World Wrestling Entertainment
Hank, management packed a lot of information in the call. What stood out for you this quarter?
Hank: With revenues on the decline and the cost of revenues on the rise, we obviously have to question what's going on. The most glaring concern is the $10 million WWE lost this quarter from its share of advertising revenue on its domestic cable broadcasts. During the next eight months, as the company transitions its fiscal year to a calendar basis "beginning with the calendar year 2007," its top line will lose another $15 million -- all because its new deal with USA Network doesn't give WWE a cut of domestic television advertising. That's a lot of lost revenue to make up.
WWE tag-teams with digital media
Bodhi: The company is still calling for "modest revenue growth" over the next eight months versus the year-ago period. Sales in its Consumer Products and newly created Digital Media segments are anticipated to more than offset the declines in TV revenues. Digital Media sales, which include WWE.com and WWE Shop, went gangbusters this quarter, increasing 71% year over year. WWE.com benefited from a 43% increase in advertising revenue, while WWE Shop saw a 98% increase in orders, with the average price per transaction rising from $46 to $51. The company should continue to capitalize on this strong momentum.
Hank: OK, but at what cost? This quarter, the company's profit contribution (net revenues less cost of revenues) dropped to 38% from 43%, hurt by the loss of higher-margin TV advertising revenues and an increase in investment costs related to its digital services. Looking ahead into the eight-month transition period, net revenues may move incrementally higher, but projected net income and earnings per share should be flat against the comparable period. This suggests that the trend we saw this quarter -- spending more, but receiving less -- will continue for at least the next several months. This doesn't concern you?
Jeremy: CFO Michael Sileck addressed this when he said, "There's a time to invest and there's a time to harvest, we're trying at this point to build something really great for the future."
Bodhi: It has a kind of a Byrds ring to it.
Hank: Bodhi, turn off your iPod for just a second -- Ecclesiastes beat the Byrds to it by more than a couple thousand years.
ECW in the ring
Jeremy: The point is that management sees this as the period in which to invest in certain key growth initiatives, like feature films (WWE Films), Digital Media, international markets, and the relaunch of the ECW league.
With respect to ECW, CEO Linda McMahon commented, "We definitely believe it can be clearly as big a brand as RAW or SmackDown." Since ECW is already an established brand, albeit for the smaller cult-like audience that it garners, it will have two advantages for the company.
First, the initial investment costs will be less than if it were launching a new project entirely from the ground up. The first year of ECW is projected to cost roughly $12 million to $15 million, but management is expecting to break even this calendar year, and "build value over the long term." The second advantage is that the company will see positive results more quickly. As evidence, McMahan pointed to a recent special on USA Network that pitted WWE and ECW wrestlers against each other; in response, the network saw ratings double.
International markets and feature films
Hank: We've highlighted Digital Media and ECW, but what about international markets and WWE Films? With respect to the former, this quarter saw revenues from live events decline by $2 million year over year, because of weaker performances in the emerging international markets of Thailand, the Philippines, and New Zealand. A part of the problem is that these countries don't have pay-per-view (PPV) technology fully developed. Thus, it will take considerable time for WWE to fully capitalize on these new markets.
Its feature film strategy seems equally sluggish out of the gate. See No Evil, recently released by Lions Gate Entertainment
Bodhi: Management was specifically asked whether See No Evil will turn a profit, and McMahon said that it will. When the feature begins benefiting from DVD, international distribution, and TV and pay-TV platforms, it should begin to make money for WWE. I'd say this spells success for the other two works in the pipeline.
Foolish bottom line
Jeremy: WWE is going through a transition phase in more ways than one. As the company moves its fiscal year to the calendar year, it's also shifting growth away from traditional TV-advertising revenues toward new outlets. These upstarts don't come without up-front costs, but the potential in international markets (particularly the United Kingdom, Italy, and Australia), Digital Media, WWE Films, and the relaunch of the ECW league should all pay dividends down the road. Coupled with Steven Mallas' argument for its healthy cash situation and 6% dividend, I agree that WWE could be a worthy title contender for your investing watch list.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned.