TKO Group Holdings Inc (TKO) 2010 Q4 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 fourth quarter and full year 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there'll be 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 Investor Relations.

Thank you and good morning everyone and welcome to WWE's fourth quarter and full year 2010 earnings conference call. Joining me for today's discussion are Vince McMahon, our Chairman and CEO, 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 our -- and in our filings with the SEC. Reconciliations for non-GAAP financial information discussed in this call can be found in our earnings release and on our website. Today, we will review our financial results for the fourth quarter and full year 2010, and will follow this review with a Q&A session. At this time, it's my privilege to turn this call over to Vince.

Thank you for that dynamic introduction. Good morning everyone. I guess maybe it should certainly be noted from the full-year standpoint, we achieved record operating results, reaching reported EBITDA of about $94 million. No small feat. However, there are some difficult trends in the fourth quarter. We had some declines across most of our business operators including live events down about 15% in average attendance in North America. Pay-Per-View was off about same, about 15%. Home video at a whopping 44% decline which we'll get into a few minutes. There are some areas of -- of strength as well. Toy revenue was out paced last year by 113%. We are continue to develop our new emerging markets, Mexico and India. We have licensing deals in -- in those areas, which is going to give us a big boost very shortly, as well as last quarter. We had our first event in China, which is going to be interesting going forward in terms of revenue opportunity. We just signed a new television deal in Russia as well as one in Brazil, so we're really focusing on the BRIC countries, so to speak.

So I -- I think that there are some areas to -- that are drivers, it should be noted, certainly talent development, primarily.More than anything else goes with talent, with good product comes good financial results. I believe that we've turned a corner here in terms of our talent development. It is far more extensive than it's ever been, far more focused than it's ever been. And I believe that this year certainly at WrestleMania you'll be seeing a lot of the older talents, but mixed with newer ones. We have individuals who have never appeared in WrestleMania before in main event, so again we -- I think we're poised to -- very well for the future and even the near future in terms of our -- our new characters, our new talent getting over, as we call it, in the -- in the general public. We've begun opportunities in terms of developing our WWE network. We've had conversation with Verizon and have many more conversations lined up in the upcoming weeks. That is developing very well. We have a program called Tough Enough television show, which is going to debut the day after WrestleMania . That's on USA Network, and in terms of reality type show. And we've pretty much have a focus on a new way of expanding as opposed to, in the past, we've said international and things of that nature and that continues to expand, but there new, many opportunities for us to flip the model so to speak, and -- and expand in that manner. I guess maybe I'll throw it back to you, George.

Okay.

And then we'll do some Q&A stuff.

Okay, thanks Vince. As Vince mentioned, WWE's performance in 2010 was highlighted by the achievement of record operating results, as we generated the highest level of reported EBITDA in the company's history. Specifically, we delivered EBITDA of $94 million and a 6% rise in net income to $53.5 million. Moreover we improved our EBITDA margins to 20%, compared to 19% in 2009 and 16% in 2008. I would describe these as favorable developments given the headwinds that the company faced during the year. To some extent, our reported earnings growth for the full year was facilitated by items recorded in the prior year, which we view as nonrecurring. These included an adjustment to our bad debt expense and charges related to our 2009 restructuring. In addition, the timing of reported TV production tax credit impacts the comparability of our fourth quarter result to the prior year quarter. To clarify trends in our business, I will discuss our performance on an adjusted basis. Excluding these items where appropriate. For further discussion, please refer to the supplemental schedules in our earnings release or our website presentation.

On an adjusted basis, our product contribution declined 7% from the fourth quarter of last year, reflecting three principle factor. These were -- one, tough retail trends impacting both sales and pricing in our Home Video business; two, continued transition in our talent base, which adversely affected our live event and Pay-Per-View performance; and three, the shift to a new film model under which we recognized marketing costs and recorded a loss in the period.Adjusted operating income for the quarter declined 22% to $14.4 million, reflecting lower profits from our Home Video, Live Events, and Pay-Per-View businesses. In addition, adjusted SG&A expenses increased about 3%.

