TKO Group Holdings Inc (TKO) 2013 Q3 法說會逐字稿

Welcome to the WWE 2013 third quarter earnings call. My name is Adrian, 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 Michael Weitz. Michael 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, and have posted the release, our earnings presentation and other supporting materials on our website at Corporate.WWE.com. 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. In today's discussion, 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 in our filings with the SEC. At this time, it is my privilege to turn the call over to Vince.

Good morning everyone. Our current movies, the slate of movies are expected to generate a 13% rate of return, not bad. However, we did take a $7 million impairment off of the Mike Pavone slate of movies in the past. So excluding the impairment OIBDA increased about $6 million that is due to television rights fees and Third Hour of RAW, Total Divas, another television show. So that more than offset the weak performance of SummerSlam, and SummerSlam Pay Per View rather, and lower video game sales. Our metrics are pretty mixed. Life Events increased about 6% in North America. Over the quarter the television audience increased a whopping 30% to 15.1 million viewers on a weekly average. Social media followers increased 28% to 219 million. Pay Per View buys were down 9% with SummerSlam being the biggest one of them. They didn't buy the attraction. As you know these Pay Per View events are attraction driven.

From an achievement standpoint, Total Divas is the reality show as many of you know on the E network maintained a strong performance, averaging about 1.8 million viewers since the July debut, which is really good for that network and that genre. From a Pay Per View distribution in the console platforms, that increased an extraordinary amount although it is 17,300 views, it is 160% increase but still 17,300 views, and the launch of PS3 as well, it does indicate that some of these other forms are distribution are growing. Other achievements, we launched the John Cena apparel line at Kmart. We have marketing partnerships, we announced marketing partnerships with Kraft and General Mills, and of course, we continue to expand our television coverage in China and Japan as well.

From a strategic initiative standpoint, we continued developing our network looking at both traditional and nontraditional means of distribution. In addition to that from a content licensing agreement standpoint, we feel pretty bullish on all of this in terms of realigning our television properties and the rights that they should be garnering. We liken WWE more to more of NASCAR more than anything else, because of the live nature of our audience. And the overall viewership as well, and gross rating points which is higher than the NASCAR in general. So we have, all of these properties, television properties are co-terminus, they are all available at the same time. We are looking forward to our discussions with NBCU and potential other distributors after that.

We are currently in discussions, many of you know that our largest television agreements come due not only just here in the States, but also in the United Kingdom, and we currently are negotiating a window with BskyB, our distributor over in the United Kingdom, which is a very big partner of ours. India is coming up shortly thereafter. So a lot of these are becoming due, and we are actively pursuing all of them going forward. So we pretty much think that all of these initiatives are, if all of the stars line up and we believe that they will, and we are working hard to make sure that happens, then our business is going to be transformed as we know it now. So George.

Thanks Vince. There are several key topics which I would like to review today. These include Management's discussion of our third quarter financial performance, our revised business outlook, and the progress of our key strategic initiatives. For the third quarter our financial results as measured by OIBDA declined $0.6 million, or 6% from the prior year, with impairments in our film business. On an adjusted basis excluding the impact of film impairments, our OIBDA results increased approximately $6 million as a meaningful increase in rights fees from the licensing of television content was partially offset by the performance of our SummerSlam pay per view and lower video game sales. Overall our earnings were in line with our 2013 guidance that we communicated previously, and which I will discuss further momentarily.

The current quarter valuation of our film assets resulted in an impairment charge of $7 million. The impairment charge primarily relates to movies released over the 2010 through 2012 period under our former distribution model. Our remaining financial exposure to these films is limited. We believe our current revised approach to film entertainment possesses the critical ingredients for long-term success in this business. It is important to note that the movies released under this revised approach are projected to generate a 13% rate of return. Our overall brand metrics remain strong, the launch of our original series, Total Divas, the average weekly reach of our domestic television programs has grown to 15.1 million homes, representing a 30% increase from the end of the second quarter of this year, and a 16% increase from the third quarter last year.

Over the past 12 months our programming surpassed the cumulative audience delivery of most sports and entertainment programs, including the national broadcast of Major League Baseball, NASCAR, the NHL, and even The Walking Dead. And our total social media platform now reaches nearly 219 million followers, including more than 140 million Facebook Likes, and 70 million Twitter followers, representing a 28% increase from the end of the preceding quarter, and a 92% increase from the end of the third quarter last year. Building the strength of our brands as evidenced in these metrics and taking advantage of that strength is a critical component of our long-term strategy.

