WWE announced fourth-quarter results this morning, closing the financial books on an transformative year.
WWE reported record annual revenues of $542.6 million for 2014. However, while revenue grew to new heights, profits fell sharply. Operating income for 2014 was a negative-$42.2 million, compared with $5.9 million last year and a historical annual average of around $75 million (2007-2010).
|WWE Financial Results (in millions $USD)|
|$WWE Filings at sec.gov|
WWE had two primary objectives for 2014:
The transition from traditional pay-per-view model to an over-the-top WWE Network service has resulted in higher revenues and higher costs for WWE. Importantly, the new guaranteed, profitable revenue streams from the television rights deals provide the WWE with a financial cushion for 2015 as the company strives to gain and retain subscribers for the WWE Network. It's a delicate balance.
When WWE announced stronger-than-expected earnings per share, the stock went up. It ended the trading day at $14.36/share. It's been a tumultuous year for WWE shares, which have gone as high as $32 (March 2014) to as low as $10/share (less than a month ago, January 2015). The recent stock rally began on January 27 after WWE released an announcement that the WWE Network had "surpassed 1 million subscribers".
The health of the WWE is intimately tied to the fate of the WWE Network.
As Chief Strategy and Chief Financial Officer George Barrios put it today, "In 2015, we expect growth from almost all our businesses, with the most significant increases driven by the performance of WWE Network, the escalation of our television rights fees, as well as continued innovations."
In the fourth quarter of 2014, the WWE Network grew from 731,000 to 816,000 paid subscribers. The net addition of 85,000 subscriptions was composed of 336,000 new subscriptions minus 251,000 cancellations.
The company noted that an important driver for growth was the #freefreefree campaign. In November, WWE offered the WWE Network "free of charge for the entire month" for new subscribers. On today's call, CFO Barrios explained that the promotion attracted "approximately 242,000 trial subscribers" and that almost 170,000 subscribers ("approximately 70 percent") from the November promotion remained active as of January.
While this conversion rate is lower than other services, such as the early days of Netflix (90 percent), the results were promising enough to motivate WWE to stage a similar promotion for February. Barrios did note that he believed the campaign will be successful but probably "smaller in number than what we did in November."
CONTROVERSY EQUALS CASH
WWE's recent announcement that the WWE Network had achieved 1,000,648 subscribers surprised some analysts. After all, the company had just made the news when the #cancelwwenetwork hashtag trended overnight as fans tweeted their dissatisfaction over Roman Reigns winning the Royal Rumble.
At today's conference call, Vince McMahon weighted in on the subject. Replying to Needham analyst Laura Martin's question about #cancelwwenetwork, Chief Executive Officer McMahon said, "We saw no decline whatsoever in any of that. It created controversy, and that was really good for us."
Unsurprisingly, McMahon dismissed the campaign as a "gesture by some vocal minority" who didn't care for the creative direction. He added that fans often say, "I'm never going to watch this ever again," but he believed that person "is going to be glued to the television next week."
Considering the growth from December 31 (816,000 subscribers) to January 27 (1,000,648), the #cancelwwenetwork movement had little negative effect on the WWE Network subscriber numbers. Rather, WWE promoted that a combination of finally launching the WWE Network in the United Kingdom and Ireland and interest in the Royal Rumble were the primary components to reaching the 1 million number.
Vince McMahon @VinceMcMahon
Thank you to all @WWENetwork subscribers for this milestone. #Then#Now#Forever http://t.co/RTRBLXKjGr1/27/2015, 7:14:21 PM
Barrios did note that WWE was surprised at "how quickly adoption happened in the U.K." and that "almost overnight" the United Kingdom "became the second-largest market globally" for the WWE Network.
WWE certainly wants to capitalize on the opportunity to expand WWE Network reach prior to WrestleMania.
To that end, today WWE announced that Canadian fans using Shaw, Cogeco, TELUS and Videotron would be able to order the Rogers' Communications version of the WWE Network. Similarly, WWE also announced a new five-year partnership with OSN (pay-TV channel in the Middle East) to distribute the WWE Network as a "premium, linear channel." (However, George Barrios admitted during the Q&A session that the addressable market for the OSN deal was likely "3 to 4 million" homes.)
CHURN AND CONTENT
The real challenge for the WWE comes during the period immediately following WrestleMania. Will there be a massive decline in subscribers (in the parlance of WWE, this is "churn")? Or will WWE reach a new normal where they have year-round strong subscription numbers?
Benchmark analyst Mike Hickey specifically asked about this. Barrios offered this insight:
I think we've got to do what every subscription business needs to do to manage churn. We've got to deliver incredible value in the content; the experience has to be great. And so that's what we're working really hard on. We think if we deliver great content, it starts with our pay-per-view events, our live events. But as I mentioned in the script, and as Vince mentioned, we're working on a lot of new content that we're excited to talk about, and will be soon. But that's the way we'll keep subscribers over the long-term.
1. Live "Pay-per-view" events (Royal Rumble, Fastlane)
2. Live first-run shows (Main Event, NXT specials)
3. Original WWE Series (Legends House, Monday Night Wars)
4. Vault Material (TV show re-runs and archived PPV)
In today's press release, WWE promised new "content carousels" that would include "exclusive live specials with sought-after interviewees, talk shows, animation and short-form content." Exactly what this means remains unclear. However, it seems very likely there will be more televised Stone Cold Podcasts.
2015 AND BEYOND
WWE has secured "$100 million of revenue growth" from new television agreements through 2018. That's very good news for the company.
Trends in live-event attendance and weekly television ratings are relatively flat. Will the company be able to achieve adequate annual WWE Network subscription levels to return to profitable growth if other trends are stagnant? It's a tall order.
WWE loves to tout their social media metrics.
The only question is whether the escalating number of Twitter followers and YouTube video views will ever translate to oodles of new WWE Network subscribers.