TKO Group Holdings Inc (TKO) 2012 Q4 法說會逐字稿

Welcome to the WWE 2012 fourth quarter earnings conference call. My name is John and I'll be your operator for today's call. (Operator Instructions). I will now turn the call over to Mr. Michael Weitz. Mr. Weitz, you may begin.

Thank you and good morning, everyone. 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, as well as a release covering our business outlook. We posted these releases, our release presentation and other supporting materials on our website, www.corporate.WWE.com.

These materials can be referenced in conjunction with the discussion today to clarify our performance and business expectations. In our discussion today, we'll 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 the call. Reconciliations to GAAP measures can be found in our earnings release and in our website presentation. Today, as I mentioned, we're review our financial results for the quarter and full year and provide perspective on our business plan. We'll follow this with a Q and A session. At this time, it's my privilege to turn the call over to Vince.

Good morning, everyone. You can see, pretty much, our fourth quarter results. Splitting them, our adjusted EBITDA increased about 57% in Q4, driven by an increase in television and digital content rights. Other highlights of Q4 would include pay-per-view profits of about $2 million, resulting in talent development and innovating marketing.

We also had an increase in home entertainment profits of about $2 million due to strong catalog sales. As far as the brands itself is concerned, we've maintained our strength on television and actually increased it considerably. Social media, Facebook and Twitter followers grew by about 100%. It will continue to grow at a rapid rate. We're at about 130 million as far as that's concerned. CPG, we have the number two action figure in the US. And, as you recall, our action figures did very well on an annual basis. But this was a particularly good quarter.

As far as partnerships, which help us in terms of image and increased business opportunities as well--as well as I enjoyed doing the right thing with a lot of partnerships with Susan G. Komen and breast cancer awareness. We did pay-per-view with the Rolling Stones, which led to many other opportunities, which we hoped would open many doors for us, and they have.

Of course with Army National Guard we've done something with Hire Heroes, we believe is going to be an excellent corporate initiative as well. And, which George will speak of in a few minutes, we completed our deal with the new video game partner, Take-Two, which is very, very exciting. We continue to do a great deal of research as well in terms of the popularity of the brand and perception of the brand.

I mentioned a few minutes ago about the increase in television and digital rights. We have produced and licensed about two and a half additional hours of domestic television, a Third Hour of RAW from 8 AM to 9 AM, which is new. It's a Saturday morning show reaching kids called Saturday Morning Slam on the CW Network that's with (inaudible).

We also are producing a WWE Main Event show, which is on a new network for us with reaching a different set of demographics which is on the ION Network. And on Hulu we completed agreements to license some of our digital replay rights, mainly from RAW and SmackDown.

From a business outlook standpoint, you can expect 2013 to be pretty much flat from the EBITDA, and we'll get into as to why in terms of increased production capacity, increase in terms of creative writing staff, talent development brands, things of that nature to the building of our brands, which then, of course, we also sent out earlier this morning.

To give you more of a flavor, more insightful view of the network we've been talking about for God knows how long, to give you some idea of where we are on that as far as our business plan and potential path of significant earnings growth as it relates to the network specifically. It gives you some idea of where we are, notwithstanding the fourth quarter, but where we are hopeful of going in the very near future. George, do you want to take it from there?

Thanks, Vince. There are several key topics which I'd like to review today. These include management perspective on our financial performance, some additional detail regarding our fourth quarter results and a discussion of our strategy and business outlook over the next few years.

Over the past two years our investment in films, entertainment and the development of a potential network has significantly impacted our results. Excluding our film results and network investments, our traditional core business delivered adjusted EBITDA of $77 million in 2012,in line with our historic performance which ranged from $76 million to $96 million over the preceding four years.

Entering the 2012 year we anticipated various challenges, including the reset of management incentive compensation which increased our operating expenses by approximately $11 million and the absence of the second video game release as we had in the prior year. Recognizing these challenges our performance demonstrated successful management efforts in key areas of our business.

