WWE’s third quarter financial report

By Jason Powell, ProWrestling.net Editor (@prowrestlingnet)

WWE issued the following 2019 third quarter earnings report via Corporate.WWE.com.

Third Quarter 2019 Highlights

• Revenues were $186.3 million as compared to $188.4 million in the prior year quarter
• Operating income was $6.4 million; Adjusted OIBDA¹ was $25.4 million, which exceeded the Company’s guidance
• SmackDown debuted on Fox (Friday, Oct. 4) and averaged 3.9 million viewers during the premier telecast, up 221% versus the same time slot over the prior four weeks on Fox (9/6-9/27)²
• Announced content distribution deal with USA Network to air NXT, expanding the reach of the new live, 2-hour show to further build WWE’s third global brand alongside Raw and SmackDown
• WWE Network averaged 1.51 million paid subscribers³, consistent with the Company’s guidance
• Through the first nine months of 2019, digital video views increased 12% on a year-over-year basis to 25.6 billion and hours consumed increased 14% to 957 million hours across digital and social platforms⁴

Business Outlook

• The Company has modified its full year 2019 guidance to an Adjusted OIBDA range of $180 million to $190 million⁵, which would be an all-time record. The change is attributable to the delay in completing a previously contemplated agreement in the MENA region and the impact of accelerated investment to support content creation. While the Company continues to work toward the completion of a MENA agreement, no assurances can be given in this regard. The Company expects to have clarity on this point in advance of providing guidance for 2020⁵
• The Company expects to provide in-depth perspective on its 2020 performance, long-term strategy and business model in mid-to-late February following the announcement of its 2019 results

STAMFORD, Conn.–(BUSINESS WIRE)– WWE (NYSE: WWE) today announced financial results for its third quarter ended September 30, 2019.

“During the quarter, we remained focused on expanding the reach of WWE’s brand with the successful debut of Friday Night SmackDown on Fox Broadcast and NXT on USA Network,” stated Vince McMahon, Chairman and Chief Executive Officer. “With our flagship programming now spanning both broadcast and cable throughout the week in the U.S. and our expanding roster of international distribution partners, we remain excited about our ability to deepen the engagement with our fans around the world.”

George Barrios, Co-President, added “In the quarter, we accelerated strategic investments to support our content creation. Although we have modified our 2019 guidance of Adjusted OIBDA to a range of $180 million to $190 million, performance in this range would still be an all-time record. We continue to believe in WWE’s global growth potential and remain focused on maximizing future opportunities and shareholder value.”

Third-Quarter Consolidated Results

Revenues were $186.3 million as compared to $188.4 million from the prior year quarter as increased revenue in the Media segment, driven by the monetization of core content, was more than offset by decreased sales of live event tickets and merchandise.

Operating Income decreased to $6.4 million from $18.1 million in the prior year quarter, reflecting the decline in revenue and increases in fixed costs, including the impact of certain strategic investments, which were partially offset by a year-over-year reduction in accrued management incentive compensation. The Company’s Operating income margin declined to 3% from 10% in the prior year quarter.

Adjusted OIBDA (which excludes stock compensation) was $25.4 million as compared to $35.8 million in the prior year quarter. The Company’s Adjusted OIBDA margin was 14% as compared to 19% in the prior year quarter.

Net Income declined to $5.8 million, or $0.06 per diluted share, from $33.6 million, or $0.37 per diluted share, in the third quarter of 2018, primarily reflecting a reduction in excess tax benefits related to the Company’s share-based compensation awards at vesting, lower operating performance and the impact of the finance lease related to the Company’s new headquarters.⁶

Effective Tax Rate increased in the current year quarter relative to that in the third quarter of 2018, primarily driven by the recognition of $8.0 million of excess tax benefits related to the Company’s share-based compensation awards at vesting, as compared to $20.7 million in the prior year quarter. The decline in excess tax benefits was driven by the change in the Company’s stock price between the original grant date of the awards and their subsequent vesting date during the third quarter. Excluding discrete items (including the above mentioned excess tax benefits), the Company’s effective tax rate was 27% in the current year quarter as compared to 28% in the prior year quarter.

Cash flows generated by operating activities were $3.2 million as compared to $44.7 million in the prior year quarter driven by unfavorable timing of working capital and lower operating performance.

