World Wrestling Entertainment Inc. Q1 2009 Earnings Call Transcript

| About: World Wrestling (WWE)

World Wrestling Entertainment Inc. (NYSE:WWE)

Q1 2009 Earnings Call

May 7, 2009 11:00 am ET


Michael Weitz – Vice President, Investor Relations and Financial Planning

Vincent K. McMahon, Chairman Co-Chief Executive Officer

Linda McMahon – Chief Executive Officer

George Barrios – Chief Financial Officer

Donna Goldsmith – Chief Operating Officer


Jared Schramm for Richard Ingrassia – Roth Capital Partners

Marla Backer – Research Associates

Alan Gould – Natixis Bleichroeder

Luke Shagets – Sterne Agee & Leach

Jamie Clement – Sidoti & Company

Michael Weitz

Welcome to World Wrestling Entertainment's first quarter 2009 earnings conference call. Joining me for today's discussion are Vince McMahon our Chairman, Linda McMahon, Linda McMahon our CEO, Donna Goldsmith our COO and George Barrios our CFO. We issued our earnings release earlier this morning and will be referencing a presentation as part of our discussion. These are available on our corporate website at

We will be making several forward-looking statements today as part of our discussion. These statements are based on management's estimates. Actual results may differ due to numerous factors, which are referenced on page one of the presentation. These risks and uncertainties are discussed in more detail in our filings with the SEC. Reconciliations for non-GAAP financial information discussed on this call can be found in our earnings release or on our website. Today, we will review our financial results for the first quarter and we'll follow this review with a Q&A session.

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

Vincent K. McMahon

I'm here because I'd like to compliment our current staff on your earnings call and to, perhaps, lend a vision and more direct communication to our current and potential stockholders. Getting right into business in terms of Q1, I thought that our performance was fair to poor. I think we can do a heck of a lot better than we have done.

We saw a 10% decline in revenue over last year, however, it's been offset by somewhat of a flat in terms of last year as far as profit is concerned. The reason we were able to maintain that, obviously, is more efficiency in terms of reducing some of our expenses, as we said we were going to some $20 million over a period of time. So, we were, again, fair to poor on the quarter in general. Notwithstanding that do I feel that we are setup for a success in the future.

I think that when we make reference to our efficiency it's not just in cost reduction, but those efficiencies not surprisingly have led to us utilizing our resources a heck of a lot better than we have in the past and, not just a reduction of costs, but we're finding that fewer people can do a heck of a lot more than we have with more people in the past, and that's something we should have seen some time ago. In this really tough economic environment, a lot of companies look at things like that.

A lot of them just cut costs. Ours is a double benefit, as I've said before, not just cutting costs, but fewer people are doing more things in setting up no doubt continued and even greater success than we have had in the past. Our product, of course, is extremely important to us as it in any entertainment company. You first and foremost must have an extraordinary product that's both innovative and unique.

I think we fit that category extremely well, although we can be a bit more innovative as we always strive to be in terms of making good television, good film, good product and general publication, etc. across the line. We still maintain the number one status on USA Network, as well as Sci-Fi. Actually every network that we're on, we are number one over the entire year. MyNetworkTV continue to be number one there as well.

And of course we've just signed a new deal, we're like three or four weeks into our new distribution [WG in America] as a complementary show of all three brands are combined and that is doing very well for all of us. Again, it's important that we create our own product. We're somewhat unique in that respect because we create our own product, distribute our own product, own our own product extremely important, and market that product. Again, I think we can do better on all counts, nonetheless this does allow us, as far as international is concerned as well as domestic, it does allow us to derive the ancillary benefits to our product unlike any other.

As far as expansion is concerned, I know that's on the mind of a lot of people and there are a lot of ways in which we are expanding. And not just in scope, in terms of international which is very important to us. But again the more valuable you become even to your domestic distributors, the more benefit you can derive from terms of how the ancillaries, as well as perhaps higher fees from the networks. Again, it's important for us to maintain and continue to be unique which we are and innovative.

I guess there's also something going on that is very important for us, and that is an educational process, be more part of mainstream America. I think we've been somewhat an island in terms of the entertainment aspect that we bring because we are unique. But nonetheless I think there's an educational process that's going to benefit us greatly in terms of working with business to business opportunities, as well as the media in general for them to explain what it is that we are, as well as that explanation to our current, and hopefully, future stockholders as well.

