Wednesday, July 29, 2015

Reviewing the WWE Network Accounting and preparing for WWE's Q2 results

I spent almost two hours with Hugh Little and Les Moore on Talking Sheet last night discussing my personal history with Wrestlenomics, WWE lawsuits, preview of WWE's Q2 results and more.

Q: Why didn't WWE announce Sting for SummerSlam? Wouldn't that help the WWE Network number they're about to announce?

A: Announcing Sting this week, last week or anytime in the last four weeks wouldn't have any impact on the number they're about to announce.

The number they're going to announce is paid subscribers as of June 30, 2015 and the average paid subscribers across all of Q2 (April 1 to June 30).

For reference, the Q1 numbers were: (see the 10-Q SEC filing from 3/31/2015)
  • 1,327,000 paid subscribers as of 3/31/2015 broken into 196,000 international and 1,131,000 domestic
  • 927,000 paid subscribers during the 1/1/2015 through 3/31/2015 period

I expect that they will announce more that they did average more than a million paid subscribers during Q2 for the first time ever and that the 6/30/15 number of paid subscribers will be higher than one million but lower than 3/31 mark.

In the 7/27/15 wrestling observer newsletter, Dave put the over/under at 1.18M paid subs as of 6/30.

If the number released on 7/30 is down below about 1.18 million, the stock will probably tumble.
Q: So, what do you think about 1.18M for the 6/30 number?

A: I still feel like that 1.18M mark feels high, so I will guess 1.11M as of 6/30 and 1,035,000 was the 4/1-6/30 paid subscriber average.

Q: If somebody is in a free month, would WWE be able to class them as a paid sub anyway? Because they kind of are... they're in the subscription, and they have their payment details etc., and they're scheduled to pay on the next month.
A: No - paid subscribers refers to money in the bank = revenue.
In the SEC filings, they're pretty clear that they're talking about "paid subscribers". You'll notice in some of the press releases (take the January 27 press release "WWE NETWORK HITS 1 MILLION SUBSCRIBERS") that they don't say the word "paid" anywhere. That's because when they hit one million subscribers, a portion of them were in free trial and a portion of them were in the UK/Ireland where there was longer protection laws around cancellation periods. That's why they hit 1 million subscribers (but not 1 million paid subscribers) near the end of January, hit 1.327M paid subscribers as of the end of March, yet only had an average of 927,000 paid subscribers over the whole period.

Q: How many subscribers does WWE need to be profitable?

A:  The last full-year guidance that WWE gave us was in the February 12, 2015 press release as part of the Q4 results.
Average Paid Subscribers in 2015 = Adjusted OIBDA
500,000 average paid subscribers in 2015 = between ($10M) - $10M
1,000,000 average paid subscribers in 2015 = between $45M - $65M
1,500,000 average paid subscribers in 2015 = between $100M - $120M
2,000,000 average paid subscribers in 2015 = between $155M - $175M
2,500,000 average paid subscribers in 2015 = between $210M - $230M

The average number of paid subscribers over the 12-months of 2014 was approximately 567,000. This 12-month average is below the average for the 2014 period in which WWE Network was operative (WWE Network was launched on February 24, 2014).

OIBDA = Operating Income Before Depreciation and Amortization
However, WWE likes to report "Adjusted OIBDA" which means they can monkey with the numbers to keep out some costs.
The Company presents OIBDA as the primary measure of segment profit (loss). The Company believes the presentation of OIBDA is relevant and useful for investors because it allows investors to view our segment performance in the same manner as the primary method used by management to evaluate segment performance and make decisions about allocating resources. The Company defines OIBDA as operating income before depreciation and amortization, excluding feature film and television production asset amortization and impairments, as well as the amortization of costs related to content delivery and technology assets utilized for our WWE Network.

That's a lot of caveats.

