World Wrestling Entertainment Inc. (NYSE:WWE)
Q3 2009 Earnings Call
November 05, 2009 11:00 am ET
Michael Weitz - VP, Investor Relations
Vince McMahon - Chairman and CEO
George Barrios - CFO
Donna Goldsmith - COO
Jerry Tang - ROTH Capital Partners
Michael Kupinski - Noble Financial
Thank you and good morning everyone. Welcome to World Wrestling Entertainment’s third quarter 2009 Earnings Conference Call. Joining me for today's discussion are Vince McMahon our Chairman and CEO, Donna Goldsmith our COO and George Barrios our CFO.
This morning we issued two press releases, one detailing our results for the quarter and the other outlining our revised business outlook. In addition to these releases, we will reference the presentation as part of our discussion. These are available on our corporate website at corporate.wwe.com.
We will make 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 on our filings with the SEC. Reconciliations of 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 quarter and we'll provide some perspective on our revised outlook. We will follow this review with a Q&A session.
At this time, it is my privilege to turn the call over to Vince.
Good morning, everyone. I just want to give you a quick overview on how things are looking from my point of view on things. I think we had a relatively good quarter. As the quarter relates to the entire year looking even better than what it is now.
One of my big parameters on how well we are doing is the average attendance to live events because when you consider that and I've mentioned this before it is the most expensive way in which our consumer enjoys the product, with parking ticket prices, hot dogs, programs et cetera, et cetera. It indicates to me the strength or lack of it in terms of where we are.
Even though we had at several more events in the quarter, but the average approximately 9% and another parameter which I use is television ratings. It isn’t always necessarily that either one of these to be a direct correlation, but the two of them together would indicate things are pretty strong, not only we have an increase in attendance, but our television ratings for our Raw program were up about 23% over the quarter.
So that really looks good. Those two parameters as far as I'm concerned. We've revised as well our business outlook and it would appear to be in a neighborhood of annual earnings growth from 15% to 20% which is substantial over the 2009 to 2012 period. Obviously it exceeds the analysts' estimates for the majority of entertainment peers which is not surprising.
In addition to that, another subject which I'd like to make mention of is a revised film philosophy and practice. As I mentioned in previous calls, if you want to buy a stock or track it in terms of just a film business, this is not the company you want to be associated with, but the film is a lot to extension of our intellectual property and as such we have a revised strategy in which we will do films at approximately $5 million all in cost and a new way of distribution which will be rolled out in some time and we're very excited about that in terms of an increase of our bottom line as well as overall revenue.
In generalities, I'd like to make note of is that from a family perspective, my wife Linda and those of you living in Connecticut might want to vote for her, but she is running for Senate and trying to achieve the Republican nomination to compete with Christopher Dodd in sometime. We’ve lost Linda in terms of her CEO role of course which I have assumed, she still sits on the Board.
The other aspect of family, some people perceive this to be a family business, which I do not. But nonetheless, my son Shane as well has decided to pursue other opportunities in the marketplace. Nonetheless, I have mentioned before that the strength of our management team is stronger now than it has ever been. And if your last name is McMahon or not, decisions are always made on your abilities in terms of whatever position you hold now and/or will in the future and be judged on your performance, not because your last name is McMahon. So I’m pretty strong on that well.
And other than that, we’ll entertain questions from everyone, which I’d hope there would be any number of them and turnover to George Barrios.
Thanks, Vince. I would like to start by providing you with some additional perspective on our third quarter results. For the quarter we managed an 84% increase in operating income with a moderate 2% increase in revenue from the prior year quarter. Our consumer products and pay-per-view businesses remain pressured by tough retail trends. Consumers however, continue to demonstrate a high level of interest in our content, evidenced by a 23% increase in our RAW ratings during the quarter.
Our continued vigilance in managing costs enabled us to achieve improved efficiencies across our businesses. Profit margins increased to 46%, compared to 39% in the prior year. On a year-to-date basis, operating income increased 26% with an 11% decline in revenue. Excluding films and the impact of foreign exchange, revenue declines were 6%.
For more detailed review of our performance in the quarter, let’s turn to page 5 of our presentation which lists the revenue and profit contribution by business units as compared to the prior year quarter.
