World Wrestling Entertainment vs. "The Charge"

World Wrestling Entertainment (NYSE: WWE  ) faced a formidable foe last quarter. A dastardly opponent named "The Charge" pinned the company to the mat with a finishing move called the "Box-Office Bomb." It's a horrible, terrifying move that brings earnings to its knees.

Yep, World Wrestling Entertainment didn't do so well with its Stone Cold Steve Austin film The Condemned. Even with a great distributing partner in News Corp. (NYSE: NWS  ) , the project bombed at the multiplexes, causing the company to take a $15.7 million charge during the second quarter. This brought earnings down to $0.10 per diluted share, a better than 50% drop. Without the charge, however, net income actually rose two pennies to $0.23 per diluted share.

That's a little better, I guess, but let's face it -- the company's movie operations are not faring well. They're terrible, in fact. I'm still waiting for the segment to contribute revenue. The Condemned, The Marine, and See No Evil, which was distributed by Lions Gate Entertainment (NYSE: LGF  ) , apparently haven't done well enough yet in their post-box office distribution channels to recoup the release costs, so WWE cannot book any top-line spoils just yet.  

So, should a shareholder who's holding the stock just up and sell it? Well, looking through the earnings release, things don't look so bad in other areas. Revenue increased by the always-desirable double digits -- 15% to $137.5 million. The profit contributions from consumer products and digital media increased substantially. There was a nice jump in Wrestlemania's buy rates, to almost 1.2 million buys this year from 958,000 buys in the previous year. And the subscriber numbers continue to grow for WWE's 24/7 subscription video-on-demand service.

Nevertheless, the total buy rates for all the pay-per-view events dropped to 2.1 million this quarter from 2.2 million in the previous quarter. That's not a good trend for World Wrestling Entertainment because its pay-per-view business is a significant driver for the business. The company is trying to strengthen this part of its portfolio by implementing a new blueprint for the events.

Thankfully, though, free cash flow has done well over the past six months, coming in at $46 million, more than triple the amount generated in the same six months last year. This was enough to cover what is perhaps the most attractive part of WWE's investment thesis -- its dividend yield.

While the financials keep improving, the film segment is the laggard. WWE Films had better believe it's in crisis mode. I understand that celluloid is a risky venture and I am willing to be patient, but Wall Street won't be so kind. Plus, even I have to concede that three failures out of the gate demands increased attention. If Vince McMahon wants to be in a business dominated by studios like Viacom (NYSE: VIA  ) and Sony (NYSE: SNE  ) , he'll have to step up his game.

One issue that needs to be mentioned is Chris Benoit's death. It's obviously having a negative effect on WWE's reputation, and has arguably had an impact on the stock. Some observers say that the attention to alleged steroid use will harm the wrestling business for a long time. My opinion at this time is that World Wrestling Entertainment will survive this short-term setback and will become even more cautious when it comes to its talent's health. 

Although WWE is having real problems with its film and pay-per-view business, and it is experiencing bad publicity because of the Benoit tragedy, I still like its long-term prospects. The popularity of wrestling ebbs and flows, as they say, but years from now, I believe WWE will build a significant library of content that it will be able to leverage into good value-building. So, fix those problems; the stock yields a lot, but shareholders want capital appreciation, too.

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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 11,990 out of more than 60,000 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.


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