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Executives

Michael Weitz - Investor Relations

Vince McMahon - Chairman and Chief Executive Officer

George Barrios - Chief Financial Officer

Analysts

Brad Safalow - PAA Research

Jamie Clements - Sidoti

Michael Kupinski - Noble Financial

World Wrestling Entertainment, Inc. (WWE) Q4 2012 Earnings Conference Call February 28, 2013 11:00 AM ET

Operator

Welcome to the WWE 2012 Fourth Quarter Earnings Conference Call. My name is John 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. Mr. Weitz, you may begin.

Michael Weitz - Investor Relations

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 earnings presentation and other supporting materials on our website, 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 will make the 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’ll review our financial results for the quarter and full year and provide perspective on our business plant. We’ll follow this with a Q&A session.

This time, it’s my privilege to turn the call over to Vince.

Vince McMahon - Chairman and Chief Executive Officer

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 improved pay-per-view profits of about $2 million resulting in talent development in innovative marketing. We also had an increase in the home entertainment profits of about $2 million due to strong catalog sales. As far as the brand itself was concerned, we have maintained our strength on television actually increased conservatively.

Social media, Facebook and Twitter followers grew about 100% and will continue to grow at a rapid rate of about $130 million as far as that’s concerned. CPG, the number two action figure, and in the U.S. and as you recall our action figures did very well on an annual basis, but this was particularly good quarter. As far as partnerships which help us in terms of image and increased business opportunities as well as I joined 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 hope to would many doors open for us. And they have of course, with Army National Guard, we have done something with the Hire Heroes, which we believe is going to be an excellent corporative initiative as well.

And, which George will speak of in a few minutes, we have completed our deal with the new videogame partner, Take-Two which is very, very exciting. We’re continuing to do a great deal of research as well in terms of the popularity of the brand and perception of the brand. I mentioned few months ago about the increase in television and digital rights we have produced in the license of about 2.5 additional hours of domestic television, a third hour of RAW from 8 to 9, which is new, it’s early morning show reaching kids called Saturday Morning Slam on the CW Network that was with the high interest (indiscernible). We also are producing a WWE Main Event show, which is on a new network for us reaching different sort 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 an EBITDA and we’ll get into why in terms of increased production capacity increase in terms of creative writing staff, talent development brands, things of that nature to building of our brands which did of course, we also send out the earlier this morning. To give you more of a flavor, more insightful view of the network we have been talking about for god knows how long 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. So, it gives us some idea of where we are, notwithstanding fourth quarter, but where we are hopeful of going in the very near future. So, George do you want to take it from there.

George Barrios – Chief Financial Officer

Thanks Vince. There are several key topics which I would like to review today. These include management perspective on our financial performance, some additional detail regarding our fourth quarter results and the discussions 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 range from $76 million and $96 million over the preceding four years.

Entering the 2012, 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 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 performing we began to 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 enhance 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 6.5 hours per week. In other term we monetized about 87 hours of our 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 our RAW, 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%, 8.6 million homes and an estimated 13 million viewers in the US. Similarly, we elevated our presence in social media by doubling our combine FaceBook and Twitter follower to 130 million. Building the strength of our brands and taking advantage of that strength is a critical component of our long-term strategy. During the fourth quarter, the increase in rights fee from the monetization of new television and digital content and improved results from our home entertainment pay-per-view operations more than offset both the aforementioned business challenges and investment in content related capabilities. Our adjusted EBITDA increased 57% to $11.3 million.

To review a key driver of our performance in the quarter, let’s turn to page five of our presentation which was 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 presentations.

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 right fees associated with our television and digital distribution agreements with USA Network, Syfy, the CW network, ION Television, Hulu Plus and YouTube.

And our consumer product segment our home and entertainment revenue increased 48% or $3.1 million driven by the promotions strong sales of our catalog titles in two additional lower price releases. Revenue stand for growth from 43% increase in shipments to nearly 1.2 million units and improve sell through rates 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 current quarter as compared to four in the prior year quarter. As well as in 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% increased 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.

Profits from pay-per-view business increased to $1.7 million due to a reduction in production and other costs. Revenue from our live events including merchandise sales of 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 attendance at these events.

