TKO Group Holdings Inc (TKO) 2010 Q3 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 World Wrestling Entertainment third 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)

I would now like to turn the call over to your host, Michael Weitz, SVP of Investor Relations. Sir, you may begin.

Thank you Casey and good morning everyone. Joining me for today's discussion are 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. 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 third quarter and will follow this review with a Q&A session.

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

Thank you Michael and good morning everyone and thank you for joining us today. Vince is unable to join us but he did ask that I step in to provide a top-line overview of the quarter for you.

So let me give you some perspective on the quarter. We managed a 12% increase in adjusted EBITDA despite some challenges. Difficult trends continued, reflecting changes in talent base and overall economic weakness. On the live event front we had a 10% decline in average attendance in North America. Pay-Per-View had a 16% decline in buys for comparable Q3 events from last year or prior year. Home video has significant increase in returns and lower prices at the retail level. However, earnings growth demonstrated our continued focus on managing the business smarter and so let's talk about some of our areas of strength.

Our global relationship with our Master toy partner, Mattel continues to be profitable and sales are strong. Toy revenue outpaced last year by 172%. Our international team continues to develop new and emerging markets and we held our first live event in China at the Shanghai World Expo in August. We were voted best show by the local Shanghai newspaper, Xinmin Evening newspaper and our free tickets that were distributed for our event went in less than one hour.

On the international licensing front, revenue rose 62% led by toys in Mexico and we reduced SG&A expenses 23% or $8 million. So I mentioned there were challenges and issues that we faced. Talent transition and overall economic weakness are both important factors in the Q3 revenue decline. In Q3 we had several top talent out. On the retirement front, Shawn Michaels and Dave Batista both left us after WrestleMania. Undertaker has been in and out of the ring with injuries. CM Punk was recently injured. Triple H has been out of the ring and Chris Jericho was temporarily out of the ring. These absences have affected many areas of our business; Live Events and Pay-Per-View to name two.

On WEE Films front we had losses in the quarter from marketing expenses to support Legendary. Legendary DVD however, is tracking to plan and we expect higher returns and profitability than in our prior business model for films. We are now done with 7 films or will be done by the end of the year and are on a production hiatus through at least the first quarter of 2011. And it's interesting to note as well that our films that we will make in 2011 will be at a lower expenditure. But we do continue to believe the film business makes sense; it builds on our core competency, it grows our audience for us and generates returns.

So, let me conclude by saying our management team is working to address these creative challenges. We're working on developing new talent like Wade Barrett, Alberto Del Rio and Nexus and we remain confident we can achieve financial objectives and deliver meaningful growth for you, our shareholders.

And now I'd like to turn the call over to our CFO, George Barrios.

Thanks Donna. I'd like to start by providing you with some additional perspective on our third quarter results. For the quarter, we managed a 40% increase in operating income with a slight decline in revenue from the prior year quarter. Our earnings for the third quarter of both 2010 and 2009 however, included tax credits which we believe impact the comparability of our results. Specifically, the third quarter 2010 included $6.1 million of tax credits related to our television and digital media productions, which were recognized as a reduction of expense in these areas. To clarify trends in our business I'll discuss our performance on an adjusted basis, excluding the impact of these tax credits.

For further discussion please refer to the website presentation or our earnings release, both of which include supplementary schedules outlining these tax credits and their impact on our financial results.

On an adjusted basis, our profit contribution declined 12% from the third quarter last year, reflecting three principle factors. These were first, continued changes in our talent base, which adversely affected our Live Event and Pay-Per-View performance. Two, tough retail trends impacting both pricing and sales in our Home Video business. And three, the transition to a new film model, under which we recognized marketing costs and recorded a loss in the period. In addition, continued weakness in the economy likely played a role in our results. Despite these challenges however, we managed a 12% increase in adjusted EBITDA with a 23% reduction in SG&A costs.

Given the headwinds that we faced, this was not an inconsequential result. Our earnings growth demonstrated our ongoing focus on managing the business in a smarter and more efficient manner. For a more detailed review of our performance in the quarter let's turn to page 6 of our presentation which lists the revenue and profit contributions by business unit as compared to the prior year quarter.

In assessing our performance you should note that there was no significant impact to our overall results from changes in foreign exchange rates. Starting with our Live Events including merchandise sales at these events, revenue decreased 15% or $4.8 million from the prior year quarter. This was primarily due to changes in our touring schedule which resulted in 15 fewer events in North America. During the quarter we adjusted our schedule to facilitate our first event in China, support our SmackDown launch on Syfy and to postpone events in Gulf states impacted by the recent oil spill.

Average attendance, both domestically and internationally was more than offset by higher average ticket prices. In North America a 10% decline in average attendance to approximately 5,200 fans was offset by 13% rise in average ticket prices. Internationally a 26% decline in average attendance to approximately 6,700 fans was offset by a 31% increase in average ticket prices.

Consistent with our strategic objective of expanding our distribution in new markets for WWE, the quarter was highlighted by our first event in China. Our exhibition at the World Expo in Shanghai attracted a capacity audience. WWE event tickets were distributed in less than an hour, underscoring what we believe is strong potential in this market.

Turning to our Pay-Per-View business, revenue decreased approximately 6% to $13.6 million, reflecting a 16% decline in Pay-Per-View buys for the comparable events produced in the current and prior year quarter. The decline in revenue was mitigated by an increase in average prices. As a reminder, the suggested domestic retail price of non-WrestleMania Pay-Per-View events increased $5.00 to $44.95 in the beginning of January 2010. It's notable that on a comparable period basis, two of the three Pay-Per-View events in the quarter generated a year-over-year increase in revenue.

Revenues from the distribution of our television programming increased by 10% or $2.8 million due to higher rights fees from our television contract, particularly our international agreements. As announced earlier in the year, we've now transitioned our SmackDown program to the Syfy Network. The move, which became effective on October 1st expands our relationship with the NBC Universal family.

In early October we also moved our domestic NXP broadcast to our WWE.com website. The move is consistent with our objective of developing new media for the distribution of our content. Broadcasting our WWE.com website takes advantage of our audience of 12.3 million unique visitors worldwide, including 5 million unique visitors in the US.

In our consumer product segment, our licensing revenue increased 37% to $10.8 million, led by sales of our toy products. The continued strong growth of our toy sales, which were up more than 170% in the quarter and 92% year-to-date, demonstrates the efficacy of our partnership with Mattel. Unit shipments of our SmackDown versus Raw video game increased to approximately 330,000 units and marked the first year-over-year increase since the third quarter of 2008. Revenues from our video games, however, decreased slightly, as the prior year quarter benefited from an additional video game title, Legends of WrestleMania.

Recently our video game partner DHQ unveiled two new video games; SmackDown versus Raw 2011, which was released last week, and WWE All Stars which will be released next year.

In our Home Video business revenue decreased 36% to $7.2 million. Although shipments of our new release and catalog title increased somewhat the period included adjustments to sell through rates. Our allowance for returns was 43% of gross domestic retail sales compared to 14% in the prior year quarter.

In addition, our average DVD price declined 6% to approximately $12, reflecting ongoing promotional activity and general industry trends.

In our magazine publishing business revenue decreased 24% to $2.6 million due primarily to lower newsstand sales. Sell through rates for our magazines fell 20% versus 26% in the prior year quarter. In addition, overall circulation was impacted by the distribution of one less special issue during the period.

In our digital media segment revenue decreased 8% to $6.8 million, primarily due to a decline in online advertising sales and the loss of a key wireless contract. Revenue from ecommerce remained essentially flat as an increase in the number of orders was offset by a decrease in the average revenue per order, specifically the number of online merchandise purchases increased 7% to 59,000 orders while the average revenue per order decreased 9% to about $46.

During the quarter WWE Studios recognized revenue of $7.6 million associated with our portfolio of films. Including $3.8 million of revenue from our latest film, Legendary. As a reminder, the business model for our previous film projects called for distribution to be led by either Lion's Gate or Twentieth Century Fox. Under that model we participate in the revenue generated by our film only after the print, advertising and distribution costs incurred by the studios has been recouped and the results have been reported to us. In contrast, under our new model we will manage the distribution and marketing of our films.

