World Wrestling Entertainment's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 20, 2014 4:54 PM ETWorld Wrestling Entertainment, Inc. (WWE)

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World Wrestling Entertainment, Inc. (NYSE:WWE)

Q4 2013 Earnings Conference Call

February 20, 2014 11:00 AM ET

Executives

Michael Weitz – Head-Investor Relations

Vincent Kennedy McMahon – Chairman and Chief Executive Officer

George A. Barrios – Chief Financial Officer

Analysts

Daniel Moore – CJS Securities, Inc.

Mike Hickey – The Benchmark Co. LLC

Operator

Hello, and welcome to the webcast entitled WWE Fourth Quarter Earnings. We have just a few announcements before we begin. Please download the slide, via the resources widget at the bottom of the screen. Also at the bottom of your browser you'll find a help icon for technical assistance. Please note the slides will not advance during the presentation. You'll only see the cover page. (Operator Instructions)

And I will now turn the call over to Michael Weitz, Senior Vice President, Financial Planning and Investor Relations, sir, you may begin?

Michael Weitz

Thank you and good morning everyone. Welcome to WWE fourth quarter 2013 earnings conference call. Leading today’s discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our Chief Strategy and Financial Officer.

We posted our presentation for today’s call and more detailed financial release on our website corporate.wwe.com. Today’s discussion will include forward-looking statements. These forward-looking statements reflect our current views are based on various assumptions and are subject to risks and uncertainties disclose from time to time in our SEC filings. Actual results may differ materially and undue reliance should not be placed on them.

Additionally, the matters we will be discussing today may include non-GAAP financial measures, reconciliation of non-GAAP to GAAP information is set forth in the notes to this presentation which is available on our website at corporate.wwe.com. Finally as a reminder today’s conference is being recorded.

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

Vincent Kennedy McMahon

Good morning, everyone, you have before you no doubt the financial results for the full year. I am pretty much inline with expectations down obviously year-over-year as we continue to invest with net income around $30 million.

Some of the key metrics, which I like to, I think certainly instrumental in where we go as from a live event standpoint, our average attendance then increased 2%. From the television audience standpoint we increased our weekly audience 19% to about 14, a little better than 14 million viewers a week.

From social media standpoint, we continue to start new round as far as that’s concerned with an increase of 87% of the 246 million of social media followers, which is pretty extraordinary. From the recent achievement standpoint, we’ve announced the new content deal with the BSkyB over in the United Kingdom as well as Thailand, which are considerably better than what they were in the past, a multiple of approximately 3 and I believe 7 times for the various for U.K. as well as Thailand.

We also have developed and monetize new content for television including Total Divas. We’ve launched new toy product in the construction toy category what we have not been before, we would have very really high hopes for that and developed some new movie contents such as working with Flintstones and Scooby Doo. And Scooby Doo is going to WrestleMania by the way as you heard.

We have enhanced our talent development continue to with our performance center down in Florida, we have established partnership with the blue chip companies with such as Kraft and Post Cereals. So, we are moving along well, I think in terms of our some of our recent achievements as far as strategic initiatives concerned obviously the biggest one. Our exclusive license period with NBCU has expired and we’re out in the marketplace with the first time in a long, long-time.

Now, we expect to complete those negotiations somewhere around the end of April maybe a little bit, a little bit later today. And of course, we’ve begun discussions with any number of individuals and in terms of renegotiating our content agreement coming up in India and others as well when we look to increase our television right fees.

For us our network is concerned we’re going to go live this Monday at 9’o clock. We are really excited about that, a lot to talk about it, especially considering for $9.99 you get unbelievable amount of content as well as our pay-per-views. Speaking of pay-per-views a majority of our MVPDs have the size to carry our WrestleMania and then from there on a month-by-month basis under the current terms.

And we continue rollout plans for international markets with our network, including Canada, U.K., Australia, and New Zealand, Singapore and some of the Nordics as well as Hong Kong all in English and then from there obviously we would continue on across the globe with our network all parts of our network. So that’s pretty much where we are at the moment.

