TKO Group Holdings Inc (TKO) 2009 Q3 法說會逐字稿

Good morning, my name is Ali and I will be your conference operator today.

At this time I would like to welcome everyone to the World Wrestling Entertainment third quarter 2009 earnings conference call.

(Operator instructions) I would now like to turn the call over to Michael Weitz, Vice President of Investor Relations.

Mr.

Weitz, you may begin your conference.

Thank you and good morning everyone.

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

Joining me for today's discussion are Vince McMahon, our Chairman and CEO; Donna Goldsmith, our COO; and George Barrios, our CFO.

This morning we issued two press releases; one detailing our results for the quarter and the other outlining our revised business outlook.

In addition to these releases, we will reference a presentation as part of our discussion.

These are available on our corporate website at corporate.wwe.com.

We will make 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 quarter and we'll provide some perspective on our revised outlook.

We will follow this review with a Q&A session.

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

Good morning everyone.

I just want to give you a quick overview on how things are looking, at least my point of view on things.

I think we had a relatively good quarter.

I think as the quarter relates to the entire year, it's looking even better than what it is now.

One of my big barometers on how well we're doing is the average attendance at live events.

I've mentioned this before, because when you consider that it's the most expensive way in which our consumer enjoys the product, what with parking, ticket prices, hotdogs, whatever it is they would buy, programs, etc., it indicates to me the strength or lack of it in terms of where we are.

And the average attendance, even though we had several more events in the quarter, but the average attendance increased approximately 9%.

And another barometer which I use is television ratings and again, it isn't always necessarily either one of these is a direct correlation, but the two of them together would indicate things are pretty strong.

Not only do we have an increase in attendance, but our television ratings for our Raw program were up about 23% over the quarter.

So that really looks good those two barometers as far as I'm concerned.

We've revised as well our business outlook and what would appear to be in the neighborhood of annual earnings growth from 15 to 20%, which is substantial over the 2009 to 2012 period.

Obviously this exceeds the analysts' estimates for the majority of our entertainment peers, which is not surprising.

In addition to that, another subject which I'd like to make mention of is a revised film philosophy and practice.

As I mentioned in previous calls, if you want to track our stock in terms of just the film business, this is not the company you want to be associated with.

But film is a logical extension of our intellectual property and as such we have a revised strategy in which we will do films at approximately $5 million all-in cost and a new way of distribution which will be rolled out in some time.

And we're very excited about that in terms of an increase of our bottom line as well as overall revenue.

And the other aspect, some generalities I'd like to make note of is from a family perspective, my wife Linda -- and those of you living in Connecticut might want to vote for her, but she's running for Senate and trying to achieve the Republican nomination to compete with Christopher Dodd in some time.

So we've lost Linda in terms of her CEO role, of course, which I have assumed.

She still sits on the Board.

The other aspect of family, because some people perceive this to be a family business, which I do not, but nonetheless, my son Shane as well has decided to pursue other opportunities in the marketplace.

Nonetheless, I have mentioned before that the strength of our management team is stronger now than it has ever been and if your last name is McMahon or not, decisions are always made on your abilities in terms of whatever position you hold now and/or will in the future and be judged on your performance, not because your last name is McMahon.

So I'm pretty strong on that as well.

And other than that, we'll entertain questions from everyone, which I would hope there'd be any number of them and I'll turn it over to George Barrios.

Thanks Vince.

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

For the quarter we managed an 84% increase in operating income with a moderate 2% increase in revenue from the prior year quarter.

Our consumer products and Pay-Per-View businesses remained pressured by tough retail trends.

Consumers however, continued to demonstrate a high level of interest in our content, evidenced by a 23% increase in our Raw ratings during the quarter.

Our continued vigilance in managing cost enabled us to achieve improved efficiencies across our businesses.

Profit margins increased to 46% compared to 39% in the prior year.

On a year-to-date basis, operating income increased 26% with an 11% decline in revenue.

Excluding films and the impact of foreign exchange, revenue declines were 6%.

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

Starting with our live events, including merchandise sales at these events, revenue increased 29% or $7 million from the prior year quarter.

This growth was led by a 38% increase in average attendance at our international events to approximately 9,100 fans and the addition of 5 international events in the current quarter.