There were eight new 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 average attendance was predominately due to weaker performance as the prior year included a strong eight event tour in Mexico. Average attendance from our events 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 profits the quarter generated a loss of $0.6 million including the film impairment charge of $0.5 million. Excluding the impact of the impairments our movie portfolio generated essentially breakeven results compared to an adjusted loss of $1.6 million in 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 as 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 SG&A expenses. Adjusted SG&A 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 year-over-year increase of approximately $2.3 million. Increased salary expenses and incremental bad debt expense, the rise in staffing costs 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 a growth and adjusted EBITDA was more than offset by increased depreciation expense and a higher effective tax rate. The former 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 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 full year taxable income. Additionally the fourth quarter rate reflected $0.2 million increase in unrecognized 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 the improved performance of our pay-per-view business will offset by the absence of the second video game release and increased operating expenses. They return to 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 SG&A.

Adjusted SG&A expenses increased 14% also reflecting higher salary expenses excluding management incentive compensation and increase bad debt expense. Network related costs which are excluded from our adjusted SG&A reached $8.2 million in the current year period.

Page 20 of the presentation contains our balance sheet which remained strong. On December 31, 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 continued 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 a much greater detail. To facilitate this discussion I will reference pages 9 to 17 in our website presentation.

Our plan to transform our business as shown on page nine, it’s simple and reflects the execution of a three part strategy to invest in the creation and ownership of strong brand, 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 innovative marketing campaigns that 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 the U.S. and international market. 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 into 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. Show on page 12, continued investment in our core business and a potential WWE network our expected to generate meaningful returns by 2015. Our core business is projected to grow based on the monetization of content and digital products. 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. I believe 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 as shown on page 13, such as the magnitude of our social medial followers and consistent top ratings of our televisions programs demonstrates WWE brand strength. In 2012, the average number of viewers of both RAW and SmackDown exceeded the average number of prime time viewers of every cable network.

And historically our programs get ranked as number one show in the respective networks. Further consumer research as shown on page 14, indicates that a high proportion of U.S. and international TV viewers have an affinity for WWE content. In the U.S. approximately 34% of digital multi channel TV household have an affinity for WWE content 31 million homes, of which approximately one quarter or 8 million home or characterized as very passionate fan households. Our research also indicates an additional 18% of U.S. 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 compiling for several international markets such as Mexico. Consumer research and statistics regarding WWE’s brand reinforced the significant opportunity that exist 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 us the value content as measured by network advertising and consumer pay subscription revenue has steadily increase and is expected to the increase further across global markets. Specifically across selected market namely the US, UK, India and China, the value 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 value sports programming right are both indicative of our potential to garner increased from our content.

Notably WWE is uniquely positioned as shown on page 16, as our program show the best characteristics of scripted entertainment and sports programming. Such as being character driven with the 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 established networks, launching the premium WWE network, introducing 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 U.S. specifically regarding the potential WWE network, we believe that a premium subscription model is the best approach to capitalize on our fans commitment, and their desire for more WWE content.

Turning to page 17, provide some context on the economics of the potential domestic WWE network. Based on our market research we estimate that fully distributed domestic pay network could ultimately attract between 2 million and 4 million subscribers at a steady state. These subscriber estimates derived from the projected base of 47 million WWE digital TV households in the US including lost fans and the proportion of which have not been really for WWE content. Take rates are based on a value proposition for the network that reflects inclusions of all of our pay-per-view events except Wrestlemania as well as new compelling original context. While our pay per view events, would still be offered on an a la carte basis, we believe that a WWE network offering would drive significant consumer interest including in households that currently do not purchase the pay per view events.

The proposed price per month between $1299 and $1499, 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 rate 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 the network would result in net investment for WWE. However, reaching the subscriber level we are in the range of 3 million to 4 million could provide transformative growth. As in the U.S., we believe that the network in other distribution models also represent the sizable economic opportunity in international market.

To reiterate, we believe that we can take the advantage of our content opportunities based on the strength of our brand 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 of the investment in key areas of talent development, content creation and end 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 i.e. 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 the network is launched within a 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 suspicion to offset the incremental direct expenses associated with the network launch such as marketing, program amortization and transmission costs. Although our 2013 EBITDA results could vary within a range of approximating our 2012 results, we expect several factors will contribute to a challenging first quarter. These factors include lower profit for home entertainment primarily due to a positive adjustment in the prior year sell through rate, lower international licensing sales and additional investment in content production including staff and talent costs. Accordingly we anticipate our first quarter EBITDA to be down approximately $6 million to $8 million from the prior year quarter. In addition 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 about $1 million.

