Originally published on April 15, 2014
On April 15, a very interesting piece of analysis was released by Needham Research. The report, authored by Laura Martin and Dan Medina, concludes with a BUY stock rating and a target price of $30. However, I believe that it's built on a faulty premise that the WWE Network (NYSE:WWE) will explode (to $336M by 2016). In addition, many other revenue streams are expected to inexplicably grow without justification.
Important reference: WWE Financials 1994-2013
About the WWE Network
A lot of Needham's optimism is built around stupendous growth of the WWE Network. As noted in the presentation:
a) WWE owns their own copyrights ("no content cost risk")
b) WWE has "downside protection from 5-year (NYSE:TV) contracts"
c) WWE has "loyal super-fans that drive venue attendance, merchandise sales, and OTT (over-the-top) subscriptions".
In other words, Needham is characterizing the demand for the WWE Network similar to OTT Netflix.
But I disagree with them on that fundamental premise. The reality is this - the WWE Network is not going to drive revenue or EBITDA for quite some time.
A major issue is the misunderstanding around the 667,000 WWE Network subscriber number for WrestleMania. Needham is not alone - most of the coverage on WWE got this element wrong and just rephrased the press release without supplying actual analysis.
Needham layers in the requisite modifiers (Only Six Weeks! First of Its Kind!) so they can pretend that success equaled only hitting two-thirds of the break-even goal during the height of WWE awareness and demand (i.e. Wrestlemania).
In essence, this contradicts their premise, which was "Not all revenue is equally valuable". WWE is sacrificing (cannibalizing) a significant portion of their $66.9M in domestic PPV Revenue ($34.1M EBITDA), $24.3M Home Entertainment Revenue ($8.8M EBITDA) and possibly $23.0M WWE.com Digital Media Revenue ($5.5M EBITDA).
At current subscriptions, they'd generate $80M in WWE Network revenue which (based on WWE's own internal financial calculations) would result in a negative EBITDA (recall, they need a million annual domestic subscribers just to hit the break-even point).
Needham believes that WWE has an enormous "hidden asset value" since they own all content rights to footage they create. I believe exactly how valuable this content really is could be a matter of great debate since it's clear that new first-run product (PPVs, Live Television) is far more coveted than re-runs and re-packaging of prior material (Home Entertainment, Classics on Demand). There's some ludicrous assumptions about how WWE has to program "6 new hours per day".
(This is actually pretty alarming because that's strangely ignorant about how the WWE Network operates. The service is live but they're talking as if they've never used it. That's a real red flag.)
WWE Network Revenue (according to Needham estimates)
2014: $75M - Needham Est.- implies about 670,000 subscribers (-$15M OBIDA)
2015: $216M - Needham Est. - implies about 1.8 million subscribers ($71M OBIDA)
2016: $336M - Needham Est. - implies about 2.8 million subscribers ($111M OBIDA)
These are insanely optimistic numbers. Even with an international launch, WWE Network will NOT have close to 2 million subscribers by the end of 2015.
VERDICT: WWE will find a way to make WWE Network work. However, it's not going to be printing money for quite some time and the sky-high expectations from Needham are unrealistic.
The Needham report does a better job looking at TV Rights Fees. In 2013, WWE TV Rights were split into Domestic ($105.9M) and International ($55.0M).
Regarding the International TV Rights deal ($55M), Needham estimates that it's split into $10M UK (BSkyB) and $12M India (Ten Sports) with no other TV deal larger than $3M annually. They assumed that starting in 2015, the UK deal tripled ($30M/year) and Thailand "rose seven-fold" ($3.5M/year).
(I've certainly heard rumors along those lines, though I don't know if the company has ever confirmed either.)
Regarding the Domestic TV Rights deal ($106M), Needham estimates that it's split into $85M (Raw on USA/Smackdown on SyFy) with $14M (Main Event on ION) and $7M (Total Divas).
(That's in the ballpark of my estimates though I caluclate they earn slightly more for Total Divas and slightly less for Raw/Smackdown.)
Either way, the most critical piece is understanding that Raw and SmackDown represent between 75% and 80% of total WWE Domestic TV Rights.
(It should also be noted that the lucrative ~$14M/year Main Event contract expired last week. It was not renewed by Ion. Not a great sign.)
The most important variable for any honest discussion about the future of WWE is the profitability of their new Domestic TV deal. Needham is putting a lot of faith in the "WWE is Live Sports!" narrative that WWE has pushed. They throw out the GRP statistics: 'WWE gets about 50 cents per gross rating point which is only a tenth of MLB Baseball, an eighth of NASCAR, a fourth of NHL and a third of NBA basketball.'
However, they fail to address the other side of the equation - why will advertisers magically start paying so much more for WWE airtime after this new deal is signed?
As the LA Times excellently wrote,"The challenge for potential buyers is that although WWE fare gets big ratings, there isn't much of a trickle-down effect. Also, though WWE has softened its content to appease advertisers, it still does not always command a commercial rate commensurate with the size of its audience."
Here's some historical WWE TV Rights Estimates:
2009: $111.9M = $72.8M (Domestic) + $39.1M (Int'l)
2010: $127.0M = $81.6M (Domestic) + $45.4M (Int'l)
2011: $131.5M = $80.3M (Domestic) + $51.2M (Int'l)
2012: $139.5M = $88.9M (Domestic) + $50.6M (Int'l)
2013: $160.9M = $105.9M (Domestic) + $55.0M (Int'l)
2014: $198M (Needham Estimate) = New Domestic starts in October 2014
2015: $253M (Needham Estimate) = New Int'l starts in January 2015 (+$23M for UK/Thailand)
2016: $278M (Needham Estimate)
Needham's 2014 estimate is already flawed since it assumed about $9M in Main Event (Ion) television money for Q2-Q4 2014. Whoops. That deal ended in April and was not renewed.