We're opening new doors. We have a PG environment which we're enjoying. It is our intention to remain in this PG environment. It gives a safe haven for those who would entertain being associated with us, as far as sponsorship in advertisement. Again, we derive rights fees generally from our distributors and so we're not in the business of selling our own time. Nonetheless, advertising is very important because, again, the more value we bring to our product, the higher rights fees, etc.

So, we're opening up some of these new doors, including the Army National Guard. We've done a small deal with Pepsi, which we are confident will be a larger deal going forward and, again, success begets success. I think that during these tough economic times, there are a number of products that much like us have to look to a more efficient way of reaching an audience. So, therefore, again individuals I think companies in the past have overlooked us are now taking a look at us and finding out just how efficient we are with helping sell their respective products.

I think that our reach out to media explaining who we are, as well as to other businesses, is going to pay off. Reaching out to other environments that we otherwise have not reached to because they're not our core product is very important to expanding the product. Those of you who watch attentively, and I'm sure everyone on the call watches television program called The View hosted, of course, by Barbara Walters.

Nonetheless, that's an idea of the way we're expanding our product is to reach out again, as I've said before, in avenues that we never have to grow, to be a part of mainstream, more of the mainstream than we currently already are. And again The View is an example of, that's not going to put any money in our pocket at the moment, but it does open us up some of the gatekeepers, some of the women of America to say, you know what it's an okay product, and otherwise again they would not be exposed so that's important for us as well.

And as we continue on in this endeavor, one of these days we're going to be considered an overnight sensation. It may take a little while, but that's what's going to happen. Our product remains extremely popular especially from the live event standpoint. We had over 70,000 people at WrestleMania, approximately a million pay-per-view buys. And, again, I think that is the true test of where we are in terms of valuation of the public is live events.

You would say, okay the key areas are pay-per-view, growth, etc., etc. and you could look to those barometers, but the true barometer of how we're doing is live events, because that's the most expensive way in which a consumer can reach out and touch our product. But with, and many of you know when you go to events, when you buy the ticket that's only the beginning. You've got to pay for parking and food and beverage and merchandise and on and on.

So, I mean actually our live event business remains very, very strong. Again I believe that's the barometer as to whether or not we're going to grow all these other ancillaries. And as far as these ancillaries are concerned, there's no form of entertainment in the world, quite frankly, that fits every form of distribution entertainment in the world from pay-per-view to videogames to you name it, we're in it, the music business, we're in the publication business, etc.

So, I don't believe there's any entertainment in the world that's in as many businesses as we are in terms of all the ancillaries. And we need to grow those ancillaries again through better marketing, better management and better distribution. I'm confident we can do that going forward. I'm very proud of our organization. We have the best talent, as far as not just in-ring talent, but as far as management is concerned, you're the best management team we've ever had in the company and that is growing and continuing to be more efficient and be smarter.

So, those are again some of the aspects I see of the business. I'm sure many of you have questions, which I look forward to answering. Again, it's my intention to continue to be on these calls for the foreseeable future to lend whatever I can to everyone that wants to know more about our business and educational effort as to where we are and where we want to go.

So these are generalities and with that we'll go over to George.

George Barrios

I'd like to start by providing you with some additional perspective on our first quarter results. For the quarter we reported a 34% decline in revenue. However, several factors including the timing of WrestleMania, the timing of our film projects and changes in foreign exchange rates made it more difficult to discern the underlying strength of our business. Adjusting for these factors, revenue declined approximately 10% roughly in line with other entertainment companies and perhaps better than expected given our macroeconomic environment.

Current operating conditions clearly had a continuing impact on both our live events and pay-per-view performance. Perhaps most importantly, our first quarter results demonstrate how we have fulfilled our commitment to run our business in a smarter, more efficient way. Specifically, we managed a 6% decline in SG&A expenses from the first quarter last year, and improved the operating margins for our businesses to 18% compared to 15% in the prior year, excluding WrestleMania.

As a reminder, WrestleMania occurred in the second quarter of this year compared to the first quarter last year. The event contributed $31.3 million of revenues and $7.1 million of profit contribution to our results for the first quarter of 2008. To clarify the trends in our business, I'll discuss our performance on an adjusted basis, excluding the impact of WrestleMania.

Additionally, our first quarter results, particularly our live events, pay-per-view, and consumer products were impacted by changes in foreign currency exchange rates. We estimate that these changes reduced first quarter revenue and operating income by $3 million and $1 million, respectively.

