2014 and 2015 Business Outlook
Compared to its previous Business Outlook (released July 31), the Company has improved its 2014 Adjusted OIBDA outlook by approximately $15 million to $20 million on an adjusted basis at all WWE Network subscriber levels. The improvement reflects the significant cost savings achieved to date.
The rate of WWE Network subscriber adoption is a critical determinant of the Company’s projected future financial performance. The table below outlines ranges of potential Company performance at different subscriber levels in both 2014 and 2015 (Reconciliation of Operating Income to Adjusted OIBDA can be found in the Supplemental Information included in this release).
Long-Term Growth
The strengthening of WWE’s content distribution agreements is one of the Company’s primary long-term growth drivers, which also include the development of a global WWE Network, the monetization of the Company’s digital and social media presence, and the cultivation of international business opportunities.
In the third quarter 2014, WWE finalized television distribution agreements in the U.S., India, Canada, Mexico and UAE. With the completion of these agreements as well as agreements previously completed in the U.K. and Thailand, management has greater clarity about the timing and magnitude of TV rights revenue through 2018.
Final terms of these agreements indicate a higher rate of growth from a slightly lower 2014/2015 base. The average annual value (AAV) of the Company’s new content agreements is consistent with prior disclosures. While management now anticipates lower television revenue in 2015 than in previous disclosures, the Company’s overall 2015 OIBDA guidance remains unchanged.
The Company’s seven key television agreements (as referenced above) account for television revenue that is expected to increase from approximately $130 million in 2014 to approximately $235 million in 2018. As such, over the period from 2014 to 2018, these key television deals provide over $100 million of revenue growth subject to counterparty risk.
Basis of Presentation
During the first quarter of 2014, the Company launched WWE Network, which changed the way that certain content is delivered to our customers. In conjunction with this change, management reevaluated the way it manages and reports the business. The launch of WWE Network coupled with the continued convergence within the media landscape has resulted in a change in the Company’s management reporting to its chief operating decision maker. These changes necessitated a change in the Company’s segment reporting to align with management’s operational view. The Company now classifies its operations into ten reportable segments, which include the following: Network (which includes our pay-per-view business), Television, Home Entertainment and Digital Media, individual segments that comprise the Media Division; Live Events; Licensing, Venue Merchandise, WWEShop, individual segments that comprise the Consumer Products Division; WWE Studios and Corporate and Other.
Comparability of Results
In the current year quarter, the Company recorded a one-time pre-tax restructuring charge of $4.2 million comprised of severance and other costs ($2.1 million recorded in Corporate and Other Expenses, $0.3 million in Digital Media segment expense, and $1.8 million in depreciation expense) and a $4.0 million impairment of an equity investment. During the prior year quarter, the Company recorded $7.0 million in film impairment charges.
Results for the nine months ended September 30, 2014 included a $4.2 million restructuring charge, a $4.0 million impairment of an equity investment, and a $1.6 million adjustment to reduce the carrying value of the old Corporate Aircraft to its estimated fair value in conjunction with the sale of this asset, which occurred during the third quarter 2014. Results for the nine months ended September 30, 2013 include $11.7 million in film impairment charges and an approximate $3.4 million positive impact from the transition of the Company’s video game to a new licensee in 2013. In order to facilitate an analysis of financial results on a comparable basis where noted, the Company’s results have been adjusted to exclude these items. (See Schedule of Adjustments in Supplemental Information).
Three Months Ended September 30, 2014 – Results by Region and Business Segment
Revenues increased 6% to $120.2 million from the prior year quarter due to growth in North America. North American revenues increased 7% driven primarily by an increase in Media Division revenues as the ramp up in WWE Network subscription revenue was partially offset by lower revenue from the Company’s Pay-Per-View, Television, Home Entertainment and Digital Media businesses. Revenues from outside North America were essentially flat to the prior year quarter.
Media Division
Revenues from the Company’s Media division increased 6% to $76.9 million with growth driven by the ramp up of WWE Network. Growth from the Company’s Network segment was partially offset by lower Television, Home Entertainment and Digital Media revenue as described below.
* Network revenues, which include revenue generated by WWE Network, pay-per-view and video-on-demand, increased 68% to $26.1 million from $15.5 million in the prior year quarter.
* WWE Network generated $22.4 million in subscription revenue based on an average of 723,000 paid subscribers over the quarter. WWE Network had approximately 731,000 paid subscribers at September 30, 2014 as compared to 700,000 paid subscribers on June 30.
* Pay-per-view contributed $3.7 million in revenue with approximately 294,000 buys for the three events produced during the quarter. On a comparable basis (excluding the impact of prior period events), pay-per-view buys declined 56% reflecting the availability of pay-per-view events on WWE Network.
The details for the number of pay-per-view buys (in thousands) are as follows:
* Television revenues decreased 6% to $42.2 million from $44.8 million in the prior year quarter as contractual increases for existing programs were more than offset by the production and monetization of five fewer episodes of Total Divas, a program that debuted in July 2013, due to timing. Additionally, the decline in television revenues reflected the timing of one fewer episode of Raw in the U.S. (due to one less Monday in the third quarter of 2014 as compared to the third quarter of 2013).
* Home Entertainment net revenues decreased to $3.6 million from $5.2 million in the prior year quarter, reflecting a 40% decline in units shipped, and a decrease in the average effective price. The decline in unit shipments reflected reduced shipments of WWE’s catalog titles, which are typically characterized by lower prices and profit margins than new releases. The average effective price declined 19% to $9.22 as retail pricing pressure on both new releases and catalog titles more than offset the impact of product mix. (On a year-to-date basis, average pricing has declined 6% from the prior year period.)
* Digital Media net revenues were $5.0 million compared to $7.2 million in the prior year quarter. The decline reflected lower advertising across various platforms as well as lower monetization of the Company’s pay-per-view webcasts via WWE.com as these events became available on WWE Network.
Live Events
Live Event revenues decreased 13% to $21.8 million from $25.1 million in the prior year quarter primarily due to the staging of fewer events in the Company’s international markets.
* The Company staged 79 events in the current quarter as compared to 76 events in the prior year quarter. There were 73 events held in North America this quarter versus 62 in the prior year quarter, and 6 events held in international markets versus 14 events in the prior year quarter.
* North American events generated revenues of $17.3 million as compared to $17.5 million in the prior year quarter. The impact of staging 11 additional events in North America was offset by a 7% decline in average attendance to 5,100 fans, a 5% decline in average ticket prices to $44.60, and a reduction in event-related sponsorship revenue.
* International live events generated revenues of $4.3 million as compared to $7.5 million in the prior year quarter. The 43% revenue decline was due to the staging of 8 fewer events in international markets. Partially offsetting this decline, average attendance increased 15% to 7,700 fans and average ticket prices increased 28% to $92.89. The changes in average ticket prices and attendance were predominantly due to changes in country mix.
Nick was born and raised in Detroit, Michigan, and lived there until the age of 18, when he decided to pack his flack jacket and move to New York City.
