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Executives

Michael Weitz - VP of IR

Vince McMahon - Chairman and CEO

George Barrios - CFO

Analyst

Michael Kupinski - Noble Financial

Brad Safalow - PAA Research

World Wrestling Entertainment (WWE) Q1 2013 Earnings Call May 2, 2013 11:00 AM ET

Operator

Welcome to the WWE 2013 First Quarter Earnings Call. My name is Elena 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, Senior Vice President of Investor Relations for WWE. Mr. Weitz you may begin.

Michael Weitz

Thank you and good morning everyone. Welcome to WWE first quarter 2013 earnings conference call. Joining me for today’s discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our CFO. We have issued our earnings release earlier this morning and have posted the release, our earnings presentation and other supporting materials on our website, at corporate.wwe.com.

In these materials we have changed our measure of profit from EBITDA, earnings before interest taxes, depreciation and amortization, to OIBDA, operating income before depreciation and amortization. We have made the change to be more consistent with our media peers. Additionally we have focused our business and segment reporting on OIBDA rather than profit contribution. We believe that by relating overhead to our revenue generating operations, the revised approach provide the better measure of business profitability.

For any non-GAAP financial measures discussed on this call, reconciliations to GAAP measures can be found in our earnings release and in our website presentation. In today’s discussion we will make several forward-looking statements. These statements are based on management estimates. Actual results may differ due to numerous factors, as described in our presentation and in our filings with the SEC.

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

Vince McMahon

Good morning everyone. We had mixed results as it relates to our performance. OIBDA was down 8.7 which is about consistent with our guidance. We increased our content investment. We had lower results in terms of home entertainment, international licensing, but the key metrics really increased and done considerably well in terms of live events, which has an average attendance of up about 3%, our Pay-Per-View buys were up and is now I think 17%. Our television ratings are really strong with RAW about a 6% increase and Smackdown with a 5% increase in an environment in which television ratings consistently go down.

As far as achievements are concerned even though it’s not in this quarter, WrestleMania was a huge success for us, it was the highest grossing about $72 million; certainly the most profitable in history. A lot of emphasis was placed on this year in WrestleMania; not just from a financial standpoint, but from an overall umbrella standpoint which we think will reap rewards in the weeks, months and years to come.

We completed an agreement with Yahoo! continuing with our efforts as far as digital is concerned we launched our pay per view on Xbox and Samsung which in the past and this was, increased revenue for us. We released, as far as film is concerned notwithstanding of the terminal Dead Man Down, the ballots of our film endeavors and we released The Call which was very successful over 51 million margin domestic box-office. So that more than balances out and we have increased our audience in general to 14 million per week as far as viewers are concerned which is considerable. We have also increased our Facebook and Twitter followers of about 73% over that which is expected to continue to increase at about 150 million.

We have entered into other key partnerships as it relates to CSR among them is Special Olympics and things of that nature. As far as the more strategic look is concerned talent is always very important to us. we had seven more than any other pay per view not just WrestleMania, we had seven new talent appear at this year’s WrestleMania in an effort to overall our entire talent roster and continue building new stars which is so important.

In addition and speaking of continuing to build new stars we are going to be opening a new performance center. that announcement was made performance center of course is down in Florida and that is really working well for us. As far as the network is concerned we are continuing to build on that in terms of a subscription model and making progress.

And so generally speaking as far as operating metrics live events, television audience, pay per view we are showing that again we are continuing to develop strength and we are confident that we can continue to leverage our brand strength which result of course transforms our business. so with that George do you mind taking it.

George Barrios

Sure thanks Vince. There are several key topics which I would like to review today. It includes management perspective on our financial performance, some additional detail regarding our first quarter results and a discussion of our business outlook for the remainder of the year. For the first quarter our financial results is measured by OIBDA declined approximately $8.7 million from the prior year consistent with our guidance the decline reflected several factors that were anticipated and discussed as part of our fourth quarter 2012 earnings call. These factors included additional investment in content production including celebrity guest talent and staff costs lower profits from home entertainment due to adjustments to prior period’s sell through estimates on both the current and prior year quarter and lower international licensing revenue.

In addition the quarter was affected by two items that impacted the comparability of our results on a quarter-over-quarter basis, film impairment charge and a positive impact from determination of our video game license with THQ.

The weak performance of our recent movie release, Dead Man Down resulted in a film impairment charge of $4.7 million, the incremental year-over-year impact of that charge however was partially offset by an approximate $3.4 million positive impact to income associated with the bankruptcy of THQ and the transition to our new video game licensee. An early impact to our reported income was positive; THQ’s bankruptcy resulted in an economic loss to WWE of approximately $3 million steaming primarily from foregone game receipts.

