World Wrestling Entertainment (WWE 2.03%) recently reported lower third-quarter revenue and earnings compared to a year ago. If this was just one disappointing quarter, it would be easier to dismiss as the company has had several years of robust growth. However, weakness on the top and bottom lines has continued throughout 2019, which makes me wonder how Chairman and CEO Vince McMahon, a master showman and marketer who co-founded the company, will reinvigorate growth.
Take a look at some key numbers.
| Metric |
Q3 2018 |
Q3 2019 |
9 months ending Sept. 30, 2018 |
9 months ending Sept. 30, 2019 |
|---|---|---|---|---|
|
Net revenue |
$188.4 |
$186.4 |
$657.7 |
$637.6 |
|
YOY percentage change |
(1.1%) |
(3%) |
||
|
Operating expenses |
$120.8 |
$133.8 |
$439.7 |
$466.7 |
|
Marketing & selling expenses |
$23.5 |
$16.4 |
$73.1 |
$64.4 |
|
General and administrative expenses |
$20.1 |
$18.5 |
$64.7 |
$66.4 |
|
Depreciation and amortization |
$5.9 |
$11.2 |
$19.1 |
$23.5 |
|
Operating income |
$18.1 |
$6.4 |
$61.1 |
$16.7 |
|
Operating margin |
9.6% |
3.5% |
9.3% |
2.6% |
|
OIBDA |
$35.8 |
$25.4 |
$114.5 |
$72.4 |
|
OIBDA margin |
19% |
13.6% |
17.4% |
11.4% |
Data source: World Wrestling Entertainment. YOY=year-over-year. Dollars in millions. OIBDA = operating income before depreciation and amortization.
World Wrestling's third-quarter top-line drop of 1.1% was largely driven by a few major factors that do not portend particularly well for future growth.
First, there was lower revenue from WWE Network, a subscription-based network available across multiple mediums, including internet-connected televisions, computers, and game consoles. Subscribers also gain access to pay-per-view events.
The number of paid subscribers peaked at 2.1 million in April 2018, but this was thanks to a special WrestleMania 34 event. Since then, the number has dropped. At the end of the third quarter, there were roughly 1.47 million paid WWE Network subscribers, down from over 1.6 million in the year-ago period. The company expects the average number of paid subscribers in the current quarter to show another substantial year-over-year drop. These numbers indicate content that is losing popularity.
Image source: Getty Images.
Another major factor in the revenue drop was the decline in revenue from live events. Sure, there were fewer events, but lower attendance was an even bigger factor. The average North American attendance per event fell from 4,500 to 4,400. While the company raised ticket prices, there's a limit to how much the company can keep doing that. The sliding attendance comes on the heels of 2018's average attendance decline of 7%.
To management's credit, they are trying to create compelling new content. So far, this has not boosted World Wrestling's top line. But, it has contributed to higher operating expenses. The combination of lower revenue and higher expenses caused the company's operating income before depreciation and amortization (OIBDA) to fall by 29% versus the year-ago period.
Where's the growth?
There are some new deals in place. Starting in October, SmackDown Live aired on the Fox Network. This gives the network the right to air two hours of live programming per week. The five-year deal provides World Wrestling with $205 million annually. The company also renewed a deal with USA Network to air its Raw program weekly. Reportedly, the newly inked agreement provides the company with $265 million in annual fees, more than 75% above the previous amount. This should boost World Wrestling's revenue and adjusted OIBDA. But, there are only so many times the company can receive a better deal before the merry-go-round stops. Additionally, ratings for Raw and Smackdown have been falling, which could make for tougher negotiations during the next round.
There is also an expanded deal with the Saudi General Entertainment Authority to air a second large event per year through 2027. This was announced earlier this month and financial details are not currently available. Whether this leads to more opportunities in the Middle East, like management hopes, is an open question.
There are geographic areas where the company is looking to make further inroads, such as India, but there are regulatory and other hurdles the company must clear. Management does not provide too much information for its international operations. However, internationally, the WWE Network has about 403,000 subscribers, less than half the domestic total. Instead of a growth area, however, the number of WWE Network international paid subscribers fell by 6% in the nine months ended Sept. 30.
A rich price
Until this year, shareholders had been richly rewarded under Vince McMahon's leadership, particularly in 2017 and 2018. During that time, the stock price skyrocketed about 300%.
Even with the stock price's pullback following lower revenue and profitability this year, World Wrestling Entertainment's shares still sells for a rich P/E of over 100. At these levels, I'd suggest investors get in the ring with another company.
