Sunday, February 01, 2015

Chapter 1 - The annual report - and what underlies it (The Economist's Guide to Analysing Companies) $WWE

"The annual report- and what underlies it"

What is accounting?

As we learn (pg 10) the 1966 American Accounting Association defines accounting as, "process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information."

We're going to be looking at the WWE Annual Report.


There's an interesting part of page 13 in the "Ownership and management". Noting that in private companies "members of the family act as directors" while a public company is supposed to have a clear separation of the owners of the company and its shareholders. Obviously, in the WWE where the McMahon family controlled 43,797,830 Class B shares (there were six total owners as in the 2013 Annual Report) with ten votes while the 8,206 holders of 31,349,734 Class B shares only get one vote. The McMahon's control the voting rights. As noted in the Annual Report:
A substantial number of shares are eligible for sale by Mr. McMahon and members of his family or trusts established for their benefit, and the sale of those shares could lower our stock price. All of the issued and outstanding shares of Class B common stock are held by Vincent McMahon and other members of the McMahon family and trusts set up for these family members. Sales of substantial amounts of these shares, or the perception that such sales could occur, may lower the prevailing market price of our Class A common stock. If any sales or transfers of Class B common stock were to occur to persons outside of the McMahon family, the shares would automatically convert into Class A common stock.
There's a concept in the UK of "stewardship" (or "Accountability") which is the directors' relationship with their shareholders. Typically, we call a "controlling shareholder" someone who is holding more than "20% of a company's shares". In fact, WWE must disclose anyone who owns more than "3% of a company's equity shares" in the annual report.

Let's look at the current WWE Board of Directors is:
  • Vince McMahon - Chairman of the Board & CEO of WWE.
  • Stuart Goldfarb - "President of Fullbridge - provider of an accelerated, rigorous business education program" and formerly "President and CEO of - marketer of DTC subscription products/Internet search marketing agency" (which went bankrupt). According Forbes, he earned about $108k for WWE BOD work in 2013. He was an NBC VP many years ago.
  • Patricia Gottesman - She was "CEO of Crimson Hexagon- a social media monitoring and analysis company" and previous to that a 29-year executive at Cablevision. According to Forbes, she earned about $103k for being on the WWE BOD in 2013.
  • David Kenin - His claim to fame was as EVP for Crown Media where he was in charge of programming for the Hallmark Channel. He also had experience as former President of CBS Sports and EVP at USA Network. According to Forbes, he earned about $116k for being on the WWE BOD in 2013.
  • Joseph Perkins - Perkins joined the board of directors back in 1999. He was a longtime associate of the WWF/WWE dating back to the 1970s where he was a director of syndication. He's the oldest member of the WWE Board of Directors (78). According to Forbes, he earned about $108k for his work on the WWE BOD in 2013.
  • Frank Riddick - Mr. Riddick is the executive chairman of Shale-Inland and former CEO of JMC Steel Group. According to Forbes, he earned about $125k for being on the WWE BOD in 2013.
  • Jeffrey Speed - a former EVP/CFO for Six Flags, Mr. Speed also brings extensive work history from time at the Walt Disney Company and public accounting firm PWC. According to Forbes, he earned about $117k for his work on the WWE BOD in 2013. 
  • Laureen Ong - the newest member of the WWE BOD, Ms. Ong was elected to the WWE BOD in July 2014. Her background is 30 years in the Cable industry with experience as President of the Travel Channel, launching the National Geographic Channel and working as the COO for Hong Kong's STAR Group Limited which "develops, produces, and broadcasts satellite television programs and contents in nine languages and across 59 channels in Asia."
It's a very cable/satellite-heavy BOD. Pretty much everyone, except for Mr. Riddick and Mr. Speed came from the Television industry. Mr. Speed's connections to both Walt Disney and Six Flags seem cohesive with the entertainment space which WWE plays in. Riddick is the outlier, but I think there is a connection.

I'd guess that Riddick's connection to the WWE Board was probably through former BOD member Michael Solomon. Both men have served on the Geeknet board of directors.  Geeknet is owner of popular online retailer Thinkgeek. According to Bloomberg, Solomon was on the Geeknet BOD from March 2010 to March 2014 and served on the WWE BOD from August 2001 to November 2010. Meanwhile, Riddick has been on the Geeknet BOD (and continues to serve) since August 2010.

It's interesting to go back a few years, and you'll see other familiar names on the WWE Board of Directors. Back in 2005, the WWE BOD included Lowell Weicker (former US Senator 1970-1988 and former CT Governor 1991-1995), David Kenin (still on the BOD, joined in 1999), Joseph Perkins (still on the BOD, joined in 1999), Michael Solomon (joined in 2001, left in 2010) and most interestingly, Robert Bowman.