For a more detailed review of our performance in the quarter, let's turn to page five of our presentation, which was the revenue and profit contribution by business unit as compared to the prior year quarter. Starting with our live events, including merchandise sales at these events, revenue was essentially flat for the prior year quarter on an adjusted basis. Changes in our touring schedule, including the addition of 18 domestic events, offset declines in average attendance and ticket prices.

Reflecting weak economic conditions, average paid attendance for our North American events decreased 3% on a year-over-year basis, and average ticket prices to these events declined approximately 12% to $33.54. Notably, the expansion of domestic events also offset a decline in revenue from outside North America. The quarter had four fewer international events and was impacted by changes in foreign exchange rates.

Turning to our pay-per-view business, revenue declined 22%, excluding the impact of WrestleMania. Buys for the two pay-per-view events produced in the quarter, Royal Rumble and No Way Out, decreased 16%. Although international buys comprised a larger share of total period purchases, 36% compared to 30% in the prior year quarter, revenue per buy declined in part due to the impact of foreign exchange.

We remain focused on managing improved results from our pay-per-view business, while subsequent to the quarter, we are pleased with the performance of our 25th anniversary production of WrestleMania, which we believe is on track to garner approximately 1 million pay-per-view buys.

Revenue from the distribution of our television programming increased by 4% or $0.9 million, primarily due to higher domestic and international rights fees. These higher fees reflect contractual increases in our licensing agreements. Notably, both our rights fees and the profitability of our television operations will benefit from the distribution of our new program, WWE Superstars, which debuted on WGN America on April 16.

In our consumer products segment, our licensing revenue decreased by 24% or $6.4 million over the prior year quarter. The decrease primarily reflected lower sales of videogames, as the economy adversely affected consumer demand. Increased pressure on retail prices brought unfavorable changes in foreign exchange. During the quarter, sales of our SmackDown versus RAW videogame declined 21% to 4.1 million units.

Our home video revenue declined 34% or $4.8 million reflecting a 23% decline in DVD units shipped during the quarter, and an increase in promotional expenses, which were accounted for as contra revenue. DVD shipments fell 23% to approximately 912,000 units, primarily due to the release of fewer titles. Six new titles were released in the current period, as compared to eight in the prior year quarter. In addition, sales of titles from our catalog fell by 13%.

In our magazine publishing business, revenue increased 21% to $3.5 million the growth primarily reflected the addition of our WWE Tips Magazine, which was launched in April last year. In our digital media segment, revenue declined 15% to $6.9 million from the prior year reflecting lower sales of online merchandise and Internet advertising. Revenue from e-commerce declined 17% reflecting a decrease in both the number of orders and in the average revenue per order.

The number of online merchandise purchase declined 12% to 60,000 orders. In addition, the average sales per order fell 3% to about $50. The current quarter was also characterized by lower sales of online advertising. While we managed a 12% year-over-year increase in Internet traffic as measured by paid views, we did not take full advantage of this increase, in part due to the ongoing transition of our Internet ad sales organization.

It is important to note, however, that we have seen increased activity in our ad sales pipeline, including an increase in commitments for the remainder of the year, as compared to the level of ad sales, both at the same time last year. The success of our efforts integrate the sales of our various assets, including digital media, is evident in our renewed partnership with the Army National Guard.

During the quarter, WWE Studios recognized revenue of $3.7 million and profit of $2.2 million associated with our portfolio films. Our four theatrical film, 12 Rounds, was released on March 27 of this year and generated approximately $11.8 million in domestic box office revenue. The current quarter also saw the release of a direct-to-DVD film project, Behind Enemy Lines: Columbia, on January 6 of 2009. We expect 12 Rounds, as well as our overall portfolio films, will surpass breakeven profits.

Our overall profit contribution margin increased to 48% from 42% in the prior year on an adjusted basis. The increase reflected improved margins in our live and televised entertainment and WWE studio segments. In particular, the quarter was highlighted by reduced operating expenses in our television production, live event operations and pay-per-view marketing.

For the quarter, reported SG&A expenses decreased 6% to $30.9 million, due mainly to declines in advertising and travel expenses. These cost savings were partially offset by an approximate $2.2 million restructuring charge associated with our headcount reduction that incurred January of 2009. Excluding the impact of the restructuring charge, SG&A expenses of $28.7 million represented a $4.3 million decline from the first quarter last year.