As a result, certain marketing and distribution expenses will be recognized on our financial statements rather than those of our partners. Further, we will recognize revenues and expenses on an earlier timetable upon release of our film and also on a more accelerated basis consistent with our construct of simultaneous and abbreviated distribution windows.

Legendary, released in September, was the first film to be distributed under this new approach. Based on the recognition of marketing expenses to support that film and our pending releases, our overall film business recognized a loss in the period. DVD sales for the Legendary film are tracking to plan. We continue to expect that film distributed under our new strategy will generate returns and levels of profitability higher than that of the previous model. As of the quarter end, we had approximately $57.3 million in capitalized film production costs on our balance sheet, with approximately $18 million associated with our theatrical release 12 Rounds and roughly $34 million associated with film projects under our new model.

We expect to amortize the production costs of these film projects over a shorter distribution period than our previous model and in a more accelerated fashion corresponding with the expected timing of revenue recognition.

Although our balance sheet represents our stepped up investment in films, the rate of investment is expected to abate in the fourth quarter and we expect to place production efforts on hiatus through at least the first quarter of 2011 as we continue to evaluate our ongoing results. As a reminder, the strategic rationale for our film business is that it builds on our core competencies, expands the WWE brand and audience and has the ability to generate returns in excess of our cost of capital.

Turning to our overall results. Our adjusted profit contribution declined 12% to $43.8 million and margins fell to 40% from 45% in the prior year quarter. These results reflected lower revenue across our business segments and the loss in the WWE Studio segment. As I mentioned, the later is attributable to the recognition of marketing cost under our new self-distribution model. For the quarter adjusted SG&A expenses decreased 23% or $7.8 million to $26.4 million, primarily due to adjustments to accrued management incentive compensation and to a lesser extent lower legal fees and reserves for bad debt.

Page 15 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. As shown, adjusted operating income increased 18% from the prior year quarter as SG&A cost savings more than offset the declines in profit contributions. Similarly, adjusted net income as referenced on page 20, increased 39% to $10.3 million, reflecting both the increase in operating income and a reduction in our effective tax rate. The current quarter rate of 34% benefited from certain production related deductions. The prior year rate of 42% was negatively impacted by differences between the taxes provided for as compared to actual amounts calculated on returns. For the full year we anticipate an effective tax rate of approximately 35%.

Page 16 of the presentation contains our balance sheet which remains strong. On September 30th, we held approximately $195 million in cash and investments with virtually no debt.

Page 22 shows our free cash flow. On a year-to-date basis we generated $22.9 million in free cash flow including $0.5 million in the current quarter. On a year-to-date basis our free cash flow declined over $66 million from the prior year, driven primarily by an increase in feature film investment and changes in the WWE's tax position. Our cash investment in Films increased by $40 million, driven by a $33.5 million increase in film production spending and the absence of $6.5 million in Film tax incentives in the prior period.

Related to the current period spending, we anticipate receiving approximately $7.7 million of Film tax incentives in future periods. Capital expenditures increased to $9.1 million from $3.6 million in the prior year, primarily due to increased investments in television production initiatives. In assessing our business performance we've emphasized the impact of changed in our talent base and of the sluggish economy.

Based on our history of developing talent and creating content with broad appeal however, we remain confident that we can address our creative challenges and drive meaningful earnings growth. We'll do this by strengthening our television and digital distribution, leveraging our partnerships and maintaining financial discipline. These are the pillars of our business model. Consistent with the practice that we established last year, we completed a comprehensive three-year financial plan through 2013. We intend to discuss this plan in our corresponding business outlook in conjunction with our review of 2010 results that is part of our next earnings call.

Looking ahead, we'll continue to focus on optimizing our results by executing our strategy in these areas and by talking advantage of our growth opportunities, we expect to generate superior economic returns. I look forward to discussing these further with you in the near future.

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

Thank you George. Casey, we're ready now; please open the lines for questions.

Michael

(Operator instructions) Our first question is from Richard Ingrassia with Roth Capital.

