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World Wrestling Entertainment, Inc. (NYSE:WWE)

Q3 2013 Earnings Conference Call

October 31, 2013 11:00 AM ET

Executives

Michael Weitz – Senior Vice President-Investor Relations

Vincent K. McMahon – Chairman and Chief Executive Officer

George A. Barrios – Chief Financial Officer

Analysts

Daniel Moore – CJS Securities

Operator

Welcome to the WWE 2013 Third Quarter Earnings Call. My name is Adrian, and I’ll 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’ll now turn the call over to Michael Weitz. Michael Weitz, you may begin?

Michael Weitz

Thank you, and good morning everyone. Joining me for today’s discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our CFO.

We issued our earnings release earlier this morning and have posted to release our earnings presentation and other supporting materials on our website at corporate.wwe.com. 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’ll make several forward-looking statements. These statements are based on management’s 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.

Vincent K. McMahon

Good morning everyone, our current movies the slated movies are expected to generate about a 13% rate of return, not bad. However, we did take a $7 million impairment off the Mike Pavone slate of movies in the past.

So excluding the impairment, we have increased about $6 million that’s due to television rights fees and third hour of RAW, Total Divas and on the television show. So that more than offset the weak performance of SummerSlam and SummerSlam pay-per-view rather and lower video game sales.

And that’s just our pretty mixed; lot of events increased about 6% in North America and over the quarter television audience increased a lumpy 30% to 15.1 million viewers on a weekly average.

Social media followers increased 28% to 219 million. Pay-per-view buys were down 9% with SummerSlam being the biggest one of them, they didn’t buy the attraction as you know these pay-per-view events attraction driven.

And from an achievement standpoint, Total Divas is the reality show, as many of you know on the E! Network, maintain a strong performance averaging about 1.8 million viewers since July. Their views is really good for that network in that genre.

From a pay-per-view distribution in the console of platforms, that increased extraordinary amount, although it’s 17,300 views, it did a 160% increase, but still 17,300 views in the launch of PS3 as well, it does indicate that some of these other forms of distribution are growing.

Other achievements, we launched the John Cena Apparel Line at Kmart, we have marketing partnerships, we announced that marketing partnerships with Kraft and General Mills, and of course, we continue to expand our television coverage in China and Japan as well.

From a strategic initiative standpoint, we continue developing our network, looking at growth traditional and non-traditional means of distribution. In addition to that, from a content licensing agreement standpoint, we feel pretty bullish on all of this in terms of realigning our television properties and the rights that they should be garnering; like in WWE more to – to more of NASCAR than anything else, because of the wide nature of our audience, and the overall viewership as well and gross rating points which is is higher than NASCAR in general.

So we – all these properties, television properties are coterminous, they’re all available at the same time. We’re looking forward to our discussions with NBCU, and our potential other distributors after that. We are currently in discussions, many of you know that our largest television agreements – do not only just here in the States, but also in the United Kingdom, and we currently are in the negotiating window with BSkyB, our distributor over the United Kingdom, which is a very big partner of ours. India is coming up shortly thereafter, so a lot of these are becoming due and we’re actively doing all of them going forward.

So we pretty much think that all these initiatives are, if all the stars line up, and we believe that, that they will and we’re working hard to make sure that happens, and our business is going to be transformed as we know it now. So, George?

George A. Barrios

Yeah, thanks, Vince. There are several key topics, which I’d like to review today; these includes management discussion of our third quarter financial performance, our revised business outlook and the progress of our key strategic initiatives.

For the third quarter, our financial result is measured by OIBDA decline $0.6 million or 6% from the prior year with impairments in our film business. On an adjusted basis, excluding the impact of the film impairments, our OIBDA results increased approximately $6 million, as a meaningful increase in rights fees from the licensing of television content was partially offset by the performance of our SummerSlam pay-per-view and lower video game sales.

Overall, our earnings were in line with our 2013 guidance that we communicated previously, and which I will discuss further momentarily. The current quarter’s evaluation of our film assets resulted in impairment charge of $7 million. The impairment charge primarily relates to movies released over the 2010 and 2012 period under our former distribution model.

Our remaining financial exposure to these films is limited. We believe our current revised approach to film entertainment is that it’s a critical ingredient for long-term success in this business. And it’s important to note that the movies released under this revised approach are projected to generate a 13% rate of return.

Our overall brand metrics remained strong. The launch of our original series Total Divas, the average weekly reach of our domestic television program has grown to $15.1 million homes, representing a 30% increase from the end of the second quarter this year, and a 16% increase from the third quarter last year.

