WWE 3rd-Quarter Conference Call Announces WWE Network Changes Amidst Slow Growth

WWE announced their third-quarter results this morning. For the fourth consecutive quarter, WWE reported negative net income.

Fans and analysts alike have been keenly interested in the latest WWE Network subscription numbers. The WWE Network announced expansion to over 170 countries and territories in an Aug. 12 press release. Many people expected that a strong SummerSlam build combined with new international growth could provide a much-needed boost to the number of WWE Network subscribers.

Instead, WWE's announced that as of Sept. 30, there were 731,000 paid subscribers to the WWE Network. That was split between 703,000 subscribers to the domestic version of the WWE Network and 28,000 subscribers to the international versions of the WWE Network.

That was only a 5 percent increase to the number of paid subscribers as of June 30 (699,750, according to SEC filings).

WWE's stock price fell about 5 percent today, closing at $12.51.

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In an effort to stimulate further growth of the WWE Network, WWE announced several changes to the network going forward.

First of all, WWE will no longer have a six-month requirement in order for a subscriber to qualify for the $9.99 per month subscription tier. Instead, all subscriptions will be offered on a month-to-month basis going forward. This change will begin for new subscribers starting tomorrow. As for current subscribers, during today's conference call, WWE said they will begin the migration to no commitment tier for the existing accounts starting in December.

WWE had previously launched a no-commitment WWE Network subscription tier on Aug. 12. When it was originally announced on July 31, the company said it would cost $19.99 per month. However, on launch day, WWE reduced the no-commitment price to just $12.99 per month. In the Aug. 12 release, WWE said that the lower price "better reflects the variety of economies that exist internationally." WWE reported in Thursday's third-quarter results that, as of Sept. 30, this $12.99 "cancel at any time" had 23,000 subscribers (which represented about 3 percent of the total active WWE Network subscribers).

Secondly, the company announced that the WWE Network would be free for the month of November for new subscribers. The WWE Network will be "free of charge" for the new subscribers for the entire month and will include November's biggest attraction, Survivor Series, which will air live on the WWE Network on Nov. 23.

This is part of WWE's push to try and convince more WWE fans to become WWE Network customers. As WWE Chief Strategy and Financial Officer George Barrios told the Wall Street Journal, "We know sampling will be a big part of this business.” 

U.K.

WWE also announced WWE Network expansion plans for the key United Kingdom market.

While the U.K. market was included in the original WWE Network "phase I" countries list, there have been many delays. In August, WWE's press release on the Global WWE Network expansion said that "the network is expected to be live in the U.K. by this October." However, at the very end of September, WWE announced that the U.K. WWE Network launch date would be delayed until November to provide time for "discussions with potential partners."

Earlier, I speculated that the delays in rolling out the WWE Network in the U.K. could be tied to the new BSkyB deal. Perhaps we'd see something akin to the unique deal that WWE struck with Rogers Communications in Canada. However, that does not appear to be the case.

Instead, Thursday's WWE third-quarter earnings report clearly states that the plan is to distribute the U.K. WWE Network "on an over-the-top basis" starting in November. This will likely be a great relief to many fans in the United Kingdom who did not currently have subscriptions to Sky.

While the WWE Network is available in many countries, there are still several important markets that do not have an implementation date for the WWE Network. This list includes Italy, Germany, U.A.E., Japan, India, Thailand and Malaysia. On today's conference call, WWE specifically acknowledged that these countries do not yet have WWE Network launch date. 

TV Rights

Interestingly, WWE noted that in October the company received a "$50 million advance payment associated with a recently executed television distribution agreement." It's unknown which one of the seven recently completed television distribution agreements (U.S., India, Canada, Mexico, U.A.E., U.K., Thailand) provided the advance payment. On the conference call, WWE did confirm that this was not the entire value of the recently signed deal.

WWE also noted that the company's array of recently "finalized TV distribution agreements" are expected to grow in size from about $130 million in 2014 to $235 million by 2018. The WWE Network continues to struggle to break even. Meanwhile, TV Rights fees continue to provide a healthy and profitable revenue cushion which is a critical component to the overall well-being of the company.

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Domestic Transactions

Lastly, WWE's latest narrative is the idea that the WWE Network has improved the number of "domestic transactions" associated with lesser pay-per-view events such as Night of Champions. In essence, WWE is promoting that far more people are currently watching pay-per-views (PPVs) each month through the WWE Network as compared to last year when the events were only offered solely via pay-per-view providers.

While the total number of viewers watching the "B"-level PPVs is certainly up, that doesn't fully account for the dramatic change in value per viewer. Previously, WWE netted about $21 per PPV buy in 2013. The PPV segment contributed about $34 million in OIBDA (operating income before depreciation and amortization) in 2013. At current WWE Network subscription levels, the WWE Network may not even generate positive OIBDA in 2014, let alone come close to matching 2013 profitability levels.

Other Revenue Streams

As mentioned in the third-quarter earnings report, WWE have begun to air limited video advertisements on the WWE Network. Initial sponsors include Take-Two Interactive, K-Mart, Pepsi, Mattel and Pure Talk USA. On the conference call, WWE would not disclose how much revenue they expect to generate from the advertisements. Still, the company did note that the project was not expected to be meaningful enough to require it to adjust its overall economic model.

WWE seemed excited to announce that both Raw and SmackDown TV ratings are up year-over-year (about 2-3 percent). WWE also seemed excited to note that it now has over 420 million followers on social media.

Quarterly attendance was a mixed bag. North American attendance was down 7 percent (5,100 fans/show), and event sponsorship revenue dropped year-over-year. International attendance was up 15 percent (7,700 fans/show) but WWE ran eight fewer international shows as compared to last year.

Licensing revenue was up this quarter because of a "higher effective royalty rate" associated with the latest video game. WWE Studios only lost $400,000 this quarter. That may sound terrible, but consider that they lost $7.4 million last year in this quarter because WWE took an significant "film impairment" charge.

There was also $7.6 million increase in the "corporate and other costs" segment. This increase was related to the cost-cutting measures announced last quarter and this does include severance/restructuring charges ($2.1 million), talent development costs (NXT), brand marketing and an expansion of WWE international infrastructure. 

Conclusion

WWE Network continues to grow slowly.

Last week, Mangrove Partners founder Nathaniel August appeared on CNBC and discussed his negative outlook for WWE. His bullish assessment of the company was driven by meager WWE Network subscription numbers. The third-quarter WWE Network subscription number of 731,000 would seem to further bolster his argument.

Meanwhile, WWE surely remains hopeful that additional changes to the WWE Network and more "sampling" will entice new subscribers. By the end of this year, WWE will have launched the WWE Network in the U.K. on an over-the-top basis, provided a free month of content to new subscribers, unified the pricing structure to a single $9.99 tier and removed the six-month commitment from all subscriptions. 

These are all positive moves, but it remains unclear whether any of them with result in dramatic subscriber increases. There's been a lot of "growing pains" from launching the WWE Network. After this quarter's $5.9 million loss, WWE no doubt dearly hopes it will once again turn a profit in 2015.