What to watch for from WWE’s Q3 2020 earnings report

WWE will report Q3 earnings on Thursday, October 29 after trading closes. Information will be published that evening on corporate.wwe.com for the period from July 1 to September 30. A conference call with statements from WWE executives and questions from stock analysts will happen at 5pm ET. Anyone can listen in live.

Cost of the Thunderdome

The biggest unknown factor making it hard to anticipate WWE’s Q3 finances is that we don’t have a sense of what the company is paying to produce Raw and Smackdown with the Thunderdome set.

The enormous set of lights and numerous remote live streams of fans watching the matches has been received as an improvement over the atmosphere at the Performance Center, where there were either no spectators or new recruits playing along as if they were fans.

On earnings calls, WWE CEO Vince McMahon repeatedly cited the lack of a live audience as a factor in declining viewership, and the Thunderdome seems to be the response.

Raw and Smackdown were produced at a relatively low cost at the Performance Center for the entirety of Q2. This resulted in a more profitable quarter than most analysts expected. The Thunderdome debuted on August 21 and has been the presentation for every Raw, Smackdown, and pay-per-view taping since.

A similar presentation, branded the “Capital Wrestling Center” was unveiled for NXT at the Performance Center — but on October 4, just after Q3 ended, so won’t be a factor in this report.

The Thunderdome is provided through WWE’s partnerships with The Famous Group. They also work with Quince Imaging and Frozen Mountain to create the set.

Thunderdome era production costs per program must be higher than they were in the Performance Center (March 13 to August 17), but by how much? Relative to pre-Covid costs when WWE was touring, is the cost higher, lower, or about the same? I think each Smackdown and Raw taping cost WWE about $1 million to produce, with pay-per-view events running higher.

In my earlier estimate, I modeled the cost of production during the Thunderdome to be roughly equal to the pre-Covid touring Raw and Smackdown costs.

That would still result in a profitable Q3 for WWE, but this results in an estimate lower than what any stock analyst is estimated. I was relieved to find there is now one analyst who’s modeled an EPS nearly as low. However due to my lack of access to the Bloomberg Terminal, I don’t know who my prognostic neighbor is.

My EPS estimate implies a net income for Q3 of about $13 million on quarterly revenues of $222 million. (The full estimate is here.)

What will Kristina Salen bring to WWE?

Kristina Salen will debut on the call as WWE’s new permanent chief financial officer. She replaces interim CFO Frank Riddick and, before him, former long-time CFO and co-president George Barrios.

What role will the new CFO play in the company? Will investors get an impression of her vision for the company? Will she be the key public figure for investors, as Barrios was, or will that role be more dominated by new president and chief revenue officer Nick Khan?

Will the former Etsy CFO change the company’s reporting methods, resulting in changes in how we get information on WWE’s corporate website and in its SEC filings? The company’s finances are generally broken down into three major divisions: media, live events, and consumer products. Eleven revenue segments are revealed across those three divisions. This has not always been the case and may change under new management.

Further, will the company’s “Key Performance Indicators” slides change? Are there metrics the Barrios regime focused on that Salen will not, and vice versa? Does it make sense to focus on viewership trends for Raw and Smackdown, or are there other metrics that more full tell the story? (I think there are.) Will Salen continue to focus on the Barrios-favored non-GAAP profit measure, adjusted OIBDA? In the past WWE focused on OIBDA (the non-adjusted variety) and something called “profit contribution”.

These questions may not be answered with the Q3 report, but gradually over time.

WWE Network subscribers

End-period paid subs for the WWE Network were up in Q2 after being down year-over-year throughout 2019 and into Q1 2020. Average paid subscribers (the key metric for calculating revenue related to the service) however was down slightly for Q2 from the prior year.

Did paid subscribers grow in Q3? Streaming services across the board seem to be growing in strength. After stalling in 2019, probably related to popularity of the product overall, is broader consumer behavior encouraging a rebound for WWE in this area?

Vince McMahon’s comments on TV ratings

Vince McMahon was grilled by analysts on Raw and Smackdown ratings in the Q&A portion of the Q2 call. It was pointed out to him that NXT and AEW bounced back after a lull following Covid, but Raw and Smackdown had not.