We generated meaningful growth from our pay-per-view business through talent development and innovative marketing. And we improved the performance of our home entertainment business, promoting our catalog titles in a way that enabled us to surpass industry trends. In terms of our overall performance we began the transition of our movie business entering new partnerships with much more favorable deal terms.

Although we did not announce the launch of a domestic television network we did expand the production and licensing of new programs and enhanced the strength of our brands. We view these achievements as fundamental precursors to a much broader expansion, both domestically and internationally.

As a reminder, our fourth quarter results reflected the production and licensing of the Third Hour of RAW, a new kids show, WWE Saturday Morning Slam and a new, one hour original series, WWE Main Event. As a result of these agreements we increased the number of hours of original WWE content on domestic television from four hours per week to six and a half hours per week.

Or in other terms we monetized about 87 hours of original domestic television compared to 52 hours in the fourth quarter of last year. In addition, we expanded our online distribution, licensing replay rights of ourRAW, SmackDown and Main Event programs to Hulu Plus.

As we expanded the distribution of our content we also strengthened our WWE brand. While maintaining the compelling quality and top rankings of our programs, we increased our television audience by 12% to 8.6 million homes and an estimated 13 million viewers in the US. Similarly, we elevated our presence in social media by doubling our combined Facebook and Twitter followers to 130 million.

Building the strength of our brand and taking advantage of that strength is a critical component of our long-term strategy. During the fourth quarter, the increase in rights fees from the monetization of new television and digital content and improved results from our home entertainment and pay-per-view operations more than offset both the aforementioned business challenges and investment and content related capabilities. Our adjusted EBITDA increased 57% to $11.3 million.

To review the key drivers of our performance in the quarter, let's turn to page five of our presentation, which lists the revenue and profit contribution by business as compared to the prior year quarter. To clarify the trends in our financial performance we have adjusted our results for items such as network investment and film impairment. Schedules that demonstrate the impact of these adjustments can be found in earnings release and in our website presentation.

As shown, revenues from our television and WWE.com businesses increased by 28% or $10.2 million,representing the most significant source of revenue and profit growth in the quarter. This growth is attributable to the rights fees associated with our television and digital distribution agreements with USA Network, Syfy,the CW Network,ION Television, Hulu Plus and YouTube.

In our consumer product segment our home and entertainment revenue increased 48% or $3.1 million, driven by the promotion and strong sales of our catalog titles and two additional lower priced releases. Revenue growth stems from a 43% increase in shipments to nearly 1.2 million units and improved sell through rates of our prior period releases that more than offset the impact of promotional pricing.

The liquidation of catalog titles and the corresponding change in product mix contributed to a 16% reduction in average price to $11.31. Turning to our pay-per-view business, revenue declined 11% or about $1.6 million in the quarter due to a reduction in the number of events.

Revenues and buys were impacted by the production of three pay-per-view events in the third quarter as compared to four in the prior year quarter, as well as the distribution of one less pay-per-view event by our television partner in the UK. On a comparable basis for the events produced in the quarter, revenue increased approximately 4% as a 3% decline in buys was more than offset by a 7% increase in the average revenue per buy.

This increase was attributable to a higher proportion of buys to view our events in high definition, which generally garner a higher retail price. Profit from our pay-per-view business increased $1.7 million due to a reduction in production and other costs.

Revenues from our live events, including merchandise sales at these events, declined 12% or $3.7 million in the quarter primarily due to a reduction in the number of international events and lower average at these events. There were eight fewer international events in the quarter and average attendance at these events declined 11% to 5,600 from 6,300 in the prior year quarter.

The decline in the average attendance was predominately due to weaker performance as the prior year included a strong eight event tour in Mexico. Average attendance from our event in North America declined 5% to 5, 700. Partially offsetting these declines, average ticket prices increased 4% at our domestic events and 5% at our international events reaching nearly $45 and $70 in these regions respectively.