For a more detailed review of our performance in the quarter let's turn to page six of our presentation, which identifies the revenue and adjusted profit contribution by business unit as compared to the prior year. Starting with our live events, including merchandise sales at these events, revenue decreased $3.5 million or 10% from the prior year. This decline was primarily due to lower average attendance both domestically and internationally. Average attendance at our events in North America declined 15% to approximately 5,600 fans. Similarly average attendance at our international events declined 12% to approximate 7,500 fans. We managed an 11% increase in domestic ticket prices to approximately $39, which partially offset the declines in attendance. Ticket prices at our international events declined approximately 5%, in part due to changes in foreign exchange rates.

Turning to our Pay-Per-View business. Revenue fell 15% to $13.8 million from the fourth quarter last year, reflecting a 23% decline in total Pay-Per-View buys, including a 15% decline in 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, this adjusted domestic retail price of non-Wrestle Mania Pay-Per-View events increased $5 to $44.95 in the beginning of January 2010. Revenues from the distribution of our television programming increased by 17% or $5.3 million, driven by improved deal terms associated with the renewal of key programming agreements. Additionally, the rise reflected contractual increases, particularly from our international agreements. During the quarter, we effectively transitioned our SmackDown program to the Sci-Fi net network. SmackDown became the most-watched, regularly scheduled program on the network, and is consistently among the top five most-watched cable programs on Friday nights. As mentioned at -- in our earnings call last quarter, we have also moved our domestic NXT broadcast to our wwe.com website. The move is consistent with our objective of evaluating new media for the distribution of our content.

In our consumer product segment, our licensing revenue increased $4.3 million or 54%, primarily due to higher toy sales. Revenues related to our toy products increased by approximately $4 million, reflecting the strength of our new partnership with Mattel. In fact, sales of our toy products increased 162% for the quarter and 113% for the full year. Revenues from our video games, however, decreased by approximately $400,000, as shipments of our SmackDown vs. Raw video game fell 35% to 285,000 units. Anticipating higher demand for new video game products, we are now working with our partner THQ on the launch of a new game, WWE All Stars, which is scheduled to debut this March.

Home video revenue declined 44% or $4.6 million, primarily due to a $1.9 million reduction in our wholesale home video revenue, a $1.6 million reduction from lower than expected sell through rate for our current and prior period releases, and $1.1 million lower revenue from our international licensing. The reduction in our wholesale home video revenue was due primarily to changes in product mix and pricing, as the number of units shipped in the quarter increased slightly. The average effective price per unit declined 7% to approximately $14.22, reflecting discounted sales and promotions. The downturn in video sales is echoed in the earnings calls of other entertainment companies. For the year, our domestic home video decline essentially tracked the overall industry. In our magazine publishing business, revenue declined 14% or $0.5 million, reflecting lower newsstand sales in the current quarter. In our digital media segment, revenue declined 3% to $10.3 million, reflecting a 13% decline in e-commerce sales from our WWE shop site and the February 2010 expiration of a key contract for mobile content. WWE shops saw 14% decline in the average revenue per order to about $46, which offset a 2% increase in the number of online purchases, which increased to 125,000 orders. On a positive note, sales of our online advertising and syndication of our content grew approximately 46% to $3.9 million for the quarter.

In our film business, WWE Studios recognized revenues of $7.9 million as compared to $0.2 million in the prior year quarter. The increase is driven by the release of our latest film, Legendary and Knucklehead, under our revised film distribution model. This new model entails self-distribution and marketing of films. Under this new model, we reflect the entirety of a film's gross receipts and its associated distribution and advertising costs in our results. In addition, this change in the distribution model resulted in the earlier recognition of revenue and expenses as compared to our previous model. The current quarter included $5 million in revenue and $6 million in expenses, including $2.5 million of distribution and advertising costs, resulting in a $1 million loss for the two films released under this new model. We expect each film to generate positive earnings in future periods.

For the six films that were released under prior to distribution model, we participate in revenues on a net basis, that is, after the costs incurred by our partners have been recouped and reported to us. For these licensed films, we recorded an increase of $2.7 million in revenue from the prior year quarter, primarily from 12 Rounds which was released in March 2009. As of the quarter end, we had approximately $56 million in capitalized film production costs on our balance sheet, with approximately $16 million associated with our theatrical release 12 Rounds, and nearly $34 million associated with film projects under our new model. Our balance sheet represents our stepped-up investment in films. We will continue to evaluate our revised film model and its ongoing results. As a reminder, the strategic rationale for our film business is that it builds on our core competencies, brings the WWE brand to a new audience, and is structured to generate returns in excess of our cost of capital.

