Black Widow
02-25-2009, 02:26 PM
World Wrestling Entertainment Inc. (WWE)
Q4 2008 Earnings Call
February 24, 2009 11:00 am ET
Executives
Michael Weitz – Vice President, Investor Relations and Financial Planning
Linda McMahon – Chief Executive Officer
George Barrios – Chief Financial Officer
Donna Goldsmith – Chief Operating Officer
Analysts
Richard Ingrassia – Roth Capital Partners
Arvind Bhatia – Sterne Agee & Leach
Jamie Clement – Sidoti & Company
Alan Gould – Natixis Bleichroeder
Ian Corydon – B. Riley & Company
Marla Backer – Research Associates
Bobby Melnick – Terrier Partners
Presentation
Operator
Good day. Welcome to today's World Wresting Entertainment fourth quarter 2008 earnings call. (Operator instructions) It is now my pleasure to turn the program over to Mr. Michael Weitz, Vice President of Investor Relations for World Wrestling Entertainment.
Michael Weitz
Thank you [Katie] and good morning everyone. Welcome to World Wrestling Entertainment's 2008 Fourth Quarter and Full Year Earnings Conference Call. Joining me for today's discussion, are Linda McMahon, our CEO, Donna Goldsmith, our COO, and George Barrios, our CFO.
We issued our earnings release earlier this morning and will be referencing the presentation as part of our discussion. These are available on our corporate website at corporate.wwe.com.
We will be making 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 in our filings with the SEC. Reconciliations for 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 fourth quarter and we'll follow this review with a Q&A session. At this time, I would like to turn the call over to Linda.
Linda McMahon
Thanks, Michael. Good morning everyone and thank you for joining us today. Before we officially begin, I would like to welcome Donna Goldsmith, our COO. Donna has been with the company a little over 8 years at this point and just doing a really incredible job as our new COO. So if you haven't had an opportunity to speak with her or to meet her, please do take advantage of that.
Now let's talk a little bit about WWE. Over the past year, we've seen a difficult economic environment, which deteriorated in the latter half of the year and became especially harsh in the fourth quarter. Despite these challenges, our results showed resilience through these tough conditions, generating revenue growth for the first three quarters and for the full year of 2008.
We recognize, however, that WWE may face more challenging trends in the near-term and circumstances require us to operate in a smarter, more efficient way. As a result, we've intensified our efforts to improve the company's operating efficiency, targeting and moving ahead with a $20 million reduction to our expense base.
In January, we announced a 10% reduction in staff, which was part of our effort to fulfill this commitment. This reduction in staff came from across all areas of WWE's operations and is expected to generate annual savings of approximately $8 million in compensation and benefit costs.
In addition, our review process identified several other broad initiatives to improve efficiencies, including the restructuring of our marketing efforts, vendor renegotiations, and reductions in discretionary spending.
As part of the reorganization, we integrated our online and print advertising sales and streamlined our international operations. We've reduced our presence in Canada and Australia, closed our office in Brazil, and centralized our overall international management team.
Additionally, while understanding the importance of expanding and upgrading our Media Center, we have decided to delay spending on this initiative, until key economic conditions become more favorable. As we address our cost structure, however, I do not want you to lose sight of our achievement in developing our long-term growth opportunities.
During the fourth quarter and throughout the year, we made significant progress advancing our mission, especially our international strategy. Specifically, we continued to strengthen our television platform, both domestically and internationally. These efforts help our brands further cultivate loyal audiences around the world.
During the fourth, quarter we announced a new television distribution agreement with WGN America. Under this agreement, we will produce a new action-packed television program, WWE Superstars. The hour-long weekly show will debut this April.
Through this deal, we can now deliver 21 hours of programming per week in the U.S., including six hours of original, first-run broadcasts. Similarly, in January, we announced a new agreement with Eurosport. Under this agreement we will produce two original shows, featuring highlights of our recent programs and historical footage of our WWE legends.
Through this partnership, we can now reach more than 100 million homes across Europe. These new agreements complement our achievements from earlier in the year, which extended our television distribution in India and Japan and launched new distribution in Mexico, China, and Eastern Europe.
Our recent agreements with Televisa and TV Azteca greatly improved distribution of our television programs throughout Mexico. These agreements made our programs available to over 20 million TV homes in that country.
Since their debut, both our RAW and SmackDown programs have attracted audiences which are now approaching 2 million TV viewers. As exemplified by our experience in Spain this year, strengthening our television platform not only builds an audience for our TV programs, but a consumer base for our other products.
Revenue grew 170% in that country this year and led our overall international revenue growth of 14% for the year. With regard to the fourth quarter, dramatic changes in foreign currency exchange rates made it more difficult to discern the underlying health of our international live events and television businesses.
However, it is important to note that our European tour in November attracted over a 171,000 fans and yielded the highest paid attendance for any single international tour in the history of WWE. In addition to the impact of exchange rates, we believe several other factors also hindered our overall fourth quarter results.
These included the downdraft in the economy and declines in consumer spending. After stabilizing our Pay-Per-View business in the first half of the year, Pay-Per-View buys declined 11% in the second half of the year, including an 11% decline in the fourth quarter.
Similarly, after generating in excess of 24% growth over the previous two years, growth in consumer products dropped to 15% reflecting lower sales of our licensed toys, products and apparel. Looking ahead, our 2009 outlook is clouded by global recession and assumes adverse rates of exchange compared to 2008, as well as further declines in consumer spending.
In this context, we will continue to be vigilant in finding new ways to improve efficiency. Bottom line, our unique content continues to hold an unrivaled, strong competitive position. My long experience in this business gives me confidence that we will manage through these diverse conditions and emerge in a stronger position than ever before.
As we manage our business going forward, we will continue to focus on maintaining the high quality of our creative content and continuing to expand our businesses profitably, while protecting our cash flow. By staying focused on this mission, we will be well positioned for continued and long-term success.
Now I'd like to turn the call over to George Barrios, our CFO, who will give you more in-depth perspective on our quarter.
George Barrios
Thank you, Lind. For the quarter, our profit contribution slightly exceeded our prior year results, despite a 5% decline in revenue. Increased profits from our licensing, television, and films entertainment businesses more than offset the decline in other areas of our operation.
Revenue and profits reflected a $6.3 million benefit from the recognition of an advance relating to a multi-year contract with our book publisher. Offsetting this benefit, however, several factors dampened our revenue and profit performance, including the impact of foreign exchange.
We estimate the changes in foreign currency exchange rates reduced fourth quarter revenue and profits by $4 million and $2 million respectively. Additionally, we believe our fourth quarter results were also influenced by the economic climate, affecting to some extent our live events, Pay-Per-View and consumer products businesses.
Operating income was $23.3 million, compared to $24.7 million in the prior year, reflecting an increase in depreciation, primarily associated with our investment in high definition broadcasting equipment. For a more detailed review of our performance in the quarter, let's turn to page five of our presentation, which lists the revenue and profit contribution by business unit as compared to the prior year.
Starting with our live events, including merchandise sales at these events, revenue declined $6.5 million or 18% from the prior year, led by lower revenue from our international events. Our international performance reflected a higher proportion of buy-out deals in the current quarter.
Five out of the 26 international events in the prior period were structured as buy-out deals with guaranteed fixed revenues, as compared to one buy-out deal in the prior year quarter. In addition, the average ticket price for our other international events for which we sold tickets, declined 16% to $70.09, largely due to the effect of foreign exchange rates.
These factors more than offset an approximate 5% increase in attendance at our international events to 8,300. The performance of our North American events also contributed to the overall decline in live event revenue. The average ticket prices at our North American events fell 6 % to $38.18 in the quarter, while the average attendance at these events declined 3% to 6,900 fans on a year-over-year basis.
