TKO Group Holdings Inc (TKO) 2015 Q2 法說會逐字稿

Hello and welcome to the webcast entitled WWE Second Quarter Earnings. We have just a few announcements before we begin. If you are logged into the webcast, please note that the slides will not advance during the presentation. You will only see the title slide. Please download the full slide presentation via the download presentation button at the bottom of the webcast screen. Also at the bottom of your screen, you will find a help icon for technical assistance, an enlarge slides button and you may ask a question at any time by typing your question into the question box located on the web interface and clicking submit. (Operator Instructions)

I will now turn the call over to Michael Weitz, SVP, Financial Planning and Investor Relations. Please go ahead, Michael.

Thank you and good morning everyone. Welcome to WWE second quarter 2015 earnings conference call. Leading today's discussion are Vince McMahon, our Chairman and CEO, and George Barrios, our Chief Strategy and Financial Officer.

We issued our earnings release earlier this morning and have posted the release, our earnings presentation and other supporting materials on our website ir.corporate.wwe.com.

Today's discussion will include forward-looking statements. These forward-looking statements reflect our current views are based on various assumptions and are subject to risks and uncertainties disclosed in our SEC filings. Actual results may differ materially and undue reliance should not be placed on them.

Additionally, the matters we will be discussing today may include non-GAAP financial measures. A reconciliation of non-GAAP to GAAP information is set forth in our earnings release and presentation, which are available on our website.

As a reminder, WrestleMania occurred in the first quarter of 2015 versus the second quarter of 2014. In order to facilitate an analysis of our results on a comparable year-over-year basis, we have prepared a pro forma statement which identifies the impact of WrestleMania ticket sales, merchandise sales, pay-per-view revenue and production costs on our second quarter results last year. This timing impact is shown in our earnings release and our presentation.

Finally, as a reminder, today's conference is being recorded and the replay will be available on our website later today.

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

Thanks. You guys can see that we delivered strong earnings growth. It reflects our strategy to realize a greater value of our content which we always attempt to do. We had a strong revenue growth of 16% through six months of 2015, significant international growth of about 38%.

Our network segment revenue reached a record $131 million over the past year, exceeding, and this is important, exceeding the range of our annual pay-per-view revenue throughout our history. Naturally, there are some higher costs charged against that but George will get in there in a few minutes.

Our network at 1.2 million subs at the end of quarter represents a 75% increase from Q2 of 2014, definitely on the right path. The network paid views is more than -- had more than 75 original hours of content. So it was a lot more of that to come and again, always at prices they say.

We have a lot of other new content coming to the network, including, I'm sure most of you are familiar with one of the [most] popular shows of -- HBO's show of Hard Knocks. We are trying to come up with a better name than Hard Knocks.

We also do have some studio show stuff which we haven't done before which we think that's going to move the needle as well, the new episodes of WWE 24 and many things that have been successful, Stone Cold Podcast, things of that nature.

And one of the things we've also mentioned in the past which is coming into fruition is Camp WWE, which is our version of South Park, of course that's on a VOD basis only. It's really, really funny, especially (inaudible) portion of it.

Aside from that, Tough Enough, which is the USA series and Total Divas, both realty shows. Both of them when you combine those shows together including replays add that to [Ron's] Smackdown, we are at 14 million uniques that are watching WWE every week, and that's just here in the US and really is significant.

Also is significant, we've surpassed the 500,000 social media followers across our global platform and I can't help with the promoter in me I have to say instead of 500,000, it's 0.5 billion, which sounds much better.

And we're also apart by the way of [something that] Facebook is doing in terms of an ad-supported video test which shared revenue content with creators. So we think we are going to do really well with that. I think Facebook is going to do very well with that as well. And speaking of Facebook, we served more than 440 million video views.

And that's an overview of where we are now. George?

Thanks, Vince. There are several key topics which I'd like to review today. These include management discussion of our financial performance, the progress of key strategic initiatives and our business outlook.

Over the past few years we've communicated an overarching objective to distribute our content across new platforms and realize much greater value from that content. As we entered 2015, we foresaw a significant earnings growth driven by the expansion of WWE network, escalation of TV rights fees and continued innovation across all of our businesses. In the second quarter, our business accomplishments and financial performance reflected the successful execution of this strategy.

