World Wrestling Entertainment, Inc. (NYSE:WWE) Q2 2016 Earnings Conference Call July 28, 2016 11:00 AM ET
Michael Weitz - SVP, Financial Planning and IR
Vince McMahon - Chairman and CEO
George Barrios - Chief Strategy and Financial Officer
Evan Wingren - Pacific Crest Partners
Brandon Ross - BTIG
Eric Katz - Wells Fargo
Laura Martin - Needham Investor Group
Dan Moore - CJS Securities
Rob Routh - FBN Securities
Hello, and welcome to the webcast entitled WWE Second Quarter Earnings. We have just a few announcements before we begin. [Operator Instructions]
I will now turn the call over to Michael Weitz, SVP, Financial Planning and Investor Relations. Please go ahead, Michael.
Thank you and good morning everyone. Welcome to WWE's second quarter 2016 earnings conference call. Leading today's discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our Chief Strategy and Financial Officer. We issued our earnings release earlier this morning and have posted the release, our earnings presentation and other supporting materials on our Web site at ir.corporate.wwe.com.
Today's discussion will include forward-looking statements. These forward-looking statements reflect our current views, are based on various assumptions, and are subject to risks and uncertainties disclosed in our SEC filings. Actual results may differ materially and undue reliance should not be placed on them. Additionally, the matters we will be discussing today may include non-GAAP financial measures. Reconciliation of non-GAAP to GAAP information is set forth in our earnings release and presentation, which are available on our Web site. As a reminder, today's conference call is been recorded, and the replay will be available on our Web site later today.
At this time, it's my privilege to turn the call over to Vince.
Thank you very much. Just a couple of comments, some of our notes on the quarter; we're certainly pleased with the execution of our strategy to optimize our long-term value of our content. Our revenue; sort of proud of those, increased 32% for a quarterly record of $199 million, which of course is in line with our guidance.
Our network and live event segments had their highest level of quarterly revenue in WWE history. International, by the way, increased approximately 15%, which I thought was considerable. Our network, more importantly, had a record 1.52 million average paid subscribers over the quarter, which is up 25% higher than the previous year, which is again on budget.
SmackDown, we have a brand extension, as we call it, with SmackDown and RAW having different sets of rosters and things of that nature, and we executed that most recently. And Tuesday before last, we had our highest television rating ever on SmackDown since it transitioned from broadcast to cable many, many years ago. And the brand extension thus far is working extremely well, different sets of storylines and talent exclusives, both RAW and SmackDown, and the competitive nature of both. So that's working thus far very, very well.
Also of big note, our WWE content has 7.7 billion video views on social and digital platforms in the first half of the year, which is up about twice what it was the previous year. So that I think is a really big metric for us. People are watching us, they're enjoying us whether it's on traditional television, on social media, or on our own network, there's more of a valued experience other than just watching television with all of this going on all at the same time.
And we also, just changing the subject completely, announced recently that our new deal with PPTV in China, and they are taking RAW and SmackDown live in Mandarin, which is a nice way to wake up early Tuesday and Wednesday mornings, as the case may be. So we're proud of that, and we think there's a lot of growth obviously in that market. So those are some of the highlights.
Thanks, Vince. There are several key topics which I'd like to review today. These include management discussion, our financial performance, progress of key strategic initiatives, and our business outlook. For the second quarter, we achieved record quarterly revenue, and our financial results were in line with our guidance. As Vince indicated, our performance to date reflects the effective execution of our strategy to optimize the long-term value of our content. This includes the sustained year-over-year subscriber growth of WWE Network, the transition of SmackDown to a live format every week, and the completion of our first exclusive content agreement in China.
Supporting the successful execution of our strategy, our key operating and brand metric continues to show remarkable growth during the quarter. WWE Network averaged 1.52 million paid subscribers over the quarter, in line with our guidance, and representing a 25% increase from the second quarter last year. In the quarter, WrestleMania achieved record-breaking attendance, ticket sales, viewership, and social media activity. And our digital engagement metrics continue to grow through the first six months of the year. Consumption of WWE content more than doubled to nearly 8 billion video views across Facebook, YouTube, and wwe.com.