Over the past 12 months, our programming surpassed the cumulative audience delivery of most sports and entertainment programs, including the national broadcast of Major League Baseball, NASCAR, the NHL and even The Walking Dead, and our total social media platform now reaches nearly 219 million followers, including more than 140 million Facebook likes and 70 million Twitter followers, representing a 28% increase from the end of the preceding quarter and a 92% increase from the end of the third quarter last year. Building the strength of our brand is evidenced 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 6 of our presentation, which lists the revenue and OIBDA contribution by business as compared to the prior year quarter.

Revenue increased by 9% or approximately $9 million. The growth was predominantly due to increased rights fees for our television content and to a lesser extent increased ticket revenue from our international events and higher sales of advertising and content on our digital platform.

Revenues from our television business increased by 30% or $10.1 million, primarily due to the production and monetization of new program including Total Divas and WWE Main Event, and to a somewhat lesser degree, contractual increases for existing programs both domestically and internationally.

Total Divas, a new original series, began airing on the E! Network in July. Since its debut, the program has averaged approximately 1.8 million viewers per week, representing an increase of more than 150% over the programming that it replaced.

WWE Main Event was licensed to and began airing on ION Television in the fourth quarter 2012. Revenue from our live events including merchandise sales at these events increased 6% or approximately $2 million in the quarter primarily due to a rise in the number and proportion of international events, which are typically characterized by higher average attendance and ticket prices than events in North America.

Specifically, there were seven additional international events in the quarter, partially offsetting the impacts of these events average international ticket prices decreased $26 to $72.30 and average attendance decreased 20% to approximately 6,700.

The decreases in average ticket price and attendance were due in part to changes in territory mix as the incremental events in the period were concentrated in South Africa, a region that has a high proportion of WWE fans, but that has experienced significant economic challenges.

In addition, changes in foreign exchange rates reduced average ticket prices by approximately 12%, and accounted for nearly half of the year-over-year decline in this metric.

In North America, changes in venue mix contributed to a 9% rise in ticket prices, and a 6% rise in average attendance to 5,500. However, these positive developments were offset by the staging of eight fewer events in the quarter.

Our digital media businesses also contributed $1.1 million to the company’s revenue growth. During the quarter, revenue increased 15% to $8.6 million driven by higher sales of advertising and digital content including our pay-per-view events, across various digital platforms.

Supporting the growth in advertising, key digital metrics such as unique visitors to the company’s website and mobile apps, average monthly page views, and CPMs increased from the prior year quarter.

We launched digital distribution of its pay-per-view events on the Microsoft Xbox Live platform in April and on the Sony PlayStation 3 platform in August. Revenue from our pay-per-view business declined $1.7 million or 10% primarily due to the performance of our SummerSlam event, which contributed to a 9% reduction in buys for the comparable events in the current and prior year quarter.

In our Consumer Product segment licensing revenue declined $1.4 million or 20% from the prior year quarter. The decrease was driven by 24% reduction in video game shipments that resulted in a $1.3 million decline in video game royalties.

Shipments of our annual franchise video game, WWE '13, which was the last release published by THQ, declined to 178,000 units as compared to 233,000 for the corresponding games in the prior year quarter.

Royalties from the sale of toy and apparel products were essentially unchanged from the prior year quarter, as modest growth in the U.S. was offset by lower sales in international markets. Additionally, a new installment of our video game, WWE 2K14, was released by Take-Two earlier this week.

Our Home Entertainment revenue declined 19% or $1.2 million primarily from a reduction – a 23% reduction in domestic shipments to approximately 720,000 units. With fewer releases in the quarter as the average price per unit increased 4%.

In addition, revenue from our International Home Entertainment licensing activities declined by about $0.4 million due to lower sales in Canada and the transition to a new licensee in the EMEA region.

Earlier this month Cinedigm acquired Gaiam Vivendi’s Home Entertainment brand including WWE, NFL, and Discovery. Cinedigm is the largest the aggregator and distributor of independent content, and the fourth the largest distributor of non-theatrical DVDs and Blu-ray Discs surpassing Sony, Fox, and Lions Gate among others.

We expect no material impact to our home entertainment results in the near-term. During the quarter WWE Studios recognized revenue of $1.8 million as compared to $1.9 million in the prior year quarter.

As mentioned earlier based on an evaluation work film assets we have recognized an impairment charge of $7 million in the quarter. The impairment charge primarily relates to our 2010 to 2012 slate of movies that released under our former distribution model. The impairment was driven by the performance of this slate over the past several months.

As a measure of the remaining financial exposure to these movies at the end of the third quarter this 2010, 2012 slate represented less than $1 million of a total $17.2 million in capitalized film assets on our balance sheet.