George A. Barrios

Thanks Vince. There are several key topics, which I’d like to review today. We’ve include management discussion of financial performance and progress of our key strategic initiatives.

For the fourth quarter, our financial results as measured by OIBDA declined $14.1 million from the prior as we maintain investments and staffing, production, talent development and marketing to support our key content initiatives. These results were inline with management expectation and for the full year our OIBDA results were inline with our 2013 guidance, which targeted an OIBDA range excluding film impairments of $40 million to $50 million.

Throughout the past year our communication has highlighted critical strategic milestones, especially the launch of WWE Network and the renegotiation of our most significant content agreement. Today, we have completed all of the key requirement to launch the network in 4 days on Monday February 24. This includes creating compelling original programming, developing and testing the user interface, reach of our distribution platform and putting in place the technical backbone and customer service infrastructure to affectively deliver the network.

Regarding our content negotiations, we have recently announced the renewal of key television agreements in the U.K and Thailand. Which now represents our number 1 and number 3 most valuable content deal outside the U.S. We believe the new agreements in these markets reflect more appropriate value for our content based on our analysis of recent transactions in those markets.

Regarding our domestic TV licensing agreements, we are now engaged with potential partners after exiting our exclusive negotiating period with NBCU. We look forward to being in the market with the number 1 show on cable television and content that delivers more gross rating points than the national broadcast of most sports and entertainment programs.

Additionally, we like to be aware that we are currently in similar discussions in India, where our analysis also indicate significant economic upside. Each of these developments represent significant milestones in our effort to realize greater value from our content and transform our business. During the past year, as we prepare for change we continue to invest in our operations. We enhanced our talent development process through the completion of the WWE Performance Center.

We flexed our production muscles to develop and monetize compelling new content exemplified by total viewers. We launched the new line of toy product in the construction category a segment which has shown significant growth, and we continue to improve our film business, entering new production and financing partnerships such as with Warner Bros. to deliver exciting new film project such as the animated features; Scooby-Doo WrestleMania mystery that will be released on Tuesday, March 25 of this year.

As we invested in our business, our overall brand metrics remains strong, with the launch of our original series Total Divas, the average weekly reach of our domestic television program grew to 14.2 million home, representing a 19% increase from last year. As I mentioned previously, 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 The Walking Dead,

And our total social media platform as of today now reaches more than $260 million followers including more than $175 million Facebook likes and $80 million Twitter followers, representing a 90% increase from a year ago. Building the strength of our brand as evidenced in these metrics, and taking advantage of that strength is the 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 3% or approximately $3 million based on growth in international markets. Our international revenue grew 12% driven by the impact of scheduling three additional events in international markets, stronger performance of our live event tours and contractual increases in our international television agreement. Revenue from our live events including merchandise sales of these events increased 6% or approximately $2 million in the quarter due in part to the staging of three additional live events in international markets.

Additionally, changes in the mix of international territories contributed both to an increase in average ticket price and partially offsetting decline in average attendance. The average ticket price rose 17% to $81.98 as the current year quarter included three events in Abu Dhabi, an international market that has historically garnered higher ticket prices. Average international attendance declined 7% to 5,200.

In North America average attendance increased 4% to 5,900 fans. For the full year, average attendance at our North American events, which we view as an important leading indicator, increased 2%, while our average ticket prices rose 7% from the prior year.

Revenues from our pay-per-view business increased 21% or $2.7 million, primarily due to the timing of one additional pay-per-view in the quarter. There were four pay-per-view events in the fourth quarter 2013 as compared to three events in the fourth quarter last year.

Revenue for the comparable events held in both the current and prior year quarter increased 2% based on a corresponding increase in pay-per-view buys.

Revenues from our television business increased by nearly $1 million due to the production and monetization of Total Divas and contractual increases for existing programs licensed in international markets. Total Divas, a new original series, began airing on the E! Network in July. Since debut the program has averaged approximately 1.7 million viewers per week, representing an increase of more than 150% over the programming that it replaced.