Social media fan engagements measured across all social platforms increased 39% to $570 million. These outcomes demonstrate the increasing strength of our brand and our potential to capitalize on these strengths to drive long-term growth. To review our performance in the quarter, let's turn to page six of our presentation which shows the revenue in a list of contributions by business as compared to the prior year quarter. As we review these results you should note the timing of WrestleMania, which occurs during the second quarter of 2016 as compared to the first quarter of 2015. Despite the shift in timing, WrestleMania had a significant impact on subscriber growth in the second quarter of both years. Therefore we have not attributed any of the year-over-year change in subscription revenue to the timing of WrestleMania.
We believe the timing impact of the event on second quarter 2016 results is best estimated by measuring the direct contribution of the event's ticket sales, merchandise sales, pay-per-view revenue, and production costs. In aggregate these items increased second quarter 2016 revenue by $29.4 million, but essentially had no impact on profitability. The pro forma impact of the event's timing on profit is minimal because we don't adjust for the year-over-year change in the subscription revenue. In contrast to this event's timing impact however, the value of WrestleMania is significant. And it comes from its ability to drive subscriber acquisition, and generate meaningful economics as subscribers are retained over a longer period.
As I just indicated, although the timing of WrestleMania did not have a material impact on our overall earnings growth, it did impact the comparability of results for specific business segments. As such, you'll discuss our performance on a pro forma basis excluding this timing impact. On a pro forma basis revenue increased 13% to $170 million, with increases from across our businesses driven by the growth of WWE Network, escalation of our T.V. rights fees, and strong performance of our live events' business. On a pro forma basis OIBDA declined $5.5 million, reflecting our strategic investments in key areas. Changes in foreign exchange rates did not have a material impact on either revenue or profit for the quarter.
As shown on page seven of our presentation, network segment revenue increased $7.7 million on a pro forma basis reflecting growth in subscription revenue to $45.9 million as the network's customer base increased 25% to an average of 1.52 million paid subscribers. Network segment pro forma OIBDA declined $5.4 million as the growth in subscription revenue was offset by increased program production costs, including a $5.3 million allocation of certain shared production expenses that are shared between our network and T.V. segments.
We continue to increase the global distribution of WWE's network as measured on a year-over-year basis, with launches over the trailing 12 months in six countries, including Malaysia, Germany, and Japan. The network had 1.56 million total subscribers at quarter end, including 1.13 million paid U.S. subscribers and 381,000 paid international subscribers. Importantly, with the increased size and maturity of the network subscriber base average monthly churn declined 20% to 9.9% for the first six months of 2016, from 12.3% for the comparable period in 2015.
WWE Network content continues to drive viewer engagement. We remain on track to add more than 300 hours of original content to the network's featured programming in 2016, and to add more than 1,500 hours of archival content. This would result in an on-demand library of nearly 6,000 hours at year-end 2016, about four times the size of the library at the network's launch in February, 2014.
Turning to our television operations pro forma profit from the licensing of television content increased $6 million with the allocation of shared production costs to our network segment, as I described. As shown on page nine, live event profits increased $1.2 million on a pro forma basis primarily due to the strong performance of our events in Europe, which has achieved a 17% increase in average attendance to 8,000 fans.
Also during the quarter, the showcase for developmental talent, NXT, continued to expand its touring schedule, performing 53 events in the U.S. and Europe, compared to 33 events in the prior year. Our ability to bring NXT to new audiences is a critical part of our efforts to prepare the next generation of talent, and deepen engagement with our fans.
Shown on page 10, licensing profit declined $2.5 million based on a 20% decrease in licensing revenue derived from a lower effective royalty rate for our franchise video game than in the prior year. The lower effective royalty rate derived from an increasing rate structure over the 2015 year as compared to [technical difficulty] rate structure in 2016. Importantly, for the full year, we expect the rate for 2016 to be comparable to the average rate for 2015. Corporate and other expenses increased $7 million, to $49.4 million in quarter reflecting investments in global branding, data and technology, certain talent initiatives, as well as increased legal expenses. In terms of WWE's overall performance, changes in other business segments were largely offsetting, and as such did not have a material impact on our consolidated results.