Starting with our Live Events including merchandized sales at these events, revenue increased 29% or $7 million from the prior year quarter, this growth was led by 38% increase in average attendance at our international events to approximately 9,100 fans and the addition of five international events in the current quarter.
The quarter was highlighted by a strong six-event tour in Australia and New Zealand which averaged over 12,000 fans per event. France continued to emerge as a potent market for WWE with two soldout shows in Paris that yielded over 14,000 fans per event.
Average attendance on our North American events increased 9% to approximately 5,800 fans. Favorable trends in attendance, both domestically and internationally more than offset declines in average ticket prices. Our average ticket price declined 5% to $36.26 at our North American events and 19% to $65.59 at our international events due in part to changes in foreign exchange rates.
Turning to our Pay-Per-View business, revenue declined approximately 12% to $14.5 million reflecting a 10% decrease in total Pay-Per-View buys. In addition, the quarter had a higher percentage of international buys which are generally lower in price. International purchases comprised 38% of our current period buys compared to 31% in the prior year quarter.
For the comparable events, which were produced in, both the current and prior year quarter, Pay-Per-View buys declined 22% in the quarter and 9% on the year-to-date basis. We continue to work on stabilizing our Pay-Per-View performance and preliminary estimates of our recent Hell in a Cell pay-per-view indicated year-over-year increase in buys of approximately 11% for that event.
Revenues from the distribution of our Television Programming increased by 16% or $3.9 million due to high rights fees from our global television contracts and the addition of our new WWE Superstars Television Show. The new program debuted on WGN America on April 16. Notably profit from our television's business nearly doubled in the quarter. Here our gross profit margins improved to 43% from 26% with the expansion of revenue from WWE Superstars and significant efficiencies in our production processes.
In our consumer product segment, our licensing revenue decreased 25% to $7.9 million over the prior-year quarter. Royalties earned in the current quarter mirrored a decline in the sales of our video game and toy products especially in international markets. US sales of our SmackDown vs Raw 2009 video game declined 35% at $320,000.
The quarter benefited from continued sales of our Legends of WrestleMania game which sold 120,000 units. Our Home Video revenue increased slightly from the prior year quarter, the performance of our new release in catalog titles resulted in a 16% increase in shipments to 847,000 DVD units. The increase in shipments was offset by an increase in incentive programs and promotional offers which resulted in an effective 21% reduction in DVD prices.
In September, we transitioned our Home Video distribution to Vivendi Entertainment. We believe Vivendi is best-in-class in terms of its operations, sales and marketing. The terms of our new deal are comparable to the terms that we have with Genius.
In our magazine publishing business, revenue decreased 28% to $3.4 million driven by a 6% combined reduction in subscription and newsstand sales. These revenue streams are impacted in part by the publication of one fewer WWE magazine issue in the current quarter. In addition, the reduction in our magazine publishing net revenue reflected some disruption in our newsstand distribution channel.
In our Digital Media segment, revenue decreased 6% to $7.4 million from the prior year. Lower sales of our online merchandize were only partially offset by a step up in our online advertising and the licensing of our website for international markets. Revenue from e-commerce declined to 26% reflecting a decrease in both the number of orders and the average revenue per order.
The number of orders online declined 21% to 55,000. In addition, the average sales per order fell 8% to about $50. During the quarter, we managed a 10% increase in online advertising delivering on the increased activity that we had seen in our ad sales pipelines. This quarter’s results which outpace recent industry trends are testaments to the increasing effectiveness of our add sales force.
In our film business, WWE Studios recognized revenue of $3 million associated with four of our releases. See No Evil, The Marine, The Condemned and Behind Enemy Lines Columbia. As of the quarter end we had approximately $28.8 million in capitalized film production costs on our balance sheet primarily, associated with our theatrical release to around as well as our direct-to-video projects.
Regarding these direct-to-video initiatives Behind Enemy Line Columbia was release in Late January and The Marine 2 is scheduled to release in December of this year. As we have stated before , we believe our overall portfolio of films will surpass breakeven profits, most importantly we are now developing a new distribution model for our films which I’ll describe in a few moments.
Our overall profit contribution margin increased to 46% from 39% in the prior year quarter reflecting increased efficiencies in our live and televised segment. Improved margins were driven by sustained cost reductions in our marketing and TV production and by staff reductions which were carried out at the start of this year.
