World Wrestling Entertainment's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: World Wrestling (WWE)

World Wrestling Entertainment, Inc. (NYSE:WWE)

Q3 2012 Earnings Call

November 01, 2012, 11:00 am ET


Michael Weitz - SVP, Investor Relations

Vince McMahon - Chairman & CEO

George Barrios -CFO


Richard Ingrassia - Roth Capital Partners

Michael Kupinsky - Noble Financial

Bradley Safalow - PAA Research

Michael Weitz

Thank you and good morning everyone. We hope our investors and analysts on the East Coast weathered the storm safely. 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 as is our usual practice have posted the release, our earnings presentation and other supporting materials on our website, These materials can be referenced in conjunction with the discussion today to clarify our performance and to shed light on the trends in our business.

In our discussion today, 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. 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. Today, we’ll review our financial results for the third quarter and we’ll follow this review with a Q&A session.

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

Vince McMahon

Good morning everyone. You can tell about the materials yeah, our quarter was about where we expected to be, maybe a little bit better, obviously down from last year and as a result of the reflex basically before key components with the increased expense of management incentive comp. Home video was up about 16% and licensing down slightly a bit only because of the lack of our second video game that was budgeted All Stars video game and of course we had a reduced loss from the movie business. So all-in-all about where we expected.

Key metrics are very encouraging I think. Pay-Per-View was up 13% from our three events in the quarter; social media is through the roof and it will continue to be through the roof for quite some time, because the engagement that we have with our audience and even I'll talk about a little more, further engagement in terms of something is revolutionary.

Live Event attendance which is extremely important as far as trend is concerned is up 6% for the domestic with the international attendance average of about plus 17%. Targeted ratings are good, we remained number one show in both SmackDown as well as USA and our third hour of RAW which we’ll get to in a moment.

And we are as far as content expansion is concerned we have two and a half additional hours of television. We have launched between July and October third hour out of RAW which is doing extremely well and in addition to that Saturday Morning Slam as we call it, which is a kids’ show on the CW Network again the number one show across all channels for kids at that time.

We also debut a show we called WWE Main Event, which is a one hour show on ION which gives us a whole different set of viewers and whole different series of networks. Continuing with content expansion with Hulu Plus which is not Hulu, its behind, it’s a subscription model and pay role and we completed those agreements.

In addition to that, on films we completed deals with Warner Brothers Animation to do a full length feature with Scooby-Doo, so it’s Scooby Doo and the WWE Superstars which would be interesting and fun and again reaching a different audience. Likewise, we've made a deal with the Christmas film with ABC Family which again gives us a different network, different audience and speaking of that, we just have completed the October Breast Awareness, let me say that right, Breast Health Awareness; (inaudible) common, which again gave us a different audience completely and it was promoted on television predominantly although with the social media as well, and again a different way to spread the word about WWE in a much different way.

As far as the new television programs are concerned, the shows that we placed in the time slot are way over when they were before, some are pulling 14% to 15% launch in the ones that replaced the game show Staying Power in right away the number one network ION; Saturday Morning Slam, the number one show against all networks; 50% above what CW had before.

And in addition to that, one of the things, we've as far as brand is concerned, we renewed our Army National Guards sponsorships and I know you may have heard something about distributing the Rolling Stones pay-per-view, which is also an expansion in somewhat of a different audience, an older audience that we can predominantly promote to, which is good for us.

As far as product innovation is concerned, we're doing something called Brawlin’ Buddies. Just to give a little flavor how we're doing with Mattel is part of, is going to be extremely, Mattel is really, really happy with the sales. It's on play time statutory list; it’s on K-Mart’s fab 15, so we think that’s going to bode very well for Christmas, for main holidays.

Our Mobile App is extraordinary and revolutionary and then what we are going to be doing with it, probably in the next couple of weeks, that’s going to be interactive in a way that no television show, no social media has ever been interactive and that’s scheduled to launch. We've done some of this, but this is going to be revolutionary in the amount and how we do it. We didn’t speaking of the download apps, we have downloaded about 2.5 million over the last 90 days which is phenomenal growth and we will continue to grow.