Turning to our Pay-Per-View business, revenue decreased 20% or $4 million from the fourth quarter of last year. Revenue reflected an overall 11% decline in buys for the four comparable events that were produced in both the current and prior year.
A decline in Pay-Per-View revenue from international sources accounted for approximately one-third of the year-over-year drop in revenue. Although international buys comprised a larger share of total current period buys, 40% compared to 37% in the prior year quarter, revenue per buy declined in part due to the impact of foreign exchange.
Revenues from the distribution of our television programming increased by 16% or $3.8 million, primarily due to increased domestic and international rights fees. These increases derived from the expansion of programming times due to certain specials, contractual increases in our international licensing, and the impact of a new agreement to broadcast SmackDown on myNetworkTV.
In our consumer product segment, our licensing revenue increased by 56% or $5.3 million over the prior year quarter. The increase primarily reflected the recognition of an advance relating to a multi-year contract with our book publisher. Excluding this revenue, licensing declined 11% or $1 million, led by lower domestic sales of toy products and apparel.
Revenue related to our video games was essentially flat on a year-over-year basis. Our home video revenue declined 24% or $4.8 million, reflecting the timing of our release schedule in the prior year. The current quarter has seven new title releases, compared to 12 in the prior year quarter.
As a result, DVD shipments fell 35% to approximately 885,000 units, led by declines in the U.S., U.K., and Australia. It is important to note, however, that the average units shipped per new release declined only 8%, while the units shipped for other current year releases and catalog titles declined 14%.
In our magazine publishing business, we experienced lower newsstand stales and advertising revenue, as well as fewer subscriptions per issue. Profits declined on a year-over-year basis as the magazine also incurred increased paper and editorial costs.
In our digital media segment, revenue declined 8% to $10.9 million from the prior year, reflecting lower sales of online merchandise and internet advertising. Revenue from e-commerce declined 7%, matching a comparable decrease in average revenue per order to about $58.
The number of online merchandise orders remained essentially flat at 120,000, compared to the prior year. Notably, the number of orders did not decline with the drop in internet traffic, which fell 18% as measured by average monthly unique visitors for the respective quarterly periods.
The current quarter was also characterized by lower sales of online advertising, partially reflecting the ongoing transition of our internet ad sales organization. However, we are seeing increased activity in our ad sales pipeline.
During the quarter, WW Studios recognized revenue of $5 million and profit of $2.6 million associated with our portfolio of films. The results compare favorably to the prior year quarter. As of year-end 2008, we had approximately $31.7 million in capitalized sales production costs on our balance sheet, primarily associated with our upcoming theatrical release, "12 Rounds," as well as our direct-to-video projects.
Regarding the direct- to-video initiatives, "Behind Enemy Lines: Columbia," was released in late January and "The Marine, II," is scheduled for release early next year. Our overall profit contribution margin increased to 45% from 42% in the prior year, despite an approximately $2 million impact from changes in currency exchange rates.
The improved margins derive from the recognition of a book publishing advance described earlier and incremental profits from our failed entertainment business.
For the quarter, SG&A expenses increased 2% to $29.4 million, due mainly to an increase in legal and professional fees. Staff and marketing expenses were essentially flat on a year-over-year basis. Our SG&A expense for the quarter represented the lowest level since the fourth quarter of last year.
You should note that the $20 million reduction to our 2009 expense base will result in both lower SG&A expenses and lower direct expenses that are captured in our profit contribution. Net income declined to $13.6 million, compared to $21.5 million in the prior year quarter, reflecting increases in both non-operating expenses and a provision for taxes as well, as lower investment income.
It should be noted that other expense recorded below operating income in the quarter, included an $800,000 charge associated with the revaluation of certain warrants. The effective tax rate in the current quarter of 38% exceeded the 23% rate in the prior year quarter, which was reduced by the recognition of certain tax benefits.
Investment income declined with lower average investment balances and interest rates. Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. For the full year, revenue grew 8%, reflecting increases from across our business. Operating income increased 3% to $70.3 million and EBITDA increased 7% to $83.4 million.
These results reflect the growth in revenue, partially offset by increased SG&A cost. SG&A expenses increased 20% primarily due to increased staffing, legal, and professional fees, as well as marketing costs. As previously disclosed, the current year includes a $1.9 million charge for our film "See No Evil." Whereas, the prior year period included a $15.7 million asset impairment charge for "The Condemned."
Excluding these items, EBITDA was $85.3 million for the current period as compared to $93.5 million in the prior year period. Changes in foreign currency exchange rates did not have a material impact on revenue or profits for the current 12 month period.
Page 15 of the presentation contains our balance sheet, which remains strong. On December 31st, we held nearly $200 million in cash and investments, with virtually no debt.
Page 18 shows our free cash flow. For the full year, we generated approximately $10 million of free cash flow, compared to nearly $80 million in the prior year. This decline was driven by the timing of our feature film investment and by changes in working capital, including the timing of tax payments, as well as by increased operating costs.
In addition, capital expenditures increased due to our Media Center project. Looking ahead, we recognize that to manage the company prudently, we need to improve our cash returns. As we indicated, we have targeted annual expense savings of at least $20 million in 2009.
In addition, we have delayed our Media Center project as part of our broader effort to contain and reduce our capital expenditures. Through increased efficiencies, profitable product extensions, and careful management of our growth, we intend to deliver greater value to you, our shareholders.
That concludes this portion of our call and I will now turn it back to Michael.
Michael Weitz
Thank you, George. [Katie], we’re ready now, please open the line for questions.
Question-and-Answer Session
Operator
(Operator instructions). We’ll take our first question from the site of Richard Ingrassia – Roth Capital Partners
Richard Ingrassia – Roth Capital Partners
I think this may be a question for Linda, but for anyone who wants it. Obviously, I understand the reason for delaying the capital investment in the Media Center project, but what impact does that have, if any, on opportunities for revenue growth beyond 2009?
Linda McMahon
Well, what we have done is to carefully manage the expansion of our media facility, so that it doesn’t have any impact on the product that we’re delivering and getting to the marketplace. We’ve leased some outside space. We’ve expanded. We utilized and outsourced some of our production so that we’re not taking away from the quality of our productions. It’s harder. It’s more difficult, but I think we’re managing it well for the time being.
Richard Ingrassia – Roth Capital & Partners
Okay and then two more if I can. The WGN deal with the "Superstars" programming was, I think, a pretty impressive expansion of the franchise. It brought to mind the total exploitation opportunity, for lack of a better word. I mean, maybe on a scale of one to ten or if you don’t want to use a number just maybe give us some perspective. Where do you think you are in terms of fully exploiting the WWE assets on domestic TV?
Linda McMahon
Well, we now have Monday night covered, Tuesday night covered, with WGN we'll have Thursday night covered, with My Network TV we'll have Friday night covered, and we produce our Pay-Per-Views as being about 12 to 14 a year on Sunday nights, so we're really hitting really good nights of television.
I think that there is constant opportunity for WWE, with always on our website. We also have our 24/7 classics channel and our fan base, WWE Universe seems to have an insatiable appetite for our product. So as long as we have demand and we are continuing to produce quality products, which we are, we'll keep filling that pipeline.
Richard Ingrassia – Roth Capital Partners
Five days a week we could count on at least two more.
Linda McMahon
Well, they're open.
Richard Ingrassia – Roth Capital Partners
And then one last question, I guess for Donna, can you say a little about the status of the DVD distribution relationship with Genius?
Donna Goldsmith
Sure, as you probably know, Genius had some hard times last year. However, having said that, GNTR, which is an affiliate of Quadrant Management, has taken a 60% ownership of Genius, and that company is [chess] rich and they are looking at reorganizing Genius. They're looking at better ways to do business, constantly looking at, of course the top line and bottom line, and at the same time, our people that are working on the WW business continue to work on that business.