For the year, free cash flow is also 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 rates and the sale of our current aircraft will outset a significant portion of the down payment. As with EBITDA, our 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 maintained our current dividend.

Projected free cash flow performance assumed the investment of approximately $15 million to $20 million to produce the portfolio of movies, while we have confidence that our revised approach to film, entertainment will yield significant returns above our cost of capital. We have also established criteria that will guide our level of participation in potential exit from the business.

Future investment will be predicated on the evaluation in our performance in 2013 in this business. Overall 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 or not about our past effectiveness. Today, we communicated more information that we’ve done previously regarding our strategies, opportunities, and tactics. We hope our investors will understand share of commitment to establishing a firm platform for meaningful unprecedented earnings growth.

That concludes this portion. Back to Michael.

Michael Weitz – Senior Vice President, Investor Relations

Thanks, George. John, we are ready to take calls from our analysts and investors.

Question-and-Answer Session

Operator

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.

Brad Safalow – PAA Research

Hi, thanks for taking my questions. I was hoping I can may be get a little bit more information on what exactly in the opportunities for U.S., some of these commercial agreements expired. Are you referring to your current distribution deals for SmackDown and RAW or is this related to your pay-per-view distribution deals.

Vince McMahon

Yeah, we – over the plan for you Brad, we’ve got our four largest content agreement, RAW and SmackDown in U.S., our content are likely to get agreement in the U.K. and our licensing agreement in India, which again represent our four largest deals will be renegotiated renewed during that period.

Brad Safalow – PAA Research

Okay and just to be clear you are not making some sort of reference to that you might bring those – that content on to the network, this is more you feel it’s economically have an opportunity to increase what you are getting.

Vince McMahon

Yeah, strategically we feel comfortable without involved distribution in the U.S. In addition to a premium network so, yeah, we feel very comfortable that given the value content given how well we performed for partners that orders well for those four deals.

Michael Weitz

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

Brad Safalow – PAA Research

Okay. And then just in terms of timing, you’re giving us a lot more detail on the network I assume this is a large – in large part because you refer to long enough process of actually getting closer to large. Is it queue – give us an expectation and something like this is the likelihood that it occurs in 2013 some estimate probability.

Vince McMahon

Yeah I think, like we said in the last call Brad, we are going to get out of the – for an application business we are 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 we believe the numbers. So, we feel, we are optimistic, but we are going to get out of predicting dates.

Brad Safalow – PAA Research

Okay. And just the question on kind of a granular question just having first look at the slide, but you are showing cannibalization misses on slide 17 or $5 million to $10 million is going at as high as $20 million to $25 million based on the four scenarios from our pay-per-view revenues that’s actually the number that’s lower than I would have thought gave us understand what you’re assuming in terms of the number of pay-per-view buys that we call it subscribers to the network.

Vince McMahon

Sure, what you think of domestic pay-per-view revenue being that $45 million to $50 million range roughly WrestleMania represents more than half of that. So we’d expect that as we mentioned we remain our pay-per-view and so that the cannibalization in essence would happen with the remaining pay-per-views and they would ramp up as people moved from purchasing pay-per-views to subscribing to the network because of the strong value proposition so that’s all the cannibalization works. And there is obviously its ranges a lot of assumptions on adoption curves which households to move when, so which is why the ranges are pretty wide but the concept is early on less cannibalization at 3 million or 4 million subs essentially the only pay-per-view you have left this WrestleMania and as you know that generally has done over million buys globally.

George Barrios

And also some increase of network buys of people who really do not and cannot afford that huge monthly pay-per-view bill.

Brad Safalow – PAA Research

Good okay. One last question on the video game deal, can you talk a little bit about what is different about the arrangement it with a take-two it sounds there is some sort of agreement that they will not only produce the console-based game 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 it actually produced – be produced in terms of content maybe economically the difference for the company?