So we feel good about the expansion of our content and distribution and I think this quarter pretty much reinforced our confident, so we can take advantage of our growing demand for content which would then lead us into our some of which to give you a little bit more flavor of our network, we have been talking about for sometime based on the research that we have, it will be a premium subscription model distributed on all the usual payers and all over the top and it will be compelling programming obviously.

And again, the most interactive network in the world which gives a tremendous heads on probably anything you have to have things like that it was going to be a subscription model. And again, the research, extensive research we have done over and over again taking haircut up to haircut getting down to what we think is going to be a takeaway in the case very, very strong results of which we won’t be specific today and George will give you a little bit more flavor on the research, but there is a movement on the network in a subscription premium way.

And with that, I’ll turn it over to George.

George Barrios

Thanks Vince. There are several key points which I would like to review today. These include the projects of our strategic objectives including our network initiative, our third quarter financial performance and our business outlook for the remainder of this year.

In terms of our strategic initiatives, we continue to make important progress in the third quarter expanding our content and distribution and building our brand strength. I would like to reiterate this, because both these goals are perhaps are more important strategic imperatives. They form the foundation of our future growth.

During the quarter, we began the production of third hour of RAW and new kids show WWE Saturday Morning Slam which have been licensed to the USA Network and the CW respectively. Subsequent to quarter end, we launched a new one hour original series WWE Main Event; it’s been licensed to ION Television. As a result of these agreements, we have increased the number of hours of original WWE content that will be aired in prime-time on domestic television from four hours per week to six hours per week.

Including the nine original short-film series that we produced for YouTube, this means that during the upcoming fourth quarter, we will create and monetize about 87 hours of original domestic television content compared to 52 hours in the fourth quarter last year. In addition, we recently announced and initiated an expansion of our online distribution providing Hulu Plus with replay rights to our RAW, SmackDown and Main Event programs.

While providing Hulu Plus with digital replay rights to our current programming, the agreement does not include programming or launching at WWE Network. We believe we can continue expand and monetize our content in a way that takes advantages of the growing demand for content.

In order cultivate further, the unique passion of our global fans which underlies that value, we launched the new WWE Mobile App during the quarter. We integrated fan videos in our programming with the use of Tout social media technology and extended WWE’s reach on social media networks.

WWE now has approximately 81 million Facebook likes and 37 million Twitter followers, representing growth of about 70% and 120% respectively since the start of the year. WWE now ranks third in total followers of sports brands on Facebook, behind NBA and Nike and has more fans than the NFL and its 32 member team pages combined. According to (inaudible) it was among the top five most socially active entertainment programs every week with an average of 818,000 social media mentions on GetGlue, Facebook and Twitter.

Ultimately, as we strengthen our digital presence and our fan reach on social media, we believe we can expand the audience for our television programs and stimulate demand for all of our products, our live events, pay-per-view program and consumer products. As a media company the long-term potential to monetize the staggering growth on digital platforms such as mobile and online gaming is something that our product strategy must consider as we develop our long term plans; a process that is ongoing.

During the third quarter, as we executed our broader content strategy, we continue to manage some positive developments in terms of our fundamental operating metrics, average attendance at our live events in North America increased 6% and pay-per-view buys increased 13% for a third quarter event. It’s important that while our earnings declined in the quarter that decline was attributable to factors that we discussed in the past than was largely anticipated.

These factors included a $6.6 million increase in expenses associated with the return to a more normalized level of management incentive compensation as last year’s earnings performance resulted in a reduction of accrued bonus and stock compensation. They also included $2.1 million in network related investment, and a $0.8 million reduction in licensing revenue associated with the absence of the WWE All Stars video games, which was released in 2011.