The key internal weakness that chronically affects ratings and broad trends in other metrics is, and will for the foreseeable future will be, creative. In particular, Vince in his role as CEO also functions as the head of creative. He’s held the role for decades, for far too long. WWE’s ability to create stars and storylines audiences care about will always be unduly hindered while Vince controls this role for Raw and Smackdown.

That said, this should be an easier Q&A session for Vince this time.

The Thunderdome will be touted as a success. It was a positive factor; but so was the return (he’d been out since March) and long-awaited heel turn of Roman Reigns, which supported interest in Smackdown. Smackdown was the most-viewed or tied (Showbuzzdaily reports P18-49 ratings for network with the traditional one decimal place) for most-viewed in the key demo on network primetime on every single Friday night in Q3.

Raw too held up better than one might expect against Monday Night Football. The show is doing better so far during NFL season than it did in July.

I think an additional psychological factor is at work. WWE audiences have settled into the mindset during Q3 that the pandemic era is more permanent than temporary. Temporary breaks audiences may have been taking from WWE programming, waiting for events to get back to normal, have been lifted, as life with Covid has proved to be unending.

Meanwhile, there’s been anxiety throughout the sports world about the decline in sports TV viewership, and its by no means apparent there will be any stop the growing value of sports broadcast rights.

In light of wider sports viewership suffering and a mild upswing in WWE’s ratings, some of the pressure will be off. Competition from AEW is still present, but Raw and Smackdown continue to be among the most highly-viewed weekly programs on cable within the key demo. And that’s not changing any time soon.

Is the WWE NXT agreement with NBCUniversal (USA Network) expiring next year?

When the deal was made to take NXT off the WWE Network and put it on USA, Guggenheim said they believed the deal was for “one or two years”.

A one-year deal would’ve expired a few weeks ago. Is the deal for two years? Is it going to be renegotiated soon? Is it being renegotiated now? Is it attached to the five-year agreement for Raw somehow?

WWE said at the outset of the move that the strategy was to build on TV rights value for NXT so it could be monetized in the way Raw and Smackdown are. Does WWE feel they’ve accomplished this in the last year and are looking for a sizeable upgrade in fees, relative to its delivery of P18-49 viewership?

Are online merchandise sales continuing to make-up for loss of venue merchandise business?

Venue merchandise sales, like live event ticket sales, are rendered to $0 due to the pandemic.

However eCommerce sales were up strongly in Q2, seeming to compensate for fans’ inability to purchase merchandise at venues.

eCommerce compensating at the rate it did in Q2 for merchandise sales overall (92%) would result in sales of $9.3 million in Q3.

What the latest outlook on a second Saudi Arabia event in 2020?

Each Saudi event delivers about $50 million in revenue for WWE. It’s seems doubtful now there will be a second event there this year, given unrelenting Covid deaths in the U.S. and Saudi Arabia.

Vince said in the Q2 call that if there isn’t one this year, any missed events would be tacked on the end of the current ten-year deal with the government, which runs through 2027.

No second Saudi event in 2020 is probably baked into the current stock price. This is probably the last time investors will hear from WWE’s top executives until 2021. Will they affirm there will be no second event?

Is Nick Khan closer to getting WWE a PPV rights deal?

With Nick Khan in place as chief revenue officer, the agent who WWE tapped to complete its 2018 Raw and Smackdown rights deals, is he working on selling rights to pay-per-view events away from the WWE Network and onto a major streaming player?

Vince previously speculated such a deal would be completed in Q1 2020, before Covid struck.

What’s the outlook now on such a deal? Is making this move still within WWE’s strategy to further monetize its content? Is there any clarity yet on what content WWE is trying to sell? The pay-per-views only, or additional Network content? Or the Network altogether?

Should investors give up hope on a MENA TV deal?

I don’t recall any discussion about this on the Q2 call in July. Is WWE still negotiating with Saudi government-owned Middle East Broadcasting Center (MBC) for rights fees for core content in the Middle East North Africa region?