So, WWE estimates that somewhere north of 500,000 subscribers, they can "be profitable" for the year overall. However, it's worth comparing to where WWE was BEFORE they launched the WWE Network. OIBDA in 2012 was $63.2M. By 2013, OIBDA had dropped to $30.4M but they had started to spend on the WWE Network even before they launched it. In 2014, OIBDA was -$15.5M. (see the latest Trending Schedule)

So, if WWE wanted to generate, say 2012 level of OIBDA = $63M. How many subscribers would that require? According to the loose-guidance that was provided, that would require averaging between 982,000 and 1,164,000 subscribers in 2015 (midpoint is 1,073,000). Again, in the first quarter of 2015, WWE averaged 927,000. So they'd need to average 1,122,000 for Q2/Q3/Q4 to hit that point.

That's just to hit 2012-level of profitability. Really, in that scenario, the WWE Network isn't replacing the lost PPV revenue because television rights are A LOT more profitable now than it was back in 2012. But that's what I would consider the bare minimum they should target before you can call this at least starting to work.

Q:  Is there a way to remove TV rights fees from the equation, and just focus on average PPV revenue they've lost, plus decline in DVD sales? Isn't that a more accurate indicator of whether the Network is working or not? The TV rights fees were going to go up even if they didn't start the Network.

A: It's tough.

So, if we look at the "Network" segment (which is PPV+VOD+WWE Network):

WWE Network Segment (within Media Division - PPV+WWE NETWORK+VOD)
2012: $87.7M revenue / $41.3M adjusted OIBDA
2013: $86.3M revenue / $27.9M adjusted OIBDA
2014: $115.0M revenue / -$1.8M adjusted OIBDA
2015 Q1: $37.6M revenue / -$1.5M adjusted OIBDA [927k average paid subscribers, 505k PPV buys] ** WM quarter **

So, they'd need to produce $42.8M in adjusted OIBDA between Q2 and Q4 for the Network segment to be profitable.
Thing is, it's clear that pulling apart the accounting is a total mess.

Look at quarters for 2014:

WWE Network Segment (within Media Division - PPV+WWE NETWORK+VOD)
2014 Q1: $18.4M revenue /-$3.6M adjusted OIBDA [147k average paid subscribers, 678k PPV buys]
2014 Q2: $43.3M revenue / -$7.3M adjusted OIBDA [665k average paid subscribers, 1059k PPV buys] ** WM quarter **
2014 Q3: $26.1M revenue / +$2.3M adjusted OIBDA [723k average paid subscribers, 285k PPV buys]
2014 Q4: $27.2M revenue / +$6.8M adjusted OIBDA [721k average paid subscribers, 271k PPV buys]

It's clear that absorbing the cost of WrestleMania is impactful, but still there's a huge difference between the cost structure in Q3 2014 and Q4 2014 for the Network segment. I'm not entirely sure what that honestly means.

This is why WWE loves to confuse the issue by telling us about the overall company OIBDA based on WWE Network subscribers without actually talking about what the WWE Network segment would be at different levels.

It's worth noting that during this time TV rights have jumped and profitability on TV rights have jumped too:

WWE Television Segment (within Media Division)
2012: $140.9M revenue / $51.6M adjusted OIBDA
2013: $163.4M revenue / $56.1M adjusted OIBDA
2014: $176.7M revenue / $61.9M adjusted OIBDA
2015 Q1: $58.2M revenue / $25.9M adjusted OIBDA

As you can see, in 2012 the combined OIBDA from TV and Network was $92.9M. It fell to $84.0M in 2013 and $60.1M in 2014. Thus far, in 2015, it's $24.4M.

Over the last six quarters, Network has contributed about $4M in adjusted OIBDA and Television had contributed about $99.2M.

Source for analysis: Latest Trending Schedule from WWE

-Chris Harrington
Twitter: @mookieghana


Anonymous said...

Always enjoy your analysis. The July 20th Observer said that, with the spending on new programming, break even was 1.176M, which seems close to the high end of your range near the bottom of this post.

Agree that 1.18M seems high, though we've had lots of pie in the sky analysts (Laura Martin's prediction of $30 by April 2015 even though the stock hasn't hit $20 since this story was posted: who seem to still be viewing WWE's "3-4M" promotion as a readily achievable goal (plus most stocks have overly bullish analysts).

Any predictions on the churn this quarter?

Indeed Wrestling said...

Obviously, it's after the quarterly results have been released, but I will say that I would not have guessed that churn would have topped 500k for Q2. That number surprised me in it's magnitude.