Based on these factors EBITDA declined by $9.2 million and net income declined by $7.1 million from the prior year quarter. In previous quarters, we've adjusted our results for items such as network investment and film impairments to clarify the trends in our financial performance. For consistency, we have prepared supporting schedules that demonstrate the impact of these adjustments for the third quarter. However, we do not believe that making these adjustments provides them a fairly different perspective on the quarter’s performance.

For a more detailed review of our performance in the quarter, let's turn to page 6 of our presentation which was the revenue and profit contribution by businesses as compared to the prior year quarter. Starting with our live events, revenue from ticket sales was essentially flat to the prior year quarter as increases in average attendance and ticket prices at our events in both domestic and international markets were offset by a reduction in the number and mix of international events.

Revenues from our events in North America increased 20% or $2.8 million, reflecting a 9% increase in the number of domestic events that is six additional events and a 6% increase in average attendance to 5200 fans. In addition, the average ticket price for these events increased 3% to nearly $43. The revenue growth in North America however was offset by a comparable decline for international markets resulting from eight fewer events in the quarter.

In these markets average attendance increased 17% to approximately 8400 fans and average ticket price increased 23% to $98. The increase in both average attendance and average ticket prices reflected in part changes in territory mix as events in the current year quarter were concentrated in cities with greater economic strength that is the prior year quarter.

While our live event ticket sales were essentially flat to the prior year quarter, revenue from the sale of venue merchandize increased 25% to $4.5 million. The $0.9 million increase was primarily due to a 26% increase in total domestic US attendance. Domestic per capita merchandise sales increased 1% to $10.28 in the current year quarter.

Turning to our pay-per-view business, revenue increased 3% or about $500,000, a 13% increase in buys from our third quarter events was partially offset by a reduction in the number of buys reported for prior period events. For the events in the third quarter, the growth in buys was predominantly attributable to our Summer Slam pay-per-view. Buys for that event increased 21% from the prior year quarter demonstrating its creative strength. Offsetting this performance buys associated with prior period events declined by 50% due to the timing of WrestleMania related purchases as recorded by our cable and satellite distribution partners.

On a year-to-date basis, buys from WrestleMania were 8% above the prior year period, and total buys for the nine events to-date were 9% above the prior year period. As indicated previously, we believe the improved overall performance derives from both relatively easy comparisons from our prior year activity and from favorable advances in our pay-per-view operations.

(inaudible) included the continues development of our talent base and creative story lines as well as increased brand awareness that arises from our YouTube program and social media campaigns.

Revenues from our television business of $34 million were flat in the third quarter of last year. Additional rights fees and contractual increases inherent in our global TV distribution agreement were offset by the occurrence of fewer weekly telecast of our domestic Smackdown and international program and a reduction in sponsorship revenue tied to our TV assets.

For our domestic Smackdown and international programming, there were 13 telecast weeks as measured by the number of Fridays within the current fiscal quarter compared to 14 in the prior year quarter. Recently, we announced agreements to produce and license three new television programs comprised of 2.5 hours of new content. These include an extension of our Raw program from two to three hours, a new kid show, WWE Saturday Morning Slam, and one hour original series, WWE Main Event.

The third hour of Raw and WWE Saturday Morning Slam were launched within the quarter on July 23, and August 25 respectively. WWE Main Event debuted subsequent to quarter end on October 3.

As Vince noted, each of our new programs has attracted an audience that is 40% to 50% larger than the viewership of the programming they were played. Exemplifying the compelling nature of the programming, the additional third hour of Raw has attracted an average audience of 4.4 million viewers, which is 35% larger than what NCIS achieved in the comparable time slot for the 10 weeks before our debut.

In our consumer product segment, our licensing revenue declined by 21% or $1.9 million primarily due to reduced sales of our video game and to a lesser extent novelty products. Royalties earning from the sale of video game declined by $1.2 million, primarily from one fewer release WWE All Stars in the third quarter of this year. WWE All Stars was released in March 2011 and will not be refreshed in the current year.

Shifting from our franchised video games WWE ‘12 also declined 5% in the quarter to 127,000 units, resulting in a 22% decline to date compared to that of the prior year release. To date royalties from the sale of video games have declined 32%. The decline underscores our interest in developing the games category and participating in the segment of the gaming industry such as mobile and online apps which have and are expected to experience growth.