Free Cash Flow was a $16.4 million use of cash as compared to a $35.5 million source of cash in the third quarter of 2018 primarily driven by the change in operating cash flow and, to a lesser extent, a $10.4 million increase in capital expenditures primarily associated with the Company’s workspace plan.⁷

Cash, cash equivalents and short-term investments were $231 million as of September 30, 2019, and the Company estimates debt capacity under its revolving line of credit of approximately $200 million.

The schedule below reflects WWE’s performance by operating segment (in millions):¹

Results by Operating Segment

Media

Revenues increased to $146.1 million from $142.1 million in the prior year quarter, primarily due to the contractual escalation of core content rights fees, including license fees from the distribution of the Company’s flagship programs Raw and SmackDown, as well as the timing and performance of WWE Studios’ portfolio of releases, as reflected in “Other.” The growth was partially offset by the decline in WWE Network subscription revenues.

WWE Network’s average paid subscribers decreased 9% to approximately 1.51 million, primarily driven by the impact of lower subscriber additions earlier in the year. For the fourth quarter 2019, the Company projects average paid subscribers of approximately 1.43 million, representing a year-over-year decline of 10%.^3,5

Operating income declined to $33.0 million as compared to $39.3 million in the prior year quarter primarily due to the impact of increased content-related expenses, which were partially offset by a reduction in accrued management incentive compensation.

Adjusted OIBDA was $41.5 million as compared to $50.4 million in the prior year quarter.

Key Highlights: During the quarter, WWE made important progress on strategic initiatives that extend the reach of its brands and superstar talent. Specifically, the Company prepared for the transition of SmackDown to Fox Broadcast. To promote the program’s success, and with WWE’s support, Fox launched a new advertising campaign with the tagline, “We’re All Superstars,” which has been highly visible across Fox’s array of marquis sports programming. SmackDown successfully transitioned to Fox, with the program’s debut on October 4^th – which celebrated SmackDown’s 20^th anniversary on TV – attracting 3.9 million average viewers, making it one of Fox’s highest-rated Friday night programs over the past 3 years. While advancing SmackDown’s position, the Company also expanded its Wednesday night show, NXT, from one to two hours, and began to air the program live on USA Network, further building the brand as a complement to WWE’s flagship programs. Including the newly licensed NXT show, WWE now airs seven hours of live, in-ring content that span Monday, Wednesday and Friday every week, creating a lineup that broadens its reach and deepens its engagement with fans. In addition to producing the two highest rated programs on USA Network, Monday Night Raw and SmackDown Live, WWE continued to produce, develop and partner on new original content across programs. On television, Fox developed WWE Backstage, a weekly studio show to premier November 5^th on FS1. On WWE Network, the Company planned Crown Jewel, an event featuring top boxing and UFC talent, Tyson Fury and Cain Velasquez (October 31). For its social and digital platforms, WWE developed After the Bell, the Company’s first weekly podcast series (beginning October 30). The Company has also partnered with Paramount on the animated feature film, Rumble, with WWE Superstars Becky Lynch and Roman Reigns together with the main cast providing the voices for the movie’s characters (release expected in July 2020).

Live Events

Revenues declined $3.5 million to $23.2 million due to lower ticket sales at the Company’s North America events, primarily due to weaker performance and the staging of fewer events in North America.

• There were 74 total events (excluding NXT) in the current quarter, consisting of 67 events in North America and 7 events in international markets, as compared to 90 events in the prior year quarter, including 86 events in North America and 4 in international markets.
• North American ticket sales declined $4.1 million during the quarter, primarily due to lower attendance and the staging of 19 fewer events. Partially offsetting these declines, the average ticket price increased 6% to $56.64.
• International live event revenue of $2.3 million was essentially unchanged from the prior year quarter as the staging of three additional events was offset by reductions in the average ticket price and average attendance.

Operating income reflected a loss of $3.5 million as compared to a loss of $1.1 million, primarily due to lower attendance at the Company’s North American events. Although the Company held 19 fewer North American events, this change had a limited impact on operating income.

Adjusted OIBDA reflected a loss of $2.9 million as compared to $0.2 million in the prior year quarter.