For the full year, revenue from our television business increased 15% or $21.4 million driven by the production and monetization of new programs. In our Consumer Products segment, our home entertainment revenue declined $4.6 million, reflecting the continued shift in sales from new release to catalog titles. This shift derived from changes at retail, including reduced space for DVD inventory and retail demand for lower priced product. Home entertainment releases in shipments from our catalog historically have been characterized by lower average prices and higher return rates than new releases.

During the quarter, shipments of catalog titles increased 51% and accounted for 57% of total unit shipments, compared to 35% in the prior year quarter. Reflecting these factors the average price per unit declined 33% to approximately $8 and estimated returns increased to 51% from 37% of gross revenues.

Also contributing to the decline in home entertainment revenue, overall shipments fell 8% to 1.1 million units with two fewer releases during the quarter, nine in Q4 2013 versus 11 in Q4 2012.

Licensing revenues declined $1.2 million or 14% from the prior year quarter, primarily due to reduced royalties from the sale of toy products, particularly products ancillary to our core action figures in the U.S. and international markets. Despite the fourth quarter decline, domestic retail toy sales increased for the full year based on strong sales of these core products.

For the year, WWE maintained its position with the second highest selling action figure property in the U.S. market. And notably, in late 2013, we launched our first line of construction toys, a segment of the toy category that has demonstrated strong growth over the past several years. As indication of our potential, other major action figure brands, Marvel and Stockwood generates combined retail sales from their construction toys that’s roughly comparable to their combined action figure sales.

Royalties from the sale of video game 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.

Revenue from our Digital Media businesses declined less than $1 million based on lower overall sales of digital content. Key digital metrics such as unique visitors to the Company’s website and mobile app and average monthly page views increased from the prior year quarter.

During the quarter, WWE Studios recognized revenue of $5 million as compared to $0.6 million in the prior year quarter. The increase was primarily due to the performance and timing of results from our portfolio of movies. The fourth quarter reflected revenue from Christmas Bounty, a made-for-TV movie that aired in November 2013, and to a lesser extent revenue from The Call starring Halle Berry, which was released theatrically in March 2013. Although four movies were released in 2012, these releases had limited impact on revenue recognized in the fourth quarter of that year.

During the 2013 year, WWE Studios recognized impairment charges of $11.7 million primarily related to our 2010 to 2012 slate of movies that will release under a former distribution and business model. Based on the expected performance of our movie portfolio, we expect to maintain our current level of total investment and are therefore targeting film spending of approximately $20 million over the 2014 year.

Unallocated SG&A expenses increased $3.1 million to $35 million from the prior year quarter. As a reminder, these expenses include sales, marketing and talent development costs, which have not been allocated to specific lines of business. The rise in unallocated SG&A during the quarter was driven by increases in salaries, other personnel costs and marketing to support key business objective.

Salary expenses increased $1 million or 11% reflecting a 14% increase in headcount, primarily to develop our advertising sales and international infrastructure. These factors were partially offset by $1.4 million year-over-year reduction in accrued management incentive compensation based on our 2013 financial performance.

Operating income before depreciation and amortization or OIBDA declined $14.1 million primarily due to lower results from our home entertainment, licensing and television business as well as continued investment to support our content initiatives.

Lower profits from our consumer products reflected the decline in revenues as discussed earlier. Profits from our television operations declined $3.2 million, reflecting changes in the mix of the programming with one less episode of RAW and the new season of Total Divas as well as increased production costs.

Overall, company’s salary expense increased $2.7 million with a 9% increase in headcount. Talent expense increased $2.2 million and these increase in expense, which were predominately to support our strategic initiatives were partially offset by $1.3 million reduction in accrued management incentive compensation and increased profits from the timing of additional pay-per-view event.

Net income declined $8.5 million, reflecting the decline in our OIBDA results and an increase in depreciation. The change in depreciation is derived from our investment in assets to support the creation and distribution of new content, including through the WWE Network.

