Today's WWE's second-quarter results were chock-full of news and surprises.
There were both lows (WWE Network only had 700,000 paid subscribers as of June 30, meaning more than one out of every seven subscribers has cancelled already) and highs (a new 10-year deal in Canada and significant profitability improvements for 2014 and 2015). There were surprises (WWE Network is launching globally in two weeks), and there was plenty of corporate double-talk.
It’s an exciting day to be covering the WWE.
Besides the actual financial results (year-over-year revenue was up $4 million and year-over-year operating income was down $31 million), WWE announced huge developments regarding the global roll-out of the WWE Network, new pricing tiers for the WWE Network and future financial rewards expected from its aggressive cost-cutting measures. It was a very talkative conference call.
The information focused on three specific segments: television, live events and the Network (including pay-per-view and video-on-demand), which together represent more than 80 percent of the quarterly revenue.
Among the plethora of television news, WWE announced new TV deals with France’s Groupe AB (a three-year deal), OSN (a pay-tv channel available in the Middle East and North Africa) and Canada (a 10-year deal with Rogers Communications that includes PPV distribution as well as launching the WWE Network as a pay channel on its network).
WWE did confirm that it's still negotiating its India TV deal but will not be providing any new guidance on the aggregate value for these future TV deals. At this point, WWE has locked up most of its major TV contracts (the U.S. starts in the fourth quarter of 2014 and the UK in the first quarter of 2015). Television continues to be an engine of growth for the company with aggregate revenue in the last 12 months above $171 million, an improvement of over $19 million year over year.
When asked on the conference call, they noted that it’s tough to measure which countries outside the United States are WWE’s biggest TV marketplaces, but they would include Canada, the United Kingdom, India, South Africa and Mexico.
Meanwhile, nothing new was announced for domestic programming. WWE did tout TV ratings with Raw and noted improvements for SmackDown. There’s no word about new reality series such as Legends House 2. Ion Television quietly did not renew Main Event. That program aired its last episode domestically during the first week of April 2014 and has moved on to be a WWE Network exclusive for American viewers.
Alongside WGN America’s WWE Superstars and CW’s Saturday Morning Slam, Main Event is the third wrestling-based program for the WWE that hasn’t been renewed. However, the missing Main Event television revenue was offset by the Total Divas programming fees (which started the third quarter of 2013) along with the ever-escalating rights WWE gets for Raw and SmackDown.
International attendance, as previously discussed, has continued to dip year over year (-8%) to about 6,100 per event. Meanwhile, North American attendance was up 13 percent year over year to 6,000 per event.
Some of this was a function of running fewer North American events this quarter, so TV tapings, which have the largest attendance, would positively influence the average. We don’t yet know the economic value of the new “VIP Package” revenue. Once the detailed 10-quarter financial filing is available, that revenue stream will be broken down in greater detail.
It is noteworthy to mention that venue merchandise has dropped six percent compared to last year. While live-event revenue over the last 12 months has hit a four-year high ($112.4 million), live-event profitability has actually dropped ($28.5 million OIBDA in the past 12 months versus $30.7 million OIBDA over the prior 12 months). It will be interesting to see whether WWE pursues more “sold shows” for international tours.
The bulk of the interest and content for this quarter was focused on the current WWE Network performance and the future plans.
In a bold maneuver, WWE announced it will be rolling out the WWE Network internationally for “over 170 countries and territories” including Australia, Hong Kong, New Zealand, Singapore, Mexico, Spain and the Nordics on August 12.
These countries will be able to access the WWE Network through over-the-top streaming akin to subscribers in the United States. The service will be offered in English and in the future there may be “additional localization.” During the conference call, George Barrios specifically mentioned France along with this group, which had at least one Daniel Bryan fan chanting, “Oui! Oui! Oui!”
The United Kingdom was not included in the August 2014 group. Instead, the roll-out for the UK will be in October 2014. Also specifically excluded from this group of countries were Italy, UAE, Germany, Japan, India, China, Thailand and Malaysia. Plans for launching the WWE Network there will be “communicated at a later date.”
While unconfirmed, it’s quite possible that rolling out the WWE Network would interfere with recent TV and PPV-rights deals signed in each of these countries. Whether these countries will receive an over-the-top WWE Network model or an access-through-provider model (as with Rogers Communications in Canada) is unknown.