During the quarter WWE Studios recognized revenue of $0.6 million as compared to $4.3 million in the prior year quarter, primarily due to the timing of our releases. In terms of profit the quarter generated a loss of $0.6 million,including a film impairment charge of $0.5 million. Excluding the impact of impairments, our movie portfolio generated essentially break even results compared to an adjusted loss of $1.6 millionin the prior year quarter.

Overall our adjusted profit contribution increased 27% to $46.4 million driven by the licensing of new television programs and digital content as well a stronger sell through rates of our home entertainment catalog titles. Adjusted EBITDA increased 57% to $11.3 million as the growth and profit contribution was partially offset by increased SGA expenses.

Adjusted SGA expenses increased by $5.8 million to $35.1 million reflecting the reset of management incentive compensation, including bonus and stock compensation which resulted in the year-over-year increase of approximately $2.3 million. Increased salary expenses and incremental bad debt expense.

The rise in staffing cost, excluding management incentive compensation, was incurred to support our long term growth initiatives, including the expansion of our television and digital content. Adjusted net income declined 28% to $1.3 million as the growth and adjusted EBITDA was more than offset by increased depreciation expense and a higher effective tax rate.

The former derived from our investment andassets to support the creation and distribution of new content, including through a potential network. Our effective tax rate was 75% compared to 35% in the prior year quarter.

The current quarter was adversely impacted by $0.4 million in additional tax expense as a result of differences between estimated and actual four year taxable income. Additionally, the fourth quarter rate reflected a $0.2 million increase inunrecognized tax benefits and $0.2 million to provide for dividends from a foreign subsidiary.

In total these items accounted for 33 percentage points of the quarter's 75% effective rate. For the full year our adjusted net income declined 11% as increased profits from the licensing of our television and digital content and improved performance of our pay-per-view business were offset by the absence of a second video game release and increased operating expenses.

The return to a more normalized level of management incentive compensation resulted in a year-over-year expense increase of $10.8 million,$7.6 million of which is included in SGA. Adjusted SGA expenses increased 14% also reflecting higher salary expenses, excluding management incentive compensation and increased bad debt expense. Network related costs, which are excluded from our adjusted SGA, reached $8.2 million in the current year period.

Page 20 of the presentation contains our balance sheet, which remains strong. On December 31st we held $152 million in cash and investments with no long-term debt. Page 24 shows our free cash flow which for the full year decreased 17% to $29 million. The change was primarily due to an increase in capital expenditures and programming costs to support our emerging content distribution strategy, including a potential network.

We continue to believe that our content investments will yield significant returns. Given the duration and magnitude of investment required to generate this transformation we believe it's important to clearly communicate our strategy, specific opportunities and expected returns in much greater detail. To facilitate this discussion I will reference pages nine to 17 in our website presentation.

Our plan to transform our business, as shown on page nine, is simple and reflects the execution of a three-part strategy; to invest in the creation and ownership of strong brands, to cultivate a global consumer base and to monetize our IP across existing and emerging media platforms. In order to optimize our returns we expect to continue investing in key areas, including talent development, content creation and innovate marketing campaigns to leverage our business partners and social media presence.

As indicated on page 10 our plan contemplates taking advantage of opportunities that significantly outweigh ongoing investment requirements and other near-term challenges. In addition to expanding our content distribution to new media platforms, the most meaningful opportunities include the expiration and renegotiation of our largest content agreements in US and international markets, and they also include the development of digital products such as gamefication of content and mobile gaming.

Turning to page 11, segmenting our sources of revenue to broad categories highlights the importance of content creation. As shown, content monetization is expected to be the largest source of our long-term revenue growth. Shown on page 12, continued investment in our core business and a potential WWE network are expected to generate meaningful returns by 2015.

Our core business is projected to grow based on the monetization of content and digital product. Our investment in a premium domestic pay network is expected to drive significant overall EBITDA growth, potentially doubling or tripling our 2012 results over the period. These results depend on the pace of completed related carriage agreements, subscriber adoption and other factors.

