World Wrestling Entertainment, Inc.
Q4 2016 Earnings Call Transcript

Published: 9 Feb 2017

[Operator:]

Hello and welcome to the webcast entitled WWE Fourth Quarter Earnings. We have just a few announcements before we begin. [Operator Instructions] I would now like to turn the call over to Michael Weitz, Senior Vice President, Financial Planning and Investor Relations. Please go ahead, Michael.

[Michael Weitz:]

Thank you and good morning everyone. Welcome to WWE’s fourth quarter 2016 earnings conference call. Leading today’s discussion are Vince McMahon, our Chairman and CEO and George Barrios, our Chief Strategy and Financial Officer. We issued our earnings release earlier this morning and have posted the release, our earnings presentation and other supporting materials on our website, ir.corporate.wwe.com. Today’s discussion will include forward-looking statements. These forward-looking statements reflect our current views, are based on various assumptions and are subject to risks and uncertainties disclosed in our SEC filings. Actual results may differ materially and undue reliance should not be placed on them. Additionally, the matters we will be discussing today may include non-GAAP financial measures. Reconciliation of non-GAAP to GAAP information is set forth in our earnings release and presentation, which are available on our website. Finally, as a reminder, today’s conference call is being recorded and the replay will be available on our website later today. At this time, it is my privilege to turn the call over to Vince.

[Vince McMahon:]

Good morning, everyone. Most of you – I am sure all of you have the numbers, which is in terms of revenue, $729 million. It is one of the – it is the highest in our history. To add a little color to some of those numbers, our international revenue increased 11%. And that, too, is a record at $189 million for 2016. One of the things that we are doing in terms of our network is we are sort of super serving our audience, which in terms of that, we have created a number of live shows and some were recorded as well, but it’s mostly entering content. We have created something called 205 Live, which is a show involving our cruiserweights, which is another whole division in which we are starting up now, which will again have its own sources of revenue in terms of live events as well as other things that are all – merchandising, licensing and all of that. And we did something as well in the United Kingdom. We had a championship tournament for – crowned our first United Kingdom champion. That’s an effort to localize more talent and localize more content for the United Kingdom and that will continue in a lot of other ways. In terms of subs, we had 294 million hours of content, which is up 15% and subs watched 294 million hours of content. And some 15%, as I said, I mean, which means a lot of people are doing not a lot of things except watching WWE Network. We had an average of approximately 1.5 million total subs, which represents a 25% increase over 2015. Of note, having – well, it’s all associated, I started saying having nothing to do with the network, but it’s all associated in everything that we do. Our social and digital platforms, which is a big barometer for me, our content had more than 15.1 billion video views in 2016. That’s up 45% from the previous year. And our social media engagements increased 45% to 1.1 billion. And I mentioned before about the land grab in terms of social media and digital platforms as well. We continue to grab our portion of that land and a bit more, which of course reinforces everything that we are doing. In addition to that, just a little bit more color on WrestleMania, we were proud to set our attendance record of over 100,000, which includes, by the way, ushers and ticket takers and all of that, 101,000 paid, but nonetheless, it was a record for us, and again, the network reaching 1.8 million subscribers following WrestleMania. We have strengthened our global reach. As we continue to strengthen that, we completed distribution deals in China, Australia, Germany and Spain and we will continue along those lines. We are satisfied – I don’t want to say thrilled, we are satisfied with our 2016 performance and obviously, we are focused on achieving our financial objectives driving our long-term growth.

[George Barrios:]

Thanks, Vince. There are several key topics which I would like to review today. These include management discussion of our financial performance, progress on key strategic initiatives and our business outlook. Over the past year, we placed continued strategic emphasis on optimizing the value of our content across all platforms, investing in technology and expanding our