Departing from current strategy, WWE will be pursuing a “pay-channel” model for the Canadian launch of the WWE Network its partnership with Rogers Communications. Vince McMahon was specifically asked why WWE was going that route, especially considering his famous claim in January’s LA Times that he turned down pay-tv distributors because they were “too restrictive.”
On the call, Vince merely said, “Canadians tend to look at things differently." He also noted that Rogers gave them a deal they couldn’t refuse. Considering the length of the deal (10 years—unusual for a company that often only works in increments of five years or less), Rogers must have made an aggressive bid. Perhaps this also reflects the post-NBCU deal thinking where the WWE acknowledged that the WWE Network did impair some of the negotiations.
WWE also promised future plans for an “authenticated app” (likely similar to how HBO Go operates) for Canadian subscribers, which would give them functionality similar to the U.S. version of the WWE Network. If I were a WWE fan in Germany, Italy or the UK, I would pay extra attention to the Canadian roll-out of the WWE Network. It’s very possible this model could be replicated in at least one of these countries.
WWE did confirm it expected PPV revenue (which still amounted to $23.8 million in Quarter 2 of 2014) would move to zero by 2015.
Originally, WWE projected most U.S. PPV revenue would disappear in 2014, but that it would retain most of its international PPV business. That hasn't happened. Instead, international buys, particularly for WrestleMania, were down substantially year over year. This raised a myriad of theories (large numbers of international fans using the U.S. WWE Network; rampant overseas piracy; lack of global interest in a WWE product—especially without the Rock).
Now it's clear that WWE is embracing the transition from traditional PPV to the WWE Network much faster than anticipated. Recall that originally WWE was pegging “late Q4/early Q1” for an international roll-out. This will no doubt provide the WWE some good news for next quarter’s results as it will be able to report a mix of both domestic and international WWE Network subscriptions.
WWE surprised the majority of analysts with its revelation that the domestic WWE Network only had 700,000 paid subscribers as of June 30. This is obviously an increase from March 31, when the service stood at 495,000 paid subscribers. However, it’s barely a five-percent improvement since WrestleMania, when WWE announced 667,287 subscribers.
I had guessed 748,000, and even that felt low to me. Some people had suggested, tongue in cheek, that WWE was actually going to report numbers below those announced at WrestleMania. I thought that would be impossible—I was very wrong. In fact, WWE revealed that while it had actually attracted 161,000 new WWE Network subscribers since WrestleMania, its “net addition” was only 33,000.
The implication was stark: Nearly 128,000 subscribers found a way to effectively “cancel” the WWE Network without completing the six-month commitment. That’s abysmal.
In the conference call, executives explained that this represented a group of users who cancelled due to non-payment—lack of funds, denying/disputing reoccurring charges (something that can be done easily via PayPal, for instance), canceling their credit cards or convincing customer service to terminate the account.
This enormous number should give everyone pause because it implies that nearly one out of every seven users finds a way to thwart WWE’s commitment clause. On the call, the CFO confirmed that most of these cancellations were clustered around the renewal date for the mass sign-up in the week leading up to WrestleMania, when WWE Network added over 172,000 subscribers.
As was the case previously, WWE refused to release information on what percentage of users had signed up for auto-renew. WWE also won’t provide estimates for likely “churn” around the six-month renewal cliff.
Before September 30, presumably 495,000-plus subscribers (the base of users reported by March 31) need to decide whether or not to stick with the service. However, WWE did note that other video-subscription services seemed to hover around a four- to eight-percent monthly churn. WWE will have the luxury of muddying the waters because the number it reports for Quarter 3 results will be a combination of domestic and international WWE Network bases. Hopefully analysts will press WWE on two issues: separating the subscribers' count by service (optimally by country) and providing monthly numbers.
No matter what, even with the ambitious global roll-out, it’s still a very rocky sign for WWE when over 100,00 of its subscribers have “reoccurring payment issues.”
Were these people gaming the system or does this suggest that incomes for this many WWE fans are regularly insolvent? We just don’t know. I’m still waiting for WWE to release more demographic skew information (specifically around age and gender) so we can compare WWE Network users against the viewers of WWE television programming. This would give us a much better understanding of who has and has not adopted over-the-top-streaming technology.
It seems stunning to consider that the average number of subscribers in Quarter 2 of 2014 was actually 665,000—that's below the April 6, 2014, post-WrestleMania number of 667,287. It's not a good sign for the WWE when the user base for its marquee service is shrinking before it's even completed the initial six-month launch.
