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Operator
Good day.
Welcome to today's World Wrestling Entertainment fourth quarter 2008 earnings call.
All lines are now online in a listen-only mode.
Later there will be an opportunity ask questions during our question-and-answer session.
It is now my pleasure to turn the program over to Mr.
Michael Weitz, Vice President of Investor Relations for World Wrestling Entertainment.
- IR
Thank you, Katie.
Good morning to everyone.
Welcome to World Wrestling Entertainment's 2008 fourth quarter and full-year earnings conference call.
Joining me for today's discussion are Linda McMahon, our CEO, Donna Goldsmith, 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 managements estimates.
Actual results may differ due to numberous factors which are referenced on page one of the presentation.
These risks and uncertainties are discussed in more detail in our filings with the SEC.
Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website.
Today we will review our financial results for the fourth quarter and will follow this review with a Q&A session.
At this time, I would like to turn the call over to Linda.
- CEO
Thanks, Michael.
Good morning, everyone, and thank you for joining us today.
Before we officially begin, I would like to welcome Donna Goldsmith, our COO.
Donna has been with the Company a little over eight years at this point, and just [to mention] a really incredible job as our new COO.
If you haven't had an opportunity to speak with her or to meet her, please do take advantage of that.
Now, let's talk little bit about WWE.
Over the past year, we have seen a difficult economic environment which deteriorated in the latter half of the year and became especially harsh in the fourth quarter.
Despite these challenges, our results showed resilience through these tough conditions, generating revenue growth for the first three quarter and for the full year of 2008.
We recognize however, that WWE may face more challenging trends in the near term and circumstances require us to operate in a smarter, more efficient way.
As a result, we have intensified our efforts to improve the Company's operating efficiency, targeting and moving ahead with a $20 million reduction to our expense base.
In January, we announced a 10% reduction in staff which was part of our effort to fulfill this commitment.
This reduction in staff came from across all areas of WWE's operations and is expected to generate annual savings of approximately $8 million --excuse me, in compensation and benefit costs.
In addition, our review process identifies several other broad initiatives to improve efficiencies, including the restructuring of our marking efforts, visitor renegotiations and reductions in discretionary spends.
As part of the reorganization, we integrated our online and print advertising sales and streamlined our international operations.
We reduced our presence in Canada and Australia, closed our office in Brazil and centralized our overall international management team.
Additionally, while understanding the importance of expanding and upgrading our media center, we have decided to delay spending on this initiative until key economic conditions become more favorable.
As we address our cost structure, however, I do not want you to lose sight of our achievement in developing our long term growth opportunities.
During the fourth quarter, and throughout the year, we made significant progress advancing our mission, especially our international strategy.
Specifically, we continue to strengthen our television platform, both domestically and internationally.
These efforts help our brands further cultivate loyal audiences around the world.
During the fourth quarter, we announced a new television distribution agreement with WG in America.
Under this agreement, we will produce a new action packed television program, WWE Superstars.
The hour long weekly show will debut this April.
Through this deal, we can can now deliver 21 hours of programming per week in the US, including six hours of original first run broadcasts.
Similarly, in January, we announced a new agreement with EuroSport.
Under this agreement, we will produce two original shows, featuring highlights of our recent programs and historical footage of our WWE legends.
Through this partnership, we can now reach more than 100 million homes across Europe.
These new agreements compliment our achievements from earlier in the year, which extended our television distribution in India and Japan, and launched new distribution in Mexico, China, and eastern Europe.
Our recent agreements with Televisa and TV Azteca greatly improved distribution of our television programs throughout Mexico.
These agreements made our programs available to over 20 million TV homes in that country.
Since their debut, both our RAW and Smackdown programs have attracted audiences which are now approaching two million TV viewers.
As exemplified by our experience in Spain this year, strengthening our television platform not only builds an audience for our TV programs, but a consumer base for our other products.
Revenue grew 170% in that country this year and led our overall international revenue growth of 14% for the year.
With regard to the fourth quarter, dramatic changes in foreign currency exchange rates made it more difficult to discern the underlying health of our international live events and television businesses.
However, it is important to note that our European tour in November attracted over 171,000 fans and yielded the highest paid attendance for any single international tour in the history of WWE.
In addition to the impact of exchange rate, we believe several other factors also hindered our overall fourth quarter results.
These included the downdraft many the economy and declines in consumer spending.
