When we exclude the one-time $3.5 million, we are a little bit above that. Should we then look at that as a guide for the rest of the year for SG&A trends? Or, can you help us get some more color there?

Let me take your first question. On the film side, essentially we've got three things driving our film spend in the second half -- one, theatrical, a direct-to-video, and then the post-production on both Behind Enemy Lines - Columbia and 12 Rounds. If we keep to the current schedule that we have around all those three, the spend in the second half of the year will be somewhere between $15 million and $20 million. If the schedule gets pushed a little, some of that will get pushed into the first quarter of next year.

Regarding the SG&A question, the trend- - your reference- - or the question in answer to your reference in the first quarter on the $33 million, we still think that's the steady state run rate. We had two things essentially in the quarter from a comparability. We had the non-cash, McMahon's Millions, and then we also had about $1 million in legal settlements last year that, when you comp it, you've got to pull that out of the comp. So, X both of those we're around that $33 million run rate.

Okay. And what about the revenue side of the film business? How should we think about 2009? Is that going to look like 2007? Or, the revenue contribution comes later?

Yes. It will come later. There's essentially been a little bit of a lull or a dip in our production schedule, so we've got nothing that was distributed this year. So, we think that year over year that there'll be a little bit of a dip there.

Great. Thank you, guys.

Our next question comes from Jamie Clement with Sidoti. Please go ahead.

Good morning, Linda. Good morning, gentlemen.

Morning.

Morning.

Linda, let me ask you a question. You know, it seems like every international tour you do works out great. And obviously you have more infrastructure out there internationally this year than you had in prior years. From a logistical perspective, I mean, is there an opportunity down the road to maybe launch an additional brand so that you can actually do more shows out there? I mean, can you give us a sense of what your thinking is on that right now?

It is a plan down the road. I can't give you an exact time frame on that. I don't know if it's launching an additional brand or whether or not it will entail expansion of the brands that we have here to include local talent and/or superstars in those areas that we produce television locally, as opposed to more of our export product that we have at this particular time. But, clearly, that is an area of growth that we are looking at in our international development.

But I think there are just more and more opportunities, as we have these developing and emerging markets, to continue the formula and the plan that we have now, because that's working very successfully. We we are having more promotional tours, if you will, sending our superstars, like almost as advance men and women, prior to our events and creating a lot more local interest. So, I think that is really helping the scope of the growth internationally.

We have increased the number of international events that we have this year, not by much, because it is a supply and demand issue. And I think that really gets to your question of could there be greater supply, if we launch another brand? And I think that in the future, we will be able to expand, not only our television production outside the United States, getting sponsorships, partners, et cetera, but also having more tours. But it's not in the next two to three years that we see that.

Okay. But, Linda, from your perspective, I mean, you think the demand's there, right? I mean, from where I sit, it seems like you basically- - you're essentially batting a thousand every time you leave North America. I just want to make sure that that's the right way to think about this.

The demand is clearly there. I think partially- - not partially, but in great part to the way we manage that touring. We're careful not to burn out particular markets. We're careful not to go back to them too often.

Okay.

They play different sized buildings, different cities, and we really manage those tours very tightly. So, I think it's a credit to our touring and marketing group of how all of those events are spread out around the globe at this particular point. I mean, we see how successful the European tour was. We're doing that again later in the year, but again it's very, very measured and very calculated. So, we really keep a strong pulse on that marketplace.

So, it's a really, really good business, as long as we manage it well, continue the interest there, have our superstars make their appearances and their presence and don't burn it out. And I think we're doing that in a very successful way.

Thanks a lot for the extra color. I appreciate it.

You're welcome.

Our next question comes from Alan Gould with Natixis. Please go ahead.

Good morning. Thank you. I've got a few questions. First, George, can you give us a handle- - what do you think CapEx is going to look like in the second half of '08? Or are we pretty much done with the upgrade for high def?

Yes, pretty much done. We have a little bit more work to do there. The building won't start until into the next quarter, so we're looking in the $3 million to $5 million range.

$3 million to $5 million for the balance of- - for 08 in CapEx.

Yes.

Okay. Then, Linda, the cost cutting. I mean, the revenue line's been terrific. You're talking about cutting the costs. I'm just wondering where specifically, because you are spending money for good reasons on international, for digital. You're increasing the film side. Where is the cost cutting going to come from? And can you quantify how much it's going to be?

Well, I don't think we're prepared today and I'll let George speak to that, to give you an exact number. But, slowing our headcount costs, et cetera, that we're looking at going forward, we don't want to impact negatively the good growth that we have and that's a careful balance. George, you want to add?

I'm not sure I could add much to that, Linda. I think you hit on it.

Okay.

It's clearly there and we will- - those opportunities that are there for us to do, we clearly will do those. It's not where we want to be right now.

And the other thing I'd just point out, Alan, is that it's not a one quarter exercise. It's really taking a look at our overall cost structure, across the totality of our businesses, and figuring out how to develop better margins over the longer term. And that's really where we're going to put our energies. It's not a one quarter sort of fix, okay?

