TKO Group Holdings Inc (TKO) 2009 Q2 法說會逐字稿

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(Operator instructions)

It is now my pleasure to hand off the conference to your moderator, Michael Weitz, Vice President of Investor Relations with World Wrestling Entertainment.

Please go ahead, sir.

Thank you and good morning everyone.

Welcome to World Wrestling Entertainment's second quarter 2009 earnings conference call.

Joining me for today's discussion are Vince McMahon, our Chairman, 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 management's estimates.

Actual results may differ due to numerous 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 second quarter and we'll follow this review with a Q&A session.

At this time, it is my privilege to turn the call over to Vince.

Thanks Michael.

I think we did a pretty good job in the second quarter.

We had some solid growth in terms of our profits economic -- despite the economic recession and a decline in sales.

It sort of relates back to what we've stated before in terms of improving our operating efficiency.

WrestleMania's in this quarter, which is a little unusual, and it skews things a little differently in terms of the positive.

But if you take WrestleMania out, we had an operating income increase of 9% and that's in the shadow of a 18% decline in revenue.

So it's a pretty impressive operating income increase.

As far as, again, continuing to demonstrate our improved operating efficiency, you can look at WrestleMania this year and compare it to last year.

We had a -- when you consider that we more than doubled profits from last year, again, it sort of speaks to, notwithstanding about the same gross, it speaks to our operating efficiency.

And WrestleMania itself -- not to harp on WrestleMania but it's my favorite financial event nonetheless -- when you consider that -- when you take WrestleMania out of the quarter we still had about a 4% increase in attendance, which is one of our really strong barometers as to whether or not someone is enjoying a product and how you can take the product and apply it over to all areas of revenue.

So I thought that's pretty impressive.

Year to date we're about flat in attendance to what we were.

So, again, it's -- especially in today's climate, I think that's pretty good news.

It's not astounding but nonetheless I think it's pretty good news.

Our television ratings are generally up, which again is not always indicative of profit falling to the bottom line but I think it's a positive indication nonetheless.

And, again, all of this is with some degree of concerns.

You guys have looked over the numbers and the DVD revenue is a sharp decline which needs to be addressed.

And our pay-per-view buys as well need to be addressed.

There's about a -- when you take WrestleMania out there's a decline of about 4%, which again probably would relate to the economy but also we need to do a better job of creating compelling content.

But notwithstanding all this, I'm still very bullish on our company in terms of our ability to produce content that succeeds generation after generation, month after month and week after week.

It's important that we can -- that we produce compelling content, as I stated before, not just content.

And in terms of our business plans and what have you, we'll be rolling out what used to be referred to maybe as a long term business plan which is a three-year business plan we're working on now.

And I think over the next quarter we'll be rolling out -- I think you all will be impressed with our efforts to -- as far as increase of profitability in terms of being a prudent -- as far as maintaining cost on the low side.

And there are a lot of things in that three-year plan.

So, again, I'm bullish pretty much on all aspects of our business and with that we'll send her back.

George?

Thanks Vince.

I'd like to start by providing you with some additional perspective on our second quarter results.

For the quarter, we reported a 7% increase in revenue and our operating income more than doubled as compared to the prior year quarter.

Our performance reflected the impact and timing of WrestleMania.

And as a reminder, WrestleMania occurred in the second quarter of 2009 as compared to the first quarter of last year.

Excluding the impact of WrestleMania, revenue declined approximately 18%.

Despite the underlying decline in revenue, operating income, excluding WrestleMania, increased 9% demonstrating our ongoing commitment to improve efficiencies across all of our businesses.

Current operating conditions clearly had an impact on our live events, pay-per-view and home video performance.

However, our continued vigilance on cost more than offset the impact from an adverse economic environment.

We improved profit margins to 45% compared to 41% in the prior year, and achieved a 16% decline in SG&A expenses from the second quarter of last year.

Regarding WrestleMania, this year's event contributed in aggregate approximately $32.2 million of revenues and $15 million of profit contribution, and accounted for $0.13 of EPS in the current quarter.