The Saudi government also reportedly supports a pirate broadcaster, beoutQ. According to the complaint in an ongoing class-action shareholder lawsuit against WWE, beoutQ is illegally broadcasting WWE content in the Middle East North Africa region, discouraging MBC’s incentive to complete a deal with WWE.

I believe WWE’s previous deal in the region with OSN was worth $10 million to $15 million annually. OSN dropped WWE in 2019 when it decided to cut all sports programming. Conspicuously, OSN cited piracy as a reason.

Brandon Thurston has written about wrestling business since 2015. He’s also worked as an independent wrestler and trainer. For more, see our About page.

WWE Q3 2020 Estimate: Enter The Thunderdome

How will WWE’s Thunderdome production affect the company’s financial outlook?

WWE’s new “Thunderdome” production, which debuted Friday, is the company’s latest response to slumping ratings of Raw and Smackdown. Those two programs, highly valued by NBCUniversal and Fox, respectively, have been challenged for at least a few years, but have been especially hit since the pandemic forced the company to stop running at major arenas before thousands of fans.

From mid-March to mid-August, all of WWE’s in-ring content has been taped at its Performance Center training facility in Orlando. This made TV production much less expensive, while not affecting guaranteed revenues related to contractual escalating rights fees. In the short-term, taping out of the Performance Center increased WWE’s profits.

The TV program is hurt by the lack of a live audience, and that is a component of declining viewership. There were several questions to executives about ratings on the Q2 call on July 30. After providing a number of reasons why viewership and other consumer metrics were in decline pre-pandemic, CEO Vince McMahon’s latest explanation is that it’s because there are no fans in attendance.

Moving out of the Performance Center and into Orlando’s major sports arena, the Amway Center, and working with The Famous Group to create the “Thunderdome” production, will be more expensive. WWE is reportedly paying just $450,000 for 60 days of residency at the Amway Center, but the production costs associated with the “Thunderdome” are probably far higher.

I don’t have a strong sense for what the specific production cost and compensation to The Famous Group will be. I could see the expense being somewhat less than, similar to, or somewhat greater than the normal costs of WWE’s production at an arena. Due to this, I am modeling in an operating expense on WWE’s Core Content and Network lines at a slightly increased rate relative to what I estimate were the operating expenses for those segments in the period immediately before Covid took production out of arenas.

This results in a significantly less profitable 2020 than previously estimated, but my estimated net income for the full year remains within the range of the company’s current inflation-adjusted annual net income record, set in 2018 ($99.6 million).

This estimate assumes there will be no ticketed live events for the remainder of the year, and there will be no second lucrative event in Saudi Arabia.

My current estimate of $100 million in net income for full year 2020, implies earnings per share (EPS) of $1.15 for the year, and an EPS of $0.15 for Q3, and $0.20 for Q4.

These estimates are considerably lower than current analyst estimates. Among 11 analysts, the mean EPS estimate for the year is $1.61, with a low of $1.32. The low EPS analyst estimate for Q3 is $0.19 and $0.20 for Q4. However it appears there hasn’t been a new analyst estimate since July 31, well before WWE’s “Thunderdome” announcement on Monday.

Past analyst estimates from Zacks. Current analyst estimates from Refinitiv.

Vince McMahon’s problem is Vince McMahon

WWE has effectively been able to improve television viewership for a week or two with concepts like Raw 25, Smackdown 1000, Raw Reunion, Smackdown’s hyped debut on Fox, and the recent introduction of new concepts “Raw Underground” and the “Thunderdome”.

What WWE hasn’t been able to do is cause any long-lasting improvement to viewership. While Raw and Smackdown remain highly ranked and are the main source of growing revenue for the company, their ratings continue to predictably decline. Smackdown’s viewership is already showing year-over-year declines, despite not yet being through its first full year on Fox, after its move from USA Network in October 2019. Raw doesn’t have the external benefit of having been moved to Fox. It’s lived on the USA Network on Monday nights for many years. Raw is in its 28th consecutive month of year-over-year decline in P2+ and P18-49, as of August.