The investments in concepts production were made to enhance our brand strength, demonstrating the efficacy of these investments, operating metrics such as live event attendance, television audience and pay-per-view which are key leading indicators sustaining encouraging trends in the first quarter. Our television audience increased by 6% from year end and by 20% from a year ago to 9.1 million home and nearly 14 million viewers in the U.S.

Similarly, our combined Facebook and Twitter followers increased 14% over the quarter to over 150 million and increased 73% over the past 12 months that is elevated our presence in social media.

Total strength of our brand is evidence in these metrics and taking advantage of that strength is a critical component of our long term strategy. To review the key drivers of our performance in the quarter let's turn to page 5 of our presentation with fiscal revenue and OIBDA contribution by business as compared to the prior year quarter.

To clarify the trend in our financial performance, we have adjusted our results for film impairments and the positive impact of our transition to a new video game licensee were applicable.

Schedule that demonstrates the impact of these adjustments can be found in the earnings release and in our website presentation. Revenue from our traditional core businesses excluding film entertainment, increased by about 3% or $4 million the growth was predominantly due to increase rights fees for our content and increase demand for our pay-per-view offerings.

Revenues from our television business increased by 15% or $5 million representing the most significant source of revenue growth in the quarter. Growth was primarily from the production and licensing of new programming such as the third hour of RAW, WWE Saturday Morning Slam and WWE Main Event.

These programs are launched during the latter half of 2012 on the USA network, CW Network and ION television respectively. As a result, we have increased the number of hours of original content that air on domestic television from four to six and half hours per week. And our pay-per-view business, revenue increased 12% or about $1.6 million reflecting the performance of our Royal Rumble and elimination chamber pay-per-views. Buys for these events increased 17% from the prior year quarter demonstrating their creative strength and audience appeal.

Additionally, the average revenue per buy increased 5% from the prior year quarter with a higher proportion of buys to view events in high definition which generally garner a higher retail price.

In our digital media segment, revenue increased 27% or $1.9 million to $9 million driven by higher sales of online advertising including integrated cross platform sales and increased rights fees associated with the licensing of original content to Hulu Plus.

In our consumer product segment, our home entertainment revenue declined 24% or $2.2 million driven by reduction in revenue from our international licensing activities and the difference to adjustments to the domestic sale through estimates for prior period releases.

Revenue from our international licensing activities declined approximately $1.3 million to the recognition of greater minimum guarantees in the prior year quarter. Domestic home entertainment revenue fell approximately $0.9 million or 13% as a 47% increase in shipment to over 1.2 million units with offset by a net 3.3 million impact of prior period sale through adjustments.

The first quarter of this year included a favorable adjustment of 5% points for lower than anticipated sales of prior period releases while the prior year quarter included a favorable adjustment of 29% points for greater than anticipated sales of prior period releases.

Our licensing revenue of $24 million was essentially unchanged from the prior year quarter. Revenue in the quarter did reflect a $2.1 million positive impact associated with the transition to new video game licensee take to interactive that was all set by lower revenues from video game toys another product with the aggregate decline coming from our international market.

In 2009, THQ paid WWE fee to acquire our video game license which we were advertising over the term of our agreement through 2017. As a result of THQ’s bankruptcy and the termination of our license agreement, we accelerated the recognition of this peak recording the remaining balance in the first quarter of this year.

However, as a result of THQ’s bankruptcy, we did not collect nor recognize a portion video game royalties during the first quarter. As shown on page 12 of our presentation, the net impact of these items was an increase to revenue of $2.1 million and an increase to profit of $3.4 million respectively.

You should note that despite the positive impact of the video game transition on revenue income in the first quarter, WWE incurred an economic loss steaming primarily from forgone game receipts of approximately $3 million.

Excluding the $2.1 million increase to revenue, estimated sales of our video game at retail declined approximately 12% driven predominantly by a reduction in average retail prices. Royalties from the sale of toy products also declined approximately 6% or $0.4 million with lower performance in international market. Across all of our categories, royalties from international licensing excluding the impact of the video game transition declined approximately 23% or $2.2 million.

Revenue from our live event including merchandised sales at these events declined 4% or $1.2 million in the quarter primarily due to the timing of our Fan Axxess events which are helped annually in conjunction with WrestleMania.

Fan Axxess event occurred primarily in the first quarter of 2012 versus the second quarter of 2013. Excluding the impact of Fan Axxess, live event revenues increased slightly and increases in the number and performance of our North America events were offset by lower ticket sales in our international market.

