TKO Group Holdings Inc (TKO) 2012 Q3 法說會逐字稿

Welcome to the WWE 2012 third quarter earnings call. My name is Mike, and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session.

I will now turn the call over to Mr. Michael Weitz, Senior Vice President of Investor Relations for WWE. Mr. Weitz, you may begin.

Thank you, and good morning, everyone. We hope our investors and analysts on the East Coast weathered the storm safely. 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 as is it our usual practice, have posted the release, our earnings presentation and our supporting materials on our website, corporate.wwe.com. These materials can be referenced in conjunction with the discussion today to clarify our performance and to shed light on the trends in our business.

In our discussion today we will make several forward-looking statements. These statements are based on management estimates. Actual results may differ due to numerous factors as described in our presentation and our filings with the SEC. For any non-GAAP financial measures discussed on this call, reconciliation to GAAP measures can be found in our earnings release and in our website presentation.

Today we will review our financial results for the third quarter and 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. As you can tell by the materials you have with us, our quarter was about where we expected to be, maybe a little bit better. Obviously down from last year, and as a result of the -- it reflects basically the four key components, with the increased expense of management in incent comp. Home video was off about 16%. Licensing down a slight bit only because of the lack of our second video game that was budgeted, All Stars video game. And, of course, we had a reduced loss from the movie business. So all in all about where we expected.

Key metrics are very encouraging I think. Pay per view is up 13% for our three events in the quarter. Social media is through the roof, and it will continue to be through the roof for quite some time because of the engagement that we have with our audience, and even -- I will talk about it a little bit more -- further engagement in terms of something that's revolutionary.

Live event attendance, which is extremely important as far as trend is concerned, is up 6%, with a -- that is domestic -- with an international attendance average of about plus 17%. Television ratings are good. [We] remain the number one show in both SmackDown as well as USA, and we will add a third out as well which we will get to in a moment.

And we are -- as far as content expansion is concerned we have 2.5 additional hours of television. We launched between July and October a third hour of RAW, which is doing extremely well. And in addition to that the Saturday Morning Slam, as we call it, which is a kids show on The CW network. Again, the number one show across all channels for kids at that time.

We also debuted a show we call WWE Main Event, which is a one hour show on [iHome], which gives us a whole different set of viewers and a whole different network, a series of networks. Continuing with content expansion, Hulu Plus, which is not Hulu, it is behind -- it is a subscription model behind a pay wall, and we completed those agreements.

And in addition to that, films, we completed deals with Warner Bros. Animation to do a full-length feature with Scooby Doo, so it is Scooby Doo and the WWE Superstars, which will be interesting and fun and, again, reaching a different audience. Likewise, we have made a deal with -- a Christmas film on ABC Family, which again, gives us a different network and a different audience.

And speaking of that we just have completed the October breast awareness -- let me say that right; breast health awareness -- for Susan G. Komen, which gave us a different audience completely. It was promoted on television predominantly, although with the social media as well, and again a different way to spread the word about WWE in a much different way.

As far as the new television programs are concerned, the shows they replaced in their time slot up way over what they were before. Somewhere between 14% to 50% larger than the ones they replaced, which again shows staying power , and right away the number one network on ION, Saturday Morning Slam the number one show against all networks, 50% above what CW had before.

And in addition to that, one of other thing we -- as far as the brand is concerned, we renewed our Army National Guard sponsorship, and you may have heard something about us distributing the Rolling Stones pay per view, which is also an expansion in somewhat of a different audience, an older audience than people we predominately promote to, which is good for us.

As far as product innovation is concerned, we are doing something called Brawlin' Buddies. Just to give you a little flavor of how we're doing withMattel. It's part of a -- it'sgoing to be extremely Mattel is really happy with the sales. It's on Playtime's top toy list. It is on Kmart's Fab 15. So we think that is going to bode very well for Christmas -- pardon me -- and the holidays.