Our belief that we can realize much greater value from our intellectual property is based on the tremendous global appeal of our brand and the rising value of content. Audience measures is shown on page 13, such as the magnitude of our social media followers and the consistent top ratings of our television programs, demonstrate WWE's brand strength. In 2012 the average number of viewers of both RAW and SmackDown exceeded the average number of primetime viewers of every cable network, and, historically, our programs have ranked as the number one show on their respective networks.

Further, consumer research, as shown on page 14, indicates that a high proportion of US and international TV viewers have an affinity for WWE content. In the US approximately 34% of digital multi channel households have an affinity for WWE content--31 million homes. Of which approximately one quarter, or 8 million homes, are characterized as very passionate fan households.

Our research also indicates that an additional 18% of US digital multi channel TV homes, or 16 million homes, include [lost] fans that we have potential to reengage with our content. The data is also compelling for several international markets such as Mexico. Consumer research and the statistics regarding WWE's brand reinforced the significant opportunity that exists to exploit a wider range of distribution and monetization options.

Trends in the cable industry also support our view that owning and monetizing content has significant upside potential. Industry data, as shown on page 15, shows that the value of content, as measured by network advertising and consumer paid subscription revenue, has steadily increased and is expected to increase further across global markets.

Specifically across elected markets, namely the US, UK, India and China, the value of content is expected to rise at an average annual rate of 5% to 14% through 2016. We believe that benchmarking the license fees of our content to that of other original scripted programs, and the rising of sports programming rights are both indicative of our potential to garner increased revenue from our content.

Notably WWE is uniquely positioned, as shown on page 16, as our programs share the best characteristics of scripted entertainment and sports programming, such as being character driven with a continued story arc and produced live over a long playing season. In order to optimize the value of our content we plan to utilize three approaches, licensing our programming to establish networks, launching a premium WWE network through traditional cable and satellite distribution and monetizing our content through alternative digital, over the top distribution.

Although these options can exist independently they are not mutually exclusive. In fact, we plan to utilize various combinations of these approaches in our domestic and international markets. In the US specifically, regarding a potential WWE network, we believe that a premium subscription model is the best approach to capitalize on our fan's commitment and their desire for more WWE content.

Turning to page 17 provides some context on the economics of a potential domestic WWE network. Based on our market research, we estimate that a fully distributed domestic pay network could ultimately attract between 2 million and 4 million subscribers at a steady state. These subscriber estimates derive from the projected base of 47 million WWE digital TV households in the US, including lapsed fans and the proportion of which have an affinity for WWE content.

[Paid] rates are based on a valued proposition for the network that reflects inclusion of all of our pay-per-view events, except WrestleMania, as well as new compelling, original content. While our pay-per-view events would still be offered on a la carte basis, we believe that a WWE network offering would drive significant consumer interest, including in households that currently do not purchase pay-per-view events.

At a proposed price per month between $12.99 and $14.99, this would represent incremental revenue to WWE between $125 million and $250 million. And incremental EBITDA between $50 million to $150 million.

Actual results could vary materially from these ranges based on the rate of subscriber adoption, churn rates, changes in pricing and the level of promotion required to secure subscribers and distribution terms. Until a base of approximately 1 million subscribers is achieved we estimate that a network would result in a net investment for WWE.

However, reaching a subscriber level within the range of 3 million to 4 million could provide transformative growth. As in the US we believe that a network and other distribution models also represent the sizable economic opportunity in international markets. To reiterate, we believe that we can take advantage of our content opportunities based on the strength of our brands and the rising value of content potentially doubling or tripling the Company's 2012 EBITDA results by 2015.

In order to achieve this growth it's critical that we invest in key areas of talent development, content creation and in marketing. As a result we expect that our 2013 EBITDA performance will be flat with 2012 plus or minus 10%. In addition we anticipate that net income will be impacted by incremental expenses from the return to a normalized tax rate [ie] 30% to 35% as compared to 26% in 2012.