Vince McMahon

Well, we had a great partnership with THQ and our core game as always done well. We been of the feeling that the 360 degree monetization it’s now happening in interactive gaming that we will behind the curve on that. And when the time came for us to move and we talks 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 share vision in terms of getting us on as many platforms as possible given the way our audience we talk about doubling our Facebook and Twitter followers 130 million now more than the NFL and their 32 team. So we’ve got an audience they wants to interact with us there and we just haven’t been – we have been on the curve on social and mobile gaming and mobile apps. So they blew us away with their vision number one that front and then number two also they’re focused on brand its obviously at the heart of what we do and they really impresses with both of those.

Brad Safalow – PAA Research

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

Vince McMahon

Yeah it’s structurally it’s a little bit different if retail sales are about the same then our economies are about the same but structurally a little bit different.

Brad Safalow – PAA Research

Okay I’ll turn it over.

Operator

Our next question comes from Jamie Clements from Sidoti. Please go ahead.

Jamie Clements - Sidoti

Gentlemen good morning.

Vince McMahon

Good morning.

George Barrios

Hi Jamie.

Jamie Clements - Sidoti

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 is it just sort of an adjusting that step out?

George Barrios

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 essentially the loss of the pre petition sales. There is also some puts and takes in terms of an advance we received from take-two the results of the integrated sale bad debt that I have referenced in my comments. But if you cut through all that roughly a $4 million to $5 million economic loss in terms of earnings in Q1 the video game line what’s kind of black because or where you have that loss we haven’t unamortized events…

Jamie Clements - Sidoti

Of 8 million right?

George Barrios

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

Jamie Clements - Sidoti

Next question and perhaps events if you could take this halo effect that you talked about in one of your slides with respect to the network their 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 you’ve learned more about that over the last three or six months and nine months than perhaps when you initially started to thinking about the network?

Vince McMahon

All about halo aspect everything we do and when you think about everything converging in so many different ways and using so many different mediums and so many different things that we are into now as far as network and everything else we virtually have network now. And so many different areas when you consider on a year 24x7, seven days a week, we are digital in things about nature, but all of that enhances originally even our core base of RAW and Smackdown, which there is numbers of holding had quite nicely to be able to drive the network and be able to offer specific programs on the network that halo effect is the rising target for that really of everything that we do. From an image standpoint for being able to touch, so many people in so many different directions and to grow that encompasses, it is a huge halo effect went almost everything we do.

Jamie Clements - Sidoti

Yeah, let me just a follow-up question also with respect to the network do you – is it critical for the brand overall is the network is all PG, all the time or when you consider fans that may have aged out a little bit or look back at the attitude there, people like myself by appreciate a little bit more than some of the PG content have some options there to push the (envelope) in the network?

Vince McMahon

Yes, we do depending on the course of what time of day part that you are offering whatever, but we do have that ability and as well as on video, we have the ability to be able to release things even our films are most of our – lot of outcomes now are so, it’s – it is the expansion the audience to complement a broader based on lapsed fan is very, very important and bring back into the fold and one of the way you should do that is by repurposing the content from the attitude there and things about make sure it all can mixed together depending upon day part, depending upon disclaimer, things about nature, that network going to be all things in terms of new programming as well as monetization of our 100s of 1000s of software as we ought in terms of our library.

Jamie Clements - Sidoti

Okay, thank you all very much for your time.

Vince McMahon

Thanks, Tim.

Operator

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

Brad Safalow – PAA Research

Hi, guys, just a few follow-ups, one you have two films coming out in the next two to three weeks, these looks like legitimate or that they have legitimate box office potential first time you done kind of what Fed released in a while, help us understand I don’t know if there is a minimum threshold for domestic box that we can kind of think about so, where we would be a breakeven or how your economic involvement will really play out the films perform?

Vince McMahon

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

George Barrios

And Brad just to fill on that, you mentioned the two releases we have theatrical, we also have the third release in March, Direct-to-DVD, Marine III.

Brad Safalow – PAA Research

Right so just on Dead Man Down and the call I guess what I’m trying to understand is these economically a factor at all really in 2013 from a running perspective in your view, I mean, I don’t know moving accounting is notoriously again so, I just want to trying to understand what this could mean.