After stabilizing our Pay-Per-View business in the first half of the year, Pay-Per-View declined 11% in the second half of the year including an 11% decline in the fourth quarter.
Similarly, after generating in excess of 24% growth over the previous two years, growth in consumer products dropped to 15% reflecting lower sales of our licensed toy products and apparel.
Looking ahead, our 2009 outlook is clouded by global recession and assumes adverse rates of exchange compared to 2008, as well as further declines in consumer spending.
In this context, we will continue to be vigilant in finding new ways to improve efficiency.
Bottom line, our unique content continues to hold an unrivaled, strong competitive position.
My long experience in this business gives me confidence that we will manage through these adverse conditions and emerge in a stronger position than ever before.
As we manage our business going forward, we will continue to focus on maintaining the high quality of our creative content and continue to -- continuing to expand our businesses profitably while protecting our cash flow.
By staying focused on this mission, we will be well positioned for continued and long term success.
Now I would like to turn the call over to George Barrios, our CFO, who will give you more in depth perspective on our quarter.
- CFO
Thank you.
Linda.
For the fourth quarter, our profit contribution slightly exceeded our prior year results, despite a 5% decline in revenue.
Increased profits from our licensing, television, and sales entertainment businesses more than offset declines in other areas of our operations.
Revenue profits reflected a $6.3 million benefit from the recognition of an advance, relating to a multiyear contract with our book publisher.
Offsetting this benefit however, several factors dampened our revenue and profit performance, including the impact of foreign exchange.
We estimate that changes in foreign currency exchange rates reduced fourth quarter revenue and profits by $4 million and $2 million respectively.
Additionally, we believe our fourth quarter results were also influenced by the economic climate affecting to some extent our live events, Pay-Per-View and consumer product businesses.
Operating income was $23.3 million compared to $24.7 million in the prior year reflecting an increase in depreciation, primarily associated with our investment in high definition broadcasting equipment.
For a more detailed review of our performance in the quarter, let's turn to page five 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 declined $6.5 million or 18% from the prior year led by lower revenue from our international events.
Our international performance reflected a higher proportion of buy out deals in the current quarter.
Five out of the 26 international events in the prior period were structured as buy out deals with guaranteed fix revenues, as compared to one buy out deal in the prior year quarter.
In addition, the average ticket price for our other events for which we sold tickets declined 16% to $70.09, largely due to the effect of foreign exchange rate.
These factors more than offset an approximate 5% increase in attendance at our international events to 8,300.
The performance of our North American events also contributed to the overall decline in live event revenue.
The average ticket prices at our North American events fell 6% to $38.18 in the quarter, while the average attendance at these events declined 3% to 6,900 fans on a year-over-year basis.
Turning to our Pay-Per-View business, revenues decreased 20% or $4 million from the fourth quarter of last year.
Revenue reflected in overall 11% decline in buys for the four comparable events that were produced in both the current and prior year.
A decline of Pay-Per-View revenue from international sources accounted for approximately one-third of the year-over-year drop in revenue.
Although international buyings comprised a larger share of total current period buys, 40% compared to 37% in the prior year quarter, revenue per buy declined in part due to the impact of foreign exchange.
Revenue from the distribution of our television programming increased by 16% or $3.8 million, primarily due to increased domestic and international rights fees.
These increases derived from an expansion of programming tied due to certain specials, contractual increases in our international licensing and the impact of a new agreement to broadcast SmackDown on My Network TV.
In our consumer products segment, our licensing revenue increased by 56% or $5.3 million over the prior year quarter.
The increase primarily reflected the recognition of an advance relating to a multiyear contract with our book publisher.
Excluding this revenue, licensing declined 11% or $1 million, led by lower domestic sales of toy products and apparel.
Revenue related to our video games was essentially flat on a year-over-year basis.
Our home video revenue declined 24% or $4.8 million, reflecting the timing of our release scheduled in the prior year.
The current quarter had seven new title releases, compared to 12 in the prior year quarter.
As a result, DVD shipments fell 35% to approximately 885,000 units, led by declines in the US, UK, and Australia.
It is important to note, however, that the average units shipped per new release declined only 8%, while the units shipped for other current year releases and catalog titles declined 14%.
In our magazine publishing business, we experienced lower newsstand sales and advertising revenue as well as fewer subscriptions per issue.