Page 11 of the presentation shows selected elements of our capital structure. As of June 30, 2016, we held $80 million in cash in short-term investments. And we estimate that WWE has approximately $190 million in debt capacity under the company's revolving credit facility. Through the first six months of the year, free cash flow declined approximately $30 million primarily due to the timing of working capital, including the receipts of payments related to our T.V. rights agreements. During the quarter we entered an agreement to acquire a facility which will be financed principally through the assumption of the underlying $23 million mortgage on the property. The facility, which is adjacent to our production operations in Stamford, Connecticut, solved some of our short-term operational constraints, and also affords us the flexibility to meet our long-term space requirements. The transaction is expected to close early in the third quarter of 2016.
Looking back over the quarter, our financial and operating results continue to reflect how we're driving innovation, transforming our business model. For the third quarter, we are projecting average paid subscribers of 1.49 million plus or minus 2%, representing an approximately year-over-year increase of 27%. The third quarter subscriber forecast represents a sequential decline of 2% from the second quarter of 2016, compared to the 4% decline from the second quarter -- the third quarter in 2015. We also estimate third quarter 2016 adjusted OIBDA of approximately $24 million to $28 million, and this range represent an expected year-over-year increase primarily due to the increased monetization of video content and continued strong performance of our live events business.
Turning to our full year performance on page 13, as stated recently, that the average paid subscribers to WWE Network increased at a rate, in 2016, between 20% and 25%, adjusted OIBDA for the full year could be in the range of approximately $70 million to $85 million. In addition, if the recent overarching subscriber trends continue over the remainder of 2016, average paid subscriber growth would be at the upper end of this range. And 2016 adjusted OIBDA would be between $80 million and $85 million. As recent historical data may not offer a comparable basis for projecting future results and these results may differ from the range provided, we offer these ranges of potential 2016 full-year subscriber growth income to provide additional insight and perspective rather than as formal guidance.
On the OIBDA results for the first-half of '16, we're essentially flat to the comparable period last year. Over the second-half of '16 we anticipate year-over-year adjusted OIBDA growth from continued revenue growth and more favorable year-over-year comparisons in our fixed cost base. We anticipate such growth will accelerate in the fourth quarter, evidenced by the range of our full year results and our projected results through the third quarter.
Over the past few years we've placed increasing strategic emphasis on driving and optimizing the value of our content, developing digital technology platforms, and deepening our global presence. Execution of these initiatives has been very strong, and our result demonstrates the successful transformation of our business model. I conclude this portion of our call. And I'll now turn it back to Michael.
Thank you, George.
Bethany, we are ready. Please open the lines for questions.
[Operator Instructions] We will take our first question from Evan Wingren, Pacific Crest Partners.
Thanks. So, if I exclude the $5.3 million gain for TV from the allocation of expenses from the network, it looks like margins declined year-over-year, and incremental margins accelerated. Are there investments in new TV content or something that they being included in that or -- so what's driving that?
Yes. As we said, kind of heading into the year, that we would be making investments broadly across three areas: content, data and technology, and our global operations. And most investments cut across the variety of segments, including the TV segment, but for the year, we expect [indiscernible] would be up fairly significantly in the TV segment.
Okay, all right. And then on the Q3 guide, what impact if any do you have embedded for the Olympics?
In terms of the viewership?
In terms of what's potentially happening, you know if people watching the Olympics, if they [indiscernible] away from you guys and that would impact growth of that during the quarter.
Yes, we don't expect any impact. Obviously we have -- there is always high-impact items throughout the year, I think if you are a fan of WWE Network and a big enough fan that you are subscribing, we don't expect any of that.
Okay. And then just one more and I will hop out, working capital is up about $45 million year-on-year for the first half, and I know you have talked a little bit about that being the timing of television repeat and things like that, but just can you talk about your expectations for the back half in terms of the working capital?
Yes, we don't guide on the balance sheet items, but to your point, there is some timing elements related to the payment of incentive comp in '16 versus the accrual that we are doing for payout this year, as well as just some timing elements, and when we are talking a couple of days each way and some of payments and some of our bigger deals.
Okay, thank you.
And we will move to Brandon Ross of BTIG.