For the second quarter our financial results surpassed our expectations based on strong business performance. Specifically, we achieved OIBDA of $13.2 million with an average of 1,216,000 WWE network paid subscribers. This strong performance was primarily driven by higher than expected video game and pay-per-view revenues as well as the timing of certain expenses, including [the prowl of] network marketing and programming costs.

Quarter was highlighted by the performance of our network segment, which now generates more revenue on an annual basis than our previous pay-per-view business. To expand on that statement, the network segment generated revenue of $131 million on a trailing 12-month basis through June 30. This far exceeds the annual revenue from our pay-per-view business which ranged from $70 million to $95 million over the 10-year period through 2013.

The growth of WWE network demonstrates our ability to transform our legacy pay-per-view business into a global subscription business with high growth potential. At quarter-end WWE Network had more than 1.2 million total subscribers, which represented an increase of 75% from the second quarter 2014. Subscriber growth was driven by the appeal of our original programming, including WrestleMania, our international expansion and the success of our free trial promotions.

During the quarter, we premiered more than 75 hours of original content on WWE Network, increased the network's comprehensive video-on-demand library to more than 3,300 hours and continued to broaden its global distribution. The network was made available in Italy and Malaysia earlier this month. At quarter-end WWE Network had approximately 217,000 paid international subscribers. Through June 30, the network had attracted more than 2 million unique subscribers worldwide with 71% -- 61% of these subscriptions active as of that date.

Importantly, the network's live and original content continued to drive your engagement. Among the more than 75 hours of content that premiered during the quarter, original series WWE Too Hot for TV, Swerved and Stone Cold Podcast were among the network's top programs.

Additionally, Beast in the East, a live event special produced in Japan on July 4 became the network's most-watched program of all time, excluding our pay-per-views. Viewer data shows that more than 90% of subscribers continue to accept WWE Network at least once per month while our consumer research indicates that 91% of subscribers are satisfied with the experience.

During the quarter, total subscribers declined by approximately 8% or 100,000 subscribers from the first quarter of this year. The sequential quarter decline followed the March 29 performance of WrestleMania and was somewhat indicative of the event-oriented consumer behavior shaped by our legacy pay-per-view business over the past 30 years.

We continue to be focused on the continued development of original programming, impactful marketing campaigns, and the development of the user experience, which we believe could reduce such event-related seasonality over time.

We view the creation of new content and the implementation of high impact customer acquisition and retention programs as critical elements of our broader strategy to grow WWE Network. For the remainder of 2015, we expect to add approximately 180 hours of original content to the network's featured programming. Exciting original content coming to the network includes a reality series following the stars of NXT as they strive to make WWE's main roaster, a new series Table for 3 giving viewers a see at the table with our Superstars and Divas, a studio show highlighting current events in the world of WWE and beyond and new episodes of WWE 24, The WWE List, and Stone Cold Podcast, as well as teasers of Camp WWE, an animated Southport style series premiering in 2016.

Additionally, we plan to expand the network's robust video-on-demand library adding themed programming collections focusing on captivating periods in WWE history. In terms of subscriber acquisition, a three-month trial continues to be an important offering as an [incentivized span] to engage with the network for the first time. We believe one month is the minimum amount of time required for a consumer to fully understand and be exposed to the breadth of the network's content.

Based on the successful execution of the network's previous free trial promotion, we initiated a new rolling one-month program in July, which marks the fourth consecutive month and the fifth month this year that we have implemented some form of free trial offering.

To drive your engagement, we enhanced the networks' watch list functionality providing the ability to add new programs to subscribers' watch list directly from e-mail notifications. We plan to continue using this capability in our subscriber communications. We will also continue to leverage our sizable social media and digital assets such as video sampling on Facebook, YouTube and wwe.com, to target and acquire new subscribers. To facilitate network subscriptions, we plan to introduce a three-month subscription card at retail in October, enabling a no credit card required payment option.