While it's not clear who the WWE will partner with, it's hardly a given they're going to get even double the current rates considering their advertising problems.
VERDICT: Depends on whether you believe WWE can get double/triple current rates. I don't believe so.
Some facts regarding WWE Live Event revenue:
2009: $108.8M = 342 events (74 int'l) with 2,383,800 attendance for 6500 dom / 8500 int'l
2010: $104.6M = 327 events (74 int'l) with 2,155,700 attendance for 6300 dom / 7800 int'l
2011: $104.7M = 321 events (80 int'l) with 1,976,500 attendance for 6000 dom / 6700 int'l
2012: $103.7M = 314 events (66 int'l) with 1,854,100 attendance for 5900 dom / 6000 int'l
2013: $111.5M = 321 events (65 int'l) with 1,919,500 attendance for 6000 dom / 5900 int'l
2014: $128M (Needham Estimate)
2015: $137M (Needham Estimate)
2016: $148M (Needham Estimate)
I'm terribly surprised by these live event revenue estimates.
It's not clear why WWE is going to suddenly grow 15% in 2014 (and 7% in 2015 and 8% in 2016).
International attendance per event has been falling for five years. This is despite WWE running less shows overseas. Meanwhile, domestic attendance has also been slipping.
For the first time since at least 2002 (and likely much longer than that), average domestic attendance (6,000) was actually greater than average international attendance (5,900). That's a very distressing sign.
While I expect the WWE live event outlook for future years to have a rosier situation as compared to during the recession, I don't see any fundamental indicators that things are about catch on fire.
WWE no longer has two touring brands (i.e. Raw/Smackdown), and they have very few "main event" personalities that can headline each tour.
These reasons lead me to find Needham's WWE Live Event estimates quite questionable.
VERDICT: Too optimistic.
Needham estimates that Consumer Products are going to shrink to only $60M-$70M annually.
2009: $39.4M (Home Entertainment) + $46.8M (Licensing/Other) + $13.5M (Publishing)
2010: $32.1M (Home Entertainment) + $54.3M (Licensing/Other) + $11.0M (Publishing)
2011: $30.4M (Home Entertainment) + $56.8M (Licensing/Other) + $7.7M (Publishing)
2012: $33.0M (Home Entertainment) + $48.8M (Licensing/Other) + $6.0M (Publishing)
2013: $24.3M (Home Entertainment) + $46.4M (Licensing/Other) + $5.7M (Publishing)
2014: $10M (Home Entertainment) + $44M (Licensing/Other) + $6M (Publishing)Needham Est.
2015: $10M (Home Entertainment) + $46M (Licensing/Other) + $6M (Publishing)Needham Est.
2016: $12M (Home Entertainment) + $49M (Licensing/Other) + $6M (Publishing)Needham Est.
I think this prediction is a little skewed - I think Home Entertainment in 2014 will likely be stronger than $10M though I'm dubious that Magazine Publishing in 2016 will still be $6M. Ultimately, I can agree with this section of their analysis.
Needham estimates that Digital Media is going to grow about $5M annually.
2009: $16.8M (WWE.com) + $16.0M (WWEShop)
2010: $14.9M (WWE.com) + $14.0M (WWEShop)
2011: $12.5M (WWE.com) + $15.6M (WWEShop)
2012: $19.7M (WWE.com) + $14.8M (WWEShop)
2013: $23.0M (WWE.com) + $15.5M (WWEShop)
2014: $26M (WWE.com) + $18M (WWEShop) - Needham Est.
2015: $29M (WWE.com) + $20M (WWEShop) - Needham Est.
2016: $32M (WWE.com) + $23M (WWEShop) - Needham Est.
I have two concerns around Needham's projecting WWE.com revenue.
First, this is where WWE has been booking the revenue from digital rights such as Hulu.
Second, I believe that website traffic (and subsequent advertising revenue) will be impacted by the WWE Network launch.
Ultimately, I think the WWE Network may result in some WWE.com cannibalization so I'm not sure it's going to keep growing steadily for the next three years.
Why will WWEShop revenue would magically rise year-over-year?
With the number two merchandise seller (CM Punk) not currently working on television, it's strangely optimistic to believe WWE is just going to start selling more merchandise despite having less and less top stars.
VERDICT: More unsubstantiated revenue growth expectations.
2009: $7.7M revenue ($3.7M OBIDA)
2010: $19.6M revenue ($0.4M OBIDA)
2011: $20.9M revenue (-$29.3M OBIDA)
2012: $7.9M revenue (-$5.5M OBIDA)
2013: $10.8M revenue (-$12.7M OBIDA)
2014: $12M revenue (-$7M OBIDA) - Needham Estimate
2015: $14M revenue (breakeven OBIDA) - Needham Estimate
2016: $19M revenue ($5M OBIDA) - Needham Estimate
While I remain quite frustrated and confused with the WWE Studios model, at least this estimate doesn't assume that they're even turning a profit until 2016.
VERDICT: Future Revenue estimates seem high.
Overall, Needham suggests that WWE's total Revenue is going to grow from half a billion (2013) to $780M (2015) to $949M (2016!).
That's preposterously high.
Needham is overestimating all WWE revenue streams. Everything from WWE Network revenue ($336M by 2016?!) to future Live Event revenue to small things like WWEShop are grossly inflated.
In short, Needham's WWE analysis grossly overestimates future revenue.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.