Our mobile app is extraordinary and revolutionary in that what we are going to be doing with it, probably in the next couple of weeks, it's going to be interactive in a way that no television show, no social media have ever been interactive. And that's scheduled to launch. We have done some of this, but this is going to be revolutionary in the amount and how we do it. Speaking of the download apps, we downloaded 2.5 million over the last 90 days, which is phenomenal growth. It will continue to grow.

So we feel good about the expansion of our content and distribution. And I think this quarter pretty much reinforces our confidence that we can take advantage of our growing demand for content, which would then lead us into our [some of which] to give you a little bit more flavor of our you network. We have been talking about [it] for some time. Based on the research that we have, it will be a premium subscription model distributed on all of the usual players [and/or] over the top, and it will be compelling program obviously, and again the most interactive network in the world, which gives it a tremendous heads up over anything.

You have to have things like that if it is going to be a subscription model, and again the research -- extensive research we have done over and over again, taking hair cut after hair cut, getting down to what we think is going to what we think is going to be a [keg] rate indicates very, very strong results, of which we won't be specific today. George will give you a little bit more flavor on the research, but there is movement on the network and in a subscription premium way.

And with that I will turn it over to George.

Thanks, Vince. There is several key points, which I would like to review today. These include the progress of our strategic objectives, including our network initiative; our third quarter financial performance; and our business outlook for the remainder of this year.

In terms of our strategic initiatives, we continue to make important progress in the third quarter, expanding our content and distribution and building our brand strength. I would like to reiterate this because both these goals are perhaps our most important strategic imperatives. They form the foundation of our future growth.

During the quarter we began the production of a third hour of RAW and a new kids show, WWE Saturday Morning Slam, which have been licensed to the USA Network and The CW respectively. Subsequent to quarter end, we launched a new one hour original series, WWE Main Event, that has been licensed to ION Television. As a result of these agreements we have increased the number of hours of original WWE content that will be aired in prime time on domestic television from four hours per week to six hours per week. Including the nine original short form series that we produced for YouTube, this means that during the upcoming fourth quarter we will create and monetize 87 hours of original domestic television content, compared to 52 hours in the fourth quarter last year.

In addition, we announced and initiated an expansion of our online distribution, providing Hulu Plus with replay rights to our RAW, SmackDown and Main Event programs. While providing Hulu Plus with digital replay rights to our current programming, the agreement does not preclude programming or launching at WWE network. We believe we can continue to expand and monetize our content in a way that takes advantage of the growing demand for content. In order to cultivate further the unique passion of our global fans, which underlies that value, we launched a new WWE mobile app during the quarter.

We integrated fan videos in programming with the use of Tout's social media technology and extended WWE's reach on social media networks. WWE now has approximately 81 million Facebook likes and 37 million Twitter followers, representing growth of about 70% and 120% respectively since the start of the year. WWE now ranks third in total followers of sports brands on Facebook, behind NBA and Nike, and has more fans than the NFL and its 32 member team pages combined.

According to Trender, RAW is among the top five most socially active entertainment programs every week, with average of 818,000 social media mentions on GetGlue, Facebook and Twitter. Ultimately as we strengthen our digital presence and fan reach on social media, we believe we can expand the audience for television programs and stimulate demand for all of our products; our live events, pay per view programs and consumer products. As a media company, the long-term potential to monetize the staggering growth on digital platforms such as mobile and online gaming is something that our product strategy must consider as we develop our long-term plans, a process that is ongoing.

During the third quarter, as we executed our broader content strategy, we continued to manage some positive developments in terms of our fundamental operating metrics. Average attendance at live events in North America increased 6%, and pay per view buys increased 13% for our third quarter event.

It is important that while our earnings declined in the quarter, that decline was attributable to factors that we discussed in the past and were largely anticipated. These factors included a $6.6 million increase in expenses associated with the return to a more normalized level of management incentive compensation, as last year's earnings performance resulted in a reduction of accrued bonus and stock compensation.

They also included $2.1 million in network related investment and a $0.8 million reduction in licensing revenue associated with the absence of the WWE All Stars video game, which was released in 2011. Based on these factors, EBITDA declined by $9.2 million, and net income declined by $7.1 million from the prior year quarter.