At our events in North America, average attendance increased 3% to approximately 6,400 fans driven by significant improvement in our Smackdown event. The quarter had three pure events in international markets where average ticket prices declined 34% to $82.51 and average attendance declined 26% to approximately 2,500 fans from the prior year quarter.

These declines in average ticket prices and average attendance were due to weak performance in Turkey and Qatar which are developing WWE market as compared to the prior year quarter which included in the especially strong three events tour in Abu Dhabi.

During the quarter, WWE Studio recognized revenue of $1.9 million as compared to $4.8 million in the prior year quarter reflecting differences in revenue recognition between the various distribution models for our movies. Although they were three films released in the current quarter, Dead Man Down, The Call and The Marine 3: Homefront revenues from these movies will be recognized on net basis as participation statements are received rather than upon release as with our self-distributed movie, Bending The Rules in the prior year quarter.

In addition, the decline reflected the timing of results generated by our overall all portfolio movies during the quarter, the release of our movie Dead Man Down generated lower domestic box office receipts than anticipated resulting in a revised ultimate projection for that movie an $4.7 million impairment charge. As a result, WWE studio generated a loss of $5 million compared to a loss of $1.3 million in the prior year quarter which included a $0.8 million film impairment charge.

Excluding the impact of impairments our movie portfolio generated results just below breakeven compared to an adjusted loss of $0.5 million in the prior year quarter. While not impacting our first quarter results, the release of The Call, is expected to generate domestic box office receipts of $51 million and yield an ultimate profit to WWE of $5.7 million on an equity investment of $1 million. Currently the movies produced through 2013 under our revised approach to film entertainment, are expected to generate an internal rate of return of approximately 14% which exceeds our cost of capital. The level of our future movie investments will be predicated on the evaluation of our portfolio rather than on any single film at the end of 2013.

Unallocated SG&A expenses increased modestly to $30.6 million from $30 million in the prior year quarter, as defined these expenses include sale, marketing and town development cost which have not been allocated to specific lines of business as well as corporate overhead such as human resources, information technology and finance costs. During the quarter increases in staff related and consulting expenses where nearly offset by a reduction in bad debt expense, operating income before depreciation and amortization or OIBDA, declined $8.7 million from the prior year quarter. As mentioned earlier the decline in our results was predominantly from three anticipated factors. Additional investment in content production including guest talent and staff related costs, lower profit from home entertainment and lower profits from international licensing.

As evidenced on page 5 of our presentation our content related investments more than offset increased rights fees from the licensing of new television programs and digital content. Results of our television and digital media operations were essentially flat while the results of our pay per view business declined $1.3 million from the prior year quarter, although the film impairment in the quarter was significant, its 3.9 incremental impact was largely offset by the net impact of our video game transition. Net income declined $12.3 million to $1.3 million reflecting the decline in our OIBDA results, increased depreciation and a higher effective tax rate. The change in depreciation derived from our investment in assets to support the creation and distribution of new content including through our potential network.

Our effective tax rate was 37% compared to 7% in the prior year quarter. The lower 7% tax rate in the prior year quarter was primarily due to the recognition of a $4.1 million benefit related to previously unrecognized tax benefits. Excluding the impact of film impairments, videogame transition, and the significant prior year tax benefits, our adjusted net income was $3.9 million compared to $11.7 million in the prior year quarter. Page 11 of the presentation contains our balance sheet which remains strong. On March 31st, we held $132 million in cash and investments with no long term debt.

Page 14 shows our free cash flow which increased approximately $30 million, generating a deficit of $10.8 million, compared to positive free cash flow of $19.1 million in the prior year quarter. This decrease was driven by an approximate $12.3 million reduction in operating performance and a $11 million increase in the annual payout of management incentive compensation with the returns were more normalized level of management compensation 2012, the impact of terminating our videogame license with THQ and an increase in net tax payments.

Additionally changes in working capital associated with our international live event tours and Pay-Per-View events contributed to the decline in net cash flow provided by operating activities compared to the prior year quarter. Partially offsetting that decline, capital expenditures decreased by approximately $8 million from a higher level of investment spending in the prior year quarter to support our content initiatives. We continue to believe that these content investments will yield significant returns.

Given the duration and magnitude of investments that we are making in our business we believe it’s important to reiterate our rationale with these investments. As indicated in our last earnings call and in our published business outlook we believe we have the potential to double or triple our 2012 OIBDA result by 2015.

The primary drivers of this growth include the potential launch of the WWE network, the exploration and renegotiation of our largest content agreement in the U.S. and international markets and the execution of our digital strategy, developing digital products such as gamification in mobile gaming.