Okay. George, can you give us some idea of what you think-- you've spent, what, $13 million so far on film costs this year and you're going to spend another 15 to 20. So, call it 25 to 30 this year. Is that going to be an ongoing amount that you'll be investing in films each year under the current plan?

Alan, one of the things we're working on right now is both the overarching creative strategy for WWE Studios. As you know, that was just rebranded. And along with that kind of a business model to support that. So, the question you asked we'll be answering here in the next quarter or two.

Okay. My last question, can you give us some update on the litigation with Jakks and THQ. I saw they recently filed something in Connecticut as well.

What's happening now is actually that the legal process is speeding up somewhat, although, God knows, I've said many times before, it's been very, very slow. But we have now increased legal costs, because all the discovery now has kicked into gear. The judge has ruled a great deal of the discovery going forward. So, there is movement. That is why we do have some increased legal costs. We're hoping that movement is going to continue at a much more rapid pace at this particular time.

When do you think we'll have some final resolution on this case? I know it's been dragging on for years.

Well, our court date right now, believe it or not, is scheduled in 2010, which has been moved back, because of a request by the Jakks THQ group. But we're going to move forward with our discovery process and we'll see how that pans out.

Okay. Thank you.

Alan?

George, did you have something?

Yes, Alan, just in the- - when you laid out the premise of your question around the film spend, you said that- - I think you said 10 or 13 million year-to-date. The actual amount that we spent on films year-to-date is around $23 million.

I'm sorry. Okay. Thank you. So, it's 23 plus another 15 to 20- -

15 to 20- -

- - in the second half, unless some gets pushed back to '09.

That's right.

Okay.

I just would like to comment on films. We've talked about our deal that we have with Fox Atomic for some theatrical. But, also it's really good to note that what we are doing more and more with Fox is this co-venture, joint venture, that we have with them for Behind Enemy Lines 3, and that is a direct-to-video product. And the budget on that is about $5 million. So, each of us are putting in equally at 2.5. We want to duplicate that with another direct-to-video project with Marine 2 and we're also working with a couple of the other studios to look at their libraries and to have similar kinds of joint ventures. And we have some negotiation in process pretty close to closing relative to the joint venture aspect to direct-to-video. Same kind of budget, $2 million to $5 million. So, it's more product in the marketplace, less spend, less risk, but more return for us.

(OPERATOR INSTRUCTIONS) We'll take our next question from [Darryl Johnson] with Scottrade. Please go ahead.

Good morning. This is McMahon and Company?

Good morning.

Good morning.

Good morning.

Morning. Hi. It's a pleasure, a pleasure talking with you. I wish I had a chance to even come across you last week in DC at RAW. The questions I want to ask, basically. There was a point in time, being the fan that I have been, in regards to the story lines that were based around each match in your Pay-Per-Views. Do you have any kind- - with the addition of Freddie Prinze, Jr. on your team, is there a possibility to build more matches, or should I say more story lines, around the matches that are added to you Pay-Per-View, instead of just really the two big main events, like the Cena Batista, Edge Taker? It seems like they're the more- - more buildup around those two than the other matches.

Well, I'm clearly not the creative expert. And our creative writing team I know works diligently in developing all of the story lines. I think you've been able to see, with our ratings, with the growth that we've had in our Pay-Per-Views, with our merchandise that is selling against our particular characters, that all of the exploitation of our IP and our assets is moving in the direction that we would like to see.

Okay. Okay. Now, what is also your direction with the tag teams? Because, again, seeing the belts are on two of your top singles wrestlers, yet I definitely see a series of matches and growth with the tag teams, like Cryme Tyme and Priceless, and even in the SmackDown realm with Jesse and Festus, and Hawkins and Ryder, to name a few. Is there going to be a build up, once again, surrounding those tag teams, as well as the division as a whole?

You know, you're going to think this is a cop-out answer, but I absolutely don't know. I do not follow the story line creation on- - in fact, it's not even always told to me. So, that I have a surprise factor as well. But, I just ask you to keep watching. I think we're on a good course.

Cool. Cool. Cool. Just a couple more questions. What is the direction now with ECW? Is it even as extreme as it used to be? Or does the E even stand for Entertainment Championship Wrestling? I'm being facetious with that question of course, because myself, as well as probably millions of fans, who have been used to seeing what ECW used to be and, again, I do understand that to an extent that it can't be as violent as it used to be. But what is the direction you have with ECW to promote more numbers?

Well, and I'll answer this one last question on the creative and then I think I would move off of it, because I'm just not the expert in that. But I just would like to say that relative to all of our programming we have announced that our networks have looked at all of us now as PG.

Okay.

And so, all of our assets, from our websites to our television products to everything, are in that direction for more of a fan-friendly and sponsor approval aspects. So, that is clearly the direction of all of our programming and our assets. So, thank you for your interest.

Our next question comes from Alden Mahabir with Utendahl Capital. Please go ahead.