So our distribution remains strong at our key retailers, Wal-Mart, K-Mart, Target, and so on. So we're actually very happy with the changes there, and it has not made a difference in what we see at our business at retail.
Richard Ingrassia – Roth Capital Partners
Okay, thanks a lot.
Operator
Our next question will come from the site of Arvind Bhatia – Sterne Agee & Leach.
Arvind Bhatia – Sterne Agee & Leach
First question is on the $20 million savings, George, can you break that down a little bit more in terms of how much of that will be SG&A and profit contribution, improvement, which category will see the most benefit?
And then my second question is, I think you said video game revenues were flattish. I know that THQ had reported the World Wrestling game was trending, was down versus last year, so is there just a lag there that we're be looking at?
George Barrios
Well, I'll take the second question first. Our total video game revenues were flat. I believe THQ, the number you were citing, BBTHQ was specifically for "SmackDown vs. Raw 08". There are other legacy titles that we have as well, so the mix of both for us were flat. They talked specifically about that one title, I believe.
On the $20 million, I'll give you a little bit more context and then drill down specifically into your questions. The company in total, after its review of its operations, actually found about $30 plus million worth of cost reduction initiatives that it executed on, and they are completed, so we'll see the benefit of those throughout the year.
The rest of the [Claw] stack had some inflationary increase. For example, merit increases, being one example, that nets out to a net cash expense reduction of about $20 million, so just to give you that context on the $20 million.
As I mentioned during the prepared remarks, that $20 million will cut across our SG&A and the operating costs that show up in profit contribution.
In '08 we had about $440 million of total expenses, so SG&A made up about 30% of that. I would say that of the $20 million, SG&A will get roughly a pro rata percentage of those cuts against it. The one nuance that I'll add to that is that in the first quarter as we've announced, we'll have a $2.5 million, $2.7 million roughly restructuring charge in the quarter that I'm not including in those numbers.
Arvind Bhatia – Sterne Agee & Leach
Okay, and then on the Pay-Per-View trends, is there any sign that maybe there's any kind of uptick or are we bottoming out, anything like that you can share with us?
George Barrios
Well, I'll tell you at this point, I mean I think Linda mentioned it in her remarks and I think I did as well, the kind of trying to predict the future, I 'm not sure is a winner's game. So we're going to try to keep focusing on those things that we can control, and that is getting really interesting story lines on a show, which if you've been watching them, I think you'd see that, getting new product extensions like GN, and then managing the costs and the rest of our cash like delaying the Media Center.
So those are the things we can control. As far as getting into predicting when we've hit bottom in any particular business, I just think right now that's a fool's errand, so.
Arvind Bhatia – Sterne Agee & Leach
The last question is just a clarification on the, I believe it was $6.3 million advance payment, was that all margin, or is there any cost associated with it?
George Barrios
That was all margins.
Arvind Bhatia – Sterne Agee & Leach
Great, thank you, guys. Good luck.
Operator
We'll take our next question from the site of Jamie Clement – Sidoti & Company.
Jamie Clement – Sidoti & Company
George, a question and clarification just on the foreign currency, I think you said it was about $4 million of revenue that hit $2 million of profit, are you including the other expense increase or in fact was there more?
George Barrios
No, that was just in the profit contribution.
Jamie Clement – Sidoti & Company
Okay, so [only] and it was actually in excess of about $4 million, is that right?
George Barrios
That would be fair.
Jamie Clement – Sidoti & Company
Okay, with respect to capital spending in 2009, and I apologize if you gave this number and I missed it, but without significant Media Center spending, what is your budget looking like for 2009?
George Barrios
Well, as you know, we don't give guidance. What we've said in the past is that our run rate outside of the Media Center would be less than $10 million, so I'd continue with that. I think that number is
Jamie Clement – Sidoti & Company
Okay, that is very fair, and just with respect to the home video business, what in your opinion are the right numbers to look at? I remember last year, there were essentially no new titles in the third quarter, and you had a bunch in the fourth quarter. You have a slide in your presentation here, but if we want to think about apples, your DVD business, apples-to-apples, what are the right numbers to consider there?
George Barrios
Well, let me give you, kind of two parts to that, because it's the way I was thinking about it. The first part outside of the real significant decline you saw, generally macroeconomic conditions in the fourth quarter, it would have been looking at the third and fourth quarter together for home video, so if you looked at those, you'd see $26 million in revenue in '08 versus $25.5 million in revenue in '07 for those two quarters, which then normalizes the number of releases.
Still that performance, even though it's a 2% increase in fairly tough economic times, was significantly below where we were in the first half of the year. So you definitely see that the trend lines down.
And I think if you look at the fourth quarter, walking normalized for the number of releases, you see that trend line steepening down, so even though we have been resilient when compared to other DVD producers in the past, and our numbers have been ticking up while the industry has been ticking down, I'd say the trend lines certainly would accelerate in the fourth quarter.
Going back to my earlier comment about predicting what that means in the future, I'm going to stay away from that, but that's the way I'm looking at it.
Jamie Clement – Sidoti & Company
Yes, and George, the reason I asked the question, and I will check, I will ask a question, I don't know if Donna or Linda wants to handle this, but obviously some DVD data out there for the fourth quarter from some other companies was catastrophic and certainly your numbers are not.
Donna Goldsmith
Yes, and that's what I was going to add as well, that overall for 2008, we continued to be up and the industry is now down about 8 to 10%. So we continue to buck that trend and happened, but as George said, the fourth quarter was a tough one, and when you're looking at retail, the foot traffic is down, the dollars that are out there to spend are down, so we definitely have concerns like anyone else.
Having said that, we're putting together the best titles we can. We're looking at our schedule, and we'll make the right decisions for our business.
Jamie Clement – Sidoti & Company
Okay and WrestleMania is a 2Q event, yes?
George Barrios
That's right.
Jamie Clement – Sidoti & Company
Okay, great thank you.
Operator
We'll take our next question from the site of Alan Gould – Natixis Bleichroeder.
Alan Gould – Natixis Bleichroeder
I've got a few questions, the first for George. Just to clarify on this 2009 CapEx, there is zero Media Center spending in '09?
George Barrios
That's right, but Alan, I'll give you the full context of that. What we've said is we're going to delay the spending until the economic conditions brighten. At this point, we're expecting 2009 to remain choppy from a macro economic perspective, but we're essentially saying we're delaying it until the economic conditions brighten somewhat.
Alan Gould – Natixis Bleichroeder
Okay, Linda, can you just, two things, the TV ratings, I’m trying to break out the economic impact versus the core changes in the business. TV ratings are down a bit, now I know SmackDown switched to myNetworkTV and it's been the huge hit of myNetworkTV, is the reason that's down 25% in the quarter, just myNetworkTV versus CW? Just I'm trying to get this sense of the popularity of the franchise.
Linda McMahon
I think the popularity of the franchise is absolutely continuing to hold. We have seen some softening in the ratings, and that happens over time, with our business. We'll have some periods are a little softer, some periods were up. I think now what you will see if you, of course that's forward-looking a little bit, but our ratings now are ticking up.
MyNetworkTV, I think was a bit of a factor; however, we have increased week over week over week with myNetworkTV and are the number one show on their network, and continue to be to that male demographic the number one show on broadcast often week after week. So I think our trends and our rating numbers are holding very well and the popularity of the franchise is clearly there.
Alan Gould – Natixis Bleichroeder
Okay and then closing the international offices or the changes there, it seems like a bit of a change of strategy, is that basically due to the economic global conditions?