And then approximate $2 million to $3 million increase in depreciation associated with our capital investments. If a network is launched within the year we would also expect a further $10 million to $15 million reduction of EBITDA and a corresponding reduction of net income for the year.

This outcome could occur because the initial ramp in subscribers and revenue is not likely to be sufficient to offset the incremental direct expenses associated with a network launch, such as marketing, program amortization and transmission costs. Although our 2013 EBITDA results could vary within a range approximating our 2012 results, we expect several factors will contribute to a challenging first quarter.

These factors include lower profits from home entertainment, primarily due to a positive adjustment in the prior year of sell-through rates, lower international licensing sales, and additional investment in content production including staff and talent costs. Accordingly we anticipate our first quarter EBITDA could be down approximately $6 million to $8 million from the prior year quarter.

In addiction we expect that net income in the first quarter will be adversely impacted by the return to a normalized tax rate of 30% to 35% as compared to the 7% tax rate that prevailed in the first quarter last year and increased depreciation of $1 million. For the year free cash flow is expected to decline due to capital expenditures of between $50 million to $60 million of which approximately 65% is a one-time expenditure to replace our corporate jet.

We expect the acquisition of the replacement aircraft will be financed at attractive rate and that the sale of our current aircraft will offset a significant portion of the down payment. As with EBITDA , a network launch in 2013 could also negatively impact free cash flow. Similar to our EBITDA performance, successful execution of our content strategy could significantly enhance our free cash flow by 2015.

Our plan through 2015 indicates sufficient financial capacity to fund these growth initiatives, support ongoing business requirements and maintain our current dividend. Projected free cash flow performance assumes an investment of approximately $15 million to $20 million to produce a portfolio of movies. While we have confidence that our revised approach to film and entertainment will yield significant returns above our [cost of] capital we have also established criteria that will guide our level of participation and potential exit from the business.

Future investment will be predicated on the evaluation of our performance in 2013 in this business. Although our financial performance outpaced our guidance for 2012, we have not met the longer term growth target that we communicated in February 2010. As measuring and evaluating performance is an important component of managing results, we believe it's important to be fair and honest about our past effectiveness.

Today we communicated more information than we have done previously regarding our strategies, opportunities, and tactics. We hope you, our investors, will understand and share our commitment to establishing a firm platform for meaningful, unprecedented earnings growth. That concludes this portion. Back to Michael.

Thank you, George. John, we're ready to take calls from our investors.

Thank you. We will now begin the question and answer session. (Operator Instructions). We have a question from Brad Safalow from PAA Research. Please go ahead.

Hi. Thanks for taking my questions. I was hoping that I could maybe get a little bit more information on what exactly is the opportunity set for you as some of these commercial agreements expire. Are you referring to your current distribution deals for SmackDown and RAW or is this related to your pay-per-view direction distribution deals?

Over the plan period, Brad, we've got our four largest content agreements. RAW and SmackDown in the US, our licensing agreement in the UK and our licensing agreement in India, which, again, represents our four largest deals, will be renegotiated, renewed during that period.

Okay, and just to be clear you're not making some sort of reference that you might bring those--that content on to the network. This is more you feel it's economically an opportunity to increase what you're getting?

Yes, strategically we feel comfortable with having broad distribution in the US, in addition to a premium network. So, yes, we feel very comfortable that given the value content, given how well we performed for our partners, that that [augers] well for those four deals.

And it's important, in terms of how we promote other sources of revenue, including a network, to have this broad based platform of broadcast so that it can drive everyone into new areas of revenue potential.

Okay. And then just in terms of timing-- you've given us a lot more detail on the network--I would assume this is, in large part, because you're further along in the process of actually getting closer to launch. Is this-- Can you give us some an expectation as to--this is the likelihood that it occurs in 2013. Some estimate, probability?