As a reminder, we expect that our commitment to reduce our 2009 expense base by $20 million will be realized in both lower SG&A expenses and lower direct expenses that are captured in our profit contribution.

Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. As shown, operating income was essentially flat for the results in the first quarter 2008, after adjusting for both the restructuring charge and the impact of WrestleMania. Net income was $10.3 million compared to $14.9 million in the prior year quarter on an adjusted basis.

In addition to the aforementioned decline in revenue, the year-over-year decline in net income reflected a decrease in investment income, and an increase in other non-operating expenses. The former was attributable to lower average investment balances and interest rates. The increase in other expenses reflected realized translation losses and the revaluation of warrants held with licensees. Also impacting net income, the effective tax rate of 35% in the current year quarter exceeded the 30% rate in the prior year quarter, which was reduced by the recognition of certain state tax benefits.

Page 15 of the presentation contains our balance sheet, which remains strong. On March 31, we held more than $225 million in cash and investments, with virtually no debt. Page 18 shows our free cash flow. For the quarter, we generated approximately $46 million of free cash flow compared to about $5 million in the prior year quarter. This increase was driven by the timing of WrestleMania, our feature film investments, and changes in working capital, including changes in the company's tax position. In addition, capital expenditures decreased to $1.5 million as compared to $9.7 million in the prior year period.

Looking ahead, we are focused on managing the company to improve our cash returns. We made changes to realize our targeted annual expense savings of at least $20 million in 2009 and to reduce our capital expenditures. As indicated last quarter, through increased efficiencies and careful management of our growth, our goal is to deliver greater value to you, our shareholders.

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

Michael Weitz

Operator, we're ready now. Please open the lines for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Richard Ingrassia – Roth Capital Partners.

Jared Schramm for Richard Ingrassia – Roth Capital Partners

This is Jared Schramm filling in for Rich today. We're a little ways off on the handoff from JAKKS Pacific to Mattel on the toys section. Can you talk about what sort of expansion you can do with Mattel and how you plan to grow that segment of the business?

Vincent K. McMahon

I'll mention it and then we'll go to Donna who is really on the case. This is like night and day comparing JAKKS to Mattel, obviously, Mattel being to date. These people are really, really smart people and, as Donna's going to tell you, their approach to our product and the exploitation of it is nothing short of extraordinary.

The other thing about Mattel, which is important for us, is we're global they are, too. And it's not just what they're going to bring from a financial standpoint to the bottom line it's also the fact that they're a good partner. They're going to be a very, very good partner. And they have offices and they have people on the ground that can help us in markets where we don't at the moment, in terms of the overall business climate, political climate, you name it. So, we really know that they're going to be a partner, not just someone who benefits or we benefit from the bottom line.

Donna Goldsmith

Jared, the other thing I would add to that is that we have seen some of the early product development that Mattel is working on, and it's fabulous. They're going to expand the product line by hitting three segments, the collector business, which JAKKS had done a good job at, but Mattel is going to take it to another level.

They're going to hit the kids business, which is an area where JAKKS had not focused on. They're going to go for the 2 to 11, they're going to advertise on kid programming, which JAKKS had not done before. They're going to create products that are so different than what you've seen and they are going to have more articulation.

They are going to have sound and movement. They're going to do products besides the actions figures. They're going to do more additional product from role-playing to masks with championship belts. We are so excited for the array of product that they're going to do. And, of course, they will continue with the basic action figures, as well.

I just came from L.A. yesterday where we presented to a number of retailers, and the retailers are very, very charged up. They're very excited by the breadth of product that Mattel is going to have out there, and the support that Mattel gives from the retailer to, as I said, to kids advertising to the promotion.

They are connected to everybody. Everybody in the quick serve restaurants so we can talk premiums and promotions, and then as Vince said, to wrap up the circle their international business is huge and they have distribution in every market out there. And it's their own distribution it's their own people on the ground versus JAKKS used third parties in many cases. So, the whole thing is very, very exciting for us. We're chomping at the bit here for the first of 2010 to come because I think you're going to see amazing product out there.

Jared Schramm for Richard Ingrassia – Roth Capital Partners

If I can ask one more here so pay-per-view followed the TV in Mexico. As far as pay-per-view goes, is there a rollout schedule at all, or can you give me some sort of insight on that, as far as Asia goes and Eastern Europe for pay-per-view.