Vince McMahon

Yeah so, we are not going to give out domestic box office target for us, you’re right it’s that’s especially coming to be for 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 itself distributed films we are kind of for. And in essence with that meant is when the self distributed were accounting in the month of release on the net basis, we are going to account revenue and profit and amortized the cost when we received the participation statement. So, it’s a long win to way of saying revenue and profits are not big drivers in ’13 on movies.

Brad Safalow – PAA Research

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 we do launch on network obviously that’s a – in fact a major shift and how you are distributing pay-per-views obviously there is going to be some friction with incumbent pay-per-view distributors, one, you really have the ability to change the distribution of pay-per-views today and can you distribute pay-per-views today with that?

Vince McMahon

There are a lot of things in there. So, on the first portion of door we get into what our specific rights on pay-per-views on network. And over the top, yes we do we got it at the same price point but we can deliver and that is something we are working very strongly at and we’ll probably have news sooner rather than later on.

Brad Safalow – PAA Research

Okay and that’s two those domestic and overseas?

Vince McMahon

Overseas is a little bit different market-by-market, but I think you could apply the general answer is one correct overseas, but each of the marker is a little bit different, all the deals different..

Brad Safalow – PAA Research

Okay, and then.

Vince McMahon

That was pretty consistent.

Brad Safalow – PAA Research

Okay, and just a basic question, the television rights fees, the $40 million number of fourth quarter I know some of these or most of these contracts of escalators but we assume that’s king of a run rate going forward?

Vince McMahon

Yeah. You won’t have the same year-over-year impact because you’ll start lapping them but that roughly yes.

Brad Safalow – PAA Research

Just from a nominal perspective of seeking.

Vince McMahon

That’s right, yes.

Brad Safalow – PAA Research

Okay, thanks. I will turn it over.

Operator

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

Michael Kupinski - Noble Financial

Thanks, just I have a quick question most of the questions have been answered. What you considered to be the steady state or the follow up further 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 are using to determine when the network would be at a steady state or following up from it’s initial ramp?

George Barrios

So, I’ll say two things, number one on the breakeven as we mentioned up to about $1 million and again that depends on who is the million how much which pay-per-view homes have migrated so on and so forth that’s just a around number. We don’t hit breakeven as for us the ramp rate I think most people look at and its always technical term, the best of fusion curve to look at new products and their adaption and that’s when you look at HBO show time that’s based on cable penetration in general which follow that curve. So, that’s the way we are modeling it but obviously reality will differ from the model we know that, that’s the general approach we’ve taken. And get more of that you should have once you launch in a system and use that systems reach as denominator you will have pretty good sense of whether your eventual takes rates are going get there within 6 months to 12 months of launch pretty good idea what you could expect at steady state, does that answer question Mike.

Michael Kupinski - Noble Financial

Yeah. I guess on so from the sounds of you’re anticipating getting to at least million subscribers from the initial launch to it and would I consider that to be this steady state from there?

George Barrios

No, what we put out as four different scenarios.

Michael Kupinski - Noble Financial

Right.

George Barrios

We feel it’s reasonable to assume based on the data that we have reality move tell us that 3 million to 4 million subs will be reached with full distributions. So, there is two elements here, there is getting carriage and being available and that there is subscriber ramp up. So, those two things are at play. Depending on the speed of carriage and 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 want somewhere by tracking the subscriber doc just in that system. If there is other economic impacts you get the sense of how and where do you thinking eventually end up. So, those are the metrics we will be looking at as we launch the penetration on a system by system basis.

Michael Kupinski - Noble Financial

And so then technically six months after the launch you would be determining whether or not it would wanted to forward with the launch. Is that correct?

George Barrios

Yeah. I think 6 months to 12 months you would have good idea as hey is the current offering working or not and I think that will have very decisions to make but I think you’ll have pretty good idea.

Michael Kupinski - Noble Financial

Okay, thank you.

George Barrios

And just I’ll be labor this point in some point it does not mean 6 months to 12 months you broken even it just mean 6 months to 12 months. Once you all somewhere you can engage with the take rate for the network in that environment and at the high an up, you’re going take longer as you need to get full coverage because you know that the model fundamentally works. And then average on incentive to carrier because it’s market economic opportunity for them. So that complex question good one but hopefully that helps.

Vince McMahon

Okay, thank you.

Operator

And back to Michael Weitz for closing remarks.

Michael Weitz - Senior Vice President

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 203-352-642. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

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