Wednesday, April 29, 2015

Before $WWE releases Q1 Results tomorrow, some thoughts..

Tomorrow morning, at 11 AM, WWE will host their Q1 conference call. Earlier that morning, they will release their Q1 2015 results which covers Jan 1 through March 31. (Sign up for the webcast here.)

Importantly, that time-frame covers the massively successful WrestleMania 31 event on March 30.
The company has already announced that the WWE Network achieved 1.315 million subscribers as of 3/29/15 and averaged 918,000 paid subscribers in the first quarter 2015.

Last year's WrestleMania was during Q2 (April 6, 2015), so the baseline for Q1 2015 results is much lower. That skews a lot of year-over-year numbers.
  • WWE Network sub revenue was only $4.4M in Q1 2014 versus an expected $27.6M for Q1 2015. 
  • Live Event revenue will likely swell by at least $12M due to the WrestleMania timing. (Live Event Revenue for Q1 2014 was $21.7M.) 
  • Venue Merchandise is likely to be inflated as WWE set a new merchandise record with $3.3M in sales. (Venue Merchandise Sales for Q1 2014 was $5.0M).  
  • Travel Package revenue for WrestleMania (worth about $2M last year) will also be recorded in Q1 2015 this year. 
  • WWE still grossed $23.8M in PPV revenue last year during Q2 2014 despite the domestic WWE Network offering WrestleMania for just $9.99. Already, WWE has recorded 233,000 PPV buys for Royal Rumble 2015 and WWE Fastlane PPVs (should generate about $3.2M in revenue). It's tough to know how many buys WrestleMania 31 did on traditional PPV. Last year, WM30 had 420,000 domestic purchases and 264,000 international purchases. I'll guess that there was at least 225,000 PPV purchases worldwide, which could be another $4.1M in PPV revenue. That's an estimated $7.3M in PPV revenue for Q1 2015 (versus $13.8M for Q1 2014.)
In addition, I would expect to see strong growth in WWE Television Rights. Last year, WWE earned about $40.3M in Television Rights in Q1 2014 ($25.7M domestic, $14.6M international). By the end of the year, that number was already inflated by nearly 25% as the plethora of new television deals which WWE signed in 2014 came online starting Q4 2014 and Q1 2015. I'd expect in excess of $54M for Q1 2015 which would be an improvement of nearly $14M.

It's much harder to estimate the revenue for Home Entertainment, Digital Media, WWEShop and WWE Studios and Other for Q1 2015. 

I expect WWE will recognize revenue from Leprechaun: Origins (Aug. 2014), See No Evil 2 (Oct. 2014), Queens of the Ring (Nov. 2014) and Jingle All the Way 2 (Dec. 2014) in Q1 2015 since they showed no revenue as of the annual report. (Those films were released direct to DVD.)

On the flipside, Home Entertainment revenue will probably plummet. For the first two months of the year, WWE only shipped out 211,000 units ($11 gross revenue per unit shipped) compared to 1,087,000 units ($8 gross revenue per unit shipped) in Q1 2014. I wouldn't be surprised to see Home Entertainment Revenues drop $4M this quarter since last year had some funky mechanics in this segment ("recognition of a $2.5 million minimum guarantee short-fall related to 2013 sales and a $2.2 million adjustment for higher current sell-through rates than anticipated for late 2013 releases.")

Likewise, while WWE loves to talk about their award-winning social media experience, the Digital division has only generated about $6.3M in revenue per quarter, and the last three quarter that number has dropped to well below $5.3M per quarter. (I believe the WWE Magazine Revenue was being counted in this division prior to cost-cutting measures axing that division.) Also, Licensing is a hard stream to pin down. In the psat WWE has been averaging $7.4M in quarters where they don't recognize a big videogame licensing windfall. Whether the new joint venture with TapouT or other projects results in a big Q1 growth is unclear to me at this time. 

Q1 - Est.
PPV  $    13.8  $      7.3
VOD  $      0.2  $       -  
NETWORK  $      4.4  $     27.6
TV  $    40.3  $    54.0
DOM TV  $    25.7  $    33.4
INTL TV  $    14.6  $    20.6
HOME ENT.  $    10.5  $      6.3
DIGITAL  $      6.7  $      6.7
LIVE EVENTS  $    21.7  $    33.7
TRAVEL  $       -    $      2.0
LICENSING  $    14.0  $      8.0
VENUE MERCH  $      5.0  $      8.3
WWESHOP  $      4.2  $      4.2
STUDIOS  $      4.3  $      4.3
OTHER  $      0.5  $      0.8
TOTAL  $  125.6  $  163.2

I struggle to estimate the OIBDA for 2015 because WWE's accounting, particularly around the WWE Network, seems to evolve by the quarter.

My estimates have WWE Q1 2015 OIBDA tentatively jumping to nearly $17M which is a big improvement over last year's Q1 OIBDA of -$7M.

I guessed Network segment (PPV/WWE Network) at $6.6M OIBDA but that could be far too high (or low). Likewise, TV rights are not completely clear, but I assumed they could jump as much as $23M OIBDA. There's a $3M OIBDA drop in Home Entertainment offset completely by a $9M jump in Live Event OIBDA. I did assume nearly a $5M drop in Licensing OIBDA and a $2M drop in WWE Studios. Overall, the OIBDA jump would be driven by WrestleMania PPV revenue, higher WWE Network numbers, and big Live Events jump from WrestleMania plus the TV rights (especially the int'l numbers) coming online.

How does WWE account for their $50M TV prepayment? Will WWE stop using the free month gimmick so frequently? How about the increase WWE Network programming costs? Are there any viable expansion territories left - Italy/Japan/Germany? 

How close will I land to the real deal? I have no idea! Tune in tomorrow to find out.

Chris Harrington

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