During the quarter royalties from the sale toys increased 16% or $0.5 million, reflecting the successful introduction of our Brawlin' Buddies by Mattel, which has been identified as the top toy for 2012 by industry experts. Brawlin' Buddies has earned accolades on the coveted case [Smark Benefit] team and the time to play holiday 2012 most wanted list.

Royalties from the sales toys have declined 2% to date. This compares favorably to industry data that indicates a 13% sales decline for the domestic action figure category in 2012. Our home video revenue declined 23% or $1.9 million reflecting a reduction in average unit price and an adjustment for [allowance or return] that was partially offset by an increase in shipment.

Although shipments increased 36% to approximately 930,000 units, a majority of this growth was derived from lower price new releases (inaudible). The resulting change in product mix contributed to 16% reduction in average price to $11.01. A $1.7 million adjustment to allowance return was made to reflect lower sell through rates primarily of our prior period releases. This adjustment increased our reserve return to 50% of gross retail revenue has compared to 21% in the third quarter of last year.

On a year-to-date basis, home video revenues are essentially flat to the prior year period as of 15% declined in average price offset a 5% in shipments at $2.6 million. For both the current and prior year period our reserve for return represented approximately 30% of gross retail revenue on a year-to-date basis.

In our magazine publishing business revenue decreased $0.3 million reflecting somewhat lower newsstand sales in the current quarter. As describe previously, given the significant revenue decline, that our magazine publishing has experienced over the last several years and over $15 million in 2008 to less than $7 million over the trailing four quarters, we have reengineered the cost structure of this business to modestly surpass breakeven profit levels with revenue in the range of $5 million to $6 million.

In our digital media segment, revenue increased 9% or $0.6 million to $7.5 million driven by increased rights fees associated with the licensing of our original content to YouTube. Content provider under this new agreement included original short form programs with remarkable popular appeal.

Propelled by this programming WWEs Fan Nation has established its position has the fourth most watched channel for original content on YouTube since the launch of YouTube's original content channel strategy according to (inaudible).

Sales and merchandise on our e-commerce website WWEShop declined 16% or $0.05 million primarily due to 21% declined in the volume of online merchandise sales to approximately 54,000 orders. The average revenue per order increased to 2% from the prior year quarter to $47.77.

During the quarter, WWE Studio recognized revenue of $1.9 million compared to $3.7 million in the prior year quarter primarily due to the timing of releases from the pre 2010 movie portfolio. There were three feature films released in the quarter, Barricade, No Holds Barred and The Day as compared to one release Inside Out in the prior year quarter.

Based on their unique circumstances, we have [profit] expectations for two of the current quarter releases. No Holds Barred represents the DVD re-release of a 1989 WWE produced theatrical feature starting Hulk Hogan. Based on its current DVD sales and with total costs of less than $100,000, the product remains on track to generate a profit of about $300,000.

The Day was distributed as a limited theatrical release and revenues generated by this movie will be recognized as participation statements are received. As such no revenues were recorded for this movie during the quarter. WWE Studio performance in the quarter was characterized by $4.6 million reduction in film losses as the prior year quarter included a $5.1 million impairment charge related to a self distributed film.

Excluding the impact of that charge, WWE Studios Movie portfolio generated a loss of $1.5 million compared to an adjusted loss of $1 million in the prior year quarter. Over the past few quarters, we have completed agreements with Pathe, Fox, Lionsgate, IM Global, Troika Pictures and most recently Warner Bros. Animation and ABC Family to co-produce and co-finance our movies.

We are working with these partners to select content with a broad appeal, engage to recognize acting talent and to establish strong global distribution. Our upcoming [slate] of movies exemplify our revised approach. These movies include No One Lives, a horror film which stars Luke Evans; Dead Man Down, a romantic thriller starring Colin Farrell; The Marine: Home Front, the third installment of our profitable action franchise and The Hive, the thriller starring Halle Berry.

