Wednesday, August 02, 2017

WWE Q2 2017 Analysis

Net Income

Consolidated net revenues increased by $15.6 million: driven by $5.2 million in incremental revenues associated with the contractual escalation of our distribution agreements + $3.2 million of increased subscription revenues related to the growth of our WWE Network + $2.8 million due to the impact of our licensed reality based television series.

15.6m (net income) = $5.2 (TV rights) + $3.2m (WWE Network) +$2.8m (Total Divas)

4.4m = 2.8m (Live Events - more events) + 2.6m (Total Divas) + $1.1m (WWE Studios impairment) - $6.4m (reduction of Network programming costs - Swerved & Camp WWE)

WWE Network at 17% OIBDA
  • PPV: $8.6m in H1’17 vs $8.0m in H1’16 (“driven by extra events”)
  • 1,634,000 average paid
  • 1,568,000 paid as of 6/30/17 (1,158k domestic + 410k int’l)
  • Churn in Q2 was -604,000 subtractions and 598,000 additions
  • Up 144,000 average paid (114k domestic + 30k int’l) from Q1’17
  • Domestic ending was down 7k paid and int’l was 1k paid
  • YTD Network OIBDA was $17.3m TY vs $10.1m PY
  • Q2’17 OIBDA was $3.0m versus Q1’17 at -$5.7m
  • YTD Network Revenue: $101.4m versus LY $92.1m
  • Barrios: “"Having that promotional period is still a great tool for us - so we're going to continue to do it." 
  • Outlook for Q3 was 1.54m average paid +/- 2%
No specifics about the WWE UK. Usual praise for 205 Live. No admission about cost-cutting. No discussion about Talking Smack or Renee Young show cancellation. Hype for the Mae Young Classic tournament.

TV Rights continue to fuel growth at 48% OIBDA
  • Revenue: YTD TY $130.2m versus LY $116.8m
  • TV OIBDA: YTD TY $62.6m versus LY $55.5m
  • “$2.2 million from streaming content on certain platforms.”
Raw is down 9% in national ratings YoY (2.53 dropping to 2.3) while Smackdown is up 12% (1.72 growing to 1.92; benefit of going live 7/19/16). USA network was up 2% on national rating (1.16 to 1.18) and Top 25 Cable Networks dropped 4% (0.71 to 0.68).

National Rating: An average of the U.S. viewing audience (households) for each minute of a program or daypart expressed as a percentage of total U.S. television households. During Q2 2017 there were approximately 118 million U.S. television households, while in Q2 2016 there were approximately 116 million U.S. television households (+1.7%).

Michelle Wilson was bragging about how WWE’s PG rating makes it more attractive for sponsors. Also that they could advertise “cross-platforms”.

Barrios said that he still considered “monetization of content” as primary way to grow revenue

When Brandon Ross (BTIG) asked about the narrative that digital platforms would make a big play for WWE content during next renewal cycle, Barrios demurred basically saying that eventually digital players will be in the same space in terms of rights, but it they need to evaluate whether their viewers are on those platforms, watching long-form content on them and those platforms are really at the same levels of monetization.

Impairments (which WWE excludes from Adjusted OIBDA):

  • $3.2m on WWE Studios (revised ultimate profit expectations)
  • $5.6m on “certain legal matters and other contractual obligations”
  • OIBDA $27.9 (H1’2017) vs $35.1m (H1’2016) but excluding these costs adjusted OIBDA is $36.7m versus $35.1m
Barrios categorizes WWE’s position as they have plenty of investment opportunities and their decision to issue $200m in senior convertible notes improves their balance sheet for purposes of negotiations with potential partners.

Corporate & Other spend continues to expand: -$107.8m YTD TY vs -$89.5m YTD LY

“...primarily due to increases in stock compensation ($2.3 million) that derived from a rise in the Company’s stock price and increases in other expenses ($11.2 million) that primarily reflected the timing of key strategic initiatives and an increase in staff costs.”

One expense that WWE noted that they recently purchased a building a Stamford CT which will be used for additional production facilities. It will be at 12-18 month project starting in Q3.

India/China is the Future! - Lots of talk about India - try-out in Dubai with 40 talent, bragging about the new Hindi-English weekly show. However, later Barrios said, “we’re not going to get into individual countries” when an analyst called them out on only doing a single event in China this year.