Improving the user experience and content discovery across devices is also an important element of our network plan. Over the coming months we will continue to improve the user experience by enhancing the network's search functionality, adding the ability to organize content as themed collections and allowing non-subscribers the ability to explore the breadth and depth of programs that are available on the service with the subscription. Overall, we believe our strategy for attracting and retaining subscribers will facilitate the expansion of WWE Network and provide a global platform for driving growth.

Consistent with other subscription-based businesses and our own past practice, we do not intend to provide an update on current subscriber level on this call. Our next planned update will be on our third quarter earnings call.

To review our performance in the quarter let's turn to page five of the presentation which lists the revenue and OIBDA contribution by business as compared to the prior-year quarter. As shown revenue declined 4% to approximately $150 million and OIBDA increased nearly $28 million from the prior-year quarter.

As a reminder, the occurrence of WrestleMania in April 2014 as compared to March 2015 favorably impacted the second quarter results last year. On a pro forma basis, excluding the impact of WrestleMania, revenue increased 24% this quarter and OIBDA increased $37 million from the prior-year quarter.

On a year-to-date basis, revenue has increased 16% to $326 million and OIBDA has increased $56 million. This growth is one we would describe as very solid.

For the quarter as reported OIBDA increased nearly $28 million driven by the increased monetization of content and strong sales of our video game. Network segment OIBDA increased $24.5 million driven by the growth in network subscription revenue as well as operating efficiencies including lower customer service costs.

WWE Network generated $36.6 million in subscription revenue based on an average of approximately 1,216,000 paid subscribers, which increased 31% from the first quarter of this year. Pay-per-view buys contributed to $3.5 million in revenue with 264,000 buys as three events were produced during the quarter.

WrestleMania did not have a significant impact on segment OIBDA growth as the timing of the event last year resulted in lower pay-per-view revenue and an offsetting reduction in production costs in the current year quarter.

Profits from the licensing of television content increased $9.5 million or 19% in revenue. The growth in revenue and profits was primarily due to the renegotiation of key domestic and international distribution agreement, the largest of which became effective in the fourth quarter 2014 and the first quarter 2015.

Revenue growth was partially offset by the timing of Total Divas which was not aired in the current quarter whereas the prior-year quarter reflected the production and monetization of the program's second season.

Licensing profit increased $4.9 million primarily due to higher video games sales and effective royalty rates. Estimated unit sales of our franchise game, WWE2K15, increased by more than 40% in North America and Europe. Additionally, increase in licensing revenue and profit benefited from higher sales of downloadable content associated with our game WWE Supercard.

Live event profits declined $8.8 million based on the impact of WrestleMania ticket sales in the prior-year quarter. On a pro forma basis, excluding the impact of WrestleMania live event profit increased $1.6 million or 31% with an increase in revenues that's derived primarily from the staging of 12 additional events in North America.

Corporate and other expenses were essentially unchanged from the prior-year quarter and performance in other areas did not have material impact in aggregate on our results.

Net income increased $19.6 million reflecting the increase in our OIBDA results. And page 15 of the presentation contains our balance sheet. As of June 30, 2015, the Company held approximately $110 million in cash and short-term investments and currently estimates debt capacity under the Company's revolving credit facility to be approximately $151 million.

Page 16 shows our free cash flow. Through the first six months of the year, we generated $16.8 million of free cash flow representing an approximate $28 million increase from the prior-year quarter. The growth was driven primarily by the Company's improved operating performance.

Looking back over the quarter, we continue to pursue innovative new ways to grow our business. We began to develop compelling new programming for the network, including approximately 180 hours of original content that will debut over the remainder of 2015. We premiered a reality series Tough Enough on USA Network. Together with Total Divas, our reality franchises have expanded our weekly television audience by nearly 5 million unique viewers. And WWE became one of the brands that will participate in an ad-supported video test on Facebook that shares revenue with other content creators. Notably during the second quarter we served more than 440 million video views on Facebook. As we continue to innovate, our brand measures remain strong.

Now as we look ahead, we're working to leverage this entrepreneurial spirit and our brand strength to drive sustained earnings growth. For the remainder of 2015 we continue to expect year-over-year adjusted OIBDA growth for most of our businesses with the most significant increases driven by the performance of WWE network, escalation of TV rights fees as well as our continued innovation.