The quarter was highlighted by a strong 6-event tour in Australia and New Zealand which averaged over 12,000 fans per event.

France continued to emerge as a potent market for WWE, with 2 sold-out shows in Paris that yielded over 14,000 fans per event.

Average attendance at our North American events increased 9% to approximately 5,800 fans.

Favorable trends in attendance both domestically and internationally more than offset declines in average ticket prices.

Our average ticket price declined 5% to $36.26 at our North American events and 19% to $65.59 at our international events, due in part to changes in foreign exchange rates.

Turning to our Pay-Per-View business, revenue declined approximately 12% to $14.5 million reflecting a 10% decrease in total Pay-Per-View buys.

In addition, the quarter had a higher percentage of international buys, which are generally lower in price.

International purchases comprised 38% of our current period buys compared to 31% in the prior year quarter.

For the comparable events which were produced in both the current and prior year quarter, Pay-Per-View buys declined 22% in the quarter and 9% on the year-to-date basis.

We continue to work on stabilizing our Pay-Per-View performance and preliminary estimates of our recent Hell in a Cell Pay-Per-View indicate a year-over-year increase in buys of approximately 11% for that event.

Revenues from the distribution of our television programming increased by 16% or $3.9 million due to higher rights fees from our global television contract and the addition of our new WWE Superstars television show.

The new program debuted on WGN America on April 16th.

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

Here gross profit margins improved to 43% from 26% with the expansion of revenue from WWE Superstars and significant efficiencies in our production processes.

In our consumer products segment our licensing revenue decreased 25% to $7.9 million over the prior year quarter.

Royalties earned in the current quarter mirrored a decline in the sales of our video game and toy products, especially in international markets.

US sales of our SmackDown vs.

Raw 2009 video game declined 35% to 320,000.

The quarter benefited from continued sales of our Legends of WrestleMania game, which sold 120,000 units.

Our home video revenue increased slightly from the prior year quarter.

The performance of our new release and catalog titles resulted in a 16% increase in shipments to 847,000 DVD units.

The increase in shipments was offset by an increase in incentive programs and promotional offers which resulted in an effective 21% reduction in DVD prices.

In September we transitioned our home video distribution to Vivendi Entertainment.

We believe Vivendi is best in class in terms of its operations, sales and marketing.

The terms of our new deal are comparable to the terms that we had with Genius.

In our magazine publishing business revenue decreased 28% to $3.4 million driven by a 6% combined reduction in subscription and newsstand sales.

These revenue streams were impacted in part by the publication of one fewer WWE magazine issue in the current quarter.

In addition, the reduction in our magazine publishing net revenue reflected some disruption in our newsstand distribution channel.

In our digital media segment revenue decreased 6% to $7.4 million from the prior year.

Lower sales of our online merchandise were only partially offset by a step-up in our online advertising and the licensing of our website for international markets.

Revenue from ecommerce declined 26%, reflecting a decrease in both the number of orders and the average revenue per order.

The number of orders online declined 21% to 55,000.

In addition, the average sales per order fell 8% to about $50.00.

During the quarter we managed a 10% increase in online advertising, delivering on the increased activity that we have seen in our ad sales pipeline.

This quarter's results, which outpace recent industry trends, are a testament to the increasing effectiveness of our ad sales force.

In our film business, WWE Studios recognized revenue of $3 million associated with 4 of our releases; See No Evil, The Marine, The Condemned and Behind Enemy Lines; Columbia.

As of the quarter end we had approximately $28.8 million in capitalized film production costs on our balance sheet, primarily associated with our 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 in December of this year.

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

Most importantly, we are now developing a new distribution model for our films which I'll describe in a few moments.

Our overall profit contribution margin increased to 46% from 39% in the prior year quarter, reflecting increased efficiencies in our live and televised segments.

improved margins were driven by sustained cost reductions in our marketing and TV productions and by staff reductions which were carried out at the start of this year.

For the quarter SG&A expenses increased 6% or $1.8 million to $33.1 million, driven by accrued expense related to the company's incentive compensation program.

These increases were partially offset by reductions in marketing, legal and professional fees.