In previous quarters we have adjusted our results for items such as network investment and film impairs to clarify the trends in financial performance. For consistency, we have prepared supporting schedules that demonstrate the impact of these adjustments for the third quarter. However, we do not believe that making these adjustments provides a materially different perspective on the quarter's performance.

For a more detailed review of our performance in the quarter, let's turn to page six of our presentation, which lists the revenue and profit contribution by business as compared to the prior year quarter. Starting with our live events, revenue from ticket sales essentially flat to the prior year quarter, as increases in average attendance and ticket prices at our events in both domestic and international markets were offset by a reduction in the number and mix of international events.

Revenues from our events in North America increased 20% or $2.8 million, reflecting a 9% increase in the number of domestic events -- that is six additional events -- and a 6% increase in average attendance to 5,200 fans. In addition the average ticket price for these events increased 3% to nearly $43.

The revenue growth in North America, however, was offset by a comparable decline from international markets resulting from eight fewer events in the quarter. In these markets average attendance increased 17% to approximately 8,400 fans, and average ticket price increased 23% to $98. The increase in both average attendance and average ticket price is reflected in part changes in territory mix, as events in the current year quarter were concentrated in cities with greater economic strength than in the prior year quarter.

While our live event ticket sales were essentially flat to the prior year quarter, revenue from the sale of vending merchandise increased 25% to $4.5 million. The $0.9 million increase was primarily due to a 26% increase in total domestic US attendance. Domestic per capita merchandise sales increased 1% to $10.28 in the current quarter.

Turning to our pay per view business, revenue increased 3% or about $500,000. A 13% increase in buys from our third quarter events was is partially offset by a reduction in the number of buys reported for prior period event. For the events in the third quarter, the growth in buys was predominantly attributable to our SummerSlam pay per view. Buys for that event increased 21% from the prior year quarter, demonstrating its creative strength.

Offsetting this performance, buys associated with prior period events declined by 50% due to the timing of WrestleMania related purchases as reported by cable and satellite distribution partners. On a year-to-date basis, buys for WrestleMania were 8% above the prior year period, and total buys for the nine events to date were 9% above the prior year period.

As indicated previously, we believe the improved overall performance derives from both relatively easy comparisons to our prior year activity and from favorable advances in our pay per view operations. The latter included the continued development of talent base and creative storylines as well as increased brand awareness that arises from our YouTube programs and social media campaigns.

Revenues from television business of $34 million were flat to the third quarter last year. Additional rights fees and contractual increases inherent in our global TV distribution agreements were offset by the occurrence of fewer weekly telecasts of domestic SmackDown and international programs, and a reduction in sponsorship revenue tied to our TV assets. For our domestic SmackDownand international programming there were 13 telecast weeks, as measured by the number of Fridays within the current fiscal quarter, compared to 14 in the prior year quarter.

Recently we announced agreements to produce and license three new television programs comprised of 2.5 hours of new content. These include an extension of our RAW from two to three hours; a new kids show, WWE Saturday Morning Slam; and a hour original series, WWE Main Event. The third hour of RAW and WWE Saturday Morning Slam were launched during the quarter, on July 23 and August 25 respectively. WWE Main Event debuted subsequent to quarter end on October 3.

As Vince noted, each of our new programs attracted an audience that is 14% to 50% larger than the viewership of the programming they replaced. Exemplifying the compelling nature of our programming, the additional third hour of RAW has attracted an average audience of 4.4 million viewers, which is 35% larger than what NCIS achieved in the comparable time slot over the ten weeks before our debut.

In our consumer products segment, our licensing revenue declined by 21% or $1.9 million, primarily due to reduced sales of our video game and to a lesser extent novelty products. Royalties earned from the sale of video games declined by $1.2 million, primarily from one fewer release -- WWE All Stars -- during the third quarter of this year. WWE All Stars was released in March 2011 and will not be refreshed in the current year.