Live Events attendance was up slightly (5,500/66 show vs 5,400/62 show) while int’l live attendance was down (6,300/26 shows vs 8,000/19 shows). +8% net increase in total people.

Paid WrestleMania attendance was around 64,900 (58,500 and 71,500).

YTD OIBDA on Live Events is 35.0% (2017) versus 38.2% (2016).

  • WWE ran 187 events YTD in 2017 compared to 159 YTD in 2016.
  • WrestleMania’s lower seating capacity (lower ticket sales + venue merchandise sales) was $3.8m below LY; 10-Q last year had WM2016 at $21.5m and WM2015 at $15.7m
  • NXT data
    • 6 mo #s: We conducted 95 NXT events with paid attendance of 86,400 (909/show) and average ticket prices of $40.03 in the current year period as compared to 100 events with paid attendance of 91,200 (912/show) and average ticket prices of $29.00 in the prior year period.
H1 2016: $2.6m
H1 2017: $3.5m

Digital Media - AVOD global hours viewed rose in Q2’17 (154m) vs 144m in Q1’17 which turned around a trend where the AVOD # had declined Q2’16-Q4’16. Wilson admitted that most of the revenue generated from digital platforms like SnapChat or FB video was “revenue share”. Plans for WWE SnapChat programming expansion in Q3 based on success from WrestleMania.

Plan to leverage their new partner “Lagardère Sports” (“a best-in-class sports marketing agency”) for global sponsorship business - specifically mentioned in relation to there being such high consumption of digital video from overseas.

Regarding WWE "profits", let's be clear here.

WWE net income for Q1+Q2 of 2017 was $5,085,000 compared to $862,000 for Q1+Q2 of 2016. [10-Q]

However, that's not the $100 million goal for 2017 that WWE has been talking about. [8-K]

WWE management continues to expect the Company to achieve another year of record revenue and has targeted Adjusted OIBDA of $100 million
WWE's $100 million goal is specifically about their Adjusted OIBDA (Adjusted Operating Income Before Depreciation and Amortization). It's a non-GAAP measure.

WWE's Adjusted OIBDA for Q1+Q2 of 2017 is $36.7 million compared to $35.1 million for Q1+Q2 of 2016. They are aiming to hit $100 million by the year's end.
Adjusted OIBDA excludes "certain material items" which would "otherwise impact the compatibility of results". In particular, WWE is excluding a $3.2 million impairment from WWE Studios ("revised ultimate profit expectations for several of our feature films. ") and a $5.6 million impairment from the Corporate & Other segment ("related to certain legal matters and other contractual obligations.")

WWE isn't noting any impairments between OIBDA and adjusted OIBDA for last year so 2016 adjusted OIBDA = 2016 OIBDA.

Total OIBDA for WWE in 2016 was $80.1 million. So, WWE is essentially looking to grow about $20 million in additional adjusted OIBDA versus last year to hit $100 million.

Right now, they're about $1.6 million ahead compared to a year ago (because they're not counting the WWE Film impairment or the legal matters/contractual obligations impairment).

They'll get a huge boost in OIBDA just from higher TV rights (which have already delivered an incremental $7.1 million higher OIBDA compared to a year ago). WWE Network is also up in OIBDA (first six months is incremental $7.1m higher OIBDA compared to year ago because average paid subscribers for Q2'17 > Q1'17). Those gains were offset by the continuing balloon that is Corporate & Other (a negative $18.3m larger in OIBDA than a year ago - though that includes the $5.6m impairment).

Why has Corporate & Other gone up?

"This increase is primarily due to $5.6 million of expenses related to non-recurring legal matters and other contractual obligations, higher staff related costs of $5.1 million due to increased headcount, talent related costs of $2.6 million in support of talent development, and increased management incentive compensation costs of $1.9 million, driven by higher stock compensation costs of $2.3 million due to a rise in the Company’s stock price."
So, controlling costs plus higher WWE TV Rights plus strong Q4 (re: Live events/WWE Shop) will probably get them there. But I can't say it's a sure thing. Obviously, WWE knows that have to do a lot to hit that, so that's a compelling reason for WWE to be very cost conscious (especially when they're starting a high capital expenditure project with the new Stamford production studio in Q3).


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