Understanding WWE Q1 Results

Summary

• WWE key performance indicators will only be released quarterly instead of monthly.
• Majority of WWE social engagements are users outside of the U.S. while majority of WWE Network subscribers are domestic.
• WWE expects that free subscribers from #freewrestlemania campaign will convert to paid subscribers at rates consistent with previous trends.

If you want to get a full picture of World Wrestling Entertainment's (NYSE:WWE) Q1 performance, there are six different documents that you really should review:

• WWE Q1 Press Release
• WWE Trending Schedules through Q1 2016
• WWE Q1 Conference Call Transcript
• WWE 10-Q filing
• WWE Q1 Earnings Presentation
• WWE KPIs through Q1 2016

It can be an undertaking.

Furthermore, whenever the timing of WrestleMania shifts from being in the first fiscal quarter (January 1-March 31) to the second fiscal quarter (April 1 to June 30), WWE provides a "pro forma," which is supposed to exclude the impact of WrestleMania. The challenge is that doing this makes a lot of assumptions about what steady state would have been - particularly around WWE Network subscriber acquisition & retention. Obviously some financials can be clearly quantified (the live gate, venue merchandise sold at the Stadium, etc.) but as one investor elegantly put it, "When focused on the timing of certain items hitting the books for increased EBITDA, put up the bullshit alert in the sky."

WWE ran a grand experiment this year - they offered WrestleMania for free to "new" subscribers. The reasoning was that they'd be able to laud their new record-high number of active WWE Network accounts (free+paid was 1.82 million) and that a substantial number of these accounts could be converted to paid subscribers following the trial period. While WWE only reaffirmed the Q1 numbers and post-WM WWE Network numbers that were released back on April 4, they did provide some color with George Barrios noting, "Over the past month, these members converted to paying subscribers at already consistent with previous trends."

Source: WWE, 4/4/16 presentation

Determining Q2'16 WWE Network subs is a calculus based on how many of the existing paid WWE Network subscribers (1,454,000 as of 4/4/16) stick around and how many of the free WWE Network accounts (370,000 as of 4/4/16) are converted to paying subscribers. WWE did note that they've been refining their expected churn calculations based on a myriad of factors around subscriber consumption, geography and acquisition timing. (I wonder if that's some of the work that's being done out of the WWE's "Strategy and Analytics" department which is headed by Tandy O'Donoghue and recently added a new Senior Vice President of Data Strategy Pamela Murrin.) In the latest Wrestling Observer Newsletter (subscription required), Dave Meltzer estimated that WWE seemed to infer they'd add about 260k-280k new subscribers from the #freewrestlemania campaign.

source: WWE, 5/10/16 KPIs

Still, Churn in WWE remains a serious issue. 1,647,000 accounts have churned out in the last four quarters while WWE has had gross additions of 1,677,000 accounts. (Net change: +30,000 accounts.)

It terms of revenue, Q1'16 was at $171.1 million which was down from Q1'15 revenue $176.2 million. OIBDA (Operating Income before depreciation and amortization) was $27.6 million in Q1'16 compared to $21.0 million in Q1'15. Net income was $13.9 million in Q1'16 compared to $9.8 million in Q1'15. Of course, the biggest distorting factor is that WrestleMania 31 was held on March 29, 2015 (Q1'15) while this year's WrestleMania was held on April 3, 2016 (Q2'16). It will be much easier to compare financials for H1'16 (Q1+Q2) TO H1'15 (Q1+Q2) when next quarter's results are out.

One of the surprises coming out of this quarter's results was the company's decision to retool and repackage how they are presenting their Key Performance Indicators.

Previously, WWE released their KPIs monthly (example from 2014, example from 2015). The monthly KPIs covered:

1. WWE Network (paid, average, total subs - quarterly only)
2. Pay-Per-View Buys (updated monthly) including domestic & international splits and by event
3. Home Entertainment (average price, significant titles, units shipped)
4. Digital Media (social media followers, originally "internet traffic & usage" - later "free video on demand" views)
5. Live Event attendance (North America & International with breakouts for WrestleMania's impact)
6. Consumer Products (online merchandise sales)

Now, WWE is only releasing their KPIs quarterly and the new format covers:

1. Average US Primetime Cable Ratings (Raw, Smackdown, USA Network, Top 25 Cable Networks) - quarterly comparison
2. Media Consumption: WWE AVOD Consumption (Ad-supported video on demand including WWE.com, WWE App, Facebook, YouTube for Global Hours Viewed and Global Views)
3. Social Media: WWE Reach & Engagement (Social Media Followers & Social Media Engagement - cumulative fan response to WWE content measured by the number of likes, follows, shares, mentions, retweets across social media platforms including FB, Twitter, YT, Instagram and Tumbl)
4. WWE Network Ending Subscribers (Total Subscribers - free & paid, Total Subscribers - US & Int'l, Total Paid Subscribers - US & Int'l, WM Total Subscribers - Free & Paid)
5. WWE Network Average Subscribers - Free & Paid (average total subscribers, average total domestic subscribers)
6. WWE Network: Order-based subscriber growth (Gross Paid Additions, Churn and Ending Subscribers by Quarter)
7. Live Event Attendance (North America & International with quarterly averages and variance w/ and w/o WrestleMania included)

Why does this matter?

adopted from WWE Trending Schedules for 2015
(OIBDA was Network was 49.5 for PPV+WWE Network; assumed 40% OIBDA for PPV and 30% OIBDA for WWE Network)

WWE essentially stopped providing any KPI information on three segments (PPV, WWEShop, Home Entertainment) which produced a combined $61 million in annual revenue and estimated $18 million in annual OIBDA. While it can be argued that WWE is actively eschewing Pay-Per-View in their attempts to add paying subscribers to their over-the-top Network and Home Entertainment has been declining significantly for years, there really is not a good reason why WWE should stop providing insight on their WWEShop platform. However, once you move to a quarterly basis for the KPIs, almost all of those metrics are in the quarterly filings.

WWE is continuing to provide insight on live event attendance and the WWE Network (albeit only in quarterly chunks). Attendance can also serve as a proxy for Venue Merchandise sales.

WWE isn't providing any real insight into their Television revenue because those contracts are based on guaranteed deals with quarterly escalators. They can attempt to position their ratings drops as less severe than other networks or other programs, but the complete picture of the changing world of cable television in a cord-cutting world is much more complex and nuanced than the infographic may suggest.

source: WWE, Key Performance Indicators 5/10/16

The information that WWE is presenting around "WWE Reach & Engagement" on Social Media may be informative for understanding trendlines for the Digital Media segment. But it's far from a linear correlation. This subject came up especially during the Q&A portion of the conference call when Laura Martin (Needham & Company) asked the WWE about the domestic/international split on free video-on-demand consumption after George Barrios admitted that "70% to 80%" of the social media and digital media views were coming from outside of the United States.

Laura Martin

Why do we care about social media if it's not turning, if it actually doesn't drive, if that 80% of offshore social media isn't driving higher adoption offshore and higher economics, I can't figure out why I care about social media economically?

Barrios' answer is essentially that they're driving "awareness of the network" and entertaining the people "24/7" and eventually that's going to drive towards the ARPU (average revenue per user) of $10/month subscriptions.

George Barrios

So it's not directly tied to social. There are kind of steps along the way, because it's about the engagement, it's about the awareness, it's about connecting the story lines all the time around the world. All joking aside I mean, I struggle when people don't get that, that people don't get how powerful that is, because at the end of the day, our entire business is about mind share and time. And the ability to drive more mind share and more time is to me a part of the economic moat that we've got. So it's huge for us, I mean, strategically it's huge."

However, WWE wasn't off the hook yet. The next caller, Brandon Ross from BTIG, jumped on this logic with a valid follow-up:

Brandon Ross

Just a follow-up on the last question there. I think the way I would ask the question is, it's 80% of your engagement on social media and 80% of your engagement in longer form content is a broad, why isn't the network eventually 80% international? Thanks.

Barrios responded using India as his example of a country with "incredible consumption for us across every platform" but bandwidth availability is low. He sees the switch in WWE Network where International subscribers represent a large majority of users as "five, six, seven years" down the road.

In short, this is the challenge with all of WWE's bright charts about the billions of global views and record numbers of social media engagements -- what exactly is it driving in terms of revenue for WWE? Most of the WWE Network revenue is domestic subscribers yet most of the growing social media engagement and free-video views are international users. WWE booked a paltry $5.4 million for their Digital Media segment in Q1'16 (OIBDA of -$0.1 million). Barrios once gave the analogy that social media was like Cable television in the 80's - a platform that was ignored by most but capitalized by the WWF.

Of course, there's always the looming question of what happens when the latest NBCU contract domestic television rights expires. What will the live sports/live event landscape look like? Will we see new bidders coming to the table (following the lead of ESPN that WWE can equal eyeballs) or will we the cable landscape become a dinosaur's stomping grounds? Will new bundles through offerings like Hulu represent new distribution platforming which will adequately supply the consumer base demanding WWE programming?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.