Shipments of our franchise video game, WWE 12, also declined 5% in the quarter to 127,000 units, resulting in a 22% decline to date compared to that of the prior year release. To date, royalties from the sale of video games have declined 32%. The decline underscores our interest in developing the games category and participating in the segments of the gaming industry, such as mobile and online apps, which have and are expected to experience growth.

During the quarter royalties from the sale of toys increased 16% or $0.5 million, reflecting the successful introduction of the Brawlin' Buddies toy by Mattel, which has been identified as a top toy for 2012 by industry experts. Brawlin' Buddies has earned accoladeson the coveted Kmart Fab 15 and the Time to Play holiday 2012 most wanted list. Although royalties from the sale of toys has declined 2% to date, this compares favorably to industry data that indicates a 13% sales decline for the domestic action figure category in 2012.

Our home video revenue declined 23% or $1.9 million, reflecting a reduction in average unit price and adjustment to allowance for returns that were partially offset by an increase in is shipments. Although shipments increased 36% to approximately 930,000 units, a majority of this growth was derived from lower priced new releases and catalog titles. The resulting change in product mix contributed to a 16% reduction in average price to it $11.01.

A $1.7 million adjustment to our allowance for returns was made to reflect lower sell through rates, primarily of our prior period releases. This adjustment increased our reserve returns to 50% of gross retail revenue compared to 21% in the third quarter of last year. On a year-to-date basis, home video revenues are essentially flat to the prior year period, as a 15% decline in average price offset a 5% increase to shipments to 2.6 million units. For both the current and prior year periods our reserve for returns represented approximately 30% of gross retail revenue on a year-to-date basis.

In our magazine publishing business, revenue decreased $0.3 million, reflecting somewhat lower news stand sales in the current quarter. As described previously, given the significant revenue decline that magazine publishing experienced over the last several years, from over $15 million in it 2008 to less than $7 million over the trailing four quarters, we have reengineered the cost structure of this business to modestly surpass break even profit levels, with revenue in the range of $5 million to $6 million.

In our digital media segment, revenue increased 9% or $0.6 million to $7.5 million, driven by increased rights fees associated with the licensing of our original content to YouTube. Content provided under this new agreement included original short form programs with remarkable popular appeal. Propelled by the programming, WWE's Fan Nation has established its position as the fourth most watched channel for original content on YouTube since the launch of YouTube's original content channel strategy, according to ad age.

Sales of merchandise in our ecommerce website, WWEShop, declined 16% or $0.5 million, primarily due to a 21% decline in the volume of online merchandise sales to approximately 54,000 orders. The average revenue per order increased 2% from the prior year quarter to $47.77.

During the quarter WWE Studios recognized revenue of $1.9 million, compared to $3.7 million in the prior year quarter, primarily due to the timing of releases from our pre-2010 movie portfolio. There were three feature films released in the quarter -- Barricade, No Holds Barred, and The Day --as compared to one release -- Inside Out --in the prior year quarter. Based on the unique circumstances, we have modest profit expectations for two of the current quarter releases.

No Holds Barred represents a DVD rerelease of a 1989 WWE produced theatrical feature starring Hulk Hogan. Based on current DVD sales and with total cost of the less than $100,000, the project remains on track to generate a profit of about $300,000.

The Day was distributed as a limited theatrical release, and revenue generated by this movie will be recognized as participation statements are received. As such, no revenues were recorded for this movie during the quarter.

WWE Studios' performance in the quarter was characterized by a $4.6 million reduction in film losses, as the prior year quarter included a $5.1 million impairment charge related to our self-distributed films. Excluding the impact of that charge, WWE Studios movie portfolio again penetrated a loss of $1.5 million, compared to an adjusted loss of $1 million in the prior year quarter.