Donna Goldsmith
Yes it's definitely due to the economy and to some strategic decisions to do things more centralized and we have our office in the United Kingdom now, that is an office that has staff for all areas of the business from PR to marketing to consumer products and we've made a conscientious decision to have our people there manage the globe.
And I think we have some good people on the ground in satellite offices as well, we still have an office in China, we have a few people in Australia, we have someone on the ground in Mexico, in Mexico City actually, so we'll make the decisions that are right for the business. And I think again forward-looking; we'll be constantly looking at that as we go into 2009 and beyond.
George Barrios
And Alan, to amplify Donnas' point, our total investment internationally hasn’t changed, either people or dollars, so we've made some tactical changes on which resources, how we allocate them, but net-net we're invested the same amount.
Alan Gould – Natixis Bleichroeder
And one last question, "Behind Enemy Lines," you said has already come out. Can you give us some idea of the economics of that on that title? What it costs and how many units were shipped for example, or how many units sold through?
George Barrios
Well the sell through data has been about – we haven’t gotten full sell through data yet, what we have seen from our partner is that the movie we feel is performing well, the cost was shared with Fox and the total production cost was in the $4 to $5 million range.
Alan Gould – Natixis Bleichroeder
Can you give us some sense of what the initial, is it 150,000 units, any idea of what the initial sell through is?
George Barrios
It's in that ballpark.
Donna Goldsmith
The only thing I'll add on "Behind Enemy Lines" is that we still have got international distribution – that has not yet happened. So that will, we will see additional revenue there with our partner.
Operator
Your next question from the site of Ian Corydon – B. Riley & Company
Ian Corydon – B. Riley & Company
Clarification on the SG&A the $20 million that's coming out, did you say George that 30% of that is going to come out on the SG&A line, 30% of the $20 million total?
George Barrios
Again, we don’t give that kind of guidance, what I said is if you wanted to get a ballpark proxy of how the costs would be spent between SG&A and our operating costs, the pro rata shared SG&A, which was roughly 30% in 2008 is a proxy for that. But again, we're not giving specific guidance on individual line items on the P&L.
Ian Corydon – B. Riley & Company
Got it and with respect to the book publishing deal, could you just talk about any future revenues or expenses that are going to come with that?
George Barrios
Well it's the end of the deal so, it was a six year deal that needed in 2008 and the $6 million that we took in the quarter, was the unearned advances from that deal that had accumulated over the six year period. So around that deal, we've left some deferred revenue on the balance sheet for the tail on the products that were already produced, but we're not anticipating that those are big numbers.
Ian Corydon – B. Riley & Company
And then last question on live and televised events, what drove the margin improvement there?
George Barrios
I think we talked a little bit about it before, some of it was the mix of events, in the quarter so the number of bought deals year-over-year that was the driver of it.
Operator
(Operator Instructions) We'll take our next question from the site of Marla Backer – Research Associates
Marla Backer – Research Associates
I want to switch gears here because we haven’t spent much time on it, but what about toys, how do you see toys going forward in '09 given that it will be a transitional year at toy sale lat week, it seemed that Jax was not planning anything new not surprisingly for the line. And are you already working pretty well with Mattel for when they launch?
Donna Goldsmith
I can give you some anecdotal information relevant for that relative to Jax, as we look at 2009 there is still product on the shelf, we do still have a very good business at all of our major retailers. Putting the economy aside, we still have a good amass of merchandising space, domestically and internationally, as far as toys go.
Relative to Mattel, absolutely we are already starting to talk about everything we will do for that launch in 2010. We are talking about domestic and international plans, we're talking about what the product will look like, what the packaging, everything that you can imagine from advertising promotion and the actual product is in discussions now for that 2010 launch.
Marla Backer – Research Associates
And are you expecting that Mattel will be able to really expand the brand internationally beyond what Jax was able to do?
Donna Goldsmith
The thing that I can say about Mattel is that Mattel has distribution on the ground all over the world and that's a little bit different than Jax, who subcontracted out some of the distribution. So we are – we hope to see some great things from Mattel in 2010 and beyond.
Marla Backer – Research Associates
Okay thank you, then two other questions on the Pay-Per-View buys; this seems a recent weakness in the quarter, I think as you said in your comments really seems to reflect the economic pullback. In the past when you've had some problems with Pay-Per-View and you've responded by strategically reducing the number of titles, is that something you are considering now or are there any other changes to tweak the Pay-Per-View by in the works?
George Barrios
We're always evaluating our strategy across all our businesses, including Pay-Per-View, but right now that's not in the works.
Marla Backer – Research Associates
Okay and finally on the home video, our channel checks have shown that there's been some pretty aggressive promotional activity on the brand at stores such as Best Buy, and it looks like it's resulting in pretty good sell through. Are you hearing of similar kind of promotional activity across other retailing platforms?
Donna Goldsmith
Yes, what I can tell you definitely as far as retail goes, Marla, is that we have stellar relationships with all of our key retailers. And the thing about that, especially in a down economy, is that you want to have those relationships so that the buyers want to buy your product and obviously the way the buyers buy the product is if the stuff is flying off the shelf.
So even though there are less consumers in the stores, we are doing everything we humanly can with the Best Buys with the Targets with the Wal-Marts, so that our product does come off of the shelf, it's purchased and that is a promotion for WrestleMania, a Legends promotion in conjunction with Legends title. We do what makes sense so that we can achieve revenue on our side, but of course also for our retail partner.
Operator
Our next question is from Bobby Melnick- Terrier Partners
Bobby Melnick – Terrier Partners
I have a question for the CFO I wondered if you would please address the capital structure on the dividend, yes sure you do close for the year with about $209 million in cash and equivalents but what you don’t really say is it that is down from – it's not clear whether it's $266 million or $286 million, but somewhere between $65 million and $90 million in cash went out the door last year and it seems to me that a good portion of that is represented in the fact that your dividend is 180% of your earnings, specifically, you pay $1.11 in dividends and in the last two years you've earned $0.72 and $0.62
So I'm puzzled as to why it is that you retained $200 million in cash and equivalents earning, something between 2.5% per pre-tax which I'm hoping is substantially below your hurdle rates, and wondering if you could explain to me why this is the optimal capital structure for the company and the optimal dividend for the company which strikes me as quite gimmicky and the shareholders have seen through this.
I mean, obviously, with the current yield at 15% in the market place, not only do investors recognize that the dividend is not sustainable in perpetuity, but there's a significant negative arbitrage if you're earning 2.5% pre-tax on your cash and paying out 15% after tax on your equity. So I wondered if you could give us some thoughtful analysis as to why this is optimal, thanks.
George Barrios
To answer your question there was a lot of statements in there, I think some questions. Our view is our focus is on growing the cash long term for the company. That's the way we think we create value for the shareholders and that will continue to be our focus and will guide our decisions, both in our current businesses, new product extensions and the way that we manage the operations. Managing our costs, the way we manage our cash, delaying the Media Center is an example of that in what's a tough economic time.
The second part is how do we turn that value then to the shareholder and it's either through reinvestment and growing the company and the appreciation in the stock, and or through dividend payments? And today our dividend policy reflects the vehicle that we've chosen to return value to shareholders and as you mentioned, that was about $80 million in dividend payments in 2008.
Bobby Melnick – Terrier Partners
I understand that's what the current situation is; I'm asking you to substantiate that because it doesn’t make any sense.
George Barrios
Well it doesn't make sense to you, but I just gave you what our rationale is, our rationale is to manage the company in such a way that over the long-term, we're going to continue to increase the cash flow of the company and the next level of decisions we have to make is how much do we need to invest in the business and how much to return to shareholders. And our dividend policy currently reflects our best judgment on how to do that.
Michael Weitz
Thanks everyone, we appreciate you listening to the call today. If you have any questions, please do not hesitate to contact me, Michael Weitz at 203-352-8642 thank you.