Vincent K. McMahon

We have to follow the technology. In certain countries the technology is not there and so, therefore, our model has to be somewhat different with each culture that we're involved in. Although, Mexico does have pay-per-view and we just did WrestleMania at the very last minute working with one of our pay-per-view providers there and did extraordinarily well.

So, we think we'll be able to open up all of our pay-per-views into Mexico go forward. And, again, wherever there is pay-per-view we're going to be there and benefit from that further distribution. But in certain areas, there's no such thing as pay-per-view.


Your next question comes from Marla Backer – Research Associates.

Marla Backer – Research Associates

Vince, you talked about how we're definitely in a difficult economic climate and certainly on the cost side you did a great job at managing those costs down to offset some of the revenue pressure. What about are there any things you can think about in terms of tweaking pricing including ticket pricing at live events to see about whether that will help boost overall revenue? And then separately I know sponsorship has been something you've talked about you alluded to in your remarks, any opportunities there to help offset some of what we're seeing with the decline in consumer spending?

Vincent K. McMahon

As far as live event ticketing is concerned, we have looked at that and made some differences. As far as our more inexpensive ticket, we've reduced that and we find that we can put more people in an arena and still maintain, if not increase, a small amount of revenue over the previous quarter. So, we've done that we've adjusted that already. We see no diminishing demand for our higher ticket price as far as ringside is concerned.

But, again, we've already reduced that and we'd like to consider ourselves as one of the things from a marketing standpoint and, by the way happens to be true, and we like to consider ourselves as the best value in entertainment in every form that we reach, whether it's live events or pay-per-view or whatever. So, we have reduced ticket pricing, but the results of that ticket pricing is exactly what we thought we were going to have, and that's more people in the arena, which of course then benefits more people who can reach out and touch your product.

It's really grass roots, which is the best form of marketing there is. People come, they have a really good time, they go out and they talk about it, which again the benefit of that through all of our ancillary products is important. So, we have adjusted that. We are looking at efficiencies along those lines going forward.

As far as sponsorship is concerned, again we're just opening that door in a bigger way. You will see some dramatic increases going forward, as far as digital media is concerned. And with that as well, somewhat of a dramatic increase as far as individuals who are sponsoring and the frequency in our television products, which I said before, doesn't come directly back to our bottom line, but does in terms of increased television rights and what have you because, again, we're the best value in entertainment.

Marla Backer – Research Associates

I have just one other question, I guess this is for Linda and it's housekeeping, I think you get this every quarter, but on the Genius relationship, are you still happy with that relationship? Are you seeing any signs of Genius's own financial problems may be impacting your product?

Linda McMahon

I'm actually going to let Donna Goldsmith answer that for you, Marla, because she's been right in the throes of all those renegotiations.

Donna Goldsmith

Marla, Genius has done a great job with us at retail. If you get into Wal-Mart stores or Best Buy, you will see we have more facings than we've ever had before, meaning more retail placement. For example, in Wal-Mart you will see we have about anywhere from 18 to 25 positions, depending on the size of the store, which is a huge number.

As far as Genius goes, they are still working things out. They paid us on time through the first quarter, we're in good shape and they have the distribution and the reach that we need to get our product out there. So, we will keep watching them as you guys do, and so far so good.


Your next question comes from Alan Gould – Natixis Bleichroeder.

Alan Gould – Natixis Bleichroeder

I've got three questions for Vince and one for George. First for Vince, can you give us your thoughts on the TV production facility? I realize the facility in Stamford you have now is cramped, but we're talking about a $90 million or so facility, where your thoughts are on that.

Secondly, I was wondering if you could discuss your thoughts on the split dividend. Would the McMahon family be willing to keep a split dividend a little bit longer if that would be required to keep the dividend at the $1.44 rate to the public shareholders. And third, your thoughts on the digital initiative. I know you like most media companies have been frustrated about that, any thoughts on how you can get digital revenue moving a little quicker?

Vincent K. McMahon

As far as television production facility is concerned, that is something to – that we will go forward with at some time in the future. We have put that on the back burner. We have found new ways of efficiency as far as nooks and crannies and what have you concerned to be able to operate as we are. With some of the reduction in staff that's opened up other areas that otherwise were cramped.

So, I, in the short run and perhaps even in medium, we may be – we are finding different ways to better utilize our facilities so that the amount of money and even that whenever we want to do it is on hold, for the foreseeable future.