Profits declined on a year-over-year basis as the magazine also incurred increased paper and editorial costs.
In our digital media segment, revenue declined 8% to $10.9 million from the prior year, reflecting lower sales of online merchandise and internet advertising.
Revenue from e-commerce declined 7%, making a comparable decrease in average revenue per order to about $58.
The number of online merchandise orders remained essentially flat at 120,000 compared to the prior year.
Notably, the number of orders did not decline with the drop in internet traffic which fell 18% as measured by average monthly unique visitors for the respective quarterly periods.
The current quarter is also characterized by lower sales in online advertising, partially reflecting the ongoing transition of our internet ad sales organization.
However, we are seeing increased activity in our ad sales pipeline.
During the quarter, WWE Studios recognized revenue of $5 million, a profit of $2.6 million associated with our portfolio of films.
Those results compare favorably to the prior year quarter.
As of year end 2008, we had approximately $31.7 million in capitalized film production costs on our balance sheet, primarily associated with our upcoming theatrical release, 12 Rounds as well as our direct to video projects.
Regarding these direct to video initiatives, Behind Enemy Lines Columbia was released in late January and The Marine 2 is scheduled for release early next year.
Our overall profit contribution margin increased to 45% from 42% in the prior year, despite an approximate $2 million impact from changes in currency exchange rates.
The improved margins derived from the recognition of a book publishing advance described earlier and incremental profits from our filmed entertainment business.
For the quarter, SG&A expenses increased 2% to $29.4 million, due mainly to an increase in legal and professional fees.
Staff and marketing expenses were essentially flat on a year-over-year basis.
Our SG&A expense for the quarter represented the lowest level since the fourth quarter of last year.
You should note that the $20 million reduction to our 2009 expense base will result in both lower SG&A expenses and lower direct expenses that are captured in our profit contribution.
Net income declined to $13.6 million, compared to $21.5 million in the prior year quarter, reflecting increases in both nonoperating expenses and our provision for taxes as well as lower investment income.
It should be noted that other expense recorded below operating income in the quarter included an $800,000 charge associated with the revaluation of certain warrants.
The effective tax rate in the current quarter of 38% exceeded the 23% rate in the prior year quarter which was reduced by the recognition certain tax benefits.
Investment income declined with lower average investment balances and interest rates.
Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business.
For the full year, revenue grew 8%, reflecting increases from across our business.
Operating income increased 3% to $70.3 million.
And EBITDA increased 7% to $83.4 million.
These results reflect the growth in revenue, partially offset by increased SG&A costs.
SG&A expenses increased 20%, primarily due to increased staffing, legal and professional fees, as well as marketing costs.
As previously disclosed, the current year includes a $1.9 million charge for our film See No Evil, whereas the prior year period included a $15.7 million asset impairment for The Condemned.
Excluded these items, EBITDA was $85.3 million for the current period as compared to $93.5 million in the prior year period.
Changes in foreign currency exchange rates did not have a material impact on revenue or profit for the current 12-month period.
Page 15 of the presentation contains our balance sheet which remains strong.
On December 31st, we held nearly $200 million in cash and investments with virtually no debt.
Page 18 shows our free cash flow.
For the full year, we generated approximately $10 million of free cash flow, compared to nearly $80 million in the prior year.
This decline was driven by the timing of our featured film investment and by changes in working capital, including the timing of tax payments as well as by increased operating costs.
In addition, capital expenditures increased due to our media center project.
Looking ahead, we recognize that to manage the Company prudently, we need to improve our cash returns.
As we indicated, we have targeted annual expense savings of at least $20 million in 2009.
In addition, we have delayed our media center project as part of our broader effort to contain and reduce our capital expenditures.
Through increased efficiency, profitable product extension and careful management of our growth, we intend to deliver greater value to you, our shareholders.
That concludes this portion of our call.
And I will now turn it back over to Michael.
- IR
Thank you, George.
Katie, we're ready now.
Please open the line for questions.
Operator
Absolutely.
Thank you.
(Operator Instructions).
We will take our first question from the site of Richard Ingrassia of Roth Capital and Partners.
Please go ahead.
Your line is open.
- Analyst
Thanks.
Good morning, everybody.
- CEO
Morning.
- Analyst
I think this may be a question for Linda, but for anyone who wants it.
Obviously, I understand the reason for delaying the capital investment in the media center project, but what impact does that have, if any, on opportunities for growth -- for revenue growth beyond 2009?