Key Highlights: WWE continued to stage large-scale, action-packed events for engaging with its global fanbase. During the quarter, SummerSlam was performed in front of a sold-out crowd of nearly 17,000 fans to the ScotiaBank Arena in Toronto. Further demonstrating the importance of its global fanbase, WWE returned to China for the fourth-straight year with WWE LIVE Shanghai at the Mercedes Benz Arena and will hold Crown Jewel at King Fahd International Stadium in Riyadh, its second 2019 event in Saudi Arabia, later today. Over the coming months, the Company plans to hold international, live-event tours across Europe, Asia Pacific and Latin America.

Consumer Products

Revenues decreased 13% to $17.0 million from $19.6 million in the prior year quarter reflecting lower product sales across distribution platforms, including the Company’s e-commerce site, WWE Shop, live event venues and licensing agreements. Lower sales of merchandise at the Company’s live event venues can be attributed, at least in part, to the staging of fewer events (as described above).

Operating income increased 21% to $3.4 million from $2.8 million in the prior year quarter as the decline in revenue was more than offset by lower operating expenses, including a reduction in accrued management incentive compensation.

Adjusted OIBDA of $4.0 million was essentially unchanged from the prior year quarter.

Key Highlights: During the quarter, WWE continued to innovate new products that build engagement with its Superstar talent. To celebrate the 35^th anniversary of both WrestleMania and the Ghostbusters franchise, WWE, in collaboration with Mattel, created a WWE Ghostbuster action-figure collection, which quickly became a top-selling product line at Walmart. Continuing the evolution of WWE’s franchise video game, the Company launched WWE 2K20 on October 22^nd, which was developed by Take-Two Interactive.

Financial Outlook 2019

The Company’s previous full year guidance, which targeted Adjusted OIBDA of at least $200 million, assumed continued improvement in WWE’s engagement metrics, a second large scale event in the MENA region, and the completion of a media rights deal in the MENA region. Although the Company is holding a second large-scale event today in Riyadh, Saudi Arabia, its previously contemplated agreement for the region has not yet been completed. Additionally, the Company has accelerated strategic investments to support the creation of its content while reducing or delaying other expenses to lessen the impact of that investment. Given the delay in completing a MENA agreement and the impact of these strategic investments, the Company has modified its full year guidance to an Adjusted OIBDA range of $180 million to $190 million⁵, which would be an all-time record.

The Company’s full year guidance includes estimated fourth quarter 2019 Adjusted OIBDA of approximately $108 to $118 million.⁵ The fourth quarter results reflect substantial revenue growth from the Company’s new content distribution agreements in the U.S., which become effective at the start of the quarter.

WWE is unable to provide a reconciliation of fourth quarter or full year guidance to GAAP measures as, at this time, WWE cannot accurately determine all of the adjustments that would be required.

Strategy and Financial Perspective: 2020 and Beyond

The Company expects to provide in-depth perspective on its 2020 performance, long-term strategy and business model in mid-to-late February following the announcement of its 2019 results. Management plans to discuss the evolving media landscape, the potential range of the Company’s revenue and Adjusted OIBDA growth based on its key growth pillars, including its approach to evaluating and managing anticipated investments, as well as the Company’s capital allocation. The timing of this communication balances three objectives: to communicate as soon as possible, minimize the range of outcomes for the Company’s 2020 guidance and adhere to best practices for the communication of important strategic matters close to year-end. The Company anticipates that its core content rights will drive significant growth in revenue and Adjusted OIBDA in 2020. Management believes that the Company is well positioned to continue to drive growth thereafter, leveraging its focus on content, digitization and globalization.