To address these challenging developments, WWE is adopting an interesting tactic.
It is going to offer new pricing tiers for the WWE Network. In particular, WWE will now allow “one-month” subscriptions at $19.99. Essentially, this is the new digital "a la carte” price for ordering a WWE PPV. WWE did say it was considering raising this one-month-commitment price for certain events, notably WrestleMania, but it's understandably still in a “wait and see” mode.
Additionally, WWE is going to offer an option for “paid-in-full” six-month subscriptions. Presumably, this will be connected to launching “gift card” subscriptions similar to what services like Xbox Live offer.
Expanding the pricing tiers and options is a smart move—while WWE is risking only getting two purchases per year from a casual fan ($40 revenue versus the $60 it would make on a normal six-month subscription), it's acknowledging that some customers aren’t comfortable with longer commitments.
Originally, WWE’s model was geared toward attracting a large volume of fans. However, it’s evident from its fans' behavior that WWE is better off offering more pricing options and targeting the smaller base of interested consumers.
The $20 price point also brings back an interesting possibility of monthly-subscription variations more in line with the old PPV trends. However, since WWE is stubbornly refusing to release monthly WWE Network figures (WWE Network subscriptions have joined their monthly Key Performance Indicators presentation but will only be reported quarterly), it may be a while before we can actually observe these monthly ebbs and flows with much precision.
WWE also released some interesting statistics regarding WWE Network usage, including the claim that “91% of subscribers access the network at least once per week,” using "[an average of] 2.5 devices to consume network content." Both numbers surprise me. I would have expected there to be a larger base of fans who are only watching WWE Network monthly for the live PPVs and little else. WWE continues to back away from its “one million subscribers on the domestic WWE Network” goal and simply said it's pleased with the growth it's seeing.
WWE also highlighted (1) that the “resume” functionality should be added to all devices on the service, (2) new Blu-ray players and Smart TVs should be able to access the service and (3) it will be launching The Monday Night War and WWE Rivalries programs on the WWE Network.
Normally, I would have expected the lackluster announcement of only 700,000 subscribers to be met with a stock sell-off, but WWE excited the market by beating the earnings-per-share estimates, announcing the blockbuster Global WWE Network launch strategy, rolling out the impressive Rogers Communications deal in Canada and promising greater rewards from its cost-cutting measures.
WWE has announced it will be cutting seven percent of its staff, which will extend, to some degree, to the talent side.
We may have seen the latest round of this with Ricardo Rodriguez being let go on Wednesday. WWE has set aside about $4.5 million in connection with the cutbacks (restructuring charges include $2 million in severance packages). Overall, WWE believes it can improve 2014’s outlook by $10 million OIBDA and get a stunning $30 million improvement for 2015 OIBDA. In particular, this suggests that its “break-even” point for the WWE Network could be vastly lowered to fewer than a million annual subscribers.
What are they going to cut?
WWE was not specific. After completing a long-awaited company-wide assessment, it is going to “reduce inefficiencies.” Considering the rapid pace for ramping up some projects like the WWE Network, it is very conceivable that the company has some fat to trim. However, it also suggests that WWE is not likely, at least in the short term, to be announcing any large hirings when it comes to back-filling positions like Matthew Singerman's (Executive Vice President of WWE Network/Programming).
As has been the case in the past, WWE Studios didn’t turn a profit this quarter. However, the company again repeated the promise that under the new distribution strategy, the post-2012 WWE Studios assets would hit an internal rate of return of 15 percent.
This division remains an oddity on the company’s balance sheet, but since it believes it is a content-creating entertainment enterprise, it makes sense to them.
WWE’s licensing revenue has dropped considerably year over year ($32.5 million, down from $46.2 million). Some of the reduction is due to the madness around the THQ to Take Two Interactive transition and the fact that its latest title wasn’t released on the next-Gen systems such as PS4 or XboxOne. However, with sagging sales, the wrestlers' royalty payments in absolute dollars have seriously diminished, which can be a morale killer.
WWE has set the stage for an exciting third quarter with new WWE Network markets, new tactics to attract WWE Network subscribers and aggressive cost-cutting measures. The enormous drop of subscribers during the second quarter provides some real concern about how many households will choose not to renew in September/October, though. I appreciate WWE has adopted some progressive pricing features, and hopefully this corresponds to a greater emphasis on adding content to the WWE Network that will appeal to on-the-fence consumers.
Will all of these ideas work? Only time will tell.