- CEO
What we have done, it to a carefully manage the expansion of our media facility so that it doesn't have any impact on the products that we are delivering and getting to the marketplace.
We have leased some outside space.
We've expanded.
We've utilized and outsourced some production, but we're not taking away from the quality of our productions.
It is harder.
It's more difficult, but I think we are managing it well for the time being.
- Analyst
Okay.
And then two more if I can.
The WGN deal, the Superstars programming, was I think a pretty impressive expansion of the franchise.
It brought to mind the total exploitation opportunity, for lack of a better word.
Maybe on a scale of one to ten or if you don't want to use a number, maybe just some perspective.
Where do you think you are in terms of fully exploiting the WWE assets on domestic TV?
- CEO
We now have Monday night covered, Tuesday night covered with WGN, we will have Thursday night covered.
With My Network TV, we have Friday night covered and we produce our Pay-Per-View and it is about 12 to 14 a year on Sunday night.
We are really hitting really good nights of television.
I think that there is constant opportunity for WWE -- with always on our website.
We also have our 24/7 classics channel and our fan-based WWE universe seems to have an insatiable appetite for our product.
As long as we have demand and with we are continuing to produce quality products which we are, we will keep filling that pipeline.
- Analyst
Five days a week, we can count on at least two more.
- CEO
They're open.
- Analyst
And then just one last question for Donna.
Can you say a little about the status of the DVD distribution in relationship with [Genius].
- COO
Sure.
As you probably know, Genius had some hard times last year.
However having said that, GNPR which is an affiliate of [Quadrant] Management, has taken a 60% ownership of Genius.
That company is cash rich and they're looking at reorganizing Genius.
They are looking at better ways to do business, constantly looking at of course, the top line and bottom line.
And at the same time, our people that are working on the WW business continue to work on that business.
Our distribution remains strong at our key retailers; Wal-Mart, K-mart, Target and so on.
We are actually very happy with the changes there.
It has not made a difference in what we see at our business at retail.
- Analyst
Okay.
Thanks a lot.
- COO
Sure.
Operator
Thank you.
Our next question comes from the site of Arvind Bhatia of Sterne Agee.
Your line is open.
- Analyst
Thank you.
Good morning.
- IR
Morning.
- Analyst
First question is on the $20 million savings.
George, can you break that down a little bit more in terms of how much of that would be SG&A?
And profit contribution improvement, which category will see the most benefit?
And then my second question is I think you said, video game revenues were flattish.
I know that THQ had reported the World Wrestling game was trending -- it was down versus last year.
Is there just a lag there that we are looking at?
- CFO
I will take the second question first.
Our total video game revenues were flat.
THQ -- a number of your citings with TV THQ was specifically for Smackdown versus RAW '08.
There are other legacy titles that we have as well, but the mix [for both] for us were flat and they talked specifically about that one title.
- Analyst
Okay.
- CFO
I believe.
On the 20 million, I will give you a little more context and then drill down specifically into your questions.
The Company in total after the review of its operations actually found about $30 plus million worth of cost reduction initiatives that it executed on.
And they are completed.
We will see the benefit of those throughout the year.
The rest of the [cloth] sack had some inflationary increase.
For example, merit increases being one example that nets out to a net cash expense reduction of about $20 million.
Just to give you that context on the $20 million.
As I mentioned during the prepared remarks, that $20 million will cut across our SG&A and our -- the operating costs that show up in profit contribution.
In '08, we had about $440 million of total expenses so SG&A made up about 30% of that.
I would say that of the $20 million, we'll get a prorata percentage of those cuts against it.
The one nuance that I'll add to that is in the first quarter, as we've announced, we'll have a $2.5 million -- $2.7 million roughly restructuring charge in the quarter that I am not including in those numbers.
- Analyst
Okay.
And then on the pay Pay-Per-View trends, is there any sign there's an uptake or bottoming out?
Anything like that you can share with us?
- CFO
I will tell you at this point, I think Linda mentioned it in her remarks and I did as well.
The -- trying to predict the future, I am not sure is a winners game so we are going to keep focusing on those things that we can control.
And that is getting really interesting story lines on the show which if you have been watching them, you would see that.
Getting new product extensions like [GM] and then managing the cost and the rest of our cash, like delaying the media center.