Yes. Like we said in the last call, Brad, we're going to get out of the prognostication business. We're pushing real, real hard. We think the opportunity is compelling for us as well as our distribution partners because it is a paid network. So from their, in their language that helps their [ARPU], we believe, pretty significantly if you believe the numbers.

So we feel good. We're optimistic but we're going to get out of predicting dates.

Okay. And just a question on-- It's kind of a cranial question, just having first looked at the slide, but you're showing cannibalization, this is on slide 17, of $5 million to $10 million going as high as $20 million to $25 million based on the four scenarios from lost pay-per-view revenues. That's actually a number that's lower than I would have thought. [I just want to understand] What are you assuming in terms of the number of pay-per-view buys that becomes subscribers to the network?

Sure. Well, if you think of domestic pay-per-view revenue being in that $45 million to $50 million range roughly, WrestleMania represents more than half of that. So we would expect that, as we mentioned, would remain a pay-per-view, and so the cannibalization, in essence, would happen with the remaining pay-per-views and they would ramp as people moved from purchasing pay-per-views to subscribing to the network because of its strong value proposition.

That's the cannibalization works. And there is, obviously, it's range, it's a lot of assumptions on adoption curves, which households move when so--which is why the ranges are pretty wide. But the concept is early onless cannibalization at 3 or 4 million subs. Essentially the only pay-per-view you have left is WrestleMania and, as you know, that generally has done over a million buys globally.

It also assumes increase of network buys and (inaudible) of people who really do not and cannot afford that huge monthly pay-per-view bill.

Alright. Got it. Okay. One last question on the video game deal. Can you talk a little bit about what is different about the arrangement with Take-Two? It sounds like there is some sort of agreement that they will not only produce the console-based game but perhaps something that is both mobile based and you can explore all sorts of free to play models.

Help us understand what the commitment is from Take-Two and what it means for both--what will actually be produced in terms of content and maybe economically the difference for the company.

While we had a great partnership with THQ, and our core game has always done well, we've been of the feeling that the 360-degree monetization that's now happening in interactive gaming--that we were behind the curve on that. And when the time came for us to move, and we talked to all the folks that you would think we would talk to about our license, quite Frankly, Take-Two blew us away with their commitment to that shared vision, in terms of getting us on as many platforms as possible, given the way our audience-- We talked about doubling our Facebook and Twitter followers, 130 million now, more than the NFL and their 32 teams.

So we've got an audience that wants to interact with us there and we just haven't been--we've been behind the curve on social, on mobile gaming, on mobile apps. So they blew us away with their vision, number one, on that front and then number two also their focus on brand. It's obviously at the heart of what we do and they really impressed us with both of those.

And economically in terms of your royalty rate, is it fairly similar?

Yes, structurally, it's a little bit different. If retail sales are about the same then our economics are about the same. But structurally a little bit different.

Okay, I'll turn it over.

Our next question comes from [Jamie] Clement from Sidoti. Please go ahead.

Gentlemen, good morning.

Good morning.

Hi, Jamie.

Hi. George, first question just in the accounting in the first quarter related to the video game license. Are you including the puts and take there in your guidance commentary on the first quarter or are you just sort of adjusting that stuff out?

No, we're including the puts and takes. And just to talk a little bit about the transition, WWE suffered net $4 million to $5 million economic loss because of the declaration of bankruptcy and essentially the loss of the pre petition sales. There's also some puts and takes in terms of an advance we received from Take-Two, the results of the integrated sales, bad debt that I referenced in my comments.

But if you cut through all that it's roughly a $4 million to $5 million economic loss. In terms of earnings in Q1, the video game line looked kind of flat because, although you have that loss, we are, we have an unamortized advance.

Of $8 million, right?

Right, that will fall into the period. So if you looked at the video game revenue line and, from an earnings perspective, and cut through it, it will be about flat.