With comparable top line results, the event more than doubled the contribution to profit and earnings of last year's WrestleMania.

That event contributed approximately $31.3 million of revenues, $7.1 million of profit contribution, and $0.06 of EPS in the first quarter of 2008.

To clarify the trends in our business I'll discuss our performance on an adjusted basis excluding the impact of WrestleMania.

Additionally, our second quarter results, particularly our live events, per-pay-view and consumer products, were impacted by changes in foreign currency exchange rates.

We estimate that these changes reduced second quarter revenue and operating income by $7 million and $3 million respectively.

Excluding both the impact of WrestleMania and the effect of foreign exchange, revenue declined approximately 13% and operating income increased 30%.

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 contribution by business unit as compared to the prior year quarter.

Starting with our live events, including merchandise sales at these events, revenue was down 24% to the prior year quarter on an adjusted basis.

Contributing to this decline were lower average ticket prices and lower average attendance at our international events.

In addition, there were four fewer international events in the quarter.

Specifically, average ticket prices at our international events declined 35% to $62.77, and average attendance declined 11% to 8,100.

These results reflected changes in our touring schedule, the impact of a weak global economy, and importantly, adverse changes in foreign exchange rates.

Average attendance at our North American events increased 4% to 7,200 on an adjusted basis.

However, this rise was offset by a 14% decline in average ticket prices to $34.47.

Turning to our pay-per-view business, strong revenue growth reflected the performance and timing of our WrestleMania event.

WrestleMania XXV generated $21 million in pay-per-view revenue based on approximately 960,000 buys in the quarter.

Excluding the impact of WrestleMania, revenue declined 18%.

Revenue was reduced by a change in the event schedule, which deferred a relatively strong event, Night of Champions, to the third quarter and added The Bash to the current quarter.

In addition, buys for the three comparable events in both the current and prior year quarter declined by 4%.

Revenues from the distribution of our television programming increased by 15% or $3.6 million due to higher rights fees from our global television contracts and the addition of our new WW Superstars television show.

The new program debuted on WGN America on April 16.

Notably, profit from our television business more than doubled in the quarter.

Here, gross profit margins improved to 36% from 19% with the expansion of revenue from WW Superstars and significant efficiencies in our production processes.

In our consumer products segment, our licensing revenue remained flat at $9 million over the prior year quarter.

The current quarter launch of a new video game title, Legends of WrestleMania, offset declines from our Smackdown vs.

RAW video game, as well as lower revenues from our toy products.

Our home video revenue declined 54% or $9.9 million, reflecting low sales of new release and catalog titles in conjunction with a broader decline in the home video industry.

In addition, there were two fewer titles released in the current quarter.

Overall, DVD shipments declined 36% to 833,000 units during the quarter.

In our magazine publishing business, revenue decreased 30% to $3 million.

The decline primarily reflects a reduction in newsstand and subscription revenue, and the publication of two fewer special issues in the current quarter.

In our digital media segment, revenue was essentially flat at $7.9 million from the prior year.

Increased sales of online advertising were offset by lower sales of online merchandise.

During the quarter we managed a 16% increase in online advertising, capitalizing on a 22% year-over-year increase in Internet traffic as measured by page views.

Last quarter, I mentioned that we have seen increased activity in our ad sales pipeline and this quarter's results are a testament to the increasing effectiveness of our sales force.

Recently, we announced new partnerships with 7-Eleven and Pepsi Max, which represent specific examples of our developing success in this area.

Offsetting the growth in online advertising, revenue from e-commerce declined 13% reflecting a decrease in both the number of orders and in the average revenue per order.

The number of online merchandise purchases declined 13% to 62,000 orders.

In addition, the average sales per order fell 2% to about $52.

During the quarter, WW Studios recognized revenue of $800,000 associated with two of our film projects, See No Evil and The Condemned.

As we have stated before, we believe our overall portfolio of films will surpass breakeven profits.

Our overall profit contribution margin increased to 45% from 41% in the prior year on an adjusted basis.

The increase reflected improved margins across our businesses, led by our live and televised entertainment segment.