Looking at our fourth quarter results across all of our business units, our adjusted profit contribution declined approximate 7% from the prior year quarter. Increased profits from television and licensing were more than offset by declines in home video, live events, and Pay-Per-View. The resulting changes in our business mix, including the increasing share of film revenue contributed to a decline in our adjusted profit contribution margin to approximately 38% from 43% in the fourth quarter of last year. Page 15 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. Adjusted operating income fell 22% from the fourth quarter last year, reflecting our reduced profit and a 3.5% increase in adjusted SG&A expenses, led by higher marketing cost to support various initiatives. Adjusted net income was $8.1 million as compared to $11.6 million in the prior year quarter, reflecting lower results from our operations and an increase in our effective tax rate to 42% as compared to 36% in the fourth quarter last year. The rise in our effective tax rate was due to lower than expected deductions for qualified production activities as a result of recent tax -- tax changes in the tax code which took place in December of 2010.

For the full year our effective tax rate was 35%. Looking ahead, we estimate our effective tax rate over the next year at 35% to 36%. For the full year, our adjusted operating income declined 5% while revenue, excluding film, declined approximately 2% from 2009. Our performance reflected the primary challenges that I mentioned earlier. Unfavorable industry trends in home video and the impact of talent transition on Pay-Per-View and live events. Adjusted operating margins fell to 17% from 18%, reflecting the changes in business mix and the increasing share of film revenue. Despite the decline across most of our operations, our businesses exhibited three major areas of strength -- increased value from our television content; significant growth from our toy business; and continued financial discipline.

Page 16 of the presentation contains our balance sheet, which remains strong. On December 31, we held $182 million in cash and investments, with virtually no debt. Page 22 shows our free cash flow. For the full year, we generated approximately $32 million of free cash flow, compared to approximate $111 million in the prior year. The $79 million decrease was due to three primary factors -- a $34 million increase in film production spending; net of film tax incentives; a $20 million increase in cash taxes paid; and a one-time $13 million advance from a business partner, which was received in the prior year. The increase in our net film investment reflected a $30 million increase in production spending and a $4 million reduction in film tax inspensives -- incentives on a year-over-year basis. Increase in our cash taxes paid was due to an increase in estimated taxable income and an $11 million refund received in the prior year. Capital expenditures were $11 million for the current year as compared to $5.4 million in the prior year, primarily due to increased investments in television production initiatives.

Looking past our near-term challenges, we believe we can generate meaningful earnings growth by developing new products and markets while working to improve the efficiencies and effectiveness of our existing businesses. Examples of the important innovations in our site include the introduction of a new line of Mattel toys, Rumblers; a new video game, WWE All Stars; as well as the launch of our new show, Tough Enough. In 2010, our business showed strength in expanding distribution. Revenue from emerging markets, such as Mexico, India, China, and Turkey grew by more than 75%, led by increases in our television rights fees and toy sales. As an indicator of our growth potential in the high-growth market BRIC market, we held our first live exhibition event at the Expo 2010 Shanghai in China, and recently completed TV distribution deals in Brazil and Russia, which will make our programming available to audiences of 33 million and 24 million households, respectively. We are working to accelerate our cultivation of these high-growth markets. By executing our strategy with financial discipline, we believe we can deliver on our growth potential and build greater value for you, our share holders. That concludes this portion of our call and I will now turn it back to Michael.

Okay, thanks George. Casey, we are ready now. Please open the lines for questions.

(Operator Instructions)

We'll pause for just a moment to compile the Q&A roster.

And your first questions comes from the line of Jared Schramm with Roth Capital.

Morning.

Good morning, Jared.

Could you explain to me where exactly you think we are in the down cycle, a little more specifically. And historically speaking, when was last time period you saw us in a similar position as far as the talent cycle concern?

We're ready to -- on an upswing. We're ready to make this move here. Again, I think it pretty much starts at WrestleMania. Although maybe it's already started, because we have indications from our Pay-Per-View beginning with the Rumble that things are turning around, but those are indications. So, I think it's already started. But I think it'll be sort of a launch, a big kick off, just prior to and beginning with WrestleMania.

And as far as Pay-Per-View is concerned in the emerging markets, is this mainly an infrastructure issue to work around or is demand picking up there for Pay-Per-View in the some of the BRIC countries?

It is both.

Okay. And I --

I'll add that Mexico, which a couple of years ago, we didn't have one Pay-Per-View buy is now our second largest, outside the US, contributor of Pay-Per-View buys.