Our effective tax rate was 34% compared to 75% in the prior year quarter. The rate in the prior quarter was adversely impacted by additional tax expense as a result of differences between estimated and actual full year taxable income and increase in unrecognized tax benefits and the provision for dividends from a foreign subsidiary.

For the full year, out net income declined nearly $29 million with increased profits from the licensing of our television content was offset by the aforementioned investments in production, talent and staffing.

Page 13 of the presentation contains our balance sheet, which remained strong. As of December 31, the Company held $109 million in cash and investment and estimated debt capacity under our revolving line of credit to be approximately $83 million.

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

Page 16, shows our free cash flow which declined about $30 million from the prior year, the increase was driven by the decline in operating performance and changes in working capital including the $11 million increase in the annual payment of management incentive compensation related to the companies previous year performance, increase spending on television production assets including network production and timing differences in the collection of receivable that negatively impacted the current year cash flows compared to the prior year.

Partially offsetting that decline, capital expenditures excluding the purchase of the corporate aircraft decreased by approximately $9 million from a higher level of investment spending in the prior year to support our content initiatives. We continue to believe that these content investments will yield significant returns.

Now looking ahead, based on our analysis of the value of launch SmackDown compared to other benchmark programs and extensive research regarding consumer interest in our WWE Network, we continue to believe that we can double or triple our 2012 OIBDA results by 2015. Our program shared key determines 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 plus same day viewership, which makes WWE content like sports TVR approved.

Benchmarking our rights fees to the fees paid for sports programming and other original scripted series indicates that our license agreement could have meaningful upside potential. Programming and viewership data provides similar support to the re-negotiation of our content agreement in international markets.

Our licensing deals that were recently renewed in the U.K. and Thailand focuses this view. We are looking forward to our discussions as we negotiate our content agreement in India. The launch of WWE Network is another major source of future earnings growth. Based on our consumer research we estimate that a full distributed domestic pay network could ultimately attract between 2 million and 3 million subscribers.

At a price $9.99 per month this would represent incremental OIBDA between $50 million and $150 million at a steady state. Similarly the roll out of WWE Network in international market also has significant earnings potential. We expect the launch of WWE Network in the U.K., Canada, Australia, New Zealand, Singapore, Hong Kong and the Nordic countries by the end of 2014 early 2015.

To reiterate based on the raising valued content that has a broad way of following we believe we can realize significant upside potential from the negotiation of our key content agreement, we continued to believe that our efforts including the launch of WWE Network will enable us to achieve our 2015 financial objectives.

Although our key strategic initiatives holds significant potential our financial performance for 2014 could fall within a wide range of outcomes depending on the rate of subscriber acquisition for the network, potential pay-per-view capitalization and the outcome of our content negotiation.

Based on the ramp and network subscribers and the late 2015 early 2015 start date for our key content agreements the wide range of outcomes for 2014 includes potentially lower earnings in 2013.

For the first quarter of 2014, we expect net income to decline on a year-over-year basis by $15 million to $18 million resulting in net loss of $12 million to $15 million the first quarter decline reflect the impact of the network launch including marketing and customers service costs, the absence of a $2 million net benefit related to the transition of our video game partner, timing of video game royalties and continued investment in staffing and the reset of management incentive compensation.

As we expect they had better visibility regarding network subscriber acquisition and the outcome of our constant negotiation by the end of April, we expect to discuss our full year business outlook for 2014 and 2015 in greater detail in our first quarter 2014 earnings call which will occur in over May.

Regarding the disclosure of network subscriber level we will initiate reporting at the WrestleMania on Monday April 7, 2014. Looking ahead we believe that over time we can generate economic returns that better reflect WWE’s tremendous global appeal and brand strength. That conclude this portion of our call and I will now turn it back to Michael.

Michael Weitz

Thank you. George. Vanessa we are ready now. Please open the line for questions.

Question-and-Answer Session

Operator

And thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Daniel Moore with CJS Securities.