Source: Wrestling Observer Newsletter
There are a number of things to take from the 5/4 investors call and financial information for the first quarter.
The big surprise was the low profit from the quarter of $888,000 (really $897,000 with adjustments related to changes in foreign currency) even though revenues for the first quarter totaled $188,444,000, up from $171,100,00 the first quarter of 2016.
Wall Street at first reacted negatively to the lower than expected profits, but the stock later normalized as the week went on, since the feeling is still that this is a healthy company that will only grow stronger. At press time the stock price was $20.25 per share giving the company a market value of $1.55 billion.
The company these days is mostly built around making money from television, a figure that is consistently growing, and from the network. Network numbers are growing annually. They still talk of 3 to 4 million subscribers. But even with the low profits, when you look at trends as far as core business growth, the first quarter told a positive overall story.
On March 31, 2015, the network had 1,327,000 paid subscribers. On March 31, 2016, that figure was 1,357,300 subscribers. That’s a little misleading because WrestleMania’s lead in is when growth is the strongest, and Wrestlemania was on March 29, 2015, meaning all the Mania growth was in that figure while the last two years the growth continued for a few more days. Last year they gained 97,000 after 3/31 until the day after Mania that year.
On March 31, 2017, it was 1,573,500, meaning they gained 87,000 from 3/31 until Mania.
The U.S. growth was from 1,027,100 to 1,164,700 subscribers over the year or 13.4 percent. That’s a more accurate figure because international is skewed by opening up more markets. International was up from 330,200 to 408,800 , or 23.8 percent.
Television total revenue was up from $60.7 million to $64.0 million worldwide based on contractual escalators. $6.3 million of that increase is from the increases in contracts. But there was a revenue decrease of $4.4 million due to seven fewer episodes of Total Divas, which would indicate WWE is paid about $625,000 per episode of the show. We don’t know the current budget but a few years ago the budget was $400,000 per episode.
Between taped shows and the NBA playoffs, both Raw and Smackdown did their lowest ratings of the year from London. Raw actually did among the lowest ratings in the history of the show, and was the second lowest rated episode outside of football season (the lowest being on July 4, 2016) dating back to 1996.
Still, as the business shows, ratings are not the be and end all. Network subscriptions are up and house show attendance is down a little, but that’s also with running more dates. The correlation of ratings to overall business isn’t as strong as one would think, although there obviously is some correlation. Business is more a function of the avid fan base while ratings are a function of the casual fan base. The state of the business today is that the avid fan base is as into the product as ever, and more willing to spend significant money on it than ever before. But there are fewer casual fans than at any time probably since the late 1940s. And in another era, that wouldn’t have mattered. But when the key revenue stream is television rights fees and not network subscriptions or live attendance, then actually, ratings are the single most important metric for company health.
A more accurate measurement is paid subscribers the day after WrestleMania. In 2015, that figure was 1,315,000. In 2016, that was 1,454,000. This past year it was 1,661,000. So while last year was stronger for new subscribers over the last few days before Mania, this year was stronger overall for new paid subscribers during Mania season, up from 237,000 in net growth to 258,000. Before the 2015 show, that number was 499,000, but that was without the free offer, so the only way to really fairly compare the Mania seasons is when the frees expire and compare the 12/31 number to the 6/30 number, which we won’t know until the end of July or early August. But if we go with an average of 200,000 growth per year, and it stays that way, they can theoretically hit 3 million subscribers in seven years and four million in 12 years. During the first quarter, they had 536,900 new paid subscribers and there were 366,400 who canceled. Last year, the second quarter growth featuring the free paid converting saw 370,000 free at Mania and a quarter growth of 154,000. This year that number is 288,000, so with the same retention rate, it would be about 120,000 new subscribers and point to a 6/30 number of 1,781,000 paid (interestingly they are only projecting an average paid for the quarter of 1,630,000).
Granted, even with all those increases, because of higher costs, network profits are down, and that’s even with an additional $700,000 coming from PPV by doing the added show. Throwing out the PPV revenue, the WWE Network in the first quarter of 2016 posted a $13.1 million profit and in 2017, even with the increased in the number of subscribers, that would be $11.5 million. The main difference is the costs of new programming. The WWE itself listed the reasons or lower profits as the cost of doing one extra PPV show as well as the costs of doing the U.K. championship tournament. The total cost of the additional programming, the U.K. show, one PPV and the Foley shows were $4.4 million.