Regarding the potential WWE network in the U.S., our analysis indicates that a fully distributed domestic pay network could generate incremental revenue to WWE between $125 million and $250 million and incremental OIBDA between $50 million to $150 million. These projected results are based on our research which indicates that our pay network could ultimately attract between 2 million and 4 million subscribers.

As in the U.S. we believe that network and other distribution models also represented a sizable economic opportunity in its international markets. The renewal of key content agreements is another primary source of our earnings growth through 2015. Over the next few years we expect to renegotiate our four largest television agreements, the U.S., the U.K., and India.

Benchmarking our rights fees; so the fees paid for other original scripted series and the fees paid for sports programming indicates that our license agreement has significant upside potential. Our confidence that we can realize much greater value from our intellectual property through our network and the renewal of content agreement is based on the tremendous global appeal of our brands and the rising value of content.

In order to achieve our targeted growth, it's critical that we maintain investments in key areas of talent development, content creation and marketing. in the second quarter we anticipate that ongoing investment in these areas and the occurrence of one last pay per view event will more than offset the strong performance of WrestleMania however we continue to expect that our 2013 OIBDA performance excluding the impairment charge associated with Dead Man Down will be flat from 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 roughly 30% to 35% as compared to 26% in 2012 and approximate $2 million to $3 million increase in depreciation associated with our capital investments as we execute on our growth strategy we will measure our performance against several key milestones over the next 18 months these include making progress on our TV rights renewals completing a network carriage agreement developing digital products and improving the performance of our movie portfolio while our results in the near term maybe challenged we are committed to establishing a firm platform for meaningful unprecedented earnings growth that concludes this portion of our call and I will now turn it back to Michael.

Michael Weitz

Alan we are ready now please open the lines for questions.

Question-and-Answer Session

Operator

Thank you we will now begin the question and answer session. (Operating Instructions) Our first question is from Michael Kupinski with Noble Financial. Please go ahead.

Michael Kupinski - Noble Financial

A couple of questions I was wondering if you can give us a little more color on what is going on in the international markets. I know that you indicated Turkey and Qatar being developed federal markets and so forth but we have seen a little weakness on the international front on the last couple of quarters. what are your thoughts going forward regarding those venues?

George Barrios

Sure I wouldn’t focus so much on Turkey and Qatar. while they average 2,500 again it was versus the (inaudible) Abu Dhabi so they are a little bit less than we expected but I think your broader point Mike is a fair one on the international performance. we have been doing a lot of restructuring there both in who we partner with and also internal management. as you know we recently brought a new EVP of International, Gerrit Meier to lead that effort. also we brought Casey Collins a few months ago to lead our global CPG efforts and we’ve done a fairly large restructuring of our international CPG operations, open new offices, put new people on the ground. So, it’s been an execution element on our part, we’re aware of it. We made changes and we’re hopeful that we’ll see results in the future but again I wouldn’t focus on Turkey and Qatar but you are right on the broader point.

Michael Kupinski - Noble Financial

So, in terms of the number of end user you are kind of scaling those back for now and so you trying to get all these management issues in place or what we’re looking for in the near term?

George Barrios

Our international events are always profitable so we will do somewhere between high 60s to low 70s events, so 70 events plus or minus depending on the logistics that’s what we’re targeting. It's usually what we target, we'll do 250 in the U.S. and we’re hopeful that the events will be successful. And again, just because Qatar and Turkey didn’t perform as well as Abu Dhabi did last year and we’ll be in Abu Dhabi later in the third quarter this year I wouldn’t focus too much on that.

For us really on the international side is really also it’s a lot of work on the CPG side, a lot of work on our consent agreements that we think drive a lot more growth going forward.

Michael Kupinski - Noble Financial

And then on the cable network front, is there any particular timelines or benchmarks that we should be looking for in the coming months, quarters, whatever.

George Barrios

We said it in the last call that we’re going to get out of the prognostication game. at this time most of the grindstone driving on the things we need to drive on which is getting the content ready which we have, getting the infrastructure ready which we have in negotiating with distributors both domestically and in a couple of international market. So, we said that by the end of 2015, we think that could be a big driver of growth, so we’ll stick to that as far as timelines.

Michael Kupinski - Noble Financial

And then in terms of the overall part of the business, I mean obviously you guys have been kind of dipping in to your cash at this point given the negative free cash flow. I was just wondering is there a point where you guys would consider or might need to consider cutting the dividend or is it at this point you feel comfortable on just kind of going through your cash reserves, to kind of fund the experience in claims and so forth. What are your thoughts there?