As a reminder, these new results also include WWE Superstar talent. Most recently, we announced new agreements with Warner Bros. Animations to produce an animated feature Scooby Doo at WrestleMania and with ABC Family to produce a made-for-TV family movie Christmas Bounty. These agreements enable us to strengthen our connection and the bond of our superstar talent with young family viewers.

It is a very important to know as indicated in our last earnings call, that WWE’s equity investment in each of our upcoming movies which generally falls within a range of $2 million to $4 million averages less than 40% of the average of our eight previous self distributed films. We anticipate the strength of our production and distribution partnerships including better deal terms will facilitate a much higher rate of return for WWE.

Overall, our product contribution declined 3% to $43.8 million as reduced losses from our WWE Studios Movie projects were offset by the aforementioned reduction in home video sales and pricing, lower video games sales with one fewer released in the period. Gross profit margin of 41% was on par with the prior year quarter and excluding the impact of last year’s film impairments however, our current and third quarter results compared to adjusted profit contribution of $49.1 million and an adjusted gross profit margin of 45% in the prior year quarter.

For the quarter, SG&A expenses increased 33% or $8 million to $32.5 million primarily due to the reset of management incentive compensation including bonus and stock compensation which resulted in a year-over-year increase of $5.6 million.

In addition to rising SG&A costs reflected increased staffing costs. The rise in staffing costs excluding the management incentive compensation change was incurred primarily to support a potential network. These networks related costs reached approximately $2.1 million in the current year quarter.

Page nine of our presentation compares with quarter-over-quarter results and provides a summary of changes by business, as shown operating income declined $10.9 million primarily due to the increase in SG&A expenses. In addition, our reduced profit contribution and our rising depreciation also impacted our results. The latter predominantly derived from our investment in assets to support the creation and distribution of new content including through our potential network.

Excluding the impact of network related operating expenses and prior year film impairments, adjusted operating income declined $13.9 million from the prior year quarter. Net income decreased approximately $7.1 million to $3.5 million, mirroring the percentage decline in operating income.

Our effective tax rate of 30% compared to 32% in the prior year quarter, the rates in both periods benefited from the recognition of previously unrecognized tax benefits.

Page 13 of the presentation contains our balance sheet which remains strong. On September 30, we held nearly $150 million in cash and investments with no long-term debt. Page 17 shows our free cash flow. Through the first nine months of the year, we generated approximately $14 million in free cash flow compared to about $37 million in the prior year.

The change is primarily due to an increase in capital expenditures and programming costs to support our emerging content distribution strategy, including a potential network. We continue to believe our content investment will yield significant returns under almost any distribution scenario.

Based on our earnings to-date, we are raising the range of our financial forecast for the full year. While developing the transformative opportunity represented by the network, we expect that our 2012 earnings will be 15% to 25% above our 2011 net income and 10% to 15% above our 2011 EBITDA, both on as reported basis. The difference in growth rates associated with these measures is driven by the impact of lower effective tax rate in the current year.

As our net income to-date is 24% above our full year 2011 results, reaching 15% to 25% earnings growth for the full year implies some tough year-over-year comparisons for the fourth quarter. While we expect modest growth across most of our businesses, this growth is offset by the reset of management incentive compensation and an investment in our broader content initiatives including a potential WWE network.

In terms of free cash flow, our expectations have improved somewhat based on our operating performance and the timing of projected film spending. However, we continue to anticipate that our full year 2012 free cash flow will be below our 2011 results. This forecast includes investment of $10 million to $15 million to produce our future movie releases, and an estimate of $35 million to $40 million to support the network.

The latter amount includes investments of $6 million to $8 million to create new programming content approximately $20 million of capital expenditures were facilities and equipment and $8 million to $10 million of operating expenses as previously discussed to provide the broader infrastructure, personnel and systems that support this initiative.