Vince McMahon at the investors call pushed social media numbers, and WWE’s numbers look phenomenal, but in fact, the company lost $505,000 in the digital media category. Is that worth it for the long run? Probably to a degree, but geography alone tells you the social media numbers and YouTube numbers are misleading as hell when it comes to revenue.
The company’s social media numbers and YouTube viewership is mostly outside the U.S. and Canada, which make up 20 to 25 percent of that figure, but make up 77.6 percent of revenue. The percentage of the revenue domestically has actually increased, not decreased in recent years, so exactly where the company has picked up social media followers are not where they are growing. Similarly, India is their best social media market, but aside from television revenue, which is significant, the third highest of all, there isn’t a lot of other revenue coming from India. They rarely run shows. They are trying to open an office and ramp up merchandise sales but it’s at the beginning. But the key is WWE Network viewership in India is tiny, even though viewers of the content for free there is huge.
Those numbers explain the sudden push of Jinder Mahal, although when directly asked that question, CFO George Barrios didn’t give a direct answer.
Vince McMahon pushed that attendance for the quarter increased “more than 100,000.” In actuality, the increase was from 482,700 to 559,700, so 76,000, a rare math mistake in these calls. Vince noted how important live attendance is as far as a barometer of popularity, since from the start of the business, that was the key point gauged. Until the PPV era got strong, the company lived and died largely on live attendance as its key revenue source. And it is still key, along with the network numbers, because that tells you how many people are willing to pay for the product. Television is huge now because of rights fees, but too many companies correlate television ratings with success and historically, that’s really not a good case. In studying the business for a long time, television is a creature of habit stat while going out and paying for tickets or buying the network sub (although some of that could be nostalgia buys not having to do with creative, but most of it would be) is a better measure of effectiveness.
But that 76,000 increase is because they ran 95 shows in the quarter as compared to 78 last year. Plus, one of those shows was the Royal Rumble which probably drew 40,000 fans itself. The average per show dropped slightly, even factoring in the Rumble. Because it’s not all spelled out what the Rumble actually drew and that subject was avoided completely even though you’d think it would be brought up and trumpeted, the average attendance per show was factoring out San Antonio was down about 6.6 percent. But even that isn’t fair because with more house shows, and in particular the Monday night Smackdown shows, of those 95 shows, far more were actual house shows as compared to PPVs and TV tapings this year, and those would draw less. In the end, because of the different factors, I wouldn’t call that growth, but it is probably fair to say interest is steady and profits are higher because the added shows are making money. Merchandise per head was exactly identical, as $10.09 per head for this year and last year, but with 76,000 more spectators, that’s about $760,000 in added gross revenue from merchandise to go with the ticket sales for the added shows.
For the quarter, the average ticket price to a WWE live event was $51.15 in North America and $86.53 outside of North America. Last year those numbers were $47.79 in North American and $45.09 outside of North America. The combined profit margin from live events for the quarter was $10,709,000. Last year that was $8,150,000. It’s good, but as far as long-term, you have the stadium Royal Rumble and the 17 extra shows. Because we don’t have the profit margin from tickets and merchandise for the Rumble broken down, it’s impossible to get the full real gauge for a comparison. But things are better as even if attendance dropped on average, ticket prices on average were higher this year.
The brand extension is absolutely a positive. It has allowed more different wrestlers to get television time. And it’s created those added house shows, which are increasing profits.
It’s also enabled the Smackdown ratings to increase, which offsets the decreases in Raw. But on a year-to-year basis, the Smackdown increase will likely end in July, when it starts being compared to itself as a live stand-alone sort of A show as compared to a taped B show.
It’s impossible to get a breakdown of NXT costs, but the category of WWE Performance Center and talent support costs were $4.4 million in the first quarter of 2016 and grew to $6.5 million in the first quarter of 2017.
George Barrios, who again predicted OIBDA of $100 million this year, said the profits were down due to added expenses in corporate and in the network category (production of the new shows, most notably “Holy Foley,” the added PPV and U.K. tournament). But they expect that in 2017, the network expenses to end up being about the same as 2016, and with more revenue, they are projecting greater network profitability over the next three quarters. They also project spending less on network programming going forward.
Still, second quarter OIBDA, which includes WrestleMania and all the events associated with WrestleMania, so it will be the biggest revenue quarter of the year, is expected to be $13 million to $17 million. With lower production costs and professional fees, they are projecting the biggest profits to be in the final six months of this year.
There was also $5.6 million in expense related to legal matters and contractual obligations that weren’t specified, and $2.1 million in movie studio losses that don’t directly relate to wrestling business, so those are other reasons or the decline in profitability.