As far as a split dividend is concerned, that's something – and as far as dividends in general – that's something we review every quarter. As you know we just announced another dividend just the other day, but we review this on a quarterly basis depending obviously on economic conditions and things of that nature.

And notwithstanding McMahon generosity, which is unusual in Wall Street because only a few individuals in the world would ever do that and they can't quite figure out why we're doing it and it is only because of generosity. There is no end game to it, no chicanery what have you, that's what it is. But to the extent we continue our current dividend and split dividends and all of that, that's reviewed on a quarterly basis.

As far as digital is concerned, we have been behind the eight ball I think more so than other companies as far as their digital is concerned. I mentioned that Army National Guard and some of the other sponsors – one of the, we've just – and also I mentioned about our management, how proud I am of our – and our management is better that it's ever been.

We've gone through reorganization in almost every area but there especially and I'm very pleased at the moment with what the results you're going to see as far as our new sales organization is concerned. We have some crackerjack people in there. We haven't in the past. And again the management is going to bring us I think benefits we haven't seen before in the past.

Alan Gould – Natixis Bleichroeder

If I could just follow up with George on one question, you mentioned that you thought 12 Rounds would reach breakeven I was wondering if you could drill down a little bit on your film Ultimate assumptions because out of the film costing $20 million to produce and Fox spending $18 to $20 million to release it and with about $6 million in rentals out of the domestic theatrical I just don't see how you quite get to break even.

George Barrios

Well I'm not going to drill down into our Ultimate model. That's something we build. We use an external firm to build it. But I will say that one of the things that where we over index is on DVD sales and also at least historically on some of the international TV licensing.

So that's where it's coming from but, again, we use an outside firm who takes into consideration not only the genre, generally the size of the size of the production spend but also looks at how our product has performed. And as I mentioned before we see 12 Rounds as well as the entire portfolio being profitable at this point on an ultimate basis.

Vincent K. McMahon

And Alan, let me just make reference to that, this is Vince again. We've made approximately $6 million over what projected off of 12 Rounds as well as our previous films. That's not a lot of money to say the least in terms of being in that form of content development.

But it's something that – it is a logical avenue in which we should engage in as a part of what we do. It is never going to be the most important part, but nonetheless, it's logical. We are storytellers. We have our own intellectual property. We don't have to go out and hire Brad Pitt at some ridiculous amount of money. And again to the extent we're going to do $20 million productions again, I don't see that in the foreseeable future. If we do theatrical it's going to be at a reduced budget. As it is I think most studios are looking at that way now as well.

And more direct-to-DVD films with a limited theatrical control as well, greater control over distribution, greater control over marketing of our films and to have – to do – to use our assets as we do for live events and everything else, to use them in a different way, in a more efficient way as far as film distribution and marketing is concerned.

It is a part of what we do, as I said before. We're set up different than any other Hollywood studio. We have tremendous advantages. Again, we have our own intellectual product you know with our performers and again, going forward we can utilize in a different way new distribution techniques and greater marketing using our assets. And the other aspect of where we have a leg up over everybody else is we have this promotional juggernaut on a global basis in which we can promote our films at quote "no cost."

So we have benefits that no one else has. We've learned the business – I think that anyone can say they've interviewed, and I won't say we've interviewed start up in Hollywood, but because I think that's not the right way to look at it, but we've learned so much and anyone who's entered that business and not lost their shirt, is doing pretty well.

So again to have made a small margin of profit off of our films and to have learned as much as we have without losing any money, and considering this is a what I consider to be a substantial contribution to our profit going forward. That's why we're in the business in general.

Alan Gould – Natixis Bleichroeder

So Vince, it sounds like your emphasis is much more on direct to video and much less on $20 million theatricals.

Vincent K. McMahon

It is when you look at the risk reward basis $20 million is a tough number. When you consider the – and we can, when you look at the film itself and Fox who distributed that for us, says, well that's a $50 million film, you know long screen, that's all well and good because it's going to cost us $20 million to do it.

So I don't foresee us doing $20 million productions again. I don't think there's a need for doing $20 million productions. As far as when you look at that genre that action genre, with all the special effects and all of that, if there's a car crash, someone else is going to use five cars. We're going to use one.

Even that, to be in that action adventure genre the competition is so great that we need to look at some action obviously on what we're doing that makes sense. A greater emphasis on characterization and storyline, and bottom line profit, we don't need to do a $20 million film in order to turn this around and make it a highly profitable enterprise.