And just to reiterate the movies release under our current strategy beginning with re-release of No Holds Barred in late 2012 are projected to generate a 13% rate of return, 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 declined nearly $1 million to $27.3 million from the prior year quarter. As defined, these expenses include sales, marketing and talent development costs, which have not been allocated to specific lines of business. The decrease in unallocated SG&A during the quarter was driven by $2.1 million year-over-year reduction in accrued management incentive compensation based on current expectations regarding the company’s 2013 financial performance, which were revised during the. This reduction in expense was partially offset by a $1.3 million increase in consulting and professional fees to support the company’s strategic initiatives.

Operating income before depreciation and amortization or OIBDA declined $0.6 million or 6%, primarily due to the impairments in our film business. Excluding these impairments, adjusted OIBDA increased $6.4 million or 62% as the increase in television rights fees, more than offset the performance of our SummerSlam pay-per-view and lower results from our video game business.

In addition, $3.4 million year-over-year reduction in accrued management incentive compensation, which was based on revised expectation for the company’s full year performance, mitigate the rise in compensation and other costs related to the development of our strategic content related initiatives.

Net income declined $1.1 million to $2.4 million, reflecting the decline in our OIBDA results. Excluding film impairments, adjusted net income increased approximately $4 million as the growth driven by higher TV profits was partially offset by an increase in depreciation.

The change in depreciation is derived from our investment in asset to support the creation and distribution of new content, including through a potential network. Our effective tax rate was 27%, compared to 30% in the prior year quarter. The rates in both periods benefited from the recognition of previously unrecognized tax benefits.

Page 14 of the presentation contains our balance sheet, which remains strong. As of September 30, the company held $115 million in cash and investments and estimated debt capacity under our revolving line of credit to be approximately $120 million.

During the quarter, we completed the purchase of a corporate aircraft and in conjunction with this transaction and related aircraft improvements, utilized step financing of approximately $30 million, which is reflected in long-term debt on our balance sheet.

Page 17 shows our free cash flow from the first nine months of the year we used approximately $6 million in free cash flow, compared to generating about $14 million in the prior year period. This $20 million decrease was primarily driven by changes in working capital, including an $11 million increase in the annual payout of management incentive compensation related to the company’s previous year performance, increases in spending on television production, including content for the network and timing differences in the collection of receivables that negatively impacted current year cash flow, as compared to the prior year.

Partially offsetting that decline, capital expenditures, excluding the purchase of the corporate aircraft, decreased by approximately $8 million from a higher level investment spending in the prior year quarter to support our content initiatives. We continue to believe that these content investments will yield significant returns.

Recently we announced a revised financial outlook for 2013; reflecting a modest 5% change in projected revenue. To understand the resulting change in our guidance, it’s important to remember several key facts regarding our operations. First, WWE utilizes third-parties to distribute our products across multiple businesses including consumer products, while we gather expensive primary market data; we have reduced visibility of our sales performance in these areas. This is an excuse of fact regarding how we conduct our business. Secondly, WWE’s business model reflects high operating leverage with variable margins in a range of 70% to 80%.

In addition, over the past year, we’ve increased spending to support key areas of talent development, content creation and marketing. This means that modest changes in revenue, not only translate the OIBDA, but also reflects a greater share of earnings with the latter compressed by investment.

Based on a 5% reduction in projected second half revenue from several businesses, inclusive of the performance of our pay-per-view and consumer products businesses as discussed today, and the company’s high operating leverage, we revised our 2013 OIBDA guidance to a range of $40 million to $50 million excluding film impairments. This revised outlook is shown on page 11 of our website presentation.

Even though we’ve earned more than $47 million in OIBDA excluding impairments through the first three quarters of the year, hitting the midrange of our guidance imply essentially break-even OIBDA results in the upcoming fourth quarter.

The sequential decline in performance from the third quarter reflects several factors, including a reduction in television profit associated with the timing of our content rights and as well as investments, and also rise in unallocated SG&A costs associated with the timing of several marketing expenses. Fourth quarter SG&A costs are projected to exceed the level of our third quarter results, but fall in line with – of our second quarter.

Now looking ahead, we believe the investments we’re making in our brand in content will maximize WWE’s future earnings. We are confident that the rising values content in the marketplace and a potential launch of the WWE network will keep us on track to double or triple our 2012 OIBDA results by 2015.

We are unable to execute our strategic initiatives and the way that places us on the pack to achieve these goals. The management will undertake some form of restructuring to increase profitability. Over the coming months we expect to re-negotiate our fourth largest television agreements in the U.S., the UK and India. Moreover, we expect to negotiate our key domestic agreements by the end of next April.