Next question, and perhaps Vince, if you could take this, the halo effect that you talk about in one of your slides with respect to the network. There are TBDs in those rows, but can you talk a little bit about how you all are thinking internally about some of those halo effects around the network because I don't think that's nothing. I think that's an important subject, and I suspect that you've learned more about that over the last three to six months and nine months than, perhaps, when you initially started thinking about the network.

Well, we're all about a halo aspect of everything we do. When you think about everything converging, you know, in so many different ways, and using so many different mediums and so many different things that we're into now as far as network and everything else--we virtually have a network now in so many different areas when you consider we're on the air 24/7, seven days a week with digital and things of that nature.

But all of that enhances [immaterially] even our core base of RAW and SmackDown, which those numbers are holding up quite nicely, to be able to drive the network and to be able to offer specific programs on the network--that halo effect is the riding tide effect, really, of everything that we do. From the image standpoint, from being able to touch so many different people in so many different directions and to grow that encompasses--it is a huge halo effect on almost everything we do.

Just a follow-up question also. With respect to the network do you--is it critical for the brand overall, the network is all PG all the time or when you consider fans that may have aged out a little bit or looked back at the Attitude Era, people like myself who might appreciate a little more than some of the PG content. Do you have some options there to push the envelope in the network?

Yes, we do, depending on, of course, what time of day. In [day part] that you're offering whatever -- we do have that ability as well, as home video. We have the availability to be able to release things, even in our films are mostly--a lot of our films now are R. So it is the expansion of the audience to complement a broader base, that lapsed fan, is very, very important to bring back into the fold.

And one of the ways you do that is by repurposing the content from the Attitude Era and things of that nature. So it all can mix together depending on [day part], depending upon disclaimer, things of that nature. The network can be all things in terms of new programming as well as the monetization of our, however how many, hundreds of thousands of hours, whatever it is we have, in terms of our library.

Okay. Thank you all very much for your time.

Thanks, Jamie.

We have the follow up from Brad Safalow from PAA Research. Please go ahead.

Hi, guys. Just a few follow-ups. One, you have two films coming out in the next two to three weeks. These look like legitimate or that they have legitimate box office potential, the first time you've done a kind of widespread release in a while.

[I'm trying] to understand--I don't know if there's a minimum threshold for domestic box that we can kind of think about as to where we would be at break even or how your economic involvement will really play out as the films perform?

Well, I think you can gauge that, generally speaking, on the popularity of the films and what they do at the box office. Generally, you start out with the theatrical box office and everything else beyond that is additional. And, obviously, there are formulas for all of that but, nonetheless, we think that these two commercial releases are very, very important. And I think we'll have a very good idea of where we stand under the new model with the success of these two soon to be released films.

Yes. And, Brad, just to build on that, you mentioned the two releases we have theatrically. We have a third release in March. A direct to DVD Marine 3.

Right. So just on Dead Man Down and The Call, I guess what I'm trying to understand is, are these economically a factor at all, really, in 2013 from a revenue perspective in your view? I don't know-movie accounting is notoriously arcane. So I just want to try and understand what this could mean.

Yes. So we're not going to give out domestic box office targets. For us, you're right, it's--especially WWE, it's probably the most complex accounting we have. These, because they are partner distributed, we will account for on a net basis as opposed to on a gross basis,which are self distributed films we're accounting for. So, in essence, what that meant is when it's self distributed we're accounting in the month of release.

On a net basis, we're going to account revenue and profit and amortize the cost when we receive the participation statement. So it's a long winded way of saying revenue and profits are not big drivers in 2013 on the movies.

Okay. That's helpful. And then, can you help me understand what you can and can't do with your pay-per-view distribution now?If you do launch a network, obviously, that's an effect, a major shift in how you're distributing pay-per-views.

Obviously there was going to be some friction with incumbent pay-per-view distributors. One, do you already have the ability to change the distribution of pay-per-views today and can you distribute pay-per-views today over the top?

That was a little convoluted.

