TKO Group Holdings Inc (TKO) 2010 Q2 法說會逐字稿

Good morning.

My name is Casey, and I will be your conference operator today.

At this time I would like to welcome everyone to the WWE second quarter 2010 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will a question-and-answer session.

(Operator Instructions) Thank you.

I would now like to turn the call over to your host, Mr.

Michael Weitz, SVP of Senior -- of Investor Relations.

Sir, you may begin.

Thank you.

Good morning, everybody.

We really appreciate you joining us this morning.

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

We issued our earnings release earlier this morning and will be referencing a presentation as part of our discussion to clarify our performance and shed light on trends in the business.

These and other materials such as quarterly financial and metric schedules 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.

These factors are described in our presentation and 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'll review our financial results for the second quarter and will follow this review with a Q&A session.

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

Thanks, Mike.

Basically we had a lousy quarter, and I think it was sort of like the perfect storm, if you would.

We had quite a number of negatives as it relates to the Icelandic volcano situation, which our troops were stranded over there for quite some time.

Notwithstanding that, another perfect storm as it relates to talent, our intellectual property, and the use of them.

At the end of WrestleMania, there were many of those really top talents, some of them retired, which one of them we knew was going to, another we did not.

In addition to that, there were considerable injuries that put a number of our performers on the sideline as well.

Undertaker, CM Punk, Shawn Michaels retired, Batista (inaudible - technical difficulty) because Pay-Per-View is no different than really a live event that's simply televised.

So those two numbers are indicative of a lousy quarter in terms of Pay-Per-View and the lack of attendance.

But all of that, of course, relates to us not giving -- WWE not giving the public the performance in terms of attraction that they want to see.

And, again, that's because of the perfect storm type situation that we've never had in the business in terms of all these talents leaving and be -- and injured all at the same time.

We did have a couple of strengths in terms of home video somewhat up.

Our toy launch with Mattel, and Mattel is a partner, is tremendous and will continue to have very positive impacts.

International revenue was up as well.

And generally speaking, notwithstanding the lousy quarter, we're extremely confident that the financial objectives we've stated before of growth between 15% and 20% over the 2009-2012 period is very sound.

So that's basically what I have.

George.

Thanks, Vince.

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

For the quarter, we reported significant declines in revenue and operating income as compared to the prior year quarter.

Our performance reflected the impact and timing of WrestleMania, which contributed approximately $32.2 million (inaudible - technical difficulty) decline in profit contribution and revenues that were essentially flat to the second quarter of last year.

Our performance fell below management expectations and prior year as trends weakened in the latter part of the quarter.

Although ongoing economic difficulties likely played a part in our results, we believe that recent changes in our talent base also impacted key operating metrics, particularly domestic Pay-Per-View buys and live event attendance.

In fact, lower revenue from our Pay-Per-View business accounted for approximately two-thirds of the decline in adjusted earnings.

Increased profits in other businesses such as home video were offset by lower results in other areas.

As such, the remainder of the decline can be attributed to $1 million in logistical costs associated with the Icelandic volcano and a $3 million sway in other income primarily due to the realization of foreign exchange losses in the current period as compared to realized gains in the prior year period.

These factors more than offset improved efficiencies and reduced SG&A expenses in the quarter.

We view some of these factors as temporary in nature and remain confident in our ability to address the more fundamental challenges to the business, including Pay-Per-View.

While these challenges post significant risk to 2010, we believe we can still meet our longer term financial targets.

As previously communicated, our business outlook called for average annual earnings growth of 15% to 20% over the 2009 through 2012 period.

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 increased 8% from the prior year quarter on an adjusted basis.

The growth was led by our events in North America which benefited from increases in both the number and pricing of events.

The number of events held in North America increased from 50 to 62 events and average ticket prices in the region increased 15% to $39.50, reflecting a price increase in select markets implemented in April.

Partially offsetting our performance in North America was a 19% decrease in average attendance to 5,800.

We held two major tours in Europe and Latin America.

The former was impacted by ongoing weakness in the European economy and by scheduling changes caused by the Iceland volcano.

As a reminder, the resulting ash cloud over Europe shut down or impaired air travel for much of our European tour.

In contrast, our tour in Latin America demonstrated our developing presence in Mexico and generated over 12,000 fans per event over an eight-event tour.

Overall, our average international attendance increased slightly to 8,200.

Turning to our Pay-Per-View business, revenue declined 29% on an adjusted bases, reflecting one fewer event and a 16% decline in buys for the comparable events produced in both the current and prior year periods.