Over the past few quarters we completed agreements with Pathe, Fox, Lionsgate, IM Global, Troika Pictures, and most recently Warner Bros. Animations and ABC Family to coproduce and cofinance our movies. We are working partners with these partners [to create] content with broad appeal, engage recognized acting talent, and to establish strong global distribution. Our upcoming slate of movies exemplify our revised approach. These movies include No One Lives, a horror film with Luke Evans;Dead Man Down, a romantic thriller staring Collin Farrell;The Marine Homefront, the third installment of our profitable acting franchise; and The Hive, a thriller starring Halle Berry. As a reminder, these movies also include WWE superstar talent.

Most recently we announced new agreements with Warner Bros. Animation to produce an animated feature, Scooby Doo at WrestleMania, and with ABC family to produce a made for TV family movie, Christmas Bounty. These agreements enable us to strengthen our connections and the bond of our superstar talent with young family viewers. It is very important to note, as indicated in the last earnings call, that WWE's equity investment in each of our upcoming movies, which generally falls in a range of $2 million to $4 million, averages less than 40% of the average of the eight previous self-distributed films. We anticipate the strength of our production and distribution partnerships, including better deal terms, will facilitate a much higher rate of return for WWE.

Overall, our profit contribution declined 3% to $42 million, as reduced losses from the WWE Studios movie projects were offset by the aforementioned reduction in home video sales and pricing, and by lower video game sales, with one fewer release in the period. Gross profit margin of 41% was on par with the prior year quarter, and excluding the impact of last year's if film impairments, however, our current third quarter results compared to the adjusted profit contribution of $49.1 million and adjusted gross profit margin of 45% in the prior year quarter.

For the quarter SG&A expenses increased 33% or $8 million to $32.5 million, primarily due to the reset of management incentive compensation, including bonus and stock compensation, which resulted in a year-over-year increase of $5.6 million. In addition, the rise in SG&A costs reflected increased staffing costs. The rise in staffing costs, excluding the management incentive compensation change, was incurred primary early to support a potential network. These network related costs reached approximately $2.1 million in the current quarter.

Page nine of our presentation compares the quarter over quarter and provides a summary of changes by business. As shown, operating incomes declined $10.9 million, primarily due to the increase in SG&A expenses. In addition, our reduced profit contribution and our rising depreciation also impacted our results. The latter predominantly derived from our investment in assets to support the creation and distribution of new content, including through a potential network.

Excluding the impact of network related operating expense and prior year film impairments, adjusting operated income declined $13.9 million from the prior year quarter. Net income decreased approximately $7.1 million to $3.5 million, mirroring the percentage decline if operating income. Our effective tax rate of 30% compared to 32% in the prior year quarter. The rates in the both periods benefited from the recognition of previously unrecognized tax benefits.

Page 13 of the presentation contains our balance sheet, which remains strong. On September 30 we held nearly $150 million in cash and investments with no long-term debt. Page 17 shows our free cash flow. Through the first nine months of year wegenerated approximately $14 million in free cash flow, compared to $37 million in the prior year. The change was primarily due to an increase in capital expenditures and programming costs to support our merging content distribution strategy, including a potential network. We continue to believe that our content investment will yield significant returns under almost any distribution scenario.

Based on our earnings to date, we are raising the range of our financial forecast for the full year. While developing the transformative opportunity represented by the network, we expect that our 2012 earnings will be 15% to 25% above our 2011 net income and 10% to 15% above our 2011 EBITDA, bothon an as-reported basis. The difference in growth rates associated with these measures is driven by the impact of a lower effective tax rate in the current year.

As our net income to date is 24% above our full year 2011 results, reaching 15% to 25% earnings growth for the full year implies some tough year-over-year comparisons for the fourth quarter. While we expect modest growth across most of our businesses, this growth is offset by the reset of management incentive compensation and investment in our broader content initiatives, including a potential WWE network.

In it terms of free cash flow, our expectations have improved somewhat based on our operating performance and the timing of projected film spending. However, we continue to anticipate that full year 2012 free cash flow below our 2011 results. This forecast includes investment of $10 million to $15 million to produce our future movie releases, andan estimate of $35 million to $40 million to support the network. The latter amount includes investments of $6 million to $8 million to create new programming content, approximately $20 million of capital expenditures for facilities and equipment, and $8 million to $10 million of operating expenses as previously discussed, to provide the broader infrastructure, personnel and systems that support this initiative.