To review the key drivers of our performance in the quarter, let's turn to page six of our presentation, which lists the revenue and OIBDA contribution by business as compared to the prior year quarter. Revenue increased by 9%, or approximately $9 million. The growth was predominantly due to increased rights fees for our television content, and to a lesser extent increased ticket revenue from our international events, and higher sales of advertising and content on our digital platforms. Revenues from our television business increased 30%, or $10.1 million, primarily due to the production and monetization of new programs, including Total Divas and WWE Main Event, and to a somewhat lesser degree contractual increases for our existing programs, both domestically and internationally.

Total Divas, a new original series, began airing on the E network in July. Since its debut, the program has averaged approximately 1.8 million viewers per week, representing an increase of more than 150% over the programming that it replaced. WWE Main Event was licensed to and began airing on ION Television in the fourth quarter of 2012. Revenue from our live events including merchandise sales at these events increased 6%, or approximately $2 million in the quarter, primarily due to a rise in the number and proportion of international events, which are typically characterized by higher average attendance and ticket prices than events in North America. Specifically, there were seven additional international events in the quarter, partially offsetting the impact of these events, average international ticket prices decreased $26 to $72.30, and average attendance decreased 20% to approximately 6,700.

The decreases in average ticket price and attendance were due in part to changes in territory mix, as the incremental events in the period were concentrated in South Africa, a region that has a high proportion of WWE fans, but that is experiencing significant economic challenges. In addition, changes in foreign exchange rates reduced average ticket prices by approximately 12%, and accounted for nearly half of the year-over-year decline in this metric. In North America, changes in venue mix contributed to a 9% rise in ticket prices, and a 6% rise in average attendance to 5,500. However, these positive developments were offset by the staging of eight fewer events in the quarter.

Our digital media businesses also contributed $1.1 million to the Company's revenue growth, during the quarter revenue increased 15% to $8.6 million driven by higher sales of advertising and digital content, including our Pay Per View events across various digital platforms. Supporting the growth in advertising, key digital metrics such as unique visitors to the Company's website and mobile apps, average monthly page views, and CPMs increased from the prior year quarter. We launched digital distribution of our Pay Per View events on the Microsoft XBOX Live platform in April, and on the Sony PlayStation3 platform in August. Revenue from our pay per view business declined $1.7 million, or 10% primarily due to the performance of our SummerSlam event, which contributed to a 9% reduction in buys for the comparable events in the current and prior year quarter.

In our consumer products segment licensing revenue declined $1.4 million, or 20% from the prior year quarter. The decrease was driven by a 24% reduction in video game shipments that resulted in a $1.3 million decline in video game royalties. Shipments of our annual franchise video game WWE13, which was the last release published by THQ, declined to 178,000 units as compared to 233,000 for the corresponding game in the prior year quarter. Royalties from the sale of toy and apparel products were essentially unchanged from the prior year quarter, as modest growth in the US was offset by lower sales in international markets. Additionally, a new installment of our video game WWE 2K 14 was released by Take2 earlier this week. Our home entertainment revenue declined 19%, or $1.2 million primarily from a reduction, a 23% reduction in domestic shipments to approximately 720,000 units. With five fewer releases in the quarter as the average price per unit increased 4%. In addition, revenue from our international home entertainment licensing activities declined by $0.4 million, due to lower sales in Canada, and the transition to a new licensee in the EMEA region.

Earlier this month, Cinedigm acquired Gaiam and Vivendi's home entertainment brands, including WWE NFL and Discovery. Cinedigm is the largest aggregator and distributor of independent content, and the fourth largest distributor of non-theatrical DVDs and BluRay disks, surpassing Sony, Fox and Lionsgate, among others. We expect no material impact to our home entertainment results in the near term. During the quarter, WWE Studios recognized revenue of $1.8 million as compared to $1.9 million in the prior year quarter.

As I mentioned earlier, based on an evaluation of our film assets we have recognized an impairment charge of $7 million in the quarter. The impairment charge primarily relates to our 2010 to 2012 slate of movies that were released under a former distribution model. The impairment was driven by the performance of this slate over the past several months. As a measure of the remaining financial exposure to these movies at the end of the third quarter this 2010, 2012 late represented less than $1 million of a total $17.2 million in capitalized film assets on our balance sheet. And just to reiterate, the movies released under our current strategy beginning with the re-release of No Holds Barred in late 2012, are projected to generate a 13% rate of return, which exceeds our cost of capital. The level of our future movie investments will be predicated on the evaluation of our portfolio, rather than on any single film at end of 2013.