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seekingalpha.com
Q4 2008 Earnings Call
February 24, 2009 11:00 am ET
Executives
Michael Weitz – Vice President, Investor Relations and Financial Planning
Linda McMahon – Chief Executive Officer
George Barrios – Chief Financial Officer
Donna Goldsmith – Chief Operating Officer
Analysts
Richard Ingrassia – Roth Capital Partners
Arvind Bhatia – Sterne Agee & Leach
Jamie Clement – Sidoti & Company
Alan Gould – Natixis Bleichroeder
Ian Corydon – B. Riley & Company
Marla Backer – Research Associates
Bobby Melnick – Terrier Partners
Presentation
Operator
Good day. Welcome to today's World Wresting Entertainment fourth quarter 2008 earnings call. (Operator instructions) It is now my pleasure to turn the program over to Mr. Michael Weitz, Vice President of Investor Relations for World Wrestling Entertainment.
Michael Weitz
Thank you [Katie] and good morning everyone. Welcome to World Wrestling Entertainment's 2008 Fourth Quarter and Full Year Earnings Conference Call. Joining me for today's discussion, are Linda McMahon, our CEO, Donna Goldsmith, our COO, and George Barrios, our CFO.
We issued our earnings release earlier this morning and will be referencing the presentation as part of our discussion. These are available on our corporate website at corporate.wwe.com.
We will be making 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 in our filings with the SEC. Reconciliations for 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 fourth quarter and we'll follow this review with a Q&A session. At this time, I would like to turn the call over to Linda.
Linda McMahon
Thanks, Michael. Good morning everyone and thank you for joining us today. Before we officially begin, I would like to welcome Donna Goldsmith, our COO. Donna has been with the company a little over 8 years at this point and just doing a really incredible job as our new COO. So if you haven't had an opportunity to speak with her or to meet her, please do take advantage of that.
Now let's talk a little bit about WWE. Over the past year, we've seen a difficult economic environment, which deteriorated in the latter half of the year and became especially harsh in the fourth quarter. Despite these challenges, our results showed resilience through these tough conditions, generating revenue growth for the first three quarters and for the full year of 2008.
We recognize, however, that WWE may face more challenging trends in the near-term and circumstances require us to operate in a smarter, more efficient way. As a result, we've intensified our efforts to improve the company's operating efficiency, targeting and moving ahead with a $20 million reduction to our expense base.
In January, we announced a 10% reduction in staff, which was part of our effort to fulfill this commitment. This reduction in staff came from across all areas of WWE's operations and is expected to generate annual savings of approximately $8 million in compensation and benefit costs.
In addition, our review process identified several other broad initiatives to improve efficiencies, including the restructuring of our marketing efforts, vendor renegotiations, and reductions in discretionary spending.
As part of the reorganization, we integrated our online and print advertising sales and streamlined our international operations. We've reduced our presence in Canada and Australia, closed our office in Brazil, and centralized our overall international management team.
Additionally, while understanding the importance of expanding and upgrading our Media Center, we have decided to delay spending on this initiative, until key economic conditions become more favorable. As we address our cost structure, however, I do not want you to lose sight of our achievement in developing our long-term growth opportunities.
During the fourth quarter and throughout the year, we made significant progress advancing our mission, especially our international strategy. Specifically, we continued to strengthen our television platform, both domestically and internationally. These efforts help our brands further cultivate loyal audiences around the world.
During the fourth, quarter we announced a new television distribution agreement with WGN America. Under this agreement, we will produce a new action-packed television program, WWE Superstars. The hour-long weekly show will debut this April.
Through this deal, we can now deliver 21 hours of programming per week in the U.S., including six hours of original, first-run broadcasts. Similarly, in January, we announced a new agreement with Eurosport. Under this agreement we will produce two original shows, featuring highlights of our recent programs and historical footage of our WWE legends.
Through this partnership, we can now reach more than 100 million homes across Europe. These new agreements complement our achievements from earlier in the year, which extended our television distribution in India and Japan and launched new distribution in Mexico, China, and Eastern Europe.
Our recent agreements with Televisa and TV Azteca greatly improved distribution of our television programs throughout Mexico. These agreements made our programs available to over 20 million TV homes in that country.
Since their debut, both our RAW and SmackDown programs have attracted audiences which are now approaching 2 million TV viewers. As exemplified by our experience in Spain this year, strengthening our television platform not only builds an audience for our TV programs, but a consumer base for our other products.
Revenue grew 170% in that country this year and led our overall international revenue growth of 14% for the year. With regard to the fourth quarter, dramatic changes in foreign currency exchange rates made it more difficult to discern the underlying health of our international live events and television businesses.
However, it is important to note that our European tour in November attracted over a 171,000 fans and yielded the highest paid attendance for any single international tour in the history of WWE. In addition to the impact of exchange rates, we believe several other factors also hindered our overall fourth quarter results.
These included the downdraft in the economy and declines in consumer spending. After stabilizing our Pay-Per-View business in the first half of the year, Pay-Per-View buys declined 11% in the second half of the year, including an 11% decline in the fourth quarter.
Similarly, after generating in excess of 24% growth over the previous two years, growth in consumer products dropped to 15% reflecting lower sales of our licensed toys, products and apparel. Looking ahead, our 2009 outlook is clouded by global recession and assumes adverse rates of exchange compared to 2008, as well as further declines in consumer spending.
In this context, we will continue to be vigilant in finding new ways to improve efficiency. Bottom line, our unique content continues to hold an unrivaled, strong competitive position. My long experience in this business gives me confidence that we will manage through these diverse conditions and emerge in a stronger position than ever before.
As we manage our business going forward, we will continue to focus on maintaining the high quality of our creative content and continuing to expand our businesses profitably, while protecting our cash flow. By staying focused on this mission, we will be well positioned for continued and long-term success.
Now I'd like to turn the call over to George Barrios, our CFO, who will give you more in-depth perspective on our quarter.
George Barrios
Thank you, Lind. For the quarter, our profit contribution slightly exceeded our prior year results, despite a 5% decline in revenue. Increased profits from our licensing, television, and films entertainment businesses more than offset the decline in other areas of our operation.
Revenue and profits reflected a $6.3 million benefit from the recognition of an advance relating to a multi-year contract with our book publisher. Offsetting this benefit, however, several factors dampened our revenue and profit performance, including the impact of foreign exchange.
We estimate the changes in foreign currency exchange rates reduced fourth quarter revenue and profits by $4 million and $2 million respectively. Additionally, we believe our fourth quarter results were also influenced by the economic climate, affecting to some extent our live events, Pay-Per-View and consumer products businesses.
Operating income was $23.3 million, compared to $24.7 million in the prior year, reflecting an increase in depreciation, primarily associated with our investment in high definition broadcasting equipment. For a more detailed review of our performance in the quarter, let's turn to page five of our presentation, which lists the revenue and profit contribution by business unit as compared to the prior year.
Starting with our live events, including merchandise sales at these events, revenue declined $6.5 million or 18% from the prior year, led by lower revenue from our international events. Our international performance reflected a higher proportion of buy-out deals in the current quarter.
Five out of the 26 international events in the prior period were structured as buy-out deals with guaranteed fixed revenues, as compared to one buy-out deal in the prior year quarter. In addition, the average ticket price for our other international events for which we sold tickets, declined 16% to $70.09, largely due to the effect of foreign exchange rates.
These factors more than offset an approximate 5% increase in attendance at our international events to 8,300. The performance of our North American events also contributed to the overall decline in live event revenue. The average ticket prices at our North American events fell 6 % to $38.18 in the quarter, while the average attendance at these events declined 3% to 6,900 fans on a year-over-year basis.