As of August 23, 2020. Note: Smackdown moved from USA Network to Fox in October 2019.
Data

Friday’s Smackdown, with the first use of the new production set, coincided with the program’s best viewership in months. I believe this is a result of short-term curiosity. Monday’s Raw may benefit as well, but I expect viewership will revert to its usual pattern within a few weeks.

McMahon’s latest answer, that Raw and Smackdown are hindered by the lack of live crowd, and they’ll turnaround once they get fans back doesn’t hold up to scrutiny.

No amount of special effects or reunion programs address the underlying problem which is WWE’s current creative system, under the leadership of McMahon, cannot create stars or any other sort of interest that will result in a long-term increase in consumer interest.

Before Covid, live event ticket and consumer product sales were in decline. WWE Network subscribers, which are showing signs of stabilizing during Covid, saw year-over-year declines throughout 2019.

WWE’s third brand NXT and new competitor All Elite Wrestling entered the major cable picture last fall. They, along with Raw and Smackdown saw their viewership decline following Covid affecting events beginning in mid-March. But since, NXT and AEW have made a comeback while Raw and Smackdown have not. The key difference there is Vince McMahon. McMahon is the head of creative for the company’s main roster Raw and Smackdown brands, which has been the case for decades. NXT’s creative leadership is delegated to McMahon’s son-in-law, EVP Paul Levesque. AEW is a competing business, headed by Tony Khan.

Before Covid, McMahon claimed engagement including viewership would turnaround after certain talent returned from injury. After talent returned from injury and there was no turnaround, McMahon said there’d be a turnaround after new stars were developed on Raw and Smackdown. McMahon created new executive director positions for each brand in June 2019. Those positions have already fully turned over and been consolidated. Smackdown director Eric Bischoff barely lasted a few months before being fired. Paul Heyman almost lasted a year as director of Raw. The two positions have been merged into one under long-time aide Bruce Prichard. Throughout, the overall vision and the main brand’s inability to develop stars hasn’t changed.

We have a 30-plus year track record of creating compelling characters and engaging a variety of audiences, and we obviously remain confident we can continue that with our collective ability, even in the most challenging environments with no live audience.
WWE CEO & Chairman Vince McMahon, WWE Annual Shareholders’ Meeting (7/16/2020)

Executives’ current talking point in response to questions about star development is that the company has a 35-year track record of creating compelling characters and storylines. That claim is undermined by the company’s failure to create a star who boosted long-term economics for the last 15 years.

Creative leadership seems to have gradually lost its understanding of its consumer base over the last two decades. Rather than realize and address that issue, it’s evident there’s a culture of denial about this within the company.

Until WWE, or really McMahon himself, shows a willingness to reckon with the possibility that the core of WWE’s problems with declining interest lies with the CEO’s performance as head of creative, there’s no reason to expect any internal cause of long-term improvement to consumer metrics — TV ratings or otherwise.

WWE is fortunate it finds itself in a media market where the value of live content like its in-ring programming has exploded. There are opportunities to continue to grow its content value despite these issues. New President and Chief Revenue Officer Nick Khan will likely be tasked with selling the company’s pay-per-view events, currently offered via the direct-to-consumer WWE Network streaming service, to major streaming players. Market circumstances insulate the company from larger financial hardship, but also removes the economic pressure that might be cause for introspection needed to deliver more value to shareholders.

Based on Smackdown AAV of $205 million (2 weekly hours), Raw AAV of $265 million (3 weekly hours), and AEW AAV of $45 million (3 weekly hours, 1 not yet delivered)

More concerning for the next few years, WWE is on a trajectory where the viewership margin the company’s flagship shows have over rival AEW’s “Dynamite” program is shrinking.

AEW’s TV deal with WarnerMedia expires at the end of 2023, with an option for WarnerMedia to extend through 2024. If the option is picked up, then negotiations for AEW programming and WWE’s Raw and Smackdown will happen around the same time, in mid-2023.

By that point WWE and AEW ratings may be even more comparable than they are now, which could either jeopardize WWE’s content value or may result in the two companies bringing in a similar amount of revenue per hour from the U.S. TV market, and thus contributing to a more competitive environment for WWE, which has been largely unrivaled in the wrestling market since 2001.

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