Unallocated SG&A expenses declined nearly $1 million to $27.3 million from the prior year quarter. As defined these expenses include sales, marketing and talent development costs, which have not been allocated to specific lines of business. The decrease in unallocated SG&A during the quarter was driven by a $2.1 million year-over-year reduction in accrued management incentive compensation based on current expectations, regarding the Company's 2013 financial performance, which were revised during the quarter. This reduction in expense was partially offset by a $1.3 million increase in consulting and professional fees to support the Company's strategic initiatives.

Operating income before depreciation and amortization, or OIBDA, declined $0.6 million, or 6% primarily due to the impairments in our film business. Excluding these impairments adjusted OIBDA increased $6.4 million, or 62% as the increase in television rights fees more than offset the performance of our SummerSlam pay per view and lower results from our video game business. In addition, a $3.4 million year-over-year reduction in accrued management incentive compensation, which was based on revised expectation for the Company's full year performance mitigated the rise in compensation and other costs related to the development of our strategic content related initiatives.

Net income declined $1.1 million to $2.4 million reflecting the decline in our OIBDA results, excluding film impairments adjusted net income increased approximately $4 million as the growth driven by higher TV profits was partially offset by an increase in depreciation. The change in depreciation derived from our investment in assets to support the creation and distribution of new content, including through a potential network. Our effective tax rate was 27%, compared to 30% in the prior year quarter. The rates in both periods benefited from the recognition of previously unrecognized tax benefits.

Page 14 of the presentation contains our balance sheet which remains strong. As of September 30, the Company held $115 million in cash and investments, and estimated debt capacity under our revolving line of credit to be approximately $120 million. During the quarter we completed the purchase of a corporate aircraft, and in conjunction with the transaction and related aircraft improvements utilized step financing of approximately $30 million, which is reflected in long term debt on our balance sheet.

Page 17 shows our free cash flow through the first nine months of the year. We used approximately $6 million in free cash flow, compared to generating about $14 million in the prior year period. This $20 million decrease was primarily driven by changes in working capital, including an $11 million increase in the annual payout of management incentive comp related to the Company's previous year performance. Increases in spending on television production including content for the network, and timing differences in the collection of receivables that negatively impacted current year cash flow as compared to the prior year.

Partially offsetting that decline capital expenditures excluding the purchase of the corporate aircraft decreased by approximately $8 million from a higher level of investment spending in the prior year quarter to support our content initiatives. We continue to believe that these content investments will yield significant returns. Recently we announced a revised financial outlook for 2013, reflecting a modest 5% change in projected revenue. To understand the resulting change in our guidance, it is important to remember several key facts regarding operations.

First, WWE utilizes third parties to distribute our products across multiple businesses including consumer products. While we gather extensive primary market data, we have reduced visibility of our sales performance in these areas. This isn't an excuse, but a fact regarding how we conduct our business. Secondly, WWE's business model reflects high operating leverage, with variable margins in the range of 70% to 80%. In addition over the past year, we have increased spending to support key areas of talent development, content creation, and marketing. This means that modest changes in revenue not only translate to [ODSA], but also reflect a greater share of earnings with the later compressed by investments.

Based on a 5% reduction in projected second half revenue from several businesses, inclusive of the performance of our pay per view and consumer products business as discussed today, and the Company's high operating leverage, we revised our 2013 OIBDA guidance to a range of $40 million to $50 million excluding film impairments. This revised outlook is shown on page 11 of our website presentation. Given that we have earned more than $47 million in OIBDA excluding impairments through the first three quarters of the year, hitting the mid-range of our guidance implies essentially break even OIBDA results in the upcoming fourth quarter. This sequential decline in performance from the third quarter reflects several factors, including a reduction in television profits associated with the timing of our content rights, as well as investments, as well as a rise in unallocated SG&A costs associated with the timing and of staff and marketing expenses. Fourth quarter SG&A costs are projected to exceed the level of our third quarter results, but fall in line with that of our second quarter.

Now looking ahead. We believe the investments we are making in our brands and content will maximize WWE's future earnings. We are confident that the rising value of content in the marketplace, and the potential launch of a WWE network will keep us on track to double or triple our 2012 OIBDA results by 2015. If we are unable to execute our strategic initiatives in a way that places on a path to achieve these goals, then management will undertake some form of restructuring to increase profitability. Over the coming months we expect to renegotiate our four largest television agreements in the US, the UK, and India. Moreover, we expect to negotiate our key domestic agreements by the end of next April.