It was, yes. There were a lot of things in there. So on the first portion if--we don't want to really get into what our specific rights are on pay-per-views vis-a-vis the networks. On over the top, yes, we do. You've got to have data at the same price point but we [can] deliver it, and that is something we are working very strongly at and we'll probably have some use, sooner rather than later, on.

Okay. And that's true both domestically and overseas?

Overseas is a little bit different market by market but I think you could apply that general answer--page 20, correct, overseas but each of the markets are a little bit different. All the deals are different.

Okay. And then a basic--

The over the top as an element of it, though, is pretty consistent.

Okay. Just a basic question. The television rights fees, the $40 million number for fourth quarter--I know some of these or most of these contracts have escalators but should we assume that's kind of a run rate going forward?

Yes, you won't have the same year-over-year impact because you'll start lapping them but, roughly, yes.

Just from a nominal perspective I'm speaking, yes.

That's right. Yes.

Okay. Thanks, I'll turn it over.

We have a question from Michael Kupinski from Noble Financial. Please go ahead.

Thanks. I just have a quick question. Most of the questions have been answered. What do you consider to be the steady state or the follow up for the initial ramp up of the network launch?You're indicating that once you achieve the steady state is when you start getting returns.

I'm just curious. What are the benchmarks, the time parameters or whatever metric that you're using to determine when the network would be at a steady state or following up from its initial ramp?

So I'll say two things. Number one, on the break evens we mentioned, up to about $1 million. And, again, that depends on who is the million, which pay-per-view homes have migrated, so on and so forth. So that's just a--it's a round number. We don't hit break even.

As far as the ramp rate, I think most people look at--and it's an overly technical term, the Bass Diffusion Curve, to look at new product and their adoption. And that's--when you look at HBO, Showtime, FX, the cable penetration in general, which follows that curve. So that's the way we're modelling it. But, obviously, reality is different from the model. We know that. But that's the general approach we've taken.

And given all that, you should have-- Once you launch in a system and you use that system's reach as a denominator, you'll have a pretty good sense of whether your eventual take rates are going get there within six to 12 months of launch. You'll have a pretty good idea of what you could expect at steady state. Does that answer your question, Mike?

Yes. I guess-- So, it's-- From the sounds of it you're anticipating getting to at least 1 million subscribers from the initial launch to -- And would I consider that to be the steady state from there?

No.

No.

So what we put out is four different scenarios.

Right.

We feel it's reasonable to assume, based on the data that we have, and reality will tell us, that 3 to 4 million subs will be reached with full distribution. So there's two elements here. There's getting carriage and being available and then there's subscriber ramp up. So those two things are at play.

Depending on the speed of carriage and depending on the speed of ramp up will-- If you add those things it tells you how quick you get to your eventual steady state. My point is that once you launch somewhere, by tracking the subscriber adoption just in that system-- There's other economic effects. You get a sense of where you think you will eventually end up. So those are the metrics we will be looking at as we launch. The penetration on a system by system basis.

So then, technically, six months after the launch you would be determining whether or not you want to go forward with the launch. Is that correct?

Yes, I think six to 12, I think in six to 12 months you'd have a good idea as to, hey, is the current offering working or not? And, I think at that point, you have [various] decisions to make. But I think you will have a pretty good idea.

Okay. Thank you.

And I'm going to belabor this point because it's important. It doesn't mean that in six to 12 months you've broken even. It just means in six to 12 months once you're on somewhere you can gauge what the take rate is for the network. And, in that environment, if it's high enough you're going to take as long as you need to to get full coverage because you know that the model fundamentally works. And that others are [incented] to carry you because it's an economic opportunity for them. So a complex question, good one, but hopefully that helps.

Okay. Thank you.

I'll hand it back to you, Michael Weitz, for closing remarks.

Thank you everyone. We appreciate you listening to the call today. If you have any questions don't hesitate to reach out to us. You can contact me, Michael Weitz, at 203-352-8642. Thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.