Turning to our Pay-Per-View business, revenue decreased 20% or $4 million from the fourth quarter of last year. Revenue reflected an overall 11% decline in buys for the four comparable events that were produced in both the current and prior year.
A decline in Pay-Per-View revenue from international sources accounted for approximately one-third of the year-over-year drop in revenue. Although international buys comprised a larger share of total current period buys, 40% compared to 37% in the prior year quarter, revenue per buy declined in part due to the impact of foreign exchange.
Revenues from the distribution of our television programming increased by 16% or $3.8 million, primarily due to increased domestic and international rights fees. These increases derived from the expansion of programming times due to certain specials, contractual increases in our international licensing, and the impact of a new agreement to broadcast SmackDown on myNetworkTV.
In our consumer product segment, our licensing revenue increased by 56% or $5.3 million over the prior year quarter. The increase primarily reflected the recognition of an advance relating to a multi-year contract with our book publisher. Excluding this revenue, licensing declined 11% or $1 million, led by lower domestic sales of toy products and apparel.
Revenue related to our video games was essentially flat on a year-over-year basis. Our home video revenue declined 24% or $4.8 million, reflecting the timing of our release schedule in the prior year. The current quarter has seven new title releases, compared to 12 in the prior year quarter.
As a result, DVD shipments fell 35% to approximately 885,000 units, led by declines in the U.S., U.K., and Australia. It is important to note, however, that the average units shipped per new release declined only 8%, while the units shipped for other current year releases and catalog titles declined 14%.
In our magazine publishing business, we experienced lower newsstand stales and advertising revenue, as well as fewer subscriptions per issue. Profits declined on a year-over-year basis as the magazine also incurred increased paper and editorial costs.
In our digital media segment, revenue declined 8% to $10.9 million from the prior year, reflecting lower sales of online merchandise and internet advertising. Revenue from e-commerce declined 7%, matching a comparable decrease in average revenue per order to about $58.
The number of online merchandise orders remained essentially flat at 120,000, compared to the prior year. Notably, the number of orders did not decline with the drop in internet traffic, which fell 18% as measured by average monthly unique visitors for the respective quarterly periods.
The current quarter was also characterized by lower sales of online advertising, partially reflecting the ongoing transition of our internet ad sales organization. However, we are seeing increased activity in our ad sales pipeline.
During the quarter, WW Studios recognized revenue of $5 million and profit of $2.6 million associated with our portfolio of films. The results compare favorably to the prior year quarter. As of year-end 2008, we had approximately $31.7 million in capitalized sales production costs on our balance sheet, primarily associated with our upcoming theatrical release, "12 Rounds," as well as our direct-to-video projects.
Regarding the direct- to-video initiatives, "Behind Enemy Lines: Columbia," was released in late January and "The Marine, II," is scheduled for release early next year. Our overall profit contribution margin increased to 45% from 42% in the prior year, despite an approximately $2 million impact from changes in currency exchange rates.
The improved margins derive from the recognition of a book publishing advance described earlier and incremental profits from our failed entertainment business.
For the quarter, SG&A expenses increased 2% to $29.4 million, due mainly to an increase in legal and professional fees. Staff and marketing expenses were essentially flat on a year-over-year basis. Our SG&A expense for the quarter represented the lowest level since the fourth quarter of last year.
You should note that the $20 million reduction to our 2009 expense base will result in both lower SG&A expenses and lower direct expenses that are captured in our profit contribution. Net income declined to $13.6 million, compared to $21.5 million in the prior year quarter, reflecting increases in both non-operating expenses and a provision for taxes as well, as lower investment income.
It should be noted that other expense recorded below operating income in the quarter, included an $800,000 charge associated with the revaluation of certain warrants. The effective tax rate in the current quarter of 38% exceeded the 23% rate in the prior year quarter, which was reduced by the recognition of certain tax benefits.
Investment income declined with lower average investment balances and interest rates. Page 14 of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. For the full year, revenue grew 8%, reflecting increases from across our business. Operating income increased 3% to $70.3 million and EBITDA increased 7% to $83.4 million.
These results reflect the growth in revenue, partially offset by increased SG&A cost. SG&A expenses increased 20% primarily due to increased staffing, legal, and professional fees, as well as marketing costs. As previously disclosed, the current year includes a $1.9 million charge for our film "See No Evil." Whereas, the prior year period included a $15.7 million asset impairment charge for "The Condemned."
Excluding these items, EBITDA was $85.3 million for the current period as compared to $93.5 million in the prior year period. Changes in foreign currency exchange rates did not have a material impact on revenue or profits for the current 12 month period.
Page 15 of the presentation contains our balance sheet, which remains strong. On December 31st, we held nearly $200 million in cash and investments, with virtually no debt.
Page 18 shows our free cash flow. For the full year, we generated approximately $10 million of free cash flow, compared to nearly $80 million in the prior year. This decline was driven by the timing of our feature film investment and by changes in working capital, including the timing of tax payments, as well as by increased operating costs.
In addition, capital expenditures increased due to our Media Center project. Looking ahead, we recognize that to manage the company prudently, we need to improve our cash returns. As we indicated, we have targeted annual expense savings of at least $20 million in 2009.
In addition, we have delayed our Media Center project as part of our broader effort to contain and reduce our capital expenditures. Through increased efficiencies, profitable product extensions, and careful management of our growth, we intend to deliver greater value to you, our shareholders.
That concludes this portion of our call and I will now turn it back to Michael.
Michael Weitz
Thank you, George. [Katie], we’re ready now, please open the line for questions.
Question-and-Answer Session
Operator
(Operator instructions). We’ll take our first question from the site of Richard Ingrassia – Roth Capital Partners
Richard Ingrassia – Roth Capital Partners
I think this may be a question for Linda, but for anyone who wants it. Obviously, I understand the reason for delaying the capital investment in the Media Center project, but what impact does that have, if any, on opportunities for revenue growth beyond 2009?
Linda McMahon
Well, what we have done is to carefully manage the expansion of our media facility, so that it doesn’t have any impact on the product that we’re delivering and getting to the marketplace. We’ve leased some outside space. We’ve expanded. We utilized and outsourced some of our production so that we’re not taking away from the quality of our productions. It’s harder. It’s more difficult, but I think we’re managing it well for the time being.
Richard Ingrassia – Roth Capital & Partners
Okay and then two more if I can. The WGN deal with the "Superstars" programming was, I think, a pretty impressive expansion of the franchise. It brought to mind the total exploitation opportunity, for lack of a better word. I mean, maybe on a scale of one to ten or if you don’t want to use a number just maybe give us some perspective. Where do you think you are in terms of fully exploiting the WWE assets on domestic TV?
Linda McMahon
Well, we now have Monday night covered, Tuesday night covered, with WGN we'll have Thursday night covered, with My Network TV we'll have Friday night covered, and we produce our Pay-Per-Views as being about 12 to 14 a year on Sunday nights, so we're really hitting really good nights of television.
I think that there is constant opportunity for WWE, with always on our website. We also have our 24/7 classics channel and our fan base, WWE Universe seems to have an insatiable appetite for our product. So as long as we have demand and we are continuing to produce quality products, which we are, we'll keep filling that pipeline.
Richard Ingrassia – Roth Capital Partners
Five days a week we could count on at least two more.
Linda McMahon
Well, they're open.
Richard Ingrassia – Roth Capital Partners
And then one last question, I guess for Donna, can you say a little about the status of the DVD distribution relationship with Genius?
Donna Goldsmith
Sure, as you probably know, Genius had some hard times last year. However, having said that, GNTR, which is an affiliate of Quadrant Management, has taken a 60% ownership of Genius, and that company is [chess] rich and they are looking at reorganizing Genius. They're looking at better ways to do business, constantly looking at, of course the top line and bottom line, and at the same time, our people that are working on the WW business continue to work on that business.