Donna, you've already made a number of adjustments on the both event commitments and expense levels obviously in order to navigate through the creative issues. Is there any more that you can do you think to tighten your belts or are you now in a steady state in those regards with the focus now really on the talent pool and I suppose waiting out a consumer recovery?

I think that's about right Richard. Certainly we watch everything we do. We're looking at everything from travel to marketing expenses but we're pretty much down and dirty at this point and doing the things that still makes sense for the business. So to your point, I think it's about the economy at this point and we are working on the talent and our story lines because our business is so much about the attraction So I think yes, I think that's where we are at this point, though we are smart business people of course and we will always watch our expenses.

On Pay-Per View, with each event in the quarter you got closer to the 2009 buy rates or comparable. Is it too early to tell you do you think you've maybe turning the corner that, at least in terms of buys?

You know, Rich there's probably debates of what the right comparability is because in some cases some folks might say it's more the title or the attraction so should you comp that or should you comp the actual period. So I think there's a lot of different ways to look at it.

To your perspective if you looked at it from comparable period, money in the bank had a significant drop-off versus the Pay-Per-View in the prior period and then Summer Slam and the September Pay-Per-View were almost flat. When you put in the price increases the revenue was actually up. So I don't know that two data points make a trend. We're obviously happy with the latter couple of months but we'll see into the future. I think Donna's point is the overarching point which is the attraction's got to be really really strong and that includes the creative and the talent and then we'll see.

Okay. Last question then on Films, is there any more perspective you can give on film revenues and profits, if not numbers then maybe just timing? It sounds like you expect gains on Legendary to come in Q4 and if you will, remind me the extent of your (inaudible) participation in the DVD release. It looks like Legendary got moved to Q4, is that right?

No, Legendary was in Q3 at the end of the quarter. As I mentioned in the script, we shipped out according to plan what we hear from point of sale is good news but we'll wait to see. We don't actually get the real detailed numbers until a quarter lag. Knucklehead was then just recently shipped so we'll see that in the fourth quarter, the results, a significant portion of that.

But in the current period you had roughly $7.6 million of revenue, about half of that was related to Legendary, the other half is related to other films under the old model, so you're talking about significantly different margins under those two because you had a lot of frontloaded P&A cost on Legendary. So Legendary we have good expectations for it, given what we've seen so far and we're excited about the other releases that are coming.

But it's going to make the P&L a little bit lumpy until we get into a steady state, because you have two things happening; the change in approach and the accounting that follows that and you also have the fact that in 2009 we didn't produce any films so we don't get the benefit of that revenue profitability in 2010. So you're going to have some lumpiness for a while and then it will smooth out as we reach a steady state level of production.

Right and just a small pipeline in general, obviously. What's the status on Knucklehead?

Knucklehead releases as a DVD, Richard on 11-9, which is Tuesday I believe and we did a marketing theatrical this time in just six or seven theaters in the major markets. We have been promoting it of course throughout assets on our television programming and our magazine, on our DVDs and we're hoping for good things as we release the DVD across many retailers. The difference on Knucklehead versus Legendary is Legendary we went with a Walmart exclusive for the first quarter so they have an exclusive on that DVD through the end of the year. Knucklehead will have broader distribution. And then the one other thing I wanted to mention is that both DVDs have international distribution as well.

Your next question is from Michael Kupinski with Noble Financial.

I just have a couple of quick questions. With the attendance down for Live Events it's kind of hard to determine if there was some traction on your new talent and story line. Any anecdotal evidence, possibly merchandise sales for some of the new talent that you're starting to see some traction?

I can answer that regarding Nexus certainly. As you know, Nexus is our team of about seven guys now that's one of our new talent pools or in the new talent pool and because John Cena has recently been forced to join Nexus, those merchandise sales, as you can imagine, have gone up. But again, that's very very early results on that. Wade Barrett, as part of Nexus, on his own has been doing very well. We have this new talent, as I mentioned before, Alberto Del Rio, so we're working on it. We're not quite there yet. There's certainly not at the level of an Undertaker or a Triple H, but it's definitely a focus of the organization and the creative team to make those talents bigger.

