What: Shares of World Wrestling Entertainment (NYSE:WWE) rose 18.6% during the month of July, according to S&P Capital IQ data, driven by an earnings beat and strong growth of the company's WWE Network subscription service.
So what: While WWE's revenue declined by 3.9% year over year during the second quarter, the company turned a surprise profit of $0.07 per share, beating analyst estimates by nine cents. Revenue was also higher than analysts were expecting, despite the decline.
WWE's subscription service, WWE Network, posted explosive growth during the second quarter. The total number of subscribers increased by 75% year over year, driven by growth in both the U.S. and expansion into international markets. This helped drive a 38% year-over-year increase in international revenue through the first half of 2015.
The WWE Network includes pay-per-view events, and the success of the service has led to a dramatic decline in pay-per-view revenue. Revenue in WWE's Network segment, which includes both the WWE Network and pay-per-view, was down 7% year over year during the second quarter, as growth of the subscription service has yet to fully counteract falling pay-per-view sales.
The good news, and one of the major reasons why the stock rose in July, is that WWE managed to turn an unexpected profit. The company reported net income of $5.1 million during the second quarter, far better than a $14.5 million loss during the same period last year. WWE has reached the point where the initial disruption caused by the WWE Network, which represented a stark shift in the company's business model, is largely over.
Now what: The rapid growth rate of the WWE Network during the second quarter certainly isn't sustainable. About half of the growth was due to the introduction of the service into international markets, and in the third quarter the company expects a 3%-5% sequential increase in the number of paid subscribers. At the end of the first quarter, following WrestleMania, there were 1.3 million total subscribers, and that number actually decreased during the second quarter. This suggests that user retention may be an issue.
Regardless, the ability of the company to return to profitability was enough to send the stock soaring in July. WWE's profitability is still well below historical levels, but if the company can continue growing its subscriber base, earnings could grow substantially in the coming years. Investors seem to be betting on this scenario, as the stock now trades at about 30 times earnings from the most profitable year of the past decade.