Hi, thanks for taking the question. Bunch of questions on the brand extension; first, if you could give us a little more color on the rationale for doing the brand extension again, was it ratings with an eye towards the 2019 licensing deals, or are there any other benefits you anticipate? And if you could help us with how each the extension will impact your cost structure, and if that was anticipated in your guidance that you gave before 2016 target?
Sure. Well, we have a flutter [ph] of talent as a result of pile of extra influence on NXT and the performance center. We have the ability to -- when you have too many talents you just can't exploit all of that to IP. So, the option is to take all of that and develop two distinct brands. We have done this before, and we have done it with success until we ran out of talent. In this case, we won't run out of talent because of our performance center. But it allows us to have more pay-per-views, to have more income, it allows us to have more live events, it allows us because of more personalities to have more and more life-changing opportunities. So, it's a really big move on revenue and on the brand in general.
And on the cost structure question, Brandon, we didn't anticipated back in '15 when we talked about '16, but it's obviously anticipated in the guidance I gave for the full year a couple minutes ago.
Great, thank you.
Eric Katz of Wells Fargo has our next question.
Thanks. Since this is such an important quarter for the network coming out of WrestleMania, I was hoping you could provide a little more color on the trends throughout the quarter, maybe a ballpark percentage on the retention of WrestleMania subs and maybe how subs are trending towards the end of the quarter?
Other than what we provided in the materials, we are not going to give any additional data, but I think heading into it, I think if you remember, I said, if the trends we're seeing over the preceding 12 months or so help, we gave the guidance on average for the quarter which was 1.5, and it was about 1.52, so right in line with our guidance. So I think it kind of goes to show that those trends have held off of pretty well, but we are not going to get into providing any more data on that.
Maybe a qualitative question on the Q3 sub guide, how should we think about International subs going forward? In the last two quarters, you grew by about 50,000 or so sequentially; any other boost [ph] from new countries in WrestleMania, and then this quarter we have SummerSlam, but no new launches until maybe China, whenever that happens. So, should we sort of still think about 50,000 sequential increase going forward? Is that sort of a normalized type of number for you guys, or should it moderate from here?
Yes, we don't give International versus domestic guidance. I think an important note to keep in mind is once we get into late-January of next year, it'll be apples to apples International in terms of countries So, our last country to launch was Germany, which was towards the back-end of January. And so, once we lap that other than China it's apples to apples. There's no more launches impacting the growth.
Okay. Let me try out one last question. I think people typically view the network, subscribers coming from pay-per-view event, but there is quite a bit of buzz going into the drafts, and obviously ratings jumped. Have you seen any early indications that, I guess, the storyline, brand extension changes are driving subs?
Well, Eric, as Vince mentioned, SmackDown went live about a week ago and the brand extension kicked off three days ago. So to start saying, have we got trends in place? No, we don't have trends yet. We're excited about it, which is why we did it. Our expectation is that it'll drive even more engagement across all our platforms on TV, on digital, on social, on WWE network, but given that we're three days into this there aren't any trends that are kind of manifesting themselves.
Okay. All right, thank you.
And we will move to Laura Martin with Needham Investor Group.
Hi, guys. Did we talk about China? Is your deal in China exclusive? And is it -- you're doing live there as proposed to RAW and SmackDown, and there does seem to be a trend playing at the moment. Are there economic differences for live versus what's the -- like the films and then airs later, I'm wondering about that. And then also, figure up to 1600 hours get the archives, I'm wondering -- I was thinking that the library was six or seven hours [indiscernible] over the top network, or is the 1600 hours sort of tapping out [indiscernible]? Thanks.
So, on the China question, it's our first exclusive deal in China and specifically the exclusive digital deal with PPTV. They are one of the preeminent digital players in China in providing video. And I think what you are seeing similar to other parts of the world that live content has a premium. So, it's one of the things that as Vince mentioned that we are excited about is not only this exclusive deal with PPTV, but that for the first time ever we are going to be providing both RAW and SmackDown live in the market as a reminder, and I know you and I have talked about this previously, because of the time distribution, the edits that were being made to the show, it was about a two to three week delay, so that we can now go live live in Mandarin with RAW and SmackDown. We just think it's terrific. And we really found a great collaborator in PPTV.