As stated previously, the level of network subscribers is a critical determinant of financial performance. For the third quarter 2015, we expect ending paid network subscribers of approximately 1.2 million, representing an increase of about 3% to 5% from the end of the second quarter 2015 and an approximate increase of 64% from the end of the third quarter 2014.

Additionally, we expect the Company's adjusted OIBDA will range from $13 million to $17 million, representing a year-over-year increase of $10 million to $14 million. This range of financial performance is provided on an adjusted basis excluding non-recurring items which would be unknown at this time. Although, we anticipate earnings growth on a year-over-year basis in the fourth quarter, we do not expect the same level of OIBDA growth as we anticipate in the third quarter.

Our full-year 2015 business outlook at various subscriber levels can be found in our fourth quarter 2014 earnings materials. As I concluded last quarter, we believe we're executing well and innovating faster than ever.

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

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

(Operator Instructions) Brandon Ross, BTIG.

I have a couple of questions. First, you said you're going to add 180 hours of original programming on the network in the remainder of the year. In your last 10-Q I think you said, you expected $15 million to $25 million of cash spent on television. Is that number still accurate or does that go up to reflect the 180 hours?

Yes, it's still accurate and there's a couple of things. There is the capitalization of cost that would show up in our TV licensing segment for shows like Divas and Tough Enough and then there is a capitalization of cost that would show up in the network segment for the network, but those numbers are materially unchanged.

And the second question is this month you launched in Italy and Malaysia, but there is obviously some still -- there is still some large markets out there including Japan, China and India, places where Netflix is going to launch in the next year. Can you give us an update on where you stand with these markets and whether it makes sense to have a mobile-only offering to attack India and maybe even in the United States? Thanks.

Yes, as you mentioned, there is a few countries we haven't launched and we continue to work on plans, Brandon, to bring the network to market there but I want to stay out of the specifics. What I will say is there are about nine countries after we launched in August last year internationally and we've knocked off about four of them over the preceding eight months. So we will continue to work on doing that here over the next 12 months or so.

As far as mobile offerings generally, packaging and different levels of service are things that we continue to look at, but right now we like the simplicity of the offering we have. So we'll continue to look at potential options.

Eric Katz, Wells Fargo.

Can you tell us the monthly sub trends throughout the quarter or maybe a way to think about what was the churn post WrestleMania? And also whether the Q2 sub count should technically look better than the 1.2 million since you wouldn't actually count the free subs in that number.

We're not going to get into month-to-month trends. What I would say -- I mean, you see the count is generally reflected in the quarter's churn. It was one of the higher levels of churn that we've had post WrestleMania and as I mentioned in the prepared remarks it kind of coincides with that event-driven legacy pay-per-view business model, but we want to stay away from trend. And I really don't understand the second part of the question, Eric.

So when you have a free 30-day trial, obviously the paid subs wouldn't be counted there. So I'm wondering if maybe there is sort of a timing shift where you offer and April-free month, those subs wouldn't be counted until they convert over, so some of the benefits from the free trials might actually get pushed out into July?

Yes, there is always going to be with the rolling three months, I mean once we are on the -- when you are doing it every month you are pushing the benefit continually one month out so the sequential impact is nil, right, because you are always pushing it out.

Okay. And then the second question is, I know you've provided in the past some of the free sub numbers and conversion on the prior months. Do you have anything around that data for Q2?

No, we don't think it's all that relevant frankly and so it's something we don't think we're going to report on. We originally did when it was new, but at this point -- we like the way it's working. We're going to continue using it.

Okay. And then just the last question. Give me data points on the network's awareness amongst fans. I'm guessing most passionate fans know about the network and what it offers. But have you done any surveys or anything of that nature? I'd be curious to know your findings.

Yes, we do surveys, awareness, intent to purchase among those who are aware and those that aren't. I would say that the awareness, as described there is a real kind of complete understanding of the network, is still relatively low, even among our more passionate fans and certainly among casuals which we see as a great opportunity for us.

Daniel Moore, CJS Securities.

What's the decision to give a projection for ending paid subs for Q3? Previously I believe you gave the forward-looking guidance in terms of subscribers. So why the change, what gives you the confidence in 1.2 million and do you expect to provide sort of one quarter forward guidance going forward?