Why is Robert Bowman so interesting? He's the CEO of MLB Advanced Media. That's the company who provides the backbone for the WWE Network. I think it's interesting when you read an interview with Bowman about the WWE Network to recognize that Bowman's relationship with Vince McMahon dates back many years. He joined the WWE Board of Directors in September 2003.

What's missing? While TV rights has traditionally been the lifeblood for the WWE, in this changing media landscape, I would expect that there could be greater guidance from people who have more experience with over-the-top and digital media services. It's telling that most of the people on WWE's Board of Directors come from terrestrial television programming. It would seem that those with "internet company" are still traditional TV executives at heart.


As for the timing of when the annual report must be issued, I learned that "companies with assets over $75M must file a 10-K report within 60 days of the year end" (page 16). And that WWE must have a "detailed segment analysis by product and/or geographic area, including the naming of any customer accounting for many than 10% of revenues."

WWE has broken down their geographic distribution of revenues for several years. For instance, as I noted in my piece about the UK/Ireland launch of the WWE Network:

YearNorth AmericaUnited KingdomRemainingTotal
2013 Q4 - 2014 Q3$406.3$38.8$75.3$520.5
(There's a clear trend where WWE has pulled back from an growing revenue in Latin America in recent years. From FY2004-2006, international tour attendance was 9000+/show. Now it has dropped in recent years to at/lower than domestic attendance - 6,000/show. Interestingly, we've seeing revenue growth from new geographies such as India, Thailand and the Middle East for new TV rights contracts.)

I do wonder about the definition of "customer". For instance, NBCU pays WWE a lot for TV rights for television programming on their channels: Total Divas (E!), Raw (USA) and SmackDown (SyFy). Between Q4 2013 and Q3 2014, domestic TV rights was about $109M which would represent over 20% of the total net revenue for WWE. The vast majority of it came from a single company (NBCUniversarl - a division of Comcast Corporation) with the remainder being Main Event revenue (ION TV, which stopped broadcasting domestically on April 2, 2014).

There's a lot more I could comment about from chapter 1, but I'd like to focus on a interesting paragraph on page 52: "Pro-Forma figures".

Vouse writes:
When faced with uncertainty, poor performance, or the need to hide incompetence or fraud, directors may be attracted to presenting "pro-forma" figures in their reports to investors... If the terms "adjusted", "normalised", or "underlying" are used in the review of a company's performance, be on your guard. Examples of such measures may be found in the use of EBITDA. A company showing a loss in its published income statement could produce a positive EBITDA figure. If the discussion of performance management choose to use a measure other than one firmly based on the reported financial figures and GAAP, a clear explanation must be provided.
This section really struck me because WWE has a nasty habit of reshuffling divisions, and changing how they like to account their profits. Today, it's "OIBDA" - operating income before depreciation and amortization. As the costs for WWE Network have mounted, WWE has been under intense pressure to demonstrate that the service is meeting their internal (ever-changing) expectations and that it's capable of turning a profit (and eventually exceeding the previous revenue stream generated by traditional pay-per-view).

Here's how WWE explains their choice of OIBDA:
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 performance and make decisions about allocating resources. The Company defines OIBDA as operating income before depreciation and amortization, excluding feature film amortization and film impairments. OIBDA is a non-GAAP financial measure and may be different than similarly-titled non-GAAP financial measures used by other companies. A limitation of OIBDA is that it excludes depreciation and amortization, which represents the periodic charge for certain fixed assets and intangible assets used in generating revenues for our business. OIBDA should not be regarded as an alternative to operating income or net income as an indicator of operating performance, or to the statement of cash flows as a measure of liquidity, nor should it be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. We believe that operating income is the most directly comparable GAAP financial measure to OIBDA. See Note 18, Segment Information in the accompanying Consolidated Financial Statements for a reconciliation of OIBDA to operating income for the periods presented.
I'm not an accountant or a experienced investor. I can't speak about the decision to use OIBDA by WWE but I do think it's an important reason why there is significant differences in interpretation when it comes to establishing what WWE's new "break-even" point is for the WWE Network. It's especially interesting to see how much the Depreciation and Amortization for the "Live and Televised Entertainment" division is changing between 2013 ($6,657,000) and 2014 (where it seems to be $28,000,000 for just the WWE Network).

As WWE notes in the latest 10-Q filing:
Overall depreciation expense in the current year was higher due to depreciation expense related to the Company's recent investments in property and equipment to support our emerging content distribution efforts, including our WWE Network.
OIBDA doesn't include Depreciation and Amortization so those large costs aren't being included in the WWE Network calculations. Suddenly, Vause's  warning about pro-forma figures is ringing in my ears.


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