Before we discuss the network specifically, we felt it is important to share new research with you on the size of our fan base that highlights the potential from many areas of our business including the network. As shown on page 10 of the website presentation, we have conducted extensive research on the size of our US fan base. We partnered with a top tier consulting firm, conducted detailed survey of over 9,000 US households. This survey provided evidence that about half the households in the US or about 57 million homes have level of affinity for WWE.

This is a staggering number. To break this down further roughly 20% or 10 million of those households are passionate hardcore fans. They watch our television programs regularly, know superstars’ talent and are very engaged across all of our platforms. Roughly 40% or about 24 million homes are casual fans; they watch somewhat less intensity but remain engaged with our brand at various times throughout the year.

The remainder about 23 million homes are mostly lapsed fans who have not watched our shows within last year but have been a WWE fan at some point and have expressed interest in reengaging with our brand especially through our classic archival content.

In fact, more than 50% of all [respondents] indicated quite simply they want more WWE content. So there is tremendous appetite for WWE. And we expect to see similar results as we extend this research globally.

As we have more content on television and Tout digital platforms, we expect the earnings will continue to grow because each show has its own sensibilities and provides broad and cross promotional opportunities. We have known their experience as they expanded the number of television distribution partners is the case in point that supports this view.

Based on this research, we are excited by the opportunity for all of our business lines including the potential network. As it relates to the network, given the size of our fan base and the interest in WWE, we view the premiums subscription models whether through traditional distribution or over the top as the best approach to capitalize on our fans commitment and the tremendous economic opportunity for WWE.

We continue to develop our programming, build production infrastructure and negotiate with top cable satellite and Telco distributors. As we are still in negotiation, we don't believe it is our interest and that of our shareholders to discuss potential launch date on the range of anticipated financial outcomes at this time.

Looking ahead, we believe that by expanding our content and distribution, we can dramatically raise our earnings potential. As I described in previous quarters, this view is anchored by two fundamental premises, first the WWE brands are among the strongest commercial brands worldwide. Regardless of the metrics that are involved, our social media statistics or the top ratings of our television programs the statistics all support this conclusion.

The second fundamental premise is that the proliferation of distributional alternative is driving up the value content especially compelling content with broad appeal. Based on these factors, we have tremendous confidence that we can take advantage of our developing opportunities.

As evidenced by our leasing agreements of with USA ION and CW, YouTube and Hulu Plus creating new content and distributing that content in traditional and emerging platform is a natural extension of our core competencies. By executing in these areas we can drive earnings growth.

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

Michael Weitz

Thank you, George. Michael we are ready now. Please open the lines for questions.

Question-and-Answer Session


Thank you. We will now begin the Q&A session (Operator Instructions). And our first question is coming to us from Richard Ingrassia of Roth Capital Partners.

Richard Ingrassia - Roth Capital Partners

I assume we are not getting it up to on the timing of the network obviously, but Vince can you talk about what thinking has been done so far to mitigate any potential cannibalization of pay-per-view buys or obviously interested in other WWE existing revenue streams?

Vince McMahon

The network would not have anyway cannibalized pay-per-view and we have several models, one that would include pay-per-view one that would not include pay-per-view all of those still are compelling network. So the way that we are doing in terms of the network will be an add-on when you look at the entire production.

Richard Ingrassia - Roth Capital Partners

Okay, so I mean if it’s say an HBO like network, are you saying there's a model potentially that would include the pay-per-view for those subscribers, the pay-per-view that you charge today individually?

Vince McMahon

It depends.

Richard Ingrassia - Roth Capital Partners

Okay. And I thought I also heard again still no plans to change your current cable carriage of RAW and SmackDown in any case, USA and Syfy and use those shows to cross them out to the new premium channel?

Vince McMahon

Well, again the philosophy of what's good for WWE is good for all the networks, its always been that way and will continue to be that way because it is how much base program do you need to promote all these other initiatives. And actually, I think the SmackDown contract comes up soon in terms of negotiating with Syfy, that's the first one that comes up. So you have to look at just in terms of totality and you need base programming, a broad based programming to promote network, promote pay-per-view to promote all the ancillary things that we do. So it’s important you'll have that in addition to premium WWE network content.