In particular, the quarter was highlighted by reduced operating expenses associated with our television production and brand marketing.

For the quarter, reported SG&A expenses decreased 17%, or $6.3 million to $31.3 million, led by improved efficiencies in our advertising, a reduction in legal and professional fees, and lower staffing costs.

These cost reductions were partially offset by increased reserves for bad debt primarily associated with our international customers.

It should be noted that SG&A expense in the prior year -- quarter, included a charge of $3.5 million associated with the McMahon Million Dollar Mania advertising campaign.

Excluding this charge, SG&A expenses decreased 8% from the prior year quarter, and were essentially flat compared to the first quarter of this year.

As a reminder, we expect that our commitment to reduce our [2000] expense base by $20 million will be realized in both lower SG&A expenses and lower direct expenses that are captured in our profit contribution.

Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business.

As shown, operating income was up 134% as compared to the same period last year with a market increase in profit from WrestleMania.

On an adjusted basis, operating income increased 9%, or 30% excluding the impact of foreign exchange.

This growth demonstrates our commitment to managing our controllable costs in order to take advantage of the operating leverage in our businesses.

Net income was $10.2 million on an adjusted basis, excluding WrestleMania, compared to $7 million in the prior year quarter.

As discussed previously, increased earnings were attributed to improved efficiencies across our operations, especially in our television production.

The quarter also benefited from favorable changes in other nonoperating income.

These included realized gains from foreign exchange and the positive revaluation of warrants held in certain licensees.

Also favorable to net income, the effective tax rate was 35% in the current quarter compared to 40% in the prior year quarter.

Page 15 of the presentation contains our balance sheet which remains strong.

On June 30, we held more than $230 million in cash and investments with virtually no debt.

Page 18 shows our free cash flow.

For the quarter we generated approximately $26 million of positive free cash flow, compared to negative free cash flow of $18 million in the prior year quarter.

Improved performance was driven by the timing of WrestleMania, lower investment in feature films, and changes in working capital, including changes in the company's tax position.

In addition, capital expenditures decreased to $1.4 million as compared to $5.9 million in the prior year period.

Looking ahead, we will continue to manage the company to improve our cash returns.

To support this objective we are in the process of completing a comprehensive strategic review of our businesses, as Vince mentioned.

While understanding the challenges of the current macroeconomic environment, we're optimistic about our long-term growth prospects and we plan to communicate more on this topic in the future.

That concludes this portion of our call.

And I will now turn it back to Michael.

Thank you George.

Colin, we're ready now, please open the lines for questions.

(Operator instructions.) Richard Ingrassia with Roth Capital.

Good morning.

This is Jared Schramm in for Richard.

Question on live televised entertainment.

The recent events being hosted by the likes of Donald Trump, Shaquille O'Neal and Jeremy Piven, have those positively affected viewership and attendance?

And if so, is this something we can expect to see more of in the future?

It's a -- some of them have reflected in increased television ratings we think.

Certainly Shaquille O'Neal I think helped us a lot.

It's really difficult to say.

The whole intent here is to try and reach out to a broader audience and bring in new viewers and maybe some lapsed ones as well.

It gives us a platform more outside of our environment to -- in terms of promotion and things of that nature that otherwise people would not be mentioning WWE.

ESPN covered extensively the Shaq promotion after the fact.

Likewise in terms of entertainment press we got a lot out of that with Piven, with Seth Green as well.

So, these are plans on RAW specifically since it's a live show to -- not every week but to mix celebrities from all walks of life, and I do mean all walks of life, in conjunction with our legends and superstars that will be, as well, in this mix.

It's just a different approach, again, to broaden the audience, which if we can broaden the audience and increase the audience obviously that's a -- that helps us on all of our revenues.

So that's the general idea and it seems to be working.

Okay.

Is there any ongoing litigation from the booking issue with the Pepsi Center in Denver during the second quarter?

And how much of a positive impact did that have, if any, in the quarter?

There's none of that at the moment.

Although I am expecting a letter of apology from Kroenke any day, I probably won't get it.