For these comparable events, domestic Pay-Per-View buys declined 19%.

While not part of our adjusted results, it should be noted that WrestleMania XXV generated $21 million in Pay-Per-View revenue based on approximately 960,000 buys in the second quarter 2009.

Revenue from the distribution of our television programming increased by 9%, or $2.5 million due to higher rights fees from our global television contract and the addition of the WWE Superstars television show.

As a reminder, this program debuted on WGN America on April 16th of last year.

Notably, profit from our television business increased 25%.

Gross profit margins improved to 42% from 36% due to the expansion of revenue and significant efficiencies in our production processes.

In our consumer products segment, our licensing revenue declined slightly to $8.7 million.

The prior year benefited from the release of a new video game, Legends of WrestleMania, which is updated on a 24-month cycle.

As such, the timing of our video game releases resulted in lower game sales in the current period.

In addition, our SmackDown versus Raw video game, which was released in October, generated sales of 370,000 units, representing a 20% decline from the prior year.

Overall, lower game sales in the current period offsets very strong growth from our new toy launch.

Revenue from the distribution of our toys increased by 175% in the period and outpaced the prior year by 66% on a year-to-date basis.

Demonstrates the strength of our Mattel partnership.

Our home video revenue increased 34%, or $2.9 million due to higher sales of new release and catalog titles.

The growth marked the first quarterly increase since the third quarter of 2009.

DVD and Blu-Ray shipments increased 29% to nearly 1.1 million units during the quarter, reflecting video content with stronger appeal.

The quarter also benefited from a significant reduction in estimated return and from the release of two additional titles.

Estimated returns were 24% of gross domestic retail sales compared to 35% in the prior year quarter.

These increases to net home video revenue was offset in part by a 12% decline in average pricing to $12.71, reflecting ongoing promotional activity.

In our magazine publishing business, revenue decreased 17% to $2.5 million, primarily due to lower circulation.

Sell-through rates for WWE Magazine fell to 25% versus 32% in the prior year quarter.

In our digital media segment, revenue declined 32% to $5.4 million from the prior year due to a 25% reduction in online ad sales, the loss of a key wireless contract, and lower online sales of merchandise.

Revenue from our online e-commerce site, WWE Shop, decreased 29%, driven by a 24% decline in the number of orders to approximately 47,000, and a moderate decrease in average revenue per order to $50.73.

During the quarter, WWE Studies recognized revenue of $0.7 million associated with three of our film projects, Behind Enemy Lines Colombia, See No Evil, and the Condemned.

For our film releases to date, we participate in theatricals, DVD, and other revenues after distribution costs incurred by our partners have been recouped.

Accordingly, we have not yet recorded revenues for 12 Rounds or the Marine II.

We continue to believe our portfolio of released films will ultimately surpass breakeven profits.

We have endeavored to improve the returns of our future film projects and, as previously announced, will begin self distributing our film releases.

Under this new model, we will begin to record both film revenue and associated expenses once the film has been released for distribution.

The first film to be distributed under this new model, Legendary, is scheduled for release on September 10th.

Turning to our overall results.

Our profit contribution declined 9% to $43.8 million and margins fell to 41% from 45% in the prior year quarter.

These results were primarily due to a reduction in revenue from our higher margin businesses such as Pay-Per-View and by the logistical costs related to the Icelandic volcano.

For the quarter, reported SG&A expenses decreased 4%, or $1.2 million to $30.1 million led by the timing of our advertising spend, a reduction in bad debt expense, and lower staffing costs.

These changes reflect management's sustained focus on operating efficiency and our continued success in managing expenses.

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

As shown, adjusted operating income declined 21%, driven by the reduction in profit contribution partially offset by SG&A cost savings.

Adjusted net income declined approximately $4 million to $6.3 million.

As mentioned earlier, the changes in our Pay-Per-View business accounted for approximately two-thirds of the decline.

The remainder of the decline could be attributed to a $2.5 million swing in foreign exchange gains and losses, which was reported in our other expenses, as well as our volcano-related costs.

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

On June 30th, we held more than $210 million in cash and investments with virtually no debt.

Page 18 shows our free cash flow.

For the quarter, we utilized approximately $16 million of free cash flows compared to generating $26 million of positive free cash flow in the prior year quarter.

The decrease was driven by the timing of WrestleMania, higher investment in feature films, and changes in working capital, including changes in the company's tax position.

In assessing our business performance, we believe that some of the factors that reduced our second quarter performance are temporary in nature.

Although 2010 will be impacted by these short-term challenges, we remain committed to and confident in our ability to achieve the financial targets that we've communicated previously.

