WWE's Results Leave Investors on the Canvas

Going into its third-quarter earnings report, World Wrestling Entertainment (WWE) had produced a year of high-flying growth. Even after being pummeled during the recent market rout, the company was still up a remarkable 146% for the year, on the strength of two landmark five-year broadcasting deals WWE signed earlier this year.

Investors were hoping that those blowout results would continue, but the company's financial results were a mixed bag that left WWE flat on the mat.

WWE wrestlers The Showoff (at right) and The Architect. Image source: WWE.

Taking a breather

Data source: WWE Third-Quarter Financial Release. Y-o-Y = year over year. *Operating income before depreciation and amortization.

WWE reported third-quarter revenue of $188.4 million, up just 1% from the prior-year quarter, and a sharp slowdown from the 31% year-over-year growth the company reported in the second quarter. This missed analysts' consensus estimates, which were calling for revenue of about $202 million.

A majority of the revenue miss was the result of lower ticket sales at the company's live events. But a small part of the shortfall was related to the recent adoption of a new accounting standard (ASC 606, for you accounting buffs), which hit revenue to the tune of $2.6 million.

Operating income of $18.1 million fell 47% year over year, as WWE accrued for management bonuses and incentives in anticipation of the company's record-setting year.

That resulted in adjusted operating income before depreciation and amortization (OIBDA) of $35.8 million, down 21% year over year, but exceeding the high end of WWE's forecast, which topped out at $34 million. 

Earnings per share of $0.37 increased by 32% year over year, boosted by a tax benefit, and were ahead of Wall Street estimates of $0.19.

A mixed bag

Data source: WWE Third-Quarter Financial Release.

The company's media segment continued to generate the bulk of its sales, producing revenue of $142.1 million, up 9% year over year, on the strength of licensing fees for WWE's flagship programs, Raw and SmackDown. The company also benefited from other programming, including Miz & Mrs. and Total Divas. Growth of the WWE Network drove average paid subscribers to 1.66 million, up 9% compared with the prior-year quarter.

Revenue from live events declined to $26.7 million, down 16% year over year, on lower attendance and reduced ticket prices, though the company said this was partly the result of changes in the mix of venues and territories. WWE held a total of 90 events during the quarter, with North America accounting for the vast majority of those. One notable international event was the WWE Super Show-Down, in Melbourne, Australia. It attracted more than 70,000 people, the largest attendance for an event outside the U.S. in the past 25 years.

WWE announced that the company had decided to "uphold its contractual obligations" and stage the Crown Jewel, an event scheduled to be held in Riyadh, Saudi Arabia, on Nov. 2. According to its press release, the company "faced a very difficult decision," in light of the killing of a journalist in the Saudi consulate in Turkey. Some have suggested WWE could have faced stiff financial penalties if the company canceled the event. 

"We continue to effectively execute our strategy and achieved adjusted OIBDA that surpassed our public guidance," said George Barrios, co-president of WWE. "Our performance maintains our path to achieve record revenue, record adjusted OIBDA, and record subscribers for the full year 2018."

What the upcoming quarter could hold

WWE is maintaining its full-year guidance for 2018 and is forecasting OIBDA in a range of $160 million to $170 million, though this is contingent on the staging of the Riyadh event as scheduled.

Analysts' consensus estimates for the fourth quarter are calling for revenue of $245.69 million, an increase of 16% year over year, and EPS of $0.30, up 50% over the prior-year quarter.

With the stellar gains WWE has achieved so far this year, it was inevitable that the stock would eventually take a breather. As I pointed out in the earnings preview, "with a price-to-earnings (P/E) ratio north of 100, its frothy valuation may drag the stock down if its results are anything less than show-stopping." That was clearly the case this quarter.