To the extent that we pursue legal action, I mean we sent them a bill of like three-hundred-and-some thousand dollars I think, and we haven't heard much from them on that at the moment.

That's an effort in terms of recouping some of our out-of-pocket costs which we did incur.

That's -- again no legal action has been taken against the Pepsi Center.

Okay.

And a final one here.

How would you rate the success of the WWE Superstars program to date?

And are you looking to further expand the number of television programs or are you uncomfortable with your current offerings?

That's always -- as far as the WE Superstars on WGN is concerned it's right where we thought it was going to be and it's right where WGN America thought it was going to be in terms of television ratings.

It's a one-hour show and we feel good about it.

As far as other aspects are concerned and increasing our mix, negotiations are coming up in a bit with USA Network, which I think will be interesting.

I think it'll be to our betterment in one fashion or another.

It depends on what other opportunities would open to us as far as other nonevent-type television.

And there are many opportunities out there.

And I'm talking, when I say nonevent, it's nonarena-type compelling stuff.

Okay.

Thank you very much, Vince.

Alan Gould with Natixis.

Thank you.

I've got a few questions.

First, Vince how did you take $7 million out of the cost of WrestleMania this year versus last year?

Was it mostly marketing?

It's some in marketing.

It's just more efficiencies.

We took a chance to go outdoors the previous year, which just when you're doing an outdoor event it just increases your cost and it would somewhat in the future -- although we have a better handle on that.

So we sort of built this one-time structure that housed all the lighting and pyro and all that sort of stuff.

The outdoor of aspect of WrestleMania, I think, was more -- more than anything else was the contribution of more costs.

It was just -- we're just more efficient and more cost conscious.

Revenue came in about where we thought it was going to and it all dropped to the bottom line.

But it was everything.

It was production cost, I think, predominantly, you know, better handle on production cost.

Marketing as well.

Great job of keeping those costs down.

So it is across the board, but I think specifically it'd be more in television production costs.

Okay.

My next question is, you said you're going to have to take a look and examine what's happening in the home video area.

I know the whole industry is down but you seem to be down more than the industry.

What sort of changes should we expect there?

You can take that, Donna.

Well, yes, definitely the industry is down and, as you know, over the last several years the industry has been hit every single year and we have been bucking the industry and have been doing very, very well.

It seems at this point that we are showing some signs of fatigue so what we're looking at doing is changing up our content.

When we looked at 2008 content for the quarter as opposed to this quarter we see that we had slightly stronger titles last year.

So we're looking at changing up our content.

If you see the -- as we get into the second half of the year we've got some strong titles.

And in addition, of course, the economy is affecting retail and retailers are taking a lot less product than they've taken before with much shorter lead times.

They used to order way up front; they're now ordering just quick to market.

And so all of the changes on the business model have affected us as well.

So from the content side, from what we've put out, from the packaging at retail to what we offer our retailers -- we may offer a lot more exclusives than we've offered in the past.

We're looking at all of that as we move forward.

And I'll add to Donna's point that year to date, while home video is down 50% or so, we've got 25% fewer titles year to date.

So we had 15 last year, we had 11 this year.

So while the average shipments are also down, about 22% or so and our returns percentages is up a little bit year to date as well, the total number of titles is down and that'll be made up in the back half of the year, so.

Okay.

And my last question's for you, George.

Your EBITDA margin was 45 -- excuse me, profit contribution margin was 48% in the first quarter, 45-ish in the second quarter, are those sustainable levels?

Well, the way I look at it, Alan, is I look at our variable margin first which is roughly about 75% across the portfolio of products and that's definitely sustainable.

The profit contribution margin will move a little bit depending on our direct marketing costs and some other changes that we might make around the operations.

But I think in that range is right.

But generally, as we stated in the comments, our ability to take advantage of that 75% direct margin and let it flow to the bottom line as the top line improves, that's our real focus, is managing those other direct costs.

So you might see some -- a little bit of fluctuation because each business is a little bit different in the profit contribution margin, but we certainly believe the expanded margins are going to stay with us for a while.