As a reminder, we expect that our commitment to reduce our 2009 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 increased 84% as compared to the same period last year, with a marked increase in profit from live and televised entertainment.

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

Net income rose nearly 70% to $8.9 million compared to $5.3 million in the prior year quarter, driven by these improved operating efficiencies.

Partially offsetting the expansion of operating profits was an increase in our effective tax rate to 42% compared to 32% in the prior year quarter.

For both periods the effective tax rate reflects differences between the taxes provided for as compared to actual amounts calculated on our returns.

For the full year we continue to anticipate an effective tax rate of just about 37%.

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

On September 30th we held approximately $230 million in cash and investments, with virtually no debt.

Page 19 shows our free cash flow.

For the quarter we generated $17 million of positive free cash flow compared to approximately $10 million in the prior year quarter.

Improved performance was driven by operating efficiencies, lower investment in feature films and changes in working capital.

In addition, capital expenditures decreased to $0.8 million as compared to $4.2 million in the prior year period.

The company's business model remains strong, as evidenced by our generation of $89 million in free cash flow year-to-date.

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

And to support this objective, we have completed a comprehensive review of our businesses.

Based on that review, we're targeting average annual earnings growth of 15 to 20% over the 2009 through 2012 period.

You should note that our planned revenue growth outpaces projected economic growth in each of our global markets and both our revenue and earnings growth are expected to surpass the consensus analysts estimates for a majority of our entertainment peers.

We have a high level of confidence in our ability to realize these results.

Our plan assumes modest revenue growth, averaging about 5% per year, excluding films, on a relatively low 2009 base.

Specifically, we expect roughly one-third of our total revenue growth and more than 40% of our profit growth to come from increases in global television rights and the strengthening of our licensing platform led by Mattel.

We've characterized these revenue streams as fairly secure, based on the status of our commercial negotiations, the popularity of our content and the strength of our new partner, Mattel.

Our plan also reflects our ongoing commitment to manage cost and expand EBITDA margins.

This assumes that our variable costs grow proportionately with our revenue and that our fixed costs, including SG&A, grow at inflationary rates.

Although these fixed costs grew significantly from 2005 through 2008, we have engineered substantial improvements in the efficiency of our operations.

As a result, these costs are expected to increase only modestly over the planned period, driving further expansion of our margins.

Through disciplined cost management we expect our operating leverage to deliver outstanding earnings growth, even in a low to moderate revenue environment.

Our plan endeavors to increase the risk adjusted return of our film business by producing a greater number of films at a lower average cost and by exerting greater control over our film distribution.

The approach takes advantage of marketing efficiencies with a limited theatrical window and lower production budgets in the range of about $5 million.

We believe our efforts will produce returns significantly higher than the films we've released to date.

From a modeling perspective you should also note that for films produced under this new model, we expect to recognize film revenue and expense on a gross rather than net basis.

As such, the growth in film revenue and expense over our planned period will reflect the timing and performance of our releases as well as this different accounting treatment.

In addition to executing a new film model we're evaluating a potential WWE Network which we believe could generate significant economic returns.

Overall we're excited by WWE's opportunities and by the steps we're taking to enhance our long-term growth.

We remain committed to creating value for our shareholders.

By driving earnings and economic return on invested capital, we endeavor to provide the foundation for superior shareholder returns.

That concludes this portion of our call.

And I will now turn it back to Michael.

Ali, we're ready now.

Please open the lines for questions.

Let me just say, the questions will be answered by Donna Goldsmith, our Chief Operating Officer, George and myself.

(Operator instructions) Our first question is from Brian Zukav with Roth Capital Partners.

This is Jared Schramm actually in for Rich Ingrassia.

Was there a specific catalyst you can point to for higher North American attendance at live events?

Ticket prices were down approximately 5% and average attendance improved 9% in what was a pretty rough consumer spending environment.

Can you attribute that to lower ticket prices primarily, better TV storylines, something like that?

One of the things that we talk about, Jared is that quarter-over-quarter it's tough to compare the attendance numbers because it depends on what venues you're playing.

So that mix has a bit to do with it, as well as we believe the pricing is driving attendance as well.

What I was going to say is that definitely, we looked at this and we made some wise decisions on taking that lower price level down so that we could bring more people into our events.