And as we look to the fourth quarter, the number of events, will that go back to a more normalized level or are some of the events that you kind of missed in the third quarter, is that just gone? Can you just give us a little thought about year-over-year domestic events and international as well?

One of the things, if you notice this year, just because of the way the calendar is falling and some other items, you had a significant increase in Q1 year-over-year, then you had a significant decrease in Q2, I believe it was about 11 and then in this quarter, as we mentioned, an increase. So I think we'll end up the year about 8 to 10 down from last year if you do the math on what I think about on the fourth quarter. So about 8 to 10 down. We always give a range on events because there are changes we make during the year for logistical reasons.

Great. You guys have just been doing a tremendous job in cutting expenses. Obviously a substantial decrease in SG&A expense. Can you give me an idea of whether or not that's a good run-rate as we go into the fourth quarter?

I said originally I think at the start of the year that I thought our normalized run-rate was about 30 million and the two things that are hard for us to predict are legal fees and then changes in management incentive compensation and in the third quarter a big chunk of that was us adjusting our management incentive comp and that was a benefit last year it actually worked against us from an SG&A perspective, so you had both numbers going an opposite way. So I still believe the 30 million is roughly the right target on a per quarter basis, with a little lumpiness depending on how we choose to deploy some of our marketing resources.

Then if you could just give me any progress on the launching of your cable network, particularly given the challenging environment that we have, has that pushed back those plans or are those plans still full speed ahead?

We are still looking at doing the cable network, Michael. We had always contemplated getting more into it after the first of the year so we plan to talk to potential partners after the first of the year and finalize our plans at that time.

(Operator instructions) Your next question is from Marla Backer with Hudson Square.

Given that this is the first year that you've been working with Mattel and I think one of the strategies Mattel had discussed that it would pursue would be a greater focus on kids, the kids market versus the collectors market, so just was wondering whether that was something that you and Mattel had discussed and that's something that you still think is reasonable and if so, do you think we could see any kind of blip up in terms of holiday sales on the toy side?

Let me get the first part first. As far as kids versus collectors, they're both very important market segmentation for them, Marla. They are always going to focus on the collector because that's almost an easier sell for them because the collectors will always want the newest and hottest product.

Kids, as you know, are very fickle and what they've done and they've done it so well, is that they started advertising on kids' programming on Saturday morning and of course they advertise on our programming as well. You'll see them on Nickelodeon and on CW, so they do a terrific job of marketing the new product. And they have been very successful. As George and I both mentioned, our business is up 172% with Mattel and yes, some of that is apportioned to a better deal in general but the majority of it is due to better sales. They just are a terrific partner and the distribution is very solid worldwide. They have distribution all over the world, direct distribution, meaning they have offices in all the global locations.

In addition, going back to the other things that they've done very well is that they have segmented different kinds of products for the children versus the collectors versus mom that's going to buy a gift set, so everything from Flexforce which has been a very successful segment for them, to the two-packs the championship belts and rings and Elite figures, as I mentioned those are for the collectors. They have really done a terrific job of segmenting the products for the different audience.

And your second question was, will we see an up-tick? We won't give you any guidance but I'll tell you, our numbers have been so good already, if they continue at the pace that they are, I'm very very happy with that.

And in terms of we seem to be seeing just some impact of this lingering economic uncertainty, I know we're no longer in a recession apparently but this lingering economic overhang. So given that, I know when the economy really first started to slide I think one of the things you talked about was focusing on making available a greater number of lower priced seats at Live Events and I think that was something that you initially did and had some success with. Are there any opportunities or licensing of merchandise at a lower price point or providing any kind of value pricing to your fans?

We always look at the price points or our licensees really look at the price points and I believe they offer an array of price points. So Mattel for example offers mini figures at a lower price point and then of course the collector figures of the Elite line is a higher price point. We have everything from silly bands, which of course is the latest hot item for the kids, which is a very low price point. So we do try to make something for everyone and we work very closely with our business partners on making that happen. I think we've done a good job at it. We can always go better and we will continue to follow the industry trends and of course where the economy is going.

(Operator instructions) There are no questions in queue at this time.

Thank you everybody. 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.