Okay, thank you.

(Operator instructions) Marla Backer with Hudson Square.

Thank you.

I have a few questions.

First of all, I'll follow-up to one of Alan's questions.

I was also impressed by the increased profitability out of WrestleMania.

Should we view that as a way to market the event -- to model the event going forward?

Is this a more normalized example of what we should expect on profitability?

Yes.

Again, relating to our operating efficiency we're far more attentive to a lot of our costs.

Again, it depends on the venue as far as production costs are concerned.

That may go up or down a bit.

But we're -- again, we're more conscious of all of our production expenses as well as marketing so I would suggest that this year's model is certainly what we aspire to accomplish every year going forward.

Thank you.

Can you give us any color as to whether the recent arbitration between THQ and Jakks Pacific, what kind of an impact, if any, that could have on WWE itself?

I don't really think it's going to have any impact one way or the other.

If anything it might be some positive impact but, again, it's -- you know, we can't count any of that.

But at the worst it's business as usual.

Donna, you want to add any to that?

No, that's exactly what I would have said, Vince.

As you know, Marla, the arbitration is between the two parties, Jakks and THQ, and does not affect us directly.

Well, my understanding is that they were arbitrating over the royalty that they shared, number one, and also over whether Jakks could trigger the extension of the WWE joint venture.

Is that correct?

Is that your understanding?

That is correct.

And as to the first part the arbitration was settled with Jakks getting 6% instead of getting 10% from the joint venture as far as their royalty rate goes.

And to the second part of it, there has been no ruling on that account yet.

Jakks obviously are not our friends and we've been going after them aggressively and so -- but that's pretty much over.

Okay.

And then I have two final questions.

One is on 12 Rounds, which I think did about $12 million at the domestic box office but then debuted at number one on the DVD sales chart.

How are you thinking about that in terms of The Ultimate?

Are you thinking that that will be a positive title over the course of the ancillary windows?

It'll be profitable.

Again, it was a bit disappointing but nonetheless when you consider that -- consider all of our films combined, we show a profit -- a very modest one, but we show a profit.

Pretty proud of it, actually, because it allows us in terms of the industry to learn a great deal of how we want to operate in the film industry as a part of our overall product mix.

And we think we've learned a great deal.

We think as well we have, which we'll roll out in our three year plan, we think we have a new plan that works for us specifically in which the margins would be substantial.

Okay.

And my final question.

With so many other companies cutting in dividends, how do you feel right now about your dividend which is obviously extremely rich?

Again, we review this every quarter.

When someone asked me about the lone term commitment -- and I would suggest obviously a long term today in this economic environment is not what long term used to be.

Nonetheless we review that every single quarter and consider our capital structure and what our investments might be.

So, again, it's an every quarter review.

All right.

Thank you very much.

Michael Kupinski with Noble Financial.

Thank you for taking the question.

I just have a couple of questions related to your international live events.

Ticket prices dropped there, somewhat surprising, and you mention that it might be a little bit due to the economies there.

Did you change something there, maybe offer lower-tier tickets?

Were you just -- or just discounting tickets?

I was just wondering if you were looking for this to be a longer term issue.

We don't discount tickets.

I think that's a wrong thing to do.

The circus can handle that.

But I think once you start discounting tickets you're discounting the value of your product.

We, some time ago, both domestically and internationally, seeing this economic problem that was upon us, adjusted our ticket prices.

And it's more over the lower ticket price which we decreased, and that's what you're seeing here.

Again, you make reference to the attendance being up 4% for the quarter.

Part of that is being able to offer family prices, so to speak.

You know, an average of $35 that's -- to see the kind of entertainment we present for that amount of money as compared to everything else that's out there touring is pretty extraordinary in terms of being the best value in entertainment.

And the other thing I'll add to Vince's response is our key rates were down from an FX standpoint about 22% in the quarter.

So that was the predominant driver of international pricing.

And also the mix of where the events occurred.

We don't tour internationally in the same places every quarter.

So that -- both of those factors also influenced those numbers.

Okay.