Benchmarking our rights fees to the fees paid for sports programming and other original scripted series indicates that our license agreement has significant upside potential. Recent deals such as NASCAR with NBC Sports reinforce our view that the proliferation of distribution alternatives is driving up the value of content, especially compelling content with broad appeal. WWE shares the key determinants of value that are attributed to live sports. Significant first run hours and associated gross rating points, a passionate and loyal fan base, and 90% live plus same day viewership which makes WWE content like sports DVR-proof.

The potential launch of a WWE network is another major source of future earnings growth. Our market research and analysis indicate that potential for a meaningful subscriber base and a significant economic opportunity. This opportunity is comparable whether the network is distributed through traditional cable, satellite, and telco partners, or through over the top digital distribution. As we execute on our growth strategy, we will measure our performance against several key milestones over the next 6 to 9 months. These include making progress on our TV rights renewals, and completing network distribution agreements, as well as developing digital products and continued improvement of our movie portfolio. While our results in the near term may be challenged, we are committed to establishing a firm platform for meaningful unprecedented earnings growth.

Based on the execution of our strategy, which takes advantage of this rising value of content, we are confident that we can generate economic returns to better reflect WWE's tremendous global appeal and brand strength. That concludes this portion of our call, and I will now turn it back to Michael.

Thank you George. Adrian, we are ready now, please open the lines for questions.

Thank you. (Operator Instructions). We have Daniel Moore from CJS Securities on the line with a question. Please go ahead.

Good morning. Thanks for taking the questions.

Good morning Dan.

First off, in the press release you stated that you expect to negotiate the domestic television carriage agreements by the end of April of next year. Given those don't expire until later in Q4, what gives you the confidence that you will get them done by April, and secondly, based on where we are today, are you more likely to re-sign with the current carriers, or should we be looking for RAW and SmackDown on another channel as we get out to 2015?

There is an exclusive negotiating period with our current carriers, with NBCU, with a certain window there. And it is the first of the year. If we make a deal with those current carriers, great. If not, then we go outside of that window, and everyone is keenly aware of the properties, we have television properties, when they become due, and what the value is. So it is, I would imagine the deal would be struck very shortly thereafter.

I will add to Vince's comments. It is pretty typical that these content deals get done before the timing of the actual shows being on the air. So that is pretty typical.

Very helpful. George, I am intrigued by the comments that you made in the prepared remarks saying if for whatever reason you are unable to execute on the plan you would undertake a restructuring. Is there kind of a sliding scale of what you would consider success? In other words, if you were to not quite double OIBDA by 2015 based on the renegotiation, would you try to cut costs to get to those numbers? Maybe just elaborate on those comments?

I don't want to get too specific, Dan. If you looked at our current business model over our history, you would probably say that the peak to trough of the business is $50 million to $100 million, with a mid-point in that $70 million to $80 million range, and when things were going real well internally up in the 90s. Either you have some headwinds or you are making investments, you are then in the 50 range, so we think that is the natural peak to trough of the current business model, so we probably target kind of getting back to that level, in that range.

Basically a failsafe of reducing costs. It is not anything that we think is going to happen. But obviously if the worst happened, that is what we would go back to.

That is helpful color. I will ask one more and jump back in queue. Pay per view continues to see a little bit of pressure in terms of buys and revenue. Are there levers you might pull in the interim to try and stabilize or regrow, or is the current plan really to sort of let the network play out, and that be the driver of improved performance in that area?

No, pay per views are attraction driven. It is simply giving the right attraction the right promotion to go with it. And SummerSlam was not the right attraction. You don't knock them out of the park every time you get up to bat. That was one in which there was a swing and a miss. They are all attraction driven, and look at each one that way, given the promotion that you have with it. So it really doesn't have anything to do with like anything other than that.

And Dan, look, we talked about the network and the rights agreements in our four largest markets, and improving the movie portfolio, and monetizing the digital audience. Those are big, big levers that there is a lot of energy against. But we have a lot of other businesses, and we are doing a lot of other initiatives around those. So our expectation is that all of our businesses have growth potential, and we are working hard across the board.

Very helpful. I will jump back in queue as I said. Thank you.

Thanks, Dan.

(Operator Instructions).

Have a good day everyone. The future looks bright.

Thanks everyone. We appreciate you participating. If you have questions, don't hesitate to contact us at WWE. Thank you.

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