We believe we can address the more [lasting] challenges by focusing on the production of compelling unique content, creating original content, and cultivating a passionate global audience, these are the pillars of our business model and proven areas of strength for WWE.

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

Thank you, George.

Casey, we're ready now.

Please open the lines for questions.

(Operator Instructions) And your first question comes from the line of Richard Ingrassia with Roth Capital.

Thanks, Operator.

Vince, obviously, there's not much you can do about injuries.

So I'm more interested in hearing your take on fan response to new talent of late and the pipeline of talent to come.

Fan response in terms of new talent has been excellent.

We have a new group on Raw called Nexus.

It emanates from one of our television shows, NXT, in which we integrate new talent into WE, which, of course, is of extreme importance to us.

So I think there's been a very favorable reaction to a lot of our new talent.

But, obviously, you can't wave a magic wand and have that happen overnight in terms of the benefits.

But nonetheless, I'm very confident that the new talent infusion, as well as some of the older talents coming back, Undertaker and Triple H and things -- people of that nature will add to the mix and really make it a compelling talent lineup.

And at a high level, I guess a related question.

I mean, is there really much you can do on the content side to improve sales near term, other than wait for the talent to return and wait for broad improvements in employment?

Just broad economic factors.

Well, obviously, we can't control the economy and things of that nature as you're making reference to.

But I would suggest that there's no quick turnaround in terms of -- again, we had the perfect storm, unfortunately, in terms of talent retiring, injured, in which we've never had that many talents injured at one time, top talent that is.

They're coming back into the -- into the fold now, and again, an infusion of new talent.

It is going to take awhile.

Okay.

Thanks.

And just one more quickly.

Any new thoughts on use of cash?

And just to confirm with George, you don't hedge against currency fluctuations, correct?

That's right, at this point we don't.

We don't hedge, Rich.

We have a natural hedge on our live event side given that revenues and expenses are done in the same currency.

Our TV contract, which is a significant part of our international revenues, are denominated in US dollars, so we don't have exposure there.

So it's really primarily on the licensing side.

And at this point we've just decided the cost of hedging isn't worth it.

And on the cash spend?

The cash spend, essentially you've got two big items year-over-year.

One is the film spend side.

And if you look at the first six month -- six months of the year, we had film spend this year of about $21 million.

Last year the film spend was actually a net cash in flow because the tax credits that came in from previous films offset the money we had spent.

So we actually had $5 million of net cash in flow on the film spend side.

So that's a $26 million swing.

The other item was tax payments.

Last -- federal tax payments.

Last year we were overpaid and got a refund and this year not, and that's about an $18 million swing.

So those are the two big cash items.

Okay.

I lied then.

One last question.

The cash on the balance sheet, any new thoughts of use of those funds?

No.

We continue to view the cash on the balance sheet the same way.

Given the inherent risks in the business, we think it makes sense from a long-term standpoint to have limited debt.

From a liquidity standpoint, given the nature of the business, we think it makes sense to have about 30% or 40% of revenues thereabouts for liquidity.

And then we want cash available to invest in opportunities and in support in the existing businesses.

Fair enough.

Cash is good.

Thanks.

And your next question comes from the line of Michael Kupinski with Noble Financial.

Thank you.

Just a couple quick questions.

I know this is a difficult question.

But how quickly do you think it will take for you to kind of like get the story lines and the talent back on course?

I mean, obviously, internally you probably have some benchmarks when you think you kind of hope to regain the loss in maybe TV ratings and live events audience and so forth and start seeing some traction.

Would it be one quarter?

Two quarters?

Three quarters?

What -- where do you think is the time frame there?

Well, television ratings have been increasing, actually, since we've had this new influx of talent.

And you don't benefit from that until probably seven, eight weeks on the other end, which is about where we are now.

We're looking for SummerSlam to reverse the trend of the downward spiral of Pay-Per-View because of this new infusion of talent.

So we look for SummerSlam to be the kickoff, if you would, for all the new talent integrating with others, and more creative story lines and all that, which have already been created.

But the answer is, I would think SummerSlam would be the kickoff for all of this new stuff.

Okay.

And then in terms of Pay-Per-View weakness, is there any way to kind of guess or monitor how much of the weakness was related to talent issues that you might have had in the quarter versus maybe the impact of the price increases that you might have had?

There's really no way to tell exactly except our general research indicates that if you have a strong attraction, people will buy it.

So we just -- we've been giving them good attractions.

And, by the way, we've been here many times before in our company and which, for one reason or another, because of injury or what have you, that we're not the -- we don't give the audience what they want.