George Barrios

We did our outlook release in last quarter. one of things we talked about was our three plan through 2015 and we said that we thought we have the balance sheet to support the investments, support our core operations and also support the current dividend.

Operator

The next question is from Brad Safalow with PAA Research. Please go ahead.

Brad Safalow - PAA Research

The first question I had was really on the incremental margin profile of the core business and in particular your television rights fees, I mean, if I look at the weighted numbers which are basically flat year-over-year for television right fees even though in $5 million revenue increased as we started to think about as you layer on more distribution opportunities, contract pricing goes higher, what is the margin profile of that particular element of your business?

George Barrios

For the most part taking as a step function as long as we have two days television production anytime we license new content for the most it falls significantly to the bottom line, so the flat away that you’ve mentioned as we have increase our staff cost generally for the production of content including potential network, so that begins to compress the gross margins so the variable margin high the gross margin as you’ve mentioned.

Flat, the other element that we had in the first quarter this year on a year-over-year basis that we invested more in celebrity guess talent that we did last year so you saw that compression as well and the tension that you’re always fighting is the short term performance versus investing strengthening the brand and because you think that’ll drive a long term growth, so some of that compression was due to that tension.

Brad Safalow - PAA Research

Okay and that’s helpful and then what’s the carrying value now for Dead Man Down?

George Barrios

A million.

Brad Safalow - PAA Research

One million you said?

George Barrios

One million right now, yes.

Brad Safalow - PAA Research

Okay and then I just want to make sure, I fully understand your profit estimate of 5.7 million on the call and your investment of 1 million is based after whatever happens in foreign box Pay TV, DVD everything right?

George Barrios

Yes, it’s based on the current ultimate that’s right.

Brad Safalow - PAA Research

Okay and then as we go forward here is it safe to assume that your, I know historically second and third quarters were not really big quarters for you from a video game license perspective, but are we kind of went a life for life basis from a revenue perspective now going forward?

George Barrios

I didn’t hear that last for Brad.

Brad Safalow - PAA Research

I am just saying are you on a like for like basis where you’re not going to have this volatility in P&L as a result of the THQ bankruptcy and then licensing up to take two that more or less?

George Barrios

That’s right on that element, yes.

Brad Safalow - PAA Research

And then are the terms of the Yahoo deal in terms of both size of it and how you participate let say in both may be its an initial license plus add revenues similar to what you did with Google/YouTube.

George Barrios

We don’t like to comment on the commercial terms given that different partner, so we will kind of skip that one.

Brad Safalow - PAA Research

Is it going to be falling through your P&L in the second quarter?

Unidentified Company Representative

No. starting in the third.

Brad Safalow - PAA Research

Okay starting in the third quarter and then the last question I had was on the network. You guys have made a decision to distribute the TV show on E! it sounds like the plan is to put Legends House or broadcast or distribute it at some point this summer, obviously not on your own network but with someone else, can you help us to understand what were the driving points behind those decisions and how should we think about that in the context of what you are doing with the network, or plan to do with the network?

Vince McMahon

The show that's on E! Network is obviously a logical extension from a small portion of a demographics as it relates to, one third of the demographic actually relates to woman, it’s only natural when you consider a third of our audience is not (inaudible) that’s not a lot, it’s not a lot of percentage wise but when we add all that up, it’s a huge number. In terms of number of women so it’s easier for us to direct that really large number on a network which appeal to woman and a new divas show. The broader we can distribute our content on any numbers of networks drive significantly the importance of our own network and having the flexibility of being able to have programming debut on the WE Network did back potentially to E! or E! to WWE or whatever it is that we are doing with whatever network, as long as the broadening of our footprint on a broadcast basis it only enhances the value we would bring because we promote from the broader aspect back to WWE network so that’s really an advantage for us.

George Barrios

And Brad on your point on Legends House and I am not sure I understood it right but we still are planning Legend’s House as part of our network program grid.

Brad Safalow - PAA Research

Okay, I guess I have heard in the marketplace that you guys are actually thinking about distributing and I understand that this is content that you film almost a year ago now but are you planning on distributing that at some point this summer with another network partner?

George Barrios

As of right now our plan is to put Legend’s House on the network.

Operator

(Operator Instructions). We have no further questions at this time. So I would like to turn the call back over to Mr. Weitz for closing remarks.

Michael Weitz

Thank you everyone, we appreciate you listen to the call today. if you have any questions please reach out to us at WWE, you can reach me at 352-3642 with a 203 area code. Thanks.

Operator

Thank you ladies and gentlemen, this concludes the WWE 2013 first quarter earnings conference call, thank you for participating, you may now disconnect.

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