Those are the things we can control.
As far as getting into predicting when we hit bottom in any particular business, I think right now that's a [fool's baron].
- Analyst
The last question is just a clarification on the -- I think it was $6.3 million advance payment.
Was that all margin or is there any cost associated with it?
- CFO
That was all margin.
- Analyst
Great.
Thank you, guys.
Good luck.
- CEO
Thank you.
Operator
Thank you.
We will take our next question from the site is of Jamie Clement of Sidoti.
Please go ahead.
Your line is open.
- Analyst
Good morning.
- CEO
Good morning.
- Analyst
George, a question and clarification just on the foreign currency.
I think you said it was about $4 million of revenue that hit and $2 million of profit.
Are you including the other expense increase or in fact, was there more?
- CFO
No, that was just in the profit contribution.
- Analyst
Okay.
All in, it was actually in excess of about $4 million.
Is that right?
- CFO
That would be fair.
- Analyst
Okay.
With respect to capital spending in 2009, and I apologize if you gave this number and I missed it.
But without significant media center spending, what is your budget look like for 2009?
- CFO
As you know, we don't give guidance.
What we have said in the past is that our run rate outside of the media center will be less than $10 million.
I will continue with that.
I think that number --
- Analyst
Okay.
That is very fair.
And just with respect to the home video business, what in your opinion are the right numbers to look at?
I remember last year, there were essentially no new titles in the third quarter and you had a bunch in the fourth quarter.
You have a slide in your presentation here, but if we want to think about apples -- your DVD business, apples to apple, what are the right numbers to consider there?
- CFO
I will give you two parts to that.
It is the way I am thinking about it.
The first part, outside of the real significant decline, you saw generally macro economic conditions in the fourth quarter.
- Analyst
Right.
- CFO
Would have been looking at the third and fourth quarter together for home video.
If you look at those, you would see $26 million in revenue in '08 versus $25.5 million in revenue in '07 for those two quarters which normalizes the number of releases.
Still that performance, even though it is a 2% increase in fairly tough economic times, was significantly below where we were the first half of the year.
You definitely see the trend line down.
- Analyst
Sure.
- CFO
And if you look at the fourth quarter -- normalized for the number of releases, you see that trend line steepening down.
- Analyst
Right.
- CFO
I would say -- and even though we have been resilient when compared to other DVD producers in the past and our numbers have been ticking up while the industry has been ticking down, I would say the trend line certainly accelerated in the fourth quarter.
- Analyst
Okay.
- CFO
Going back to my earlier comment about predicting what that means in the future, I am going to stay away from that.
But that's the way I'm looking at --
- Analyst
George, the reason I asked the question and I will ask a question, and I don't know if Donna or Linda wants to handle this.
But obviously some DVD data out there for the fourth quarter from some other companies was catastrophic and certainly your numbers are not.
- COO
That's what I was going to add as well.
Overall for 2008, we continue to be up and the industry is now down about 8% to 10%.
We continue to buck that trend and have been, but as George said, the fourth quarter was a tough one.
When you look at retail, the foot traffic is down, the dollars that are out there to spend are down.
We definitely have concerns like anyone else.
Having said that, we are putting together the best titles we can.
We're looking at our schedule and we will make the right decisions for our business.
- Analyst
Okay.
And Wrestle Mania is a 2Q event.
Yes?
- CFO
That's right.
- Analyst
Great.
Thank you.
Operator
Thank you.
We will take our next question from the site of Alan Gould of Natixis.
Please go ahead.
Your line is open.
- Analyst
I have a few questions.
First for George, just to clarify in this 2009 CapEx.
There were zero media spending in '09?
- CFO
That's right.
I will give you the full context of that.
What we said is we are going delay the spending until the economic conditions brighten.
At this point, we're expecting '09 to remain choppy from a macro economic, but we are essentially saying we are delaying it until the economic conditions brighten somewhat.
- Analyst
Okay.
Linda, can you just -- two things, the TV ratings -- I am trying to break out the economic impact versus the core changes in the business.
TV ratings are down a bit.
SmackDown switched to My Network TV and it has been the huge hit on My Network TV.
Is the reason that is down 25% down in the quarter just My Network versus CW?
Just trying to get this sense of the popularity of the franchise.
- CEO
I think the popularity of the franchise is absolutely continuing to hold.
We have seen some softening in ratings and that happens over time with our business.