Benchmarking our right fees to the fees paid per sports programming and other original scripted series indicates that our license agreement has significant upside potential. Recent deals such as NASCAR with NBC Sports reinforce our view that the proliferation of distribution alternatives is driving up the value of content, especially compelling content with broad appeal. WWE shares a key determinants of value that are attributed to live sports.

Significant first run hours and the associated gross rating points, a passionate and loyal fan base and 90% live for same day viewership, which makes WWE content like sports TVR. The potential launch of a WWE network is another major source of future earnings growth. Our market research and analysis indicate that potential for a meaningful subscriber base and a significant economic opportunity. This opportunity is comparable whether the network is distributed through traditional cable, satellite and telco partners’ or through over the top digital distribution.

As we execute on our growth strategy we will measure our performance against several key milestones over the next six to nine months, it is include making profits on TV rights renewals and completing network distribution agreements, as well as developing digital products and continued improvement 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.

Based on the execution of our strategy, which takes advantages of this rising value of content, we are confident that we can generate economic returns that better reflect WWE’s tremendous global appeal and brand strength.

That concludes this portion of our call. And I’ll now turn it back to Michael.

Michael Weitz

Thank you, George. Adrian, we are ready now. Please open the lines for question.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions). And we have Daniel Moore from CJS Securities online with a question. Please go ahead.

Daniel Moore – CJS Securities

Good morning. Thanks for taking the question.

Michael Weitz

Good morning Dan.

Daniel Moore – CJS Securities

First up in the press release, you stated that you expect to negotiate the domestic television carriage agreements by end of the April of next year given those – don’t expire until later in Q4 what gives you the confidence that you get it done by April. And secondly, based on where we are today, are you more likely to re-sign with the current carriers or should we be looking for Raw and SmackDown on another channel as we get out to 2015?

Vincent K. McMahon

The negotiating period with our current carriers with NBCU, there’s a certain window there and it’s first of the year if we make a deal with those current carriers, great. If not, then we go outside that window and everyone is keenly aware of the properties we have, television properties, when they become due and what the value is. So I would imagine the deal would be struck very shortly thereafter.

Michael Weitz

And I’ll add to Vince’s commentary and say it’s pretty typical that these content deals get done before the timing of the actual show is being on the air. So that’s pretty typical.

Daniel Moore – CJS Securities

Very helpful. George, I am intrigued by the comments you made in the prepared remarks saying that, if for whatever reasons, unable to execute on the plan, you’d undertake a restructuring, is there kind of a sliding scale of what you would consider success in other words if you were to not quite double OIBDA by 2015 based on the renegotiation would you try to cut costs to get those numbers, maybe you can just elaborate on those comments?

George A. Barrios

Yeah, I don’t want get too specific, Dan, but I think if you look at our current business model over our history, you’d probably the peak-to-trough of the business is $50 million to $100 million with a midpoint in that $70 million to $80 million and when things were going real well internally up in the 90s, either you have some headwinds or making investments in the 50 range and so we think that’s the natural peak-to-trough of the current business model. So we probably target kind of getting back to that level in that range.

Vincent K. McMahon

Basically statement reducing cost. It’s not anything that we think is going to happen, but obviously, if the worst happened, that’s what we will go back to.

Daniel Moore – CJS Securities

That’s helpful color and I’ll ask one more and jump back in queue. Pay-per-view continues to be in a little of pressure in terms of buys in revenue, are there leverage you might pull in the interim to try and stabilize or regrow or is the current plan really to sort of let the network play out and that be the driver of improved performance in that area.

Vincent K. McMahon

No pay-per-views are attraction driven, so simply giving the right attraction, the right promotion to go with it, and that’s – SummerSlam was not the right attraction. You don’t knock it out of the park every time you get up to bat, and that was wondering when they resist swing and a miss. But they’re all attraction driven and you look each one that way, given the promotion that you have with it. So it really doesn’t have anything to do with like anything other than that.

George A. Barrios

And Dan, look while we’re talking about the network and the rights agreements and our four largest markets and improving the movie portfolio and monetizing the digital audience, those are big, big levers that we – there’s a lot of energy again. But we have a lot of other businesses and we’re doing a lot of other initiatives around those. So we – our expectation is that all our business have growth potential and we’re working hard across the board.

Daniel Moore – CJS Securities

Very helpful. I will jump back in queue with this. Thank you.

George A. Barrios

Thanks, Dan.

Operator

(Operator Instructions)

Vincent K. McMahon

Have a good day everyone. The future looks bright.

Michael Weitz

Thanks, everyone. We appreciate you participating. If you have any questions, don’t hesitate to contact us at WWE. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating, you may now disconnect.

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