Yes, I think to your point what we've done, we just did it in the previous quarter, was give a range and it was pretty broad. So, at this point it is fairly tight. We're becoming more and more comfortable in understanding kind of the cadence of acquisition and retention. What I will say, I think we're still in such early days and if you look at other subscription businesses, they'll have a certain cadence and then it will shift. So I think I would tell our investors there is always that risk that at some point that cadence shifts. But at this point we feel fairly comfortable given one month into the quarter to start giving some guidance. But I'll reinforce it's still really, really early days.

Absolutely. Very helpful. Q4 your comments, obviously you tempering growth expectations a little, at least on a year-over-year basis. Are there some key moving parts either in terms of costs or revenue on Q4 relative to Q3 that you anticipate?

Well there is both the lapping of certain elements, so for example last year we recognized a minimum guarantee in our Home Entertainment segment. That wouldn't be relevant this year. We begin to lap the largest of our TV agreements. The show Vince mentioned, our version of Hard Knocks is the reality series. A reality series tend to be a little bit more expensive on a per hour basis. We did have one on the network in Q3. So it's a few different things.

Got it. And then maybe just to take a shot at this. Looking out at 2016 and beyond what type of annual growth should we be thinking about or anticipate in terms of content cost or just fixed cost more generally associated with the network?

Yes, at this point, Dan, we will go into our planning cycle like most people in the fall so we're not going to talk about 2016.

Okay. And as I think you implied in the press release, no changes to your longer-term projected OIBDA ranges based on a range of steady state subscribers?

That business outlook is specifically for 2015, so, yes we're still comfortable with those ranges.

(Operator instructions) Laura Martin, Needham.

One for Vince and one for George. [I'd be] slightly interested in your insight. I know you're doing the Facebook experiment and I know you are one of the largest YouTube channels. Could you talk about similar economic splits according to Facebook? So how do you think about YouTube versus Facebook?

And then George for you one of the things I understand that the revenue is now higher than pay-per-view, but one of the things I think we'd hope is that at the 1 million or 1.1 million sub level you would break even with the profit contribution of the old pay-per-view in the last 10 years every year. And so the 1.2 millions subs, are we making as much money as we would be making if we stayed in the pay-per-view sort of world? Thanks, guys.

I'll grab both of them, Laura. On the break even what we had said is at a steady state level we thought somewhere between 1.3 million and 1.4 million average subscribers will be similar to pay-per-view business. I've also said before that in 2015 we spent about $120 million because that's what we spent roughly in 2014 in the segment. So the answer is yes that 1.3 million, 1.4 million we would be in the $30 million to $40 million above with the range.

I think moving forward, and again this is a 2016-beyond, is how we think about the future growth potentials and where we want to invest in the network and so on. So it's something that we're still thinking about and we will share once kind of our thoughts [collapse].

But we can definitely run the network segment at 1.3 million to 1.4 million and generate $40 million of OIBDA right now or in that range.

On the Facebook, we are almost at 7 million subscribers on our YouTube channel, 6.9 million something, and we've done about 5.5 billion video views on a trailing 12-month basis. So if you're going to do video, direct to consumer around the world you're going to talk to us because we're one of the leaders in that space. So obviously we're talking to Facebook. They're doing a beta. There are some other brands in there, and we're excited.

I mean Vince mentioned 440 million video views in the second quarter. That number was immaterial if you went back three quarters ago. So it's really interesting. We know how to kill it delivering videos. So we're excited about the opportunity.

[It's our] high-class problem.

(technical difficulty) let's talk about programming, Vince, and see if we can get you in the conversation. So you're going from -- it looks like you've got 75 hours now, you're going to have to do 180. As we think forward a year or two, do you have an ultimate goal for how many hours of original programming you'd like to see on the network? What are you targeting in your own mind?

We are just looking at all sorts of different programming and again we're looking into what does our audience really want. We're also looking at growing, not necessarily keying on our mails in terms of that demo, the important demo, I think you can have a self-fulfilling prophecy if you do that. You have to develop programming for all the segments of your audience.