We will have some periods will be softer, some periods we are up.
Now what you will see if you -- of course that's forward-looking a little bit, but our ratings are now ticking up.
My Network TV was a bit of a factor.
However, we have increased week over week over week with My Network.
And we are the number one show on their network and continue to be to that male demographic, the number one show on broadcast often week after week.
I think our trend and our rating numbers are holding very well and the popularity of the franchise is clearly there.
- Analyst
Okay.
And the closing the international offices or the changes there, it seems like a bit of a change of strategy.
Is that basically due to the economic global conditions?
- COO
Yes.
It is definitely due to the economy and to some strategic decisions to do things more centralized.
We have our office in the United Kingdom now that is an office that has staff for all areas of the business from PR to marketing to consumer products.
And we have made a conscientious decision to have our people there and manage the flow.
We have some good people on the ground in satellite offices as well.
We still have an office in China.
We have a few people in Australia.
We have someone on the ground in Mexico -- in Mexico City actually so we will make decisions that are right for the business.
And I think again, forward-looking, we will be constantly looking at that as we go through 2009 and beyond.
- CFO
And Allan, just to amplify Donna's point that our total investment internationally hasn't changed, either people or dollars.
We've made some tactical changes on which resources and how we allocate them.
But net-net, we are invested the same amount.
- Analyst
One last question, Behind Enemy Lines has already come out.
Can you give us an idea of the economics of that title -- what it costs and how many units were shipped or sold through?
- CFO
Well, the sell through data has been about a -- we haven't gotten full sell through data yet.
What we have seen from our partners is that the movie we feel is performing well.
The cost was shared with FOX and the total production cost was in the $4 million to $5 million range.
- Analyst
Can you give us some sense what the initial -- is it 150,000 units?
Any idea of what the initial sell through is?
- CFO
It is in that ballpark.
- Analyst
Okay.
Thank you.
- COO
The only thing I will add on Behind Enemy Lines is that we still have international distribution.
That has not yet happened.
We will see additional revenue there with our partner.
- Analyst
Thanks, Donna.
Operator
Thank you.
Our next question from the site of [Ian Corridon] of B.
Riley and Company.
Please go ahead.
Your line is open.
- Analyst
Thanks.
Clarification on the SG&A, the $20 million that's coming out.
Did you say, George, that 30% of that is coming out on the SG&A line -- 30% of the $20 million total?
- CFO
Yes.
Again we don't give that fine of guidance.
What I said is -- if you wanted to get a ballpark of how it would be spent between SG&A and our operating costs.
The prorata share of SG&A which was roughly 30% in 2008 is a proxy for that.
But again, we are not giving specific guidance on individual line items on the P&L.
- Analyst
With respect to the book publishing deals, could you talk about any future revenues or expenses that are going to come with that?
- CFO
It is the end of a deal.
It is a six-year deal that ended in 2008.
And the $6 million we took in the quarter was the unearned advances from that deal that had accumulated over the six-year period.
Around that deal, we left some deferred revenue on the balance sheet for the tail on the product that were already produced, but we are not anticipating that those are big numbers.
- Analyst
All right.
And then last question, on live and televised events, what drove the margin improvement there?
- CFO
We have talked a little bit about it before.
Some of it was a mix of events in the quarter.
The number of [won] deals year-over-year -- that was the driver of it.
- Analyst
Okay.
Thank you.
Operator
(Operator Instructions).
We will take our next question from Marla Backer of Research Associates.
Please go ahead.
Your line is open.
- Analyst
Thank you.
I want to switch gears here because we haven't spent much time on it, but what about toys?
How do you see toys going forward in '09, given it will be a transitional year?
At toys here last week, it seem that Jacks was not planning anything new, not surprisingly, for the line.
And are you already working pretty well with Matel for when they launch?
- COO
I can give you some anecdotal information for that.
Relative to Jack, as we look at 2009, there is still products on the shelf.
We do still have a very good business at all of our major retailers.
Putting the economy aside, we still have a good amount of merchandising space, domestically and internationally as far as toys go.
Relative to Matel, absolutely, we already starting to talk about everything we will do for that launch in 2010.
We are talking about domestic and international plans.
We are talking about what the product will look like, what the packaging, everything that you can imagine from advertising to promotion and the actual product is in discussions now for that 2010 launch.
