Could WWE's International Network Rollout Send Shares Higher?

Adam Garcia profile picture
Adam Garcia
3 Followers

Summary

  • The 2Q14 earnings report assuaged some concerns that management was going to increase costs and capex dramatically by pumping too much cash into its World Wrestling Entertainment, Inc. Network product.
  • The rollout of the WWE Network into the international market earlier than expected should accelerate subscriber growth starting in 3Q14 and return WWE to profitability.
  • Cost cutting measures worth ~$40 million annually should increase 2015 EPS by ~$0.50. Most of these are from staff reductions and should be an easy target to hit.
  • 2014 and 2015 Consensus forecast has room for upside. Upside revisions from international subscriber growth and aggressive cost cuts could act as a positive catalyst to drive the shares higher.

On July 31, 2014, World Wrestling Entertainment, Inc. (NYSE:WWE) reported 2Q14 earnings and provided some important updates. We see the updates and events since the earnings report as an inflection point in the story. Previously, management provided 2014 guidance on May 15, 2014 that was not well received. Net income guidance for a loss of $45 - $52 million in 2014 was below analysts' consensus of -$17 million, but the company did try to improve the picture by providing 2015 guidance that bookended the consensus forecast of $76 million. The effort was unsuccessful, and the stock sold off by 43%. The reduced guidance for 2014 was largely based on higher than expected costs associated with the WWE Network, which we discuss later. Management seemed unconcerned with the magnitude of the ongoing investment behind the WWE Network rollout, and the Street did not like that.

2Q14 Earnings Release and Management Comments were Positive

In that context, management comments and 2Q14 results were positive. Below is a quick summary of results from the quarter, with sales up 3% and OIBDA (operating income before depreciation and amortization) down to a loss of $14.6 million from a gain of $14.9 million in the same quarter a year ago. COGS and SG&A were up by 26% and 21.5% versus 2Q13 due to the rollout of the WWE Network. Accordingly, the margin in the Media Segment crashed to 6.58% from 26%.

Source: 2Q WWE Earnings Presentation

EPS of -$0.18 beat analysts' consensus of -$0.21 but that is not the whole story. Management introduced a plan for staff reductions and cost cutting that would impact earnings in the second half of 2014, but especially benefit them in 2015. In the earlier guidance from May and subsequent management commentary at a June conference, the Street came to view WWE as going

This article was written by

Adam Garcia profile picture
3 Followers
Trading Equities And Options For 4+ Years. Look for value plays that have been beaten down by the street. I also fade overreactions through options trading.

Disclosure: The author is long WWE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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