Good morning. Thanks for taking the question. I just had a question with respect to your international events. Wanted to know how many buyout deals you guys had this quarter and how we should think about the number of buyout deals you guys will do going forward. The reason for the question is, given the success you've had with your international events, I guess I would imagine that you guys might be missing out on a little bit of upside there?

We- - it's a great question- - we look at that very carefully. In the current quarter, we had four bought deals. And those were primarily around our events in Mexico. For the full year we are looking at a few more, frankly, four more fixed events from the prior year, so it's a slight increase. But, as we've stated before, we see that as a good way of breaking new markets and going into what may be riskier tours and it's a way of protecting the downside.

Obviously, as we continue to go back to markets, if they're good markets, then we would take on more of the risk for ourselves. So, we look at that- - it's a fair point- - that we do limit some of our upside when we go into these bought deals, but we also of course limit our downside as well. So, we keep a close eye on that. There were four in the quarter, though, just to be clear.

And just to clarify, Mike indicated that there were four in the remainder of the year. There actually are 13 in the remainder of the year, with four in the third quarter.

Okay, great. One last question. With respect to your tax rate, we saw it jump up a little bit this quarter. Is that what we should be looking forward to going forward?

No. In the first quarter- - if you remember, our effective tax rate that we plan at is around 36%. In the first quarter, we had a variety of discrete items that brought it down to 30. In the second quarter, we had discrete items going the other way that brought it up to 40. We're year to date, around 33%. I think for the full year, we'll be pretty close to our effective tax rate of around 36%.

Okay. Great.

We'll take our next question from Bobby Melnick with Terrier. Please go ahead.

I'd like to ask the CFO what your expected return is on this $100 million capital expenditure project, please?

It's a great question. The way we're viewing the project is one part supporting the- - both the current infrastructure that we have and all the products that we have, as well as the future growth. As I'm sure everyone on the call knows, our content is what drives all the revenue profitability across all our platforms, so we view a big part of the spend is to support that, both now and into the future.

In addition, there are plans within the Company looking at ways that we can add incremental revenue, through being able to do more things. But primarily, this is about supporting the current platforms and any new platforms that we develop in the future.

So, it sounds like most of this is maintenance CapEx?

It would be one way to describe it.

Well, it's- - I guess what I'm trying to do is I'm trying to reconcile that the Company is suggesting- - not suggesting- - the Company is stating that you're trying to reduce your overall costs. And I recognize the difference between a capital project and expenses through the income statement. But you've said in your releases and in this call multiple times that the costs are too high. And so it's a little disingenuous. And I'm trying to understand how it is that you could bump up a maintenance CapEx project by the equivalent of more than half a year's earnings. And apparently there's very little addressing of that, at least on this call, other than it sort of- - you said that there were incremental costs associated with raw materials. I'm just sort of puzzled, because the truth is, it seems like this company has been spending money like drunken sailors for a long period of time and it's certainly affecting the owners in terms of the valuation of the equity.

And so, to simply characterize this as a maintenance CapEx project for $100 million I think merits greater explanation, frankly, as a long term owner, a long term suffering owner, I should point out. So, I'd like to hear a little bit more elaboration. I suspect, if there are any remaining long term owners, they would, too.

Thank you, Bobby, it's Sileck. Let me take- - in terms of it being maintenance, we- - the current- - and I think you've been to the actual production facility- - the current facility that we are in has not been materially expanded in the last twenty years. And the state of that facility is one that the revenues to the Company have grown at least two to three-fold over that time period and that the amount of activities that go inside this company, both domestically and internationally, have grown significantly.

So, as a result, we need to expand that, the footprint in which we work, just because we have more activities going on and there are more employees. And in addition to that, we do have the build out the high definition that we have previously discussed.

So, you take all of those things into consideration, we feel as a management team, that, if we do not expand, significantly expand the media center, then our ability to continue to grow the revenues, of which, frankly, I think we've done a pretty darned good job over the last several years, that that rate of growth will need to continue. And we need the facility to be able to do that.

We are trying to make it as absolutely as efficient as possible, both from a use of energy standpoint and just overall long term operating efficiencies. So, we hope that over time that our cost structure will actually be helped by this significant capital expenditure.

It is difficult to put an exact IRR, or return on invested capital, on something like this when you are looking at this really being the supportive plank for all of our business activities. As George said, content is what we are, a content company. And this facility, frankly, long overdue, is one to- - will be supportive to all those activities.

So, that's really the way we look at it. I'm sorry you feel if we're being disingenuous. That is not the case at all. And I think we're really talking about how do we operate this company in the relative short and medium term from a cost structure standpoint? We're addressing that. But longer term, it- - we need to have the proper facilities to support all of our activities.

And I think if you look at the type of revenue streams that this company is in today versus where we were a few years ago, there's new revenue streams that we've introduced. And we're going to continue to introduce more and we're going to need the facility to support that.

Jill, I understand that's our last question.

Yes, sir. We 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 call me, Michael Weitz, at 203 352 8642. Thank you and good day.

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