So our distribution remains strong at our key retailers, Wal-Mart, K-Mart, Target, and so on. So we're actually very happy with the changes there, and it has not made a difference in what we see at our business at retail.
Richard Ingrassia – Roth Capital Partners
Okay, thanks a lot.
Operator
Our next question will come from the site of Arvind Bhatia – Sterne Agee & Leach.
Arvind Bhatia – Sterne Agee & Leach
First question is on the $20 million savings, George, can you break that down a little bit more in terms of how much of that will be SG&A and profit contribution, improvement, which category will see the most benefit?
And then my second question is, I think you said video game revenues were flattish. I know that THQ had reported the World Wrestling game was trending, was down versus last year, so is there just a lag there that we're be looking at?
George Barrios
Well, I'll take the second question first. Our total video game revenues were flat. I believe THQ, the number you were citing, BBTHQ was specifically for "SmackDown vs. Raw 08". There are other legacy titles that we have as well, so the mix of both for us were flat. They talked specifically about that one title, I believe.
On the $20 million, I'll give you a little bit more context and then drill down specifically into your questions. The company in total, after its review of its operations, actually found about $30 plus million worth of cost reduction initiatives that it executed on, and they are completed, so we'll see the benefit of those throughout the year.
The rest of the [Claw] stack had some inflationary increase. For example, merit increases, being one example, that nets out to a net cash expense reduction of about $20 million, so just to give you that context on the $20 million.
As I mentioned during the prepared remarks, that $20 million will cut across our SG&A and the operating costs that show up in profit contribution.
In '08 we had about $440 million of total expenses, so SG&A made up about 30% of that. I would say that of the $20 million, SG&A will get roughly a pro rata percentage of those cuts against it. The one nuance that I'll add to that is that in the first quarter as we've announced, we'll have a $2.5 million, $2.7 million roughly restructuring charge in the quarter that I'm not including in those numbers.
Arvind Bhatia – Sterne Agee & Leach
Okay, and then on the Pay-Per-View trends, is there any sign that maybe there's any kind of uptick or are we bottoming out, anything like that you can share with us?
George Barrios
Well, I'll tell you at this point, I mean I think Linda mentioned it in her remarks and I think I did as well, the kind of trying to predict the future, I 'm not sure is a winner's game. So we're going to try to keep focusing on those things that we can control, and that is getting really interesting story lines on a show, which if you've been watching them, I think you'd see that, getting new product extensions like GN, and then managing the costs and the rest of our cash like delaying the Media Center.
So those are the things we can control. As far as getting into predicting when we've hit bottom in any particular business, I just think right now that's a fool's errand, so.
Arvind Bhatia – Sterne Agee & Leach
The last question is just a clarification on the, I believe it was $6.3 million advance payment, was that all margin, or is there any cost associated with it?
George Barrios
That was all margins.
Arvind Bhatia – Sterne Agee & Leach
Great, thank you, guys. Good luck.
Operator
We'll take our next question from the site of Jamie Clement – Sidoti & Company.
Jamie Clement – Sidoti & Company
George, a question and clarification just on the foreign currency, I think you said it was about $4 million of revenue that hit $2 million of profit, are you including the other expense increase or in fact was there more?
George Barrios
No, that was just in the profit contribution.
Jamie Clement – Sidoti & Company
Okay, so [only] and it was actually in excess of about $4 million, is that right?
George Barrios
That would be fair.
Jamie Clement – Sidoti & Company
Okay, with respect to capital spending in 2009, and I apologize if you gave this number and I missed it, but without significant Media Center spending, what is your budget looking like for 2009?
George Barrios
Well, as you know, we don't give guidance. What we've said in the past is that our run rate outside of the Media Center would be less than $10 million, so I'd continue with that. I think that number is
Jamie Clement – Sidoti & Company
Okay, that is very fair, and just with respect to the home video business, what in your opinion are the right numbers to look at? I remember last year, there were essentially no new titles in the third quarter, and you had a bunch in the fourth quarter. You have a slide in your presentation here, but if we want to think about apples, your DVD business, apples-to-apples, what are the right numbers to consider there?
George Barrios
Well, let me give you, kind of two parts to that, because it's the way I was thinking about it. The first part outside of the real significant decline you saw, generally macroeconomic conditions in the fourth quarter, it would have been looking at the third and fourth quarter together for home video, so if you looked at those, you'd see $26 million in revenue in '08 versus $25.5 million in revenue in '07 for those two quarters, which then normalizes the number of releases.
Still that performance, even though it's a 2% increase in fairly tough economic times, was significantly below where we were in the first half of the year. So you definitely see that the trend lines down.
And I think if you look at the fourth quarter, walking normalized for the number of releases, you see that trend line steepening down, so even though we have been resilient when compared to other DVD producers in the past, and our numbers have been ticking up while the industry has been ticking down, I'd say the trend lines certainly would accelerate in the fourth quarter.
Going back to my earlier comment about predicting what that means in the future, I'm going to stay away from that, but that's the way I'm looking at it.
Jamie Clement – Sidoti & Company
Yes, and George, the reason I asked the question, and I will check, I will ask a question, I don't know if Donna or Linda wants to handle this, but obviously some DVD data out there for the fourth quarter from some other companies was catastrophic and certainly your numbers are not.
Donna Goldsmith
Yes, and that's what I was going to add as well, that overall for 2008, we continued to be up and the industry is now down about 8 to 10%. So we continue to buck that trend and happened, but as George said, the fourth quarter was a tough one, and when you're looking at retail, the foot traffic is down, the dollars that are out there to spend are down, so we definitely have concerns like anyone else.
Having said that, we're putting together the best titles we can. We're looking at our schedule, and we'll make the right decisions for our business.
Jamie Clement – Sidoti & Company
Okay and WrestleMania is a 2Q event, yes?
George Barrios
That's right.
Jamie Clement – Sidoti & Company
Okay, great thank you.
Operator
We'll take our next question from the site of Alan Gould – Natixis Bleichroeder.
Alan Gould – Natixis Bleichroeder
I've got a few questions, the first for George. Just to clarify on this 2009 CapEx, there is zero Media Center spending in '09?
George Barrios
That's right, but Alan, I'll give you the full context of that. What we've said is we're going to delay the spending until the economic conditions brighten. At this point, we're expecting 2009 to remain choppy from a macro economic perspective, but we're essentially saying we're delaying it until the economic conditions brighten somewhat.
Alan Gould – Natixis Bleichroeder
Okay, Linda, can you just, two things, the TV ratings, I’m trying to break out the economic impact versus the core changes in the business. TV ratings are down a bit, now I know SmackDown switched to myNetworkTV and it's been the huge hit of myNetworkTV, is the reason that's down 25% in the quarter, just myNetworkTV versus CW? Just I'm trying to get this sense of the popularity of the franchise.
Linda McMahon
I think the popularity of the franchise is absolutely continuing to hold. We have seen some softening in the ratings, and that happens over time, with our business. We'll have some periods are a little softer, some periods were up. I think now what you will see if you, of course that's forward-looking a little bit, but our ratings now are ticking up.
MyNetworkTV, I think was a bit of a factor; however, we have increased week over week over week with myNetworkTV and are the number one show on their network, and continue to be to that male demographic the number one show on broadcast often week after week. So I think our trends and our rating numbers are holding very well and the popularity of the franchise is clearly there.
Alan Gould – Natixis Bleichroeder
Okay and then closing the international offices or the changes there, it seems like a bit of a change of strategy, is that basically due to the economic global conditions?
Donna Goldsmith
Yes it's definitely due to the economy and to some strategic decisions to do things more centralized and we have our office in the United Kingdom now, that is an office that has staff for all areas of the business from PR to marketing to consumer products and we've made a conscientious decision to have our people there manage the globe.