Notes

1. The definition of Adjusted OIBDA can be found in the Non-GAAP Measures section of the release on pages 7-8. A reconciliation of three and nine months ended September 30, 2019 and 2018 Operating Income to Adjusted OIBDA can be found in the Supplemental Information in this release on pages 13-14
2. Data based on average viewers per live episode/ game measured on a Live+SD basis across broadcast and cable networks. Source: Nielsen Media Research, NPOWER
3. Average paid subscribers are calculated based on the arithmetic daily mean over the relevant period, and may differ substantially from paid subscribers at the end of any period due to the timing of paid subscriber additions and losses
4. Consumption includes videos viewed on third party (Facebook, YouTube, Twitter, Instagram, Snapchat, etc.) and WWE platforms (WWE.com and WWE App). Social media followers represent the number of followers for each individual platform as sourced from each platform; as such, total followers shown have not been adjusted for duplication among or within platforms and do not represent the number of “unique” followers
5. The Company’s business model and expected results (including our outlook for the fourth quarter and full year 2019) will continue to be subject to significant execution and other risks, including risks relating to entering into, maintaining and/ or renewing key agreements, uncertainties associated with international markets and risks inherent in large live events, and the other risks outlined in the Company’s Form 10-K filing with the SEC
6. As previously announced on March 18, 2019, the Company entered into a lease for its new Company headquarters. The lease commenced on July 1, 2019 at which time the Company gained control of the leased premises. The lease is accounted for as a finance lease pursuant to the new lease accounting standard, and the Company recorded a lease obligation of $325,453 and right-of-use asset of $285,762, net of tenant improvement allowances of $39,838 which are expected to be received from the landlord. For more information please refer to the Company’s Q3 2019 10-Q filing
7. A reconciliation of three and nine months ended September 30, 2019 and 2018 Free Cash Flow to Net cash provided by operating activities can be found in the Supplemental Information in this release on page 15
8. Core content rights fees consist primarily of licensing revenues earned from the distribution of our flagship programs, Raw and SmackDown, as well as our NXT programming, through global broadcast, pay television and digital platforms
9. Other forms of media monetization reflect revenues earned from the distribution of other WWE content, including, but not limited to, certain live in-ring programming content in international markets, scripted, reality and other programming, as well as theatrical and direct-to-home video releases
10. Other Live Events includes revenue from the sale of travel packages associated with the Company’s global live events, and commissions earned through secondary ticketing as well as revenue from events for which the Company receives a fixed fee

Non-GAAP Measures

The Company defines Adjusted OIBDA as operating income excluding depreciation and amortization, stock-based compensation expense, certain impairment charges and other non-recurring material items that otherwise would impact the comparability of results between periods. Adjusted OIBDA includes amortization expenses directly related to the Company’s revenue generating activities, including feature film and television production asset amortization, amortization of costs related to content delivery and technology assets utilized for the WWE Network, as well as amortization of right-of-use assets related to finance leases of equipment used to produce and broadcast our live events. The Company believes the presentation of Adjusted OIBDA is relevant and useful for investors because it allows them to view the Company’s segment performance in the same manner as the primary method used by management to evaluate segment performance and to make decisions regarding the allocation of resources. Additionally,

the Company believes that Adjusted OIBDA is a primary measure used by media investors, analysts and peers for comparative purposes.

Adjusted OIBDA is a non-GAAP financial measure and may be different than similarly-titled non-GAAP financial measures used by other companies. WWE views operating income as the most directly comparable GAAP measure. Adjusted OIBDA (and other non-GAAP measures such as Adjusted Operating Income, Adjusted Net Income and Adjusted EPS presented to exclude certain material items that impact the comparability between periods) should not be considered in isolation from, or as a substitute for, operating income or other GAAP measures, such as net income or operating cash flow, as an indicator of operating performance or liquidity.

The Company defines Free Cash Flow as net cash provided by operating activities less cash used for capital expenditures. WWE views net cash provided by operating activities as the most directly comparable GAAP measure. Although it is not a recognized measure of liquidity under U.S. GAAP, Free Cash Flow provides useful information regarding the amount of cash WWE’s continuing business generates after capital expenditures and is available for reinvesting in the business, debt service, payment of dividends, and the repurchase of stock.

Additional Information

Additional business metrics are made available to investors on the corporate website – corporate.wwe.com/investors. Note: As previously announced WWE will host a conference call at 11:00 a.m. ET on October 31^st to discuss the Company’s earnings results for the third quarter of 2019. All interested parties are welcome to listen to a live web cast that will be hosted through the Company’s web site at corporate.wwe.com/investors. Participants can access the conference call by dialing 1-855-200-4993 (toll free) or 1-323-794-2092 from outside the U.S. (conference ID for both lines: 9871358). Please reserve a line 5-10 minutes prior to the start time of the conference call.

The earnings presentation referenced during the call will be made available on October 31, 2019 at corporate.wwe.com/investors. A replay of the call will be available approximately two hours after the conference call concludes, and can be accessed on the Company’s web site.

Powell’s POV: WWE Co-Presidents George Barrios and Michelle Wilson will address the third quarter numbers in a conference call this morning at 10:00 a.m. CT. Join me for live report on the conference call.