It’s evident my earlier estimate of WWE profitability was too low. I estimated that the company would record $121 million in operating income for 2020, in the scenario that there were no more live events for the rest of 2020.
After a more detailed estimate of WWE’s revenues and expenses, and with improved knowledge learned in the last several weeks, an operating income of $280 million (under the same, no-more-live-events-in-2020 scenario) is more likely.
Following the company’s Q1 earnings report, we now have a better idea of how much money is being saved by producing TV out of WWE’s Performance Center, versus running at sports arenas. In this new model, I estimate the average quarterly expense related to producing Raw and Smackdown (Core Content Rights Fees) in the PC to be about $50 million per quarter (or $55 million in Q4 due to one additional episode of Raw and possible other rising costs). To be more charitable to the possibility that WWE will be under financial hardship, this estimate of Raw, Smackdown, and NXT related expenses is somewhat aggressive. Settling on $50 million per quarter in the Core Content Rights segment is based on aiming higher than WWE’s implied operating expenses for the similar Television segment from 2015 to 2017, a time when Raw and Smackdown were run weekly at arenas and when the segment possibly included expenses related to other parts of business including advertising and reality TV series. (See p. 3-4 of WWE’s 2017 Annual Report)
Implied segment expenses between 2015 and 2017 are derived from WWE’s previous reporting. The company’s reporting method at that time, disclosed segment revenues and segment operating income. Deducing expenses therefore is simply a matter of subtracting the corresponding operating income from revenue in each instance. (WWE changed its reporting method after the end of 2017 to report operating income for its three divisions [Media, Live Events, and Consumer Products], only.)
The results of this deductive math are below (with variances in the far right column to test how consistent results were over the quarters shown):
From 2015 to 2017, expenses in the Television segment were never higher than $40.8 million (Q3 2015). Even though these expenses are from a time when WWE was running Raw and Smackdown at arenas, where it’s clearly more expensive than repeated tapings at the Performance Center, in the interest of being aggressive and in the interest of anticipating higher talent expenses and accounting for expenses related to NXT (which were likely accounted to the WWE Network segment in previous years), I chose to estimate a quarterly Core Content Rights Fees operating expense of at least $50 million per quarter in the remaining quarters of 2020.
Talent expenses since 2017 have likely increased substantially due to competition from All Elite Wrestling and others, and NXT costs are now included in the segment, but net expenses related to producing TV at the Performance Center are likely much lower due to avoiding costs associated with running Raw and Smackdown at sports arenas. TV expenses may also be lower thanks to a consolidated taping schedule and far less required load time for production equipment.
CEO Vince McMahon’s comments on the April 23 earnings conference call directly support the idea that the production of Raw and Smackdown at the Performance Center is much less expensive than running at an arena.
Well, I think that obviously the cost is nowhere near the differential in terms of a live event in an arena and what we’re doing – the Performance Center we hardly have to change anything. The trons are in one location in the stage, and in one location. So there’s not much at all moving anything in or moving anything outside. So that saves a lot of money.WWE CEO Vince McMahon, WWE Q1 2020 Earnings Conference Call (April 23, 2020)
In this updated model I also anticipated somewhat lower expenses related to the WWE Network. A substantial portion of the expense related to the Network is from producing pay-per-view events. If there are no arena events for the rest of the year, those events will be less expensive to run at WWE’s own facilities.
Like in the previous model, I’m assuming there are no revenues after Q1 related to ticket sales or venue merchandise. I modeled in some expenses however related to those areas throughout the year, possibly due to factors like building holds and maintaining employees or infrastructure. 25% of 2019’s Live Event division expenses were calculated for corresponding 2020 quarters (Q2-Q4). Likewise for the Venue Merchandise segment within the Consumer Products division.
To determine WWE Network revenues, average paid subscribers were estimated to decline for the remainder of 2020 at a rate based on the Q1 year-over-year growth rates in domestic and international markets, separately, at -9% and -4%, respectively.
Year-over-year declines for Q2-Q4 in the eCommerce and Product Licensing segments were also extrapolated onto remaining quarters at the rate of the Q1 year-over-year growth rate of -9% and -18%, respectively. Exceptionally, additional year-over-year losses in Q4 were anticipated, related to the cancellation of this year’s WWE 2K21 game, confirmed on the April 23 call, which likely would have released for sale in Q4.