And having said that, let me just say that anyone who's looking at us in terms of an investment, current or future, I would advise them, don't invest in us if you're – if you're a film buff, then go invest in Warner Brothers or something.

This is a logical thing of what we do but only a part of it, so I don't want anyone investing in what we're doing and saying oh great you guys are in the film business and that's where our money should be. It's just a part of what we do.

George Barrios

Hey Alan, I'm just going to clarify something, your first question when you talked about the expansion of the media center at $90 million, what we think public is 65 to 75 is the target spend for that.

Alan Gould – Natixis Bleichroeder

Okay, thank you George.

Vincent K. McMahon

And again, that's on the shelf.

George Barrios



Your next question comes from Luke Shagets – Sterne Agee & Leach

Luke Shagets – Sterne Agee & Leach

Real quick on your Live and Televised segment, looks like there is significant improvement in the gross margin I guess from 30% last year, 47% this year, is that primarily due to the revenue mix there or is there something else driving that?

And then another quick one, just on the SG&A, the $28.6 million in this quarter, I guess ex the restructuring charges, is that a good number to use going forward, I guess in the next couple of quarters in terms of modeling?

George Barrios

On the first question on gross margins of Live and Televised events, it's primarily been part of that $20 million commitment and what Vince talked about being more efficient in everything we do, so both the production cost on our Pay Per View side which is in there, as well as the marketing cost on the Pay Per View side which are also on the Live and Televised segment, those are the biggest drivers there. A little bit of product mix, but it's primarily those areas.

On the SG&A side, I'd look at SG&A from an annual standpoint. I talked about it before. Last year we had about $456 million of total cost, about $131 million of SG&A. If you look at the $20 million that's roughly 4.5%, 5% of the total cost base.

SG&A will go down kind of pro rata to the cost base so I'd look at that kind of 5%, 6% reduction SG&A like I would look at total expenses, and frankly we're pretty bullish on that number. I think we can do even a little bit better than the $20 million, but we're sticking to the $20 million commitment.


(Operator Instructions). Your next question comes from Jamie Clement – Sidoti & Company.

Jamie Clement – Sidoti & Company

Mr. McMahon, you in your prepared remarks, mentioned live events and fan interaction as being the real driver, really all your businesses, and it seems to me that going from the late '90s period of time to where we are now is, late 90s and earlier this decade, there were a lot of older wrestlers that had been around for a long time. I think some of that was perhaps the Turner promotion's doing.

You guys have a lot of younger, fresher faces now that have kind of emerged over the last two to three years, how do you feel about where you are in that process, and first of all do you think my assessment is accurate? And second of all, sort of on a scale of one to ten, how well do you think your creative people are hitting the audience?

Vincent K. McMahon

Well,, Jamie, first let me address the first thing you said, in my prepared remarks, I don't know how prepared they are. I'm not reading from anything. I'm just giving you what I have. I think that you really can't compare the product to the '90s.

You're right about the more older performers that have pretty much gone by the wayside. We had actually had to this past WrestleMania 25th Anniversary, we had three or four guys who actually participated in WrestleMania One in an obviously very minor role.

Nonetheless it's kind of nice to go back to some of those guys but they're not a part of our mix now. It's important that our audience as well as audiences in general they want [to recognize]. At the same time they still want a couple of characters what have you that they can rely on, and they know that characterization, a Triple H and Undertaker kind of like thing.

But new is important. It always has been, and as you said, we're poised now for some of these new stars to break through. That's always been an important part of our business and always will. New story lines, new and stronger characterizations, and that's always going to result in, generally speaking, obviously as far as consumer products is concerned, you've got new stars, you've got people who want to buy new things.

It should help us in terms of Pay Per View and television ratings, and all of that, so it's a different program. It's a different company, a different business almost than the '90s.

Michael Weitz

Nick, do we have any more questions?


And at this time it does appear that there are no further questions.

Vincent K. McMahon

Yes, but Nick don't let anybody be bashful.

Michael Weitz

Thank you everyone. We appreciate you listening to the call today.

Vincent K. McMahon

Is that all Nick, are you sure?

Michael Weitz

Nick, or anybody, if you have any questions don't hesitate to contact me, Michael Weitz, at 203-352-8642. Thank you.

Vincent K. McMahon

Thank you guys very much.

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