Richard Ingrassia - Roth Capital Partners

And just on the, the money that’s going into new programming, is it too soon or can you give us some flavor for what type of programming that might be?

Vince McMahon

Again, as sort of getting into the weeds here which we’re not really ready to announce, I mean there's so many things that when you look at our audiences as it was mentioned 50% of US homes, a little bit better than that having an affinity, that means they want different things, the older audience wants thing, middle and older wants something else, the hardcore wants something else. So again you have to look at a blended area of programming which really goes from agencies, so not only being specific, we want to get some idea of what we are doing in the network without saying too much to interfere in negotiations and things of that nature.

Richard Ingrassia - Roth Capital Partners

And finally to George, can you characterize a little bit more detail that what drives the increase in the bottomline guidance here or whether it’s driven by better expectations on the top or maybe some expense controls in Q4?

George Barrios

Majority of the year-to-date performance, if you look at our earnings, we are 24% up year-over-year, year-to-date, so the 15 to 25 as I mentioned in the script, we got some tough comps coming up. I think our core businesses for the most part will be flat to up in the quarter. That’s our visibility right now. But when you look at some of the broader investments that we're making in content, specifically the network as well as the continuing reset of that management incentive comp on a year-over-year basis, that eats in to some of that core business growth. So, I would say, a 15 to 25 on net income is primarily driven by where we are year-to-date.

Richard Ingrassia - Roth Capital Partners

Can you just repeat what you said about the tax rate guidance for the year?

George Barrios

Yeah, I mean at this point, we think that fourth quarter will be in mid-30. Obviously, depending on finding FIN 48 releases, that can change as we saw this quarter but our core tax rate we think is about in the mid-30s in the fourth quarter.


Our next question comes to us from Michael Kupinsky of Noble Financial.

Michael Kupinsky - Noble Financial

Just a couple of housekeeping things. One of the largest variances in my number was a little bit lower SG&A expense, and I know that obviously that number is higher year-over-year because of the incentive comp and so forth. But it was a little lower than I was looking for. I would assume the fourth quarter is going to have a bump up given some additional conversation and things going in that quarter, but could you maybe give us some thought about how that number is going to look relative to the third quarter?

George Barrios

Yeah, it will look on an absolute basis, not year-over-year. It will look a little bit lower than the third quarter because we won’t have, it will look a little bit similar to the third quarter. I wouldn't see a big ramp up in SG&A in the fourth quarter at this point.

Michael Kupinsky - Noble Financial

So then that number will be actually down then or flat from year-over-year?

George Barrios

It will be in that range. We had about 4 plus million in network spend in the fourth quarter last year predominantly presented with an SG&A that number is probably little bit less this year because we had some one-time payment last year. So I think that kind of guidance is basically where we are at on SG&A.

Michael Kupinsky - Noble Financial

And then also on in terms of looking just at the attendance, certainly was up year-over-year but it’s still relatively lackluster from historical perspective. I was just wondering if there was a way for you to attribute what the attendance looks like, what you think would be the driver? Do you think it’s little bit of the economy or what developing story line still or is there a significant difference may be in the size of the venues? Can you just give us a little color on how quickly we can assume that that number can start to continue to ramp or are there some limitations on what you think what type of growth we might see there?

Vince McMahon

It’s based on product moreover, a better product in addition to further expansion and a broader audience whether its television, with the new shows we’ve added and the non duplicated audience. It’s a larger market for us especially as it relates to social media, reaching different people in a broader perspective it’s not just the light of in attendance it’s the rising tide (inaudible) all those.

Michael Kupinsky - Noble Financial

Vince do you think then that we could continue to see progression probably in the upper single digit range or do you think that I am just trying to gauge what you are anticipating in terms of the type of growth that we are likely to see in terms of attendance?

Vince McMahon

I don’t want to speculate now but it will be good.