- Analyst
Are you expecting that Matel will be able to really expand the brand internationally beyond what Jacks was able to do?
- COO
The thing I can say about Matel is that Matel has distribution on the ground all over the world.
That is a little bit different than Jacks because they subcontract it out some of their distribution.
We hope to see some great things from Matel in 2010 and beyond.
- Analyst
Okay.
Thank you.
Then two other questions.
On the Pay-Per-View buys, this seems a recent weakness in the quarter.
I think as you said in your comments, really seems to reflect the economic pull back.
In the past when you've had some problems with Pay-Per-View and responded quite strategically reducing the number of titles, is that something you're considering now?
Or are there any other changes to tweak the Pay-Per-View buys in the works?
- CFO
Well, we are always evaluating our strategy across all of our businesses including Pay-Per-View, but right now that's not in the works.
- Analyst
Okay.
Finally on home video, our channel checks have shown that there have been some pretty aggressive promotional activity on the brand at stores such as Best Buy.
It looks like it is resulting in pretty good sell through.
Are you hearing of similar promotional activity across other retailing platforms?
- COO
Yes, but I can tell you definitely as far as retail goes, Marla, is that we have stellar relationships with all of our key retailers.
And the thing about that, especially in a down economy, is that you want to have those relationships so that the buyers want to buy your product.
And obviously, the way the buyers buy the product is if the stuff is flying off the shelves.
Even though there are less consumers in the store, we are doing everything we humanly can with the Best Buys, with the Targets, with the Wal-Marts so that our product does come off of the shelf.
It is purchased.
And if that is a promotion for Wrestle Mania, a Legend's promotion in conjunction with Legend's titles.
We do what makes sense so that we can achieve revenue on our side, but also for our retail partner.
- Analyst
Thank you.
- COO
Sure.
Thank you.
- IR
Katie, we will take one more question.
Operator
Absolutely.
Thank you.
We will take our next question from the site of [Bobby Mownich of Carrier Partners].
Please go ahead.
Your line is open.
- Analyst
Thanks.
I have a question for the CFO.
I wonder if you would please address the capital structure and dividend.
Sure your -- you do close the year with about $200 million in cash and equivalents.
But what you really don't say is that's down from -- it is not clear whether it is $266 million or $286 million.
But somewhere between $65 million and $90 million in cash went out the door last year.
It seems to me that a good portion of that is representative of the fact that your dividend is 180% of your earnings.
Specifically, you pay $1.11 in dividends and the last two years, you have earned $0.72 and $0.62.
I am puzzled as to why it is you retained $200 million in cash and equivalents, earning something between 2.5% pretax which I am hoping is substantially below your hurdle rates.
And wondering if you can explain why this is the optimal capital structure for the Company and the optimal dividend for the Company which strikes me as quite [gimmicky].
And the shareholders have seen through this.
Obviously with the current yield of 15% in the marketplace, not only do investors recognize that the dividend is not sustainable in perpetuity, but there's a significant negative arbitrage if you are earning 2.5% pretax on your cash and paying out 15% after tax on your equity.
I wonder if you can give us some thoughtful analysis as to why this is optimal.
Thanks.
- CFO
Thanks, Bobby.
To answer your question, there was a lot of statements in there -- I think some questions.
Our view is -- our focus is on growing the cash long term for the Company.
That's the way we think we create value for the shareholder.
That will continue to be our focus and that will guide our decisions, both in our current businesses, new product extensions and the way we manage the operations, managing our costs and the way we manage our cash.
Delaying the media centers is an example of that in what is a tough economic time.
The second part is how do we return that value then to the shareholder.
It is either through investment and growing the Company and appreciation in the stock and/or through dividend payments.
Today, our dividend policy reflects the vehicle that we have chosen to return value to shareholders.
And as you mentioned, that was about $80 million in dividend payments in 2008.
- Analyst
I understand that is what the current situation is.
I am asking you to substantiate that because it doesn't make any sense.
- CFO
It doesn't make sense to you, but I just gave you what our rationale is.
Our rationale is to manage the Company in such a way that over the long term, we are going to continue to increase the cash flow of the Company.
The next level of decisions we have to make is how much do we need to invest in the business and how much to return to shareholders.
Our dividend policy currently reflects our best judgment on how to do that.
- IR
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.
Operator
This concludes today's teleconference.
You may disconnect at any time.
Thank you and have a great day.