And then for the balance of the year, can you talk about the number of domestic events versus -- are they going to be up or down versus last year and versus international live events?

Well, what we talked about from a international standpoint is that we'd do somewhere between 75 and 80 international events and we're still committed to that.

Domestically, just because of the logistics, in the first half of the year we were up about 18 events domestically.

That won't happen in the back half of the year.

Okay.

And have you given any more thought on your plans to grow your international live event business beyond what you're currently -- I mean, in terms of whether or not you look for maybe a second tier of stars and that sort of thing to kind of grow it a little bit faster?

That's a part of our three-year plan upcoming, which you'll see in all likelihood more international events.

As you alluded to, some of them won't be necessarily the A-type event only because you're not going into an A-type environment from a marketing standpoint.

Nonetheless, the profitability should be there, so pretty astute observation on your part.

Yes, we'll have more international events but it won't be always the A-type of plan; it'll be a combination of A and B.

Okay.

And I just want to congratulate you again on the SG&A line.

Can you give us a little bit of color on what -- because there might be a little of noise in there with WrestleMania and so forth -- can you give us a little bit of an idea what that expense line run rate might be as we look into the next quarter?

Yes, I think you'll see SG&A, everything else being equal, at kind of the similar trends that we've done in the first and second quarters of this year.

And as I mentioned second quarter was essentially flat to first.

And the only kind of variable in there is the company's incentive comp program will hit the SG&A line.

So there's some variability there depending on underperformance or over performance but -- versus its targets.

But ex that, stock comp and incentive comp, you'll see the SG&A at the same levels.

Okay great.

That's all I have.

Thank you.

(Operator instructions) [Marty Castor], Morgan Stanley.

Thanks for taking my call.

Congratulations again on the contribution from WrestleMania for this particular quarter.

In looking at the first half of the year results, I notice really the two bright spots being your television rights fees and venue merchandise was up as well somewhat.

Can you comment about the specific factors related to the success of those relative to the other portions of the business?

Yes, on the television rights fees, the way those work Marty is they're -- in our current contract there's annual escalators so you have that built in.

Second, and very importantly, we had a new contract this year which was WWE Superstars.

So those were the big drivers of the year-over-year increase there.

On the venue merchandise the two drivers of that revenue stream is attendance and per caps-- the per capital spending of an attendee on merchandise at the event.

Our per caps year to date are down.

Our average attendance year to date is about flat, but because we had more events that had total more aggregate attendance, so that's what drove that number.

Is that -- also with the venue merchandise portion, is that product largely the same product as in WWE Shop as it somewhat came to my attention that the merchandise sales in WWE Shop were down dramatically which seems to be inconsistent with most online and e-commerce businesses.

Marty, what I'll answer you there is two parts of it.

Yes, the merchandise is the same product that you'll see on Shop.

It's just -- obviously, because of space considerations there are a lesser number of products that you will see at the venues than you will see on Shop.

Shop is the -- is almost a store where you can see a complete array of WWE products.

The fact that the business is down somewhat is related to, number one, the fact that DVD business in general is down and we have taken a hit on our Shop site as well as at retail.

Very similar results there.

And then the second part of it is we are a unique structure as compared to entertainment companies or sports companies in that we have our own products that we sell on the Web and we also sell products at retail.

And these are different products but we're able to sell both successfully.

So, as a result of having a very, very strong program over the last several years at retail primarily led now by not only DVD and by video games and toys, we now have a very strong program at retail in the apparel front.

We are actually the number one boys brand at Wal-Mart for example.

And that to some extent has taken somewhat of a hit on our Shop site.

So we're examining that.

We're always looking at our business model and see if we should be changing it up.

But, you can't forget the number of people that walk into the retail stores that are now buying our product.

So if you look at the overall numbers we're actually -- on a per unit basis we're doing a lot better than we had done.

But relative to straight margins we need to look at that and address it on a go forward basis.

Good.

Thank you.

You're welcome.

(Operator instructions).

Okay, sounds like there's no one in the queue.

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.

Thanks for joining us.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect at this time.