And looking at the Mattel partnership into the holiday season, as a percentage of the total potential you would see there. Where would you say the Mattel partnership is running heading into the holiday season?

Well, we're not going to give any forward-looking guidance on that, but we felt good all year long. We've talked about it all year long, and as Vince mentioned, the growth in the quarter was about 150%, the growth year-to-date was about 113%. Q1 2011, is the first time we'll see holiday toy sales with Mattel for the most part. Last year's first quarter primarily included our old partner's toy sales. So, we feel good about where we are with Mattel.

Okay, thank you very much.

Your next question comes from the line of Michael Kupinski with Noble -- Global Financial.

Thank you. I appreciate it. Can you talk a little bit about the number of domestic events that you might have as we enter here the first quarter, particularly given the weather issues that so much of the country is experiencing?

Well, we have had some weather issues, not just here. But there was this volcano as you recall over in Europe and we had problems over there with the volcano ash, had to cancel a number of events there. And back over here. But you're going to have situations like that -- natural disasters or whatever. You're going to have a few snowstorms that can wipe out some of our events but by and large, I mean those are things you have no control over. And my weather forecast is one in which I think going forward we are not have these problems. We're not going to have any snow and ice problems I don't think in July and August.

Hopefully not. But in terms of the events, were there many events canceled in the January, February timeframe? And, I guess, if you had any thoughts about the attendance -- have been affected?

Again. I think from a weather standpoint, that's what that is. I think we'll have as many events next year from a local standpoint -- as to local -- that is, United States. We look at it from a global standpoint. Probably about the same number of events. We will increase a number of international events, which means we'll have more total events in general next year. So, I'm bullish on our live events. As I mentioned before about our talent -- our new talent initiatives and those that are "getting over" and the public is accepting them and very much is interested in them. So, the idea is to brush those new fellows up with some of the older talent and get the bloom off the rose.

I was wondering if you just could revisit the dividend policy again, given that the business has not been as strong as you probably would have like to have been? Any thoughts about revising the dividend policy at this point?

Again we look at it from a quarter-by-quarter basis.

And then in terms of the cost side. The costs, I guess, relative to the revenues were a little bi -- you guys have done a great job last year managing the cost in a pretty difficult and challenged environment. But seems like we kind of lost a little bit of a grip of that. Was just wondering if you could give us a little thought about your cost of goods going forward and then also any updates on your long-term earnings growth strategy for the next couple of years, given your guidance of double-digit growth?

Yes, I think on the cost side, Mike, we had about $383 million of total expenses this year which is roughly the same number last year. So, when you put some inflationary pressure on the cost space, to keep it flat, in of itself, is a fairly big accomplishment. And then on the SG&A side, we brought it down to about $108 million this year. So, we feel pretty good about what we're doing on the cost side. There is obviously a pretty sizable reduction of work. We did some heavy lifting in 2000 -- end of 2008 and 2009 -- to get our cost structure more in line, to deliver the EBITDA that we're delivering now. I don't think there is that next wave. I think right now the focus is on let's keep the infrastructure where it is and let's focus on new ideas to drive revenue.

I have to apologize. I came in a little bit late. But did you give any updates on terms of launching the network?

Yes, I mentioned that we're going forward with that. We just had our first meeting with Verizon. And scheduled, we have a meeting set up with all of the carriers -- DIRECTV, Time Warner. We already have a relationship with Comcast and with the NBCU aspect. But we're going forward with that. We feel very, very good in early indications from everyone. Our --it's a great idea and everyone seems to be looking at a lot of revenue from it.

And I know that you guys about -- talked about the fact, looking at a partnership perspective, that you didn't think that there would be a lot of cost associated with that -- have -- is there any thoughts in the terms of that prospect? What -- what the cost side might look like?

Well, I don't think we've ever mentioned that there was going to be a -- a big cost side from our standpoint. And it all depends on how these deals are structured. You got a lot of moving parts in today's environment as to what a WWE network really means and what does it mean to a telco and what does it mean to a cable consortium, with satellite. So, a lot of moving parts here. I don't necessarily think that it is going to be a big cost. Some in terms of production but we have -- we do so many television shows now with a lot more capacity to do others in the way that we do them, which -- which is a very efficient way, far more efficient than anyone in the television business.

Thank you very much.

You bet, Michael.

Your next question comes from the line of Jamie Clement with Sidoti.

Good morning, gentlemen.

Hello, Jamie.

Hello, Jamie.

George I -- I don't think I heard, I'm not -- I'm not sure if I might have missed it but did -- did you discuss a CapEx range for 2011?

We didn't discuss it. But $8 million to $12 million is always where we push maintenance CapEx. Obviously, if we have a -- an opportunity to invest in a growth project or something strategic, we'll take a look at it that. But our maintenance CapEx, $8 million to $12 million.

Sure, and then, I -- obviously it was first discussed a number of years ago and then put on hold. But a new -- new media center -- is that something we should expect sooner rather than later or is that Is -- is your production current infrastructure good enough for now?

It's good enough for us at the moment. I think that a lot of this, in terms of cost, will also relate to WWE network.

Okay.

And we're trying to tie the two together to a certain extent, although we will be -- even without a network -- we would be going forward soon, I would think, with those costs and the expansion of our studios.

And Jamie, just to be clear on my answer, the $8 million to $12 million which I obviously described as maintenance CapEx would not include the media centers.

Of course, of course. And Vince, final question . You're -- you obviously have way more experience in this than anybody on this call. I would imagine that ratings and Pay-Per-View buys and that sort of thing lag -- your audience's response to what's going on from a talent perspective, but you're on the road a ton. What's your sense in being in the arenas? Do you think the -- do you think the crowd is starting to buy into some of these newer characters better?

No question about it. And again, it's -- to me, that is the gauge of the temperament of our audience, especially the live event goer. And -- and you know whether or not, based on audience reaction, whether or not there is an acceptance or indeed, depending upon whether it's a bad guy or a good guy, in terms of their reaction. And these new talents are really getting over and I'm very proud of that.

Okay, great. Thanks a lot for your time as always.

Thanks, Jamie.

Thanks, Jamie.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Marla Backer with Hudson Square.

Thank you. A couple of questions. First, just to follow-up on Jamie's last question about some of the talent that you're seeing up-and-coming. Is there anyone on the horizon that you can identify as potentially the next John Cena or the next big name star?

It depends on whether or not from a political standpoint our talent are listening to this call. There are some political sensitivities, naturally, in terms of the locker room and whatever. But The Miz, Mike Mizanin, he's known as The Miz, certainly is coming on very, very strong in a short period of time. I say short period of time -- he's been with the Company for quite a long time, but he's fought his way all the way up to the top and sometimes it does take a while -- others, the characters are there, and the public latches on to them right away. But there -- I would say maybe more than any others. You've got The Miz, you've got Randy Orton, Alberto Del Rio -- you have a lot of really new characters that the audience is going to gravitate to.

Thank you. And WrestleMania tickets went on sale last month, I think, right? At the end of last month. So do you have any indication right now in the first ten days how ticket sales have been tracking versus prior years?

Yes, they're ahead of last year, both in terms of tickets and because of the scaling of the house in Atlanta. And the market in Atlanta being somewhat, a little of, I think, more fluid than the Phoenix area somewhat, we have -- our revenues -- is much higher.

And then --

And we just had our press conference, by the way, Marla, yesterday in Miami for the following WrestleMania .

I saw that. I mean, I saw that you had announced Miami as the next WrestleMania and with the weather being what it is, I was thinking, wow, that would be great for right now.

It's a whole lot better than what it is in the Northeast.

And my last question is, this is a topic we haven't touched upon in quite a while,. But when you first launched the celebrity host initiative, I think it really did a great job at sort of juicing the interest level, and we saw that in ratings.Are you still using celebrity chefs? Are you still seeing the same kind of traction? Or is it something was a short-term event, and you know it sort of fizzled?

We're going to go forward with celebrities. It's going to be a selective basis. I mean, once you get into the grind, if you would, of doing things on a weekly basis then you begin to get into secondary celebrities and what have you. And the audience goes, well, wait a minute, that guy's -- or gal is not much of a star. So, we're going to be doing this, going forward, on a more selective basis and with much bigger stars. And we think that's the way to do it rather than have a formula in which okay, what star are we bringing in this week from the outside. Because it takes away time, as well, to developing your own stars.

Okay, thank you.

You bet.

There are no questions in queue at this time.

Thank you, Casey, and thanks to 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, everyone.

This does conclude today's conference they give her participation you may now disconnect.