As far as gross revenue is concerned, the network category grew from $40,331,000 to $46,470,000. Television rights fees grew from $60,719,000 to $64,016,000.
Home Entertainment fell from $3,269,000 to $2,432,000. The decrease was roughly $500,000 outside North America and $400,000 decline in North America. This came during a three-month period where the company shipped 498,600 units to consumers and stores as compared to 329,400 the previous quarter. But that didn’t relate to sell-throughs and there were also a lot of cut-rate price sales.
Digital media grew from $5,397,000 to $5,735,000 but the division, a money loser, increased losses slightly. The increase was greater advertising revenue. The increase in losses in that division came from $500,000 more in staff related costs to support technology initiatives.
Live Events grew from $25,334,000 to $32,096,000. Licensing dropped slightly from $21,042,000 to $20,097,000. Venue merchandise grew from $5,440,000 to $7,088,000.
WWE Shop revenue grew from $6,807,000 to $7,921,000. WWE Shop continues to increase. There were 172,700 orders or an average of 1,919 per day with an average order price of $45.48. The key to the growth was additional distribution channels, particularly outside the U.S., increased marketing of products and a wide variety of products being offered.
WWE Studios revenue fell from $1,943,000 to $1,282,000.
In looking at OIBDA by sector, this is how things rank over the past five years, all numbers in millions.
There’s not much to glean from those tables past the obvious. The one thing notable which is the $20.9 million profit for live events in 2015 is because WrestleMania that year was very profitable and was in the first quarter instead of the second, so that skews the average. Otherwise, the live event business, even if ticket sales are about the same, is more profitable because of the ability to raise prices since every type of major arena event has raised prices and not been hurt for doing so. Wrestling at times has had the strange phenomenon, and quite frankly, UFC has had the same, that often if you raise prices a lot, more people will come. That isn’t always the case, but it’s one of the things people in live events had figured out for years and that’s why prices keep escalating to such a great degree. In the 90s, when Zane Bresloff made the call to triple live event prices for WWE, everyone, including me, thought it was a bad move even with him saying how more people will come because it’s a higher prestige event and more guys will bring women on dates because of the psychology of a $12 ticket on a date vs. a $30 ticket (and now a lot more than that). It’s been the same on PPV, as every instance or prices being raised has had people complain it’s too much, and yet even the Mayweather-Pacquiao $100 price tag, one that on paper figured to cost buys, ended up nearly doubling the prior records for most buys. If you have a cold product, that doesn’t work, but with a cold product, you often can’t even give tickets away.
Michelle Wilson pushed new programming coming up that will include new episodes of WWE 24 as well as the summer women’s tournament.
They noted that the U.S. television contract with USA expires at the end of September 2019 while the U.K. and India deals, the second and third biggest deals, expires at the end of December 2019.
Vince McMahon pushed the company’s increased popularity with women (which has offset to a minor degree the major losses in viewership of men over the last few years) by saying, “they are the gatekeepers many times to do programming and what have you and lies of whether or not they enjoy the brand.”
Barrios said that the changes in media are such that eventually, money follows eyeballs, but “Usually the money is slower than the eyeballs.” So the feeling is that in the long run, all the social media will pay off.
Wilson noted that based on all the studying and analytics they’ve done in the various surveys, she said, “What we’re finding is that obviously localization, more in-ring content is what they (subscribers) are looking for and we are able to produce that incredibly efficiently and it you look at some of the other programming that we’ve done well, reality series, and those other genres tend to be a little more–you know, require a little more investment. So I think over what we’re focusing on now, we’re able to reduce that more efficiently and that helps support the flat year-over-year.”
They were asked directly about “your Indian wrestler on the roster (who) is getting a big push,”(Jinder Mahal, Yuvraj Singh Desi, a Canadian-born nephew of Calgary wrestler Gama Singh who is of Punjabi descent and can speak the language) and asked if they’ve seen increases in viewership in India.
“Well, I think, as you can imagine, WWE superstars are WWE superstars in every country in the world. So John Cena is popular in India and the Middle East and Latin America and the U.S. However, we’re all human beings and there’s a certain level of ethnocentrism and when a local character is really popular, it kind of pushes up that country, maybe a little bit more. But we love the storyline and drive of who os hot or not, both the one specific geography, but it certainly doesn’t hurt in India.”
The company has $270,683,000 in cash and cash equivalents and is carrying $215 million in debut. At the end of the year, it had $267,140,000 in cash and cash equivalents and was carrying $200 million in debt.