And we've been there many times before and know exactly what we're doing.

It's one thing if something is broken and you don't know how to fix it.

It's another thing if it's broken, but you do know how to fix it and are in the process.

So we do know what we're doing, and we know how to fix this problem.

And over the course of the last few quarters you've been pretty successful in managing costs.

And certainly you had the little extraordinary items in the cost related to the volcano.

But the cost of sales were higher than I expected.

What -- were there any extraordinary, other extraordinary items in there that might have accounted for the stronger than expected expenses?

Yes.

I mean, the primary one, Mike, if you look at -- the revenue was flat.

You'd expect with flat revenue to get a little bit of degradation on the profit contribution just from inflation.

So we had a little bit of that.

But essentially it was the million dollars, or a little bit more than that, related to the volcano that drove the profit margins in the quarter.

It just seemed like the expenses were a couple million higher than I was looking for.

I just thought that there might have been something else in there.

No.

About half of it was the volcano.

There are some timing issues on our marketing spend that we think reverses.

But the real unique item was the volcano in the quarter.

And then finally, do you have any updates on the plans for cable network and how those discussions are going and maybe what the timetable might be?

Just any update on that.

In the first of the year we're going to Cable Systems and present what we think is a very sound proposal for everyone, them as well as us, pretty much based on the Major League Baseball model.

We're all set to go.

Indications are there is interest, in some cases a lot.

And so we're going to be pursuing that with formal presentations beginning the first of the year.

And in terms of any capital that you might be put -- put behind that, have you given any thoughts about that?

Yes, we've given that a lot of thought.

Not prepared to share anything at this point.

But, obviously, it's part of the analysis that we're doing.

We've given a lot of thought as to what the investment would be as well as to what the returns and value creation would be.

Okay.

I tried.

All right.

Thanks, guys.

And your last question comes from the line of Luke Shagets with Sterne Agee.

Thank you.

Can you talk about what your long-term goals assume in terms of overall macroeconomic trends and consumer spending trends in particular going forward?

Yes.

When we gave our three-year plan last year and talked about 15% to 20%, Luke, we said we thought we could do it with moderate revenue growth.

So we weren't expecting a bounce back or a V-shaped recovery.

We thought it would be sluggish for some time.

We continue to believe that simply because that's the general consensus.

A lot of the revenues, as we talked about at that time, we felt pretty good about because they were either contractual in nature and we've announced things subsequent to what we talked about last year, specifically a new deal with Raw on USA, a new deal with SmackDown on SciFi.

So we had those in our sights, felt good about those, as well as our international TV agreement.

So TV, in general driving a lot of the growth and a lot of that being contractual.

The second part was our Mattel deal.

We knew going in that the Mattel deal would be impactful on three fronts.

Number one, the commercial terms of the deal which were forged in a fairly competitive RFP environment.

Number two, the level of distribution or increased distribution on a global basis that Mattel provided, and we're seeing that in the numbers right now.

And number three, we felt really excited about the product development that working with the Mattel team, we were going to be able to get new SKUs in the market.

So while we can't say any of that is locked in, those two things primarily in the '9 to '12 period, we thought would support us.

What we've seen in 2010 is maybe a little bit more sluggishness in the economy than we had thought, but not a lot more, because we weren't planning for a big bounce back.

But it really is what Vince talked about at great length is really the -- kind of the perfect storm on the talent side.

Okay.

Great.

And then just a quick housekeeping question.

On the international events, how many -- how many of those were buyouts?

We had a couple in the quarter which is what -- why you see a little bit of kind of a disconnect on the -- it's one of the reasons there's a disconnect on the revenue increase year-over-year in live events versus the profit decline.

The disconnect is you gross up the revenue on the buyout deal so that increases it.

And then also you had the volcano cost.

What I will remind you is that from an accounting standpoint, depending on the nature of control that we have, even if they are buyout deals, we do include the gross revenue and gross expenses.

We just gross up the revenue further if the buyout -- if we need to get the buyout as part of the deal.

So you -- you end up grossing up the revenue for that amount.

So it's a little bit of a different accounting that we did probably a year and a half ago, but we had a couple.

Okay.

Great.

Thank you.

(Operator Instructions)

Casey, is that it?

There are no questions in queue at this time.

Thank you, everyone.

We appreciate you listening to the call today.

If you have any questions, please do not hesitate to contact us.

I'm Michael Weitz at 203-352-8642.

Thank you.

This concludes today's conference.

Thank you for your participation.

You may now disconnect.