On the matter of content on the network, I think you may have misheard the numbers. At the end of the year we should have about 6,000 hours of content available on WWE Network and when we launched we had about 1,500. And so, that was my reference to growing it by four times; so from 1,500 to 6,000. As you know, we have a 150,000 plus hour library that grows everyday as we create new content. We don't feel that all 150,000 hours will make it on to the network, but we're going to keep growing for our fans. We're going to keep growing that 6,000 hours for quite some time. Probably for most of our lifetime we'll be adding to that to the networks VOD content.
And we will move to Dan Moore, CJS Securities.
Good morning, thank you. I wanted to shift back to brand extension, maybe just talk a little bit, what are some of the key metrics that you'll be looking at and analyzing in the coming quarters to measure the success and given that it was almost simultaneous with the vision to go live. How do you kind of break that apart and analyze the impacts of one or both of those decisions?
Yes, I mean it's the metrics that we talk about pretty consistently across all the platforms. So, obviously when we are talking about traditional TV, we look at the ratings, certainly average ratings. We look at total consumption, Dan, time spent across the world on that content that sits on the traditional pay TV platform. So we'll continue to measure that and see what the impact of live, and obviously it'll be difficult to peel apart live versus the brand extension because they happened at the same time.
And then, two, on the digital platform, similarly it's of the engagement metrics to re-tweet shares. It's the time spent on the different platforms. On the network, in the old days we would have measured the special events, the pay-per-views transactionally in a subscription business it's really are we growing the new editions, are we growing, are we activation a win back rate, are our return rates improving? So, across the platforms, those are the metrics will look at.
Very helpful. And yes, I know you launched -- and I'm not sure exactly how long ago, but a three-month gift card. I'm wondering how that's been received, do you have plans to extend that to longer durations at this point? And one quick follow-up there.
Yes, I think generally speaking payment options are important, both domestically and globally. But I think one of the things you will see from us just over time is adding a variety of payment options. And I put the gift card model in that. And the reason I say that is because as most people know, the gift cards are used primarily as a payment options from the primary party buying it as opposed to really gift, change a little bit in the holiday season, but we view it as just another form of payment and you'll see us just adding more and more of those over time.
Okay. And I think that covers all I had, thank you.
All right, thanks.
[Operator Instructions] And we will move to Rob Routh with FBN Securities.
Hi. Good morning. Thank you very much for taking my questions. Can you comment a little bit about the recent U.S. transaction, and how you view that as far as the value they got given the value of the transaction WWE has and how good you guys are [indiscernible] makes sense, but obviously given that pricing, given the valuation, given the revenue that WWE's franchise could be similarly different and maybe the market is missing something there. And as a follow-up to that, is it possible to do whatever [indiscernible] the right way if somebody was referred as U.S. [indiscernible]?
Yes, on the first part, obviously, with them not being public -- all you have access to is what's in the media but if that's right, roughly $200 million of EBITDA at $4 billion, so it's 20 times. I think that reflects the value people put on branded live content. So we think that's great. And as far as the private transaction look, as you know us, we are always willing to listen and all we care about is doing what's best for our audience, for our shareholders, and for our employees. So, someone's got a great idea, we're open to listening to it.
Okay, great. And just one follow-up, given what you guys are doing with the now on the live side of SmackDown and RAW, how do you feel that virtual reality given -- it seems you know, that kind of technology that would sit very well with what you're doing. I know a while back its kind of look at it a little bit, but you couldn't really go far, but now we're hearing a lot about this in the news, Sony expensed 100 companies. This company you can add your current program and create another revenue stream for the company or just you're not willing to do that investment at this point?
Well, as you probably know, we do a lot of 360 video today, which we think is a really interesting way to experience the content. As you've mentioned, we've done VR tests. We think AR is interesting as well. So, people who are trying new things in video, whether it's a social platform or some of the tech platforms, tend to call us, because they know how well we do. On all the media platforms, so yes, we'll continue to investigate and we'll continue to test and over time the ones that we think are real wins for our fans are the ones that you'll see us adopt, but we will continue to test.
Great, thank you very much.
Sounds like there is no more questions at this time. Obviously, we are available if investor wants to reach out and analysts want to reach out and contact us, we encourage you to do so. You can contact me, Michael Weitz, or Laura Kiernan, and we thank everybody for attending the call today. Thank you.
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