For the quarter, SG&A expenses increased 6% or $1.8 million to $33.1 million, driven by a crude expense related to the company’s incentive compensation program. These increases were partially offset by reductions in marketing, legal and professional fees.
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 low direct expenses that are captured in our profit contribution.
Page 14 of our presentation compares the quarter-over-quarter results and provides the summary of changes by business. As shown, operating income increased 84% as compared to the same periods last year with a market increase in profit from live and televised entertainment. This growth demonstrates our commitment to managing costs in order to take advantage of the operating leverage in our business.
Net income, rose nearly 70% to $8.9 million compared to $5.3 million in the prior year quarter driven by these improved operating efficiencies, partially offsetting the expansion of operating profits with an increase in our effective tax rate to 42% compared to 32% in the prior year quarter. For both periods, the effective tax rates reflects differences between the taxes provided for as compared to actual amounts calculated on our returns. For the full-year, we continue to anticipate an effective tax rate of just about 37%.
Page 15 of the presentation contains our balance sheet which remained strong. On September 30, we held approximately $230 million in cash and investments with virtually no debt. Page 19 shows our free cash flow. For the quarter, we generated $17 million of positive free cash flow compared to approximately $10 million in the prior year quarter. Improved performance was driven by operating efficiencies, lower investment in feature films and changes in working capital.
In addition, capital expenditures decreased $0.8 million as compared to $4.2 million in the prior year period. The company's business model remained strong as evidenced by a generation of $89 million in free cash flow year-to-date.
Looking ahead, we'll continue to manage the company to improve our cash returns and to support this objective we have completed a comprehensive review of our businesses. Based on that review we are targeting average annual earnings growth of 15% to 20% over the 2009 through 2012 period.
You should note that our planned revenue growth outpaces projected economic growth in each of our global market and both, our revenue and earnings growth are expected to surpass the consensus, analyst estimates for a majority of our entertainment peers.
We've a high level of confidence in our ability to realize these results. Our plan assumes modest revenue growth by averaging about 5% per year excluding films on a relatively low 2009 base.
Specifically, we expect roughly one-third of our total revenue growth in more than 40% of our profit growth to come from increases in global television rates and the strengthening of our licensing platform led by Mattel. We've characterized these revenue streams, it's fairly secure based on the status of our commercial negotiations, the popularity of our content and the strength of our new partner, Mattel.
Our plan also reflects our ongoing commitment to manage cost and expand EBITDA margins. This assumes that our variable cost grow proportionately with our revenue and then our fixed costs including SG&A grew at an inflationary rate. Although these fixed costs grew significantly from 2005 through 2008, we have engineered substantial improvements in the efficiency of our operations. As a result, these costs are expected to increase only modestly over the planned period, driving further expansion of our margins.
In discipline cost management, we expect our operating leverage to deliver outstanding earnings growth even in a low to moderate revenue environment. Our plan endeavors to increase the risk-adjusted return of our film business by producing a greater number of films at a lower average cost and by exerting greater control over our film distribution. The approach takes advantage of marketing efficiencies with a limited theatrical window and lower production budget in the range of about $5 million. We believe our efforts will produce returns significantly higher than the films you've released to-date.
From a modeling perspective, you should also note that for films produced under this new model, we expect to recognize film revenue and expand on a gross rather than net basis. As such, the growth in film revenue expense over our plan period will reflect the timing and performance of our releases as well as this different accounting treatment.
In addition towards executing a new film model, we are evaluating a potential WWE network which we believe could generate significant economic returns. Overall, we are excited by WWE’s opportunities and by the steps we are taking to enhance our long-term growth. We remain committed to creating value for our shareholders by driving earnings and economic return on invested capital, we endeavor to provide the foundation for superior shareholder returns.
That concludes this portion of our call and I will now turn it back to Michael.
Ally, we are ready now. Please open the lines for question.
The questions will be answered by Donna Goldsmith, our Chief Operating Officer, George, and myself.
Your first question comes from Brian (inaudible) with ROTH Capital Partners.
Jerry Tang - ROTH Capital Partners
This is Jerry Tang. Was there a specific catalyst you can point to for higher North American attendance of live events, ticket prices were down approximately 5% and average attendance improved 9% in what was a pretty rough consumer spending environment. Can you attribute to that to lower ticket prices primarily, better TV story lines, something like that?