Michael Kupinsky - Noble Financial

Okay and then if I turned quickly to the performance of the films in the quarter, you had some releases in the third quarter and I was just wondering were they late in the quarter because obviously we didn't see a lot of revenues from that, did they perform modestly then what you have expected or there might be an impairment charge, what can you look forward from that segments?

George Barrios

Yeah, I mean part of it is just the unique nature of each release. So No Holds Barred which was the re-release obviously had smaller expectations which we have exceeded. So I think that will be profitable on the ultimate basis generated profit around $300,000. The day we essentially have purchased with our partner [Anger Bay] the domestic distribution rate. We are accounting for that similar to our license built on a net basis, so even though the film was released in the quarter, we won’t see as recorded until the participation statement starts coming in. So there is the reason for that. And then Barricade met with expectations although I’ll remind you we based on the changing model of Direct-to-DVD, we impaired Barricade as well some of our other films in the fourth quarter last year, but Barricade is roughly where we expected.


Our next question comes from Brad Safalow of PAA Research, thank you.

Bradley Safalow - PAA Research

Just on the television distribution right side, can you give a sense of what kind of sequential increase you’ll see from a third to fourth quarter after testing for the timing on Smackdown, the ION show launching basically your items obviously a third hour only being in the quarter for about two months and Hola obviously and I assume that’s going through the television [dress] line?

Vince McMahon

On the latter point, Hola actually right now goes through our digital business, actually the digital business has three economic engines advertising, the licensing of programs domestically and internationally and then e-commerce. As far as guidance on the number obviously that's something that's sensitive given that these are commercial negotiations with other partners and I don't think they want numbers out there.

So I'm not going to talk through that. I will say that the two additional hours in primetime, we are real happy with the economics, if you wanted to look at when we had those two additional hours back in 2010 which were NXT and Superstar, we feel good about both the creative on the new shows as well as on the economics of the new shows. I can't give you a number.

Bradley Safalow - PAA Research

And then just going back to thank you for providing the study that guys are having for the network and also sort of understand your thinking, when we look at the, I guess this third column here, the slide 10 that shows the 57 million households and you have this red box around the (inaudible) and like casual and passionate categories. Just help us understand in your view what; do you need to capture all these segments for the network to be successful? It’s subtle for us to understand what are the thresholds here for success just in a broad sense without getting into too much detail?

Vince McMahon

No, we don't need to capture under any sort of circumstances, all that much of this audience or for our network to be successful. Again, if we just you know just the ones that are very, very likely to join the network even if you put it down on just that basis. You know, our model makes considerable amount of revenue. It’s just the broad aspect of all these numbers indicates again our lapsed fan might as well based on our research enjoy the network depending on what we give them but that would be somewhat of the older audience and they have indicated what type of programming they really want to see. So this is a broad metric in terms of, I was quite frankly surprised myself that 50 plus percent as we can reach a large percentage of them but its not based on the lapsed fan.

Bradley Safalow - PAA Research

And then just as you go forward in this investment process, is there a meaningful step up in 2013 as we get close to launch, I mean how obviously it’s November now. So we are all trying to think about what things might look like for next year, understanding the negotiations are still [fluid] release from a spending perspective, order of magnitude give us a sense or how much would be required to actually launch?

George Barrios

So two things. One, we will give broader guidance on ‘13 on the next call kind of as we did this year. So we are not going to do it right now. I think for the network specifically we are probably on the OpEx side 80% to 90% of infrastructure that we need to run the network at least to launch there, the big incremental increase would be the marketing dollars at launch and I think that is driven by launch date. So I think we are about 80% to 90% of infrastructure we need, the next variable is [one state] and then the marketing spend which obviously is going to be a significant part of the network and that we are really not ready to talk about.


(Operator Instructions)

Michael Weitz

That’s it. Thank you everybody. We appreciate you listening to the call today. If you have any questions, please do not hesitate to contact us. Thank you.


Thank you ladies and gentlemen. That concludes today’s conference. Thank you for your participation. You may all disconnect.

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