When you look at the segment of our total television audience, pretty much in four quadrants. We're not supplying programming for all those four quadrants at the moment. And I think once you start doing and you start broadening beyond the basis of what we do, I think you're going to attract a broader base which is always very, very good in terms of kids and things of that nature, even for older people. I mean I think there are so many -- when you look at our demographics on television and generally they haven't necessarily matched what we're doing on the network and we just need to develop programming for all of those quadrants.

Mike Hickey, Benchmark Company.

Congrats on a great quarter. Another one (technical difficulty) question. George, I know you probably (technical difficulty) 2015 at this point, but obviously through Q2 that's sort of the direction that's going to be more material (technical difficulty). When you think, maybe even at a high level, as we think about your 2015 OIBDA growth potential and you saw the reflect on your average sub expectation for 2015. Would it be reasonable at least to assume for a slightly better or a similar OIBDA expectation over a similar hypothetical subscriber range in (inaudible)?

Yes, Mike, kind of like I mentioned to Dan, we really aren't going to talk about planning for -- or guidance on 2016. We're really focused right now on 2015. We'll go through our planning process here in the fall and communicate as we usually do in our Q4 earnings call which typically takes place in February of the following year. So that's the plan right now.

All right. Fair enough. [I thought] I give it a shot. Your upcoming SummerSlam event, [they are looked on] the surface, the match is very good, but maybe I'm the only one pumped to see the Undertaker-Lesnar match, but curious, I guess when you look within the network and your social media release which is expensive, do you have an idea at this point how initial indication for demand are tracking? And in a market period with your success with Beast in the East (inaudible) more promotions like this in the future? And I have one more follow-up.

So, Mike, if I heard you right, I just want to because you come in a little [foggy] on our end, number one you said, how do we feel about SummerSlam and do we think it will be a real big attraction for the network and number two, do we potentially plan to do more things like Beast in the East, were those the two points?

Yes, you got it.

Yes, I mean we're thrilled. We're all fans obviously, so we are thrilled with SummerSlam. It's starting to feel like WrestleMania in August. So we're really, really excited and we'll see what the results are, but we don't have visibility to that. It's not like we could see from a cadence standpoint the impact. So we won't know until the event.

As far as SummerSlam is concerned we feel [we feel that so strong] we went from our traditional three hours to four hours this year. It's just so much great content we had to do that.

And Beast in the East, I mean huge success on the network. People love it. We mentioned it before. NXT has developed its own brand and following, is doing -- the program does incredibly well on the network. When we have a live special it trends globally on Twitter and it's primarily available on the network. So, yes, we're going to do -- continue to do more and innovate in that program because this has just been a home run.

Yes, absolutely. That sort of dovetails my next question. Curious if you could share with us how you plan to continue develop your NXT franchise. I mean, it seems to be a huge hit here and a big contributor perhaps to your network subscriber engagement.

Look, you've seen the development here over the last couple of years under the leadership of Paul Levesque, not only is it an incredible training ground for our Superstars and Divas, but there are so many compelling characters and stories within that process that only makes sense to share it with our fans. And I think it's a little bit of a different feel. It feels a little different than Ron's Smackdown. And so it has its own unique fan base. So we just think it's great, another way to super serve our audience and we are going to continue to develop it.

All right, guys. Thanks. Best of luck.

Thanks, Mike.

(Operator instructions) Daniel Moore, CJS Securities.

Thank you, again. Obviously there has been a lot of noise, if you will, in the media about severing ties with the long-term legendary marquee talents. Anything you care to comment on? And then more generally, what's your view of the pipeline of talent, where it stands today and the investments that you are making to continue to improve that? Appreciate it.

And we feel very strong about where we are now. As George just mentioned about the development of all the NXT stars coming up. When you look at what Paul has done over the last several years and you look at the number of individuals who have come from NXT are now main events. And investment in the future, quite frankly, doing extremely well now. Long-term wise we feel really good as well. I mean there is a recent situation with hold co but it is no longer with the organization and that doesn't have any material effect. Again we're keying on individuals who can actually compete in the ring and derive benefit from that. So that's where our emphasis really is.

And there are no further questions from the phone lines at this time.

Thank you, everyone. We appreciate you listening to the call today. If you have any questions, don't hesitate to contact us.

And this does conclude today's conference. We thank you for your participation. You may now disconnect.