This estimate anticipates no additional major live event in Saudi Arabia, which would have provided revenue of around $50 million in the Other segment within the Media division. Also in that division, I’m estimating 10 episodes of Total Bellas in Q2, with an average revenue per episode of just under $1 million. It’s assumed there are no additional new reality TV episodes in the year beyond Q2.
Modeled into the Advertising & Sponsorship segment is an anticipated growth in YouTube views (evident from early 2020 results), but a decrease in CPM, related to lower advertising demand. Also in this segment, -33% growth in on-air sponsorships is anticipated in Q2-Q4, due to lower ad demand as well.
But what else encourages a higher estimate of WWE’s profitability?
We also learned on the April 23 call, from interim CFO Frank Riddick, that WWE’s increase in rights payments from its second-most important TV market India, will go into effect beginning in Q2. WWE recently completed a new five-year agreement with Sony in that market to broadcast WWE programming, which represents a 1.8x increase from the previous five-year term. The value of the new deal is believed to be an average of $50 million per year, likely escalating over the term. The previous deal is believed to have been worth $28 million on average per year.
Although he declined not to give specific guidance, Riddick also affirmed that WWE expects the company to be profitable in Q2. That’s despite the absence of expected operating income (probably more than $15 million) related to Wrestlemania and its adjacent events and merchandise sales.
If you assume everything else equal, based on the cost reductions, yes [Q2] should be profitable.WWE Interim CFO Frank Riddick, WWE Q1 2020 Earnings Call (April 23, 2020)
WWE’s TV rights fees are the key to the company’s finances during the COVID-19 crisis, and in general in this era. McMahon gave some reassurance that WWE’s TV partners are being supportive during this unusual time. There was no indication or hint that fees might be cut for some reason. Despite delivering TV shows without live audiences, TV partners so far seem happy to continue paying promised fees at a time when there’s little other new sports content available.
Our [TV] partners obviously are not doing as well as they would like to, nor are we. But as far as the content is concerned, they totally get it… We have a really good relationship with [NBCUniversal and Fox]. And they have our backs, as we do theirs.WWE CEO Vince McMahon, WWE Q1 2020 Earnings Conference Call (April 23, 2020)
As long as WWE’s expected contractual fees continue to be paid, it’s difficult to imagine a scenario in which WWE is not profitable in 2020.
For the sake of exercise, and to consider to what extent April 15 cuts of employees and talent was economically necessary, if we were to be very pessimistic and wiped out all revenue in Q2, Q3, and Q4, except for TV rights (Core Content Rights Fees) and WWE Network, and still maintained all expenses in all segments, WWE gets to $168 million operating income for 2020, still ahead of 2019’s $116.5 million operating income.
To be even more extreme, if every subscriber cancelled the WWE Network on April 1 (which is obviously not the case based on WWE’s post-Wrestlemania disclosure) and the company generated no revenue from Q2-Q4 in any segment except for Core Content Rights Fees, but kept on all segment expenses, total operating income for the year is still $44 million. It’s finally possible, in that unrealistic scenario, depending on interest, taxes, and other uncertain investment costs, net income could come in just under $0.
To get an idea of how financially necessary the cost-cutting announced on April 15 was, none of the scenarios in this article try to account for the $4 million WWE said it will save as a result of layoffs, furloughs, talent releases, and cuts to executive compensation.
If the conditions of the cuts and furloughs were maintained through the rest of the year, $4 million in monthly savings over eight-and-a-half months comes to a total savings of $34 million for the full year. Those savings, not factored into the tables above, make it even more difficult to conceive of a money-losing 2020 for WWE.
Upon a more detailed analysis of WWE’s finances and additional knowledge gained since my previous estimate on March 31, it’s extremely likely WWE will be profitable in 2020. Unless TV partners cut or become unable to pay WWE’s escalating rights fees, which there’s no sign of yet, WWE will have a profitable year. In fact, despite the effects of COVID-19, it’s likely WWE will report its highest operating income in company history (even when adjusting for inflation). Depending on less certain interest expenses, investments, and taxes, it’s quite possible, too, the company will break its annual net income record of $99.6 million, set in 2018.