One of the things Jerry, that we talked about is that quarter-over-quarter, it’s tough to compare the attendance numbers because it depends on what venues you’re playing. So that mix has a bit to do with it, as well as we believe the pricing affects the revenue attendance as well.
We looked at this and we made some wise decisions on taking that lower price level down, so that we could bring more people into our events and we think that it had a very positive return as a result of making those decisions.
I will point as you guys are doing your modeling, if you look at year-to-date, our North American attendance is up around 3% and our international attendance is about flat. I believe the longer time period gives you a better feel for kind of the underlying trends there.
Jerry Tang - ROTH Capital Partners
Could you give you some color on pay-per-view prices internationally compared to North America and if you would give some color on pay-per-view traction in Mexico specifically?
On the pay-per-view prices internationally, what we do is we don't make that decision in a vacuum. We look on a country-by-country basis, what is being charged locally for various forms of pay-per-view, be it an event attraction, a movie and then we take that number and we look at what makes sense.
So, in Spain for example, the pay-per-view prices maybe considerably lower than they would be in the United Kingdom. We have to do that because you want to be competitive with the market out there.
Mexico has been great for us. We are really excited about Mexico as a market in general. As you may know we are on television, on Televisa and [TVSECA], we have been attracting huge numbers to our television programming which in turn has turned into large numbers on our pay-per-view results as well. We are on about four or five providers in Mexico for the pay-per-view product. Not only the pay-per-view front, but also at the live event side, at the consumer good side, Mexico is turning out to be a very, very strong market for us.
Jerry Tang - ROTH Capital Partners
Linda was very excited about the agreement with the Army National Guard. Could you just provide me updates on how that's progressing?
Army National Guard has been great partner for us. We have done a number of things that are live events where we will do recruiting for them at the live event and as well as they sponsor pay-per-views or Fan Access Program which is a live event stand program, where we did it at Summerslam in Los Angeles in August and we brought in ton of fans and the army had a number of component at our fan event and we're very excited.
We give them our IP, they use it, we use their IP. It's been a win-win for both parties and we will continue to work with them through 2010.
(Operator Instructions). Your next question comes from [Robert McIntosh] with McIntosh Associates.
WWE has such a vast library of old wrestling material. How come it is not more older stuff that is being issued? I'm 42. So my heyday of being with the old WWWF was back in the late '70s, early '80s and I see very little released on video. The only thing I ever see is the occasional (inaudible) Classics on Demand. Any thought to expanding that?
We’ve done a considerable amount of DVDs using our footage. Those DVDs have been successful and we will continue to use that footage to drive our DVD business, our Classics On Demand, and you may have heard some rumblings about us doing a WWE Network and although we're just starting to put the business plans in place, you can be sure that we will be using our 100,000 hours of footage that we have in our library here in that, on that WWE Network. So stay tuned, there will be even more usage of our library.
Has there been any talk of perhaps eliminating a pay-for-view so you are constantly [drowning] up to main pay-for-views?
We always look if we should add a pay-for-view, should we eliminate a pay-for-view, should we change the themes of our pay-for-view. So that’s something that we will look at and continue to look at based on our numbers, the trends and our content.
Your next question comes from Michael Kupinski with Noble Financial.
Michael Kupinski - Noble Financial
Given your expectation for strong earnings growth over the next few years, have you determined the capital investment requirement to deliver that growth?
The growth plan that we have laid out is for our existing businesses and as we mentioned in the release we didn’t include any of the new businesses that we potentially may get into like the network. So given that our existing businesses are pretty low users of capital, I think our historical run rates are a pretty good indicator and that’s been in the $10 million to $15 million roughly.
Michael Kupinski - Noble Financial
The prospect of launching a WWE Network, that’s not inclusive in the 15% to 20%? Is that correct?
Michael Kupinski - Noble Financial
Have you given some thought in terms of the amount of invested capital for that if you’re deciding to forward with that?
No, we are in the preliminary evaluation stage and we’ll figure that out as we move forward.
Ally, thank you very much for coordinating this conference call. We appreciate everybody listening to the call today. If you have any questions, please do not hesitate to contact me, Michael Weitz at 203-352-862-42. Thank you.
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