And I think we have some good people on the ground in satellite offices as well, we still have an office in China, we have a few people in Australia, we have someone on the ground in Mexico, in Mexico City actually, so we'll make the decisions that are right for the business. And I think again forward-looking; we'll be constantly looking at that as we go into 2009 and beyond.
George Barrios
And Alan, to amplify Donnas' point, our total investment internationally hasn’t changed, either people or dollars, so we've made some tactical changes on which resources, how we allocate them, but net-net we're invested the same amount.
Alan Gould – Natixis Bleichroeder
And one last question, "Behind Enemy Lines," you said has already come out. Can you give us some idea of the economics of that on that title? What it costs and how many units were shipped for example, or how many units sold through?
George Barrios
Well the sell through data has been about – we haven’t gotten full sell through data yet, what we have seen from our partner is that the movie we feel is performing well, the cost was shared with Fox and the total production cost was in the $4 to $5 million range.
Alan Gould – Natixis Bleichroeder
Can you give us some sense of what the initial, is it 150,000 units, any idea of what the initial sell through is?
George Barrios
It's in that ballpark.
Donna Goldsmith
The only thing I'll add on "Behind Enemy Lines" is that we still have got international distribution – that has not yet happened. So that will, we will see additional revenue there with our partner.
Operator
Your next question from the site of Ian Corydon – B. Riley & Company
Ian Corydon – B. Riley & Company
Clarification on the SG&A the $20 million that's coming out, did you say George that 30% of that is going to come out on the SG&A line, 30% of the $20 million total?
George Barrios
Again, we don’t give that kind of guidance, what I said is if you wanted to get a ballpark proxy of how the costs would be spent between SG&A and our operating costs, the pro rata shared SG&A, which was roughly 30% in 2008 is a proxy for that. But again, we're not giving specific guidance on individual line items on the P&L.
Ian Corydon – B. Riley & Company
Got it and with respect to the book publishing deal, could you just talk about any future revenues or expenses that are going to come with that?
George Barrios
Well it's the end of the deal so, it was a six year deal that needed in 2008 and the $6 million that we took in the quarter, was the unearned advances from that deal that had accumulated over the six year period. So around that deal, we've left some deferred revenue on the balance sheet for the tail on the products that were already produced, but we're not anticipating that those are big numbers.
Ian Corydon – B. Riley & Company
And then last question on live and televised events, what drove the margin improvement there?
George Barrios
I think we talked a little bit about it before, some of it was the mix of events, in the quarter so the number of bought deals year-over-year that was the driver of it.
Operator
(Operator Instructions) We'll take our next question from the site of Marla Backer – Research Associates
Marla Backer – Research Associates
I want to switch gears here because we haven’t spent much time on it, but what about toys, how do you see toys going forward in '09 given that it will be a transitional year at toy sale lat week, it seemed that Jax was not planning anything new not surprisingly for the line. And are you already working pretty well with Mattel for when they launch?
Donna Goldsmith
I can give you some anecdotal information relevant for that relative to Jax, as we look at 2009 there is still product on the shelf, we do still have a very good business at all of our major retailers. Putting the economy aside, we still have a good amass of merchandising space, domestically and internationally, as far as toys go.
Relative to Mattel, absolutely we are already starting to talk about everything we will do for that launch in 2010. We are talking about domestic and international plans, we're talking about what the product will look like, what the packaging, everything that you can imagine from advertising promotion and the actual product is in discussions now for that 2010 launch.
Marla Backer – Research Associates
And are you expecting that Mattel will be able to really expand the brand internationally beyond what Jax was able to do?
Donna Goldsmith
The thing that I can say about Mattel is that Mattel has distribution on the ground all over the world and that's a little bit different than Jax, who subcontracted out some of the distribution. So we are – we hope to see some great things from Mattel in 2010 and beyond.
Marla Backer – Research Associates
Okay thank you, then two other questions on the Pay-Per-View buys; this seems a recent weakness in the quarter, I think as you said in your comments really seems to reflect the economic pullback. In the past when you've had some problems with Pay-Per-View and you've responded by strategically reducing the number of titles, is that something you are considering now or are there any other changes to tweak the Pay-Per-View by in the works?
George Barrios
We're always evaluating our strategy across all our businesses, including Pay-Per-View, but right now that's not in the works.
Marla Backer – Research Associates
Okay and finally on the home video, our channel checks have shown that there's been some pretty aggressive promotional activity on the brand at stores such as Best Buy, and it looks like it's resulting in pretty good sell through. Are you hearing of similar kind of promotional activity across other retailing platforms?
Donna Goldsmith
Yes, what I can tell you definitely as far as retail goes, Marla, is that we have stellar relationships with all of our key retailers. And the thing about that, especially in a down economy, is that you want to have those relationships so that the buyers want to buy your product and obviously the way the buyers buy the product is if the stuff is flying off the shelf.
So even though there are less consumers in the stores, we are doing everything we humanly can with the Best Buys with the Targets with the Wal-Marts, so that our product does come off of the shelf, it's purchased and that is a promotion for WrestleMania, a Legends promotion in conjunction with Legends title. We do what makes sense so that we can achieve revenue on our side, but of course also for our retail partner.
Operator
Our next question is from Bobby Melnick- Terrier Partners
Bobby Melnick – Terrier Partners
I have a question for the CFO I wondered if you would please address the capital structure on the dividend, yes sure you do close for the year with about $209 million in cash and equivalents but what you don’t really say is it that is down from – it's not clear whether it's $266 million or $286 million, but somewhere between $65 million and $90 million in cash went out the door last year and it seems to me that a good portion of that is represented in the fact that your dividend is 180% of your earnings, specifically, you pay $1.11 in dividends and in the last two years you've earned $0.72 and $0.62
So I'm puzzled as to why it is that you retained $200 million in cash and equivalents earning, something between 2.5% per pre-tax which I'm hoping is substantially below your hurdle rates, and wondering if you could explain to me why this is the optimal capital structure for the company and the optimal dividend for the company which strikes me as quite gimmicky and the shareholders have seen through this.
I mean, obviously, with the current yield at 15% in the market place, not only do investors recognize that the dividend is not sustainable in perpetuity, but there's a significant negative arbitrage if you're earning 2.5% pre-tax on your cash and paying out 15% after tax on your equity. So I wondered if you could give us some thoughtful analysis as to why this is optimal, thanks.
George Barrios
To answer your question there was a lot of statements in there, I think some questions. Our view is our focus is on growing the cash long term for the company. That's the way we think we create value for the shareholders and that will continue to be our focus and will guide our decisions, both in our current businesses, new product extensions and the way that we manage the operations. Managing our costs, the way we manage our cash, delaying the Media Center is an example of that in what's a tough economic time.
The second part is how do we turn that value then to the shareholder and it's either through reinvestment and growing the company and the appreciation in the stock, and or through dividend payments? And today our dividend policy reflects the vehicle that we've chosen to return value to shareholders and as you mentioned, that was about $80 million in dividend payments in 2008.
Bobby Melnick – Terrier Partners
I understand that's what the current situation is; I'm asking you to substantiate that because it doesn’t make any sense.
George Barrios
Well it doesn't make sense to you, but I just gave you what our rationale is, our rationale is to manage the company in such a way that over the long-term, we're going to continue to increase the cash flow of the company and the next level of decisions we have to make is how much do we need to invest in the business and how much to return to shareholders. And our dividend policy currently reflects our best judgment on how to do that.
Michael Weitz
Thanks everyone, we appreciate you listening to the call today. If you have any questions, please do not hesitate to contact me, Michael Weitz at 203-352-8642 thank you.
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