And we think that had a very positive return as a result of making those decisions.

And how fortunate you guys are doing your modeling; if you look at year-to-date our North American attendance is up around 3% and our international attendance is about flat.

I believe the longer time period gives you a better feel for kind of the underlying trends, too.

Okay.

And can you give some color on Pay-Per-View prices internationally compared to North America and if you would, give some color on Pay-Per-View traction in Mexico specifically?

I can answer on the Pay-Per-View prices internationally.

What we do is we don't make that decision in a vacuum; we look on a country by country basis what is being charged locally for various forms of Pay-Per-View, be it an event attraction, a movie, and then we take that number and we look at what makes sense.

So in Spain, for example, the Pay-Per-View prices may be considerably lower than they would be in the United Kingdom.

And we have to do that because you want to be competitive with the market out there.

And the second question, I'm sorry, what was it again?

Any color on Pay-Per-View traction in Mexico?

Mexico has been great for us.

We're really excited about Mexico as a market in general.

As you may know, we are on television on Televista and TBS [Techa].

We have been attracting huge numbers to our television programming which in turn has turned into large numbers on our Pay-Per-View results as well.

And we're on about 4 or 5 providers in Mexico for the Pay-Per-View product.

So not only on the Pay-Per-View front, I will actually tell you that we're looking at the line event side, at the consumer goods side, Mexico is turning out to be a very, very strong market for us.

And one more here.

I met with Linda a few months ago; she was very excited about the agreement with the Army National Guard.

Can you provide any updates on how that's progressing?

Army National Guard has been a great partner for us and we for them, by the way.

We have done a number of things at our live events where we will do recruiting for them at the live events and as well as they've sponsored Pay-Per-Views, our fan access program, which is a live event fan program where we did it at Summer Slam in Los Angeles in August, and we brought in a ton of fans and the Army had a number of components at our fan event and we're very excited.

So we give them our IP, they use it, we use their IP, it's been a -- to use the proverbial win-win for both parties and we will continue to work with them through 2010.

Congrats on the great quarter and thank you very much.

(Operator instructions) Your next question is from Robert McIntosh with McIntosh Associates.

A question that I have that I've been meaning to ask for a while.

WWE has such a vast library of old wrestling material; how come there's not more older stuff that's being issued?

I'm 42, so my heyday of being with the old WWWF was back in the late '70s early '80s and I see very little released on video and actually the only thing I ever see is the occasional match on Classics on Demand.

Any thoughts of expanding that at all?

Well, I would say, Robert, that actually we've done a considerable amount of DVDs using our footage and those DVDs have been successful and we will continue to use that footage to drive our DVD business, our Classics on Demand.

And you may have heard some rumblings about us doing a WWE Network and although we're just starting to put the business plans in place, you can be sure that we will be using our 100,000 hours of footage that we have in our library here, on that WWE Network.

So stay tuned; there will be even more usage of our library.

Also, has there been any talk of perhaps maybe eliminating the Pay-Per-View so you're not constantly drowning out the main Pay-Per-Views?

We're always looking at should we add a Pay-Per-View, should we eliminate a Pay-Per-View, should we change the themes of our Pay-Per-View, so that's something that we will look at and continue to look at, based on our numbers and the trends and our content.

Your next question is from Michael Kupinski with Noble Financial.

Congratulations on a good quarter.

Given your expectation for strong earnings growth over the next few years, have you determined the capital investment requirement to deliver that growth?

The growth plan that we've laid out is for our existing businesses and as we mentioned in the release, wouldn't include any of the new businesses that we potentially may get into like the network.

So given that our existing businesses are pretty low users of capital, I think our historical run-rate is pretty good indicator and that's been in the $10 to $15 million range, roughly.

Okay.

The prospect of launching a WWE Network so that's not inclusive in the 15 to 20%, is that correct?

That's right.

And have you given it some thought in terms of the amount of invested capital for that, if you decide to move forward with that?

No, we're in the preliminary evaluation stage and we'll figure that out as we move forward.

(Operator instructions)

Ali, thank you very much for coordinating this conference call.

We appreciate everybody 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.

This does conclude today's conference call.

You may now disconnect.