Before we discuss the networks specifically, we felt it important to share new research on the size of the fan base that highlights the potential for many areas of our business, including the network. As shown on page ten of the website presentation, we have conducted extensive research on the size of our US fan base.

We partnered with a top tier consulting firm to conduct a detailed survey of over 9,000 US households. The survey provided evidence that about half of the households in the US, or about 57 million homes, have level of affinity for WWE. This is a staggering number.

To break this down further, roughly 20% or 10 million of those households are passionate hardcore fans. They watch our television programs regularly, know our superstar talent, and are very engaged across all of our platforms. Roughly 40% or about 24 million homes are casual fans. They watch, somewhat less intensity, but remain engaged with our brand at various times throughout the year. The remainder, about 23 million homes, are mostly lapsed fans, who have not watched our shows within the last year, but have been a WWE fan at some point and have expressed interest in reengaging with our brand, especially through our classic archival content.

In fact, more than 50% of all respondents indicated quite simply they want more WWE content. So there is tremendous appetite for WWE. And we expect to see similar results as we extend this research globally.

As we add more content on television and digital platforms, we expect the audience will continue to grow because each show has its own sensibilities and provides broad cross-promotional opportunities. The NFL and their experience as they expanded the number of television distribution partners is a case in point that supports this view. Based on this research, we are excited by the opportunity for all of our business lines, including a potential network.

As it relates to the network, given the size of our fan base and the interest in WWE, we view the premium subscription model, whether it's through traditional distribution or over the top, as the best approach to capitalize on our fan's commitment and the tremendous economic opportunity for WWE. We continue to develop our programming, build production infrastructure and negotiate with top cable, satellite and telco distributors. As we are still in negotiations, we don't believe it is in our best interest -- or that of our shareholders -- to discuss potential launch dates on the range of anticipated financial outcomes at this time.

Looking ahead, we believe that by expanding our content and distribution, we can dramatically raise our earnings potential. As I described in previous quarters, this view is anchored by two fundamental premises. First, the WWE brands are among the strongest commercial brands worldwide. Regardless of the metrics that are invoked, our social media statistics or the top ratings of our television programs, the statistics all support this conclusion.

The second fundamental premise is that the proliferation of distribution alternatives is driving up the value of content, especially compelling content with broad appeal. Based on these factors, we have tremendous confidence that we can take advantage of developing opportunities. As evidenced by our recent agreements with USA, ION, The CW, YouTube and Hulu Plus, creating new content and distributing that content in traditional and emerging platforms is a natural extension of our core competencies. By executing in these areas, we can drive earnings growth.

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

Thank you, George. Michael, we are ready now. Please open the lines for questions.

Thank you. (Operator Instructions). Our first question is coming it us from Richard Ingrassia of ROTH Capital Partners.

Good morning, everybody.

Good morning.

I assume we are not getting an update on the timing of the network obviously, but,Vince, can you talk about what thinking has been done so far to mitigate any potential cannibalization of pay per view buys or obviously interest in other WWE existing revenue streams?

The network would not in any way cannibalize pay per view. And we have several models, one that would include pay per view, one that would not include pay per view, all of which still is compelling network. So whatever we do in terms of the network will be an add on when you look at the entire production.

Okay, so --I mean, if it is a -- say an HBO-like network, are you saying that there is a model potentially that would include the pay per view for those subscribers, the exist -- the pay per view that you charge today individually?

It depends.

Okay. And I thought I also heard again still no plans to change your current cable carriage of RAW and SmackDownin any case on USA and Syfy and use those shows to cross-promote the new premium channel?

Well, again, the philosophy of what is good for WWE is good for all the networks and has always been that way and will continue to be that way. The question is how much base program doing you need to promote the other initiatives. And actually I think the SmackDowncontract comes up soon in terms of negotiating with Syfy. That is the first one that comes up. So you have to look at this in terms of totality, and you need base programming -- broad-based programming to promote network, promote pay per view, to promote all of the ancillary things that we do. So it is important to be able to have that in addition to a premium WWE network content.

Okay. Thanks. And just on the money that is going into new programming, isit too soon or can you give us some flavor for what type of programming that might be?

Again, [that's] getting into the weeds here, which we are not really ready to announce. I mean, there is so many things that when you look at our audience, as was mentioned, 50% of US homes -- a little better than that -- having an affinity, that means they want different things. The older audience wants one thing. The middle of the road wants something else. The hardcore wants something else. So again, what you have to look at is a blended area of programming, which really goes from A to Z. So not being specific, we want to give you some idea of what is going on with the network without saying too much to interfere with the negotiations or things of that nature.

Fair enough. Okay, thanks. And finally, just to George, can you characterize in a little bit more detail what drives the increase in the bottom line guidance here, whether it is driven by better expectations on the top or maybe some expense controls in Q4?

The majority is year-to-date performance, Rich. If you look at earnings, we are I think 24% up year-over-year, year-to-date, so the 15% to 25% as mentioned in the script, we have got some tough comps coming up. I think our core businesses for the most part will be flat to up in the quarter. That is our visibility right now.

But when you look at some of the broader investments that we are making in content, specifically the network as well as the continuing reset of that management incentive comp on a year-over-year basis, that eats into some of that core business growth. So I would say the 15% to 25% on net income is primarily driven by where we are at year-to-date.

Okay. And can you just repeat what you said about the tax rate guidance for the year?

Yes, I mean, at this point we think fourth quarter will be in the mid 30s. Obviously, depending on timing of FIN 48 releases, that can change, as we saw this quarter, but our core tax rate we think about the mid 30s in the fourth quarter.

Okay. Thanks. That's all I have got. Thank you.

And our next question comes to us from Michael Kupinski of Noble Financial.

Thanks for taking the question. Just a couple of housekeeping thing. One of the largest variances in my number was a little bit lower SG&A expense, and I know that obviously that number is higher year-over-year because of the incentive comp and so forth, but it was a little lower than I was looking for. I would assume the fourth quarter is going to have a bump up given some additional compensation and things going into that quarter, but is -- could you maybe give us some thought about how that number is going to look relative to the third quarter?

Yes, it will look -- on an absolute basis, not year-over-year, it will look a little bit lower in the third quarter, because we won't -- or I mean it will look a little bit similar to the third quarter. I wouldn't see a big ramp up in SG&A in the quarter at this point.

So then that number will be actually down then or flat from year-over-year.

It will be in that range. We had about $4 million-plus in network spend in the fourth quarter last year, predominantly presented within SG&A. That number will probably be a little bit less this year are, because we had some one-time payments last year. I think that kind of got into basically where we are at on SG&A.

Okay, fine. Thank you. And then also on -- in terms of looking just at the attendance, and certainly it was up year-over-year, but it's stillrelatively lackluster from a historical perspective. I was just wondering if there was a way for you to attribute what the attendance looks like, what you think would be the driver. I mean, do you think it is a little bit of the economy? What -- developing storyline still, or is there significant difference maybe in the size of the venues? What -- can you just give us a little color on what you -- how you quickly we can assume that number can start to continue to ramp? Or are there some limitations in what you think it might -- what type of growth we might see there?

It is based on product [moreover] -- a better product in addition to further expansion and a broader audience, whether it is television with the new shows we have added and the nonduplicated audience. It is a larger market for us, especially as it relates to social media. Reaching different people in a broader perspective, it's notnot just the live event attendance. It is the rising tide floats all boats. Bad pun [in this area].

Vince, do you think we could continue to see progression probably in the upper single digit range, or do you think that -- I'm just trying to gauge what you are anticipating in terms of the growth we are likely to see he in terms of attendance?

I don't want to speculate now, but it will be good.

And then if I turn quickly to the performance of the films in the quarter. You had some releases in the third quarter, and I was just wondering were they late in the quarter, or where they -- because obviously we didn't see a lot of revenues from that. Did it they perform more modestly than what you expected, or can we anticipate there might be an impairment charge? I mean, what can we look for from that segment?

Part of it is just the unique nature of each release. So No Holds Barred, which was the rerelease, obviously had smaller expectations which we had exceeded and still think that will be profitable on an ultimate basis, generate a profit of around $300,000.

The Day, where we're really -- we essentially have purchased with our partner Anchor Bay the domestic distribution rights. We are accounting for are that similar to our licensed films, so on a net basis. So even though the film was released in the quarter, we -- you won't see us record revenue until the participation statements start coming in. So there is a reason for that.

And Barricade is met with expectations, although I will remind you we -- based on the changing model of directed EBD, we impaired Barricade as well as some of our other films in the fourth quarter last year. But Barricade is roughly where we expect.

Okay. Very well. Thank you very much.

Our next question comes to us from Brad Safalow of PAA Research. Thank you.

Thanks for taking my questions. Just on the television distribution rights side, can you give us a sense of what kind of sequential increase you will see from the third to fourth quarter after adjusting for the timing of SmackDown, the ION show launching and some of the other items, obviously the third hour only being in the quarter for about two months? And the Hulu obviously. I assume that is going through the television [trench] line.

On the latter point, Hulu actually right now goes through the digital license, so our digital business.

Okay.

Essentially the digital business has three economic engines. Advertising, the licensing of programs domestically and internationally, and then ecommerce. As far as guidance on the number, obviously that is something that is sensitive, given these are commercial negotiations with other partners, and I don't think they want numbers out there. So I'm not going to talk to that.

I will say that the two additional hours in prime time, we are real happy with the economics. If you wanted to look at it, when we were -- when we had those two additional hours back in 2010, which were NXT and Superstar, we feel good about both the creative on the new shows as well as on the economics on the new shows. But I'm not -- I can't give you a number.

Okay. And then just going back to -- and I thank you for providing this study that you guys is put together for the network. It helps us understand your thinking. When we look at the I guess the third column here on the slide ten that shows the 57 million households, and you have this red box around the like fan parent, light casual to casual, and passionate categories. Just help us understand, in your views what -- do you need to capture all of these segments for the network to be successful? It is helpful for us to understand what are the thresholds here for success, just in a broad sense without getting into too much detail?

No, we don't need to capture under any set of circumstances all that much of this audience in order for our network to be successful. Again, if we just the ones that are very, very likely to join the network, even if you put it down on just that basis, our model makes considerable amount of revenue.

It is just that the broad aspect of these numbers indicates, again, a lapsed fan might as well, based on research, enjoy the network, depending on what we give them. But that would be somewhat the older audience, and they have indicated what type of programming they really want to see. So this is a broad metric in terms of -- I was quite frankly surprised myself about 50%-plus. We can reach a large percentage of them, but it is not based on the lapsed fan.

Okay. And then just as you go forward in this investment process, is there a meaningful step up in 2013 as we get closer to launch? I mean obviously it is November now, so we are all trying to think about what things might look like for next year, understanding the negotiations are still fluid. At least in a spending perspective, order of magnitude, can you give us a sense of how much would be required to actually launch?

So, two things. One, we'll give broader guidance in 2013 on the next call, kind of as is we did this year. So we are not going to do it right now. I think for the network specifically, we are probably on the OpEx side 80% to 90% of the infrastructure that we need to run the network. At least it launch there. The big incremental increase would be the marketing dollars at launch, and I think that is then driven by a launch date.

So I think we are about 80% to 90% of the infrastructure we need. The next variable is launch date, and then the marketing spend, which obviously is going to be a significant part of network, and that we are really not ready to talk about.

Okay. Thanks for the detail. I will turn it over.

(Operator Instructions).

I guess that's it. Thank you, everybody. We appreciate you listening to the call today. If you have any questions, please do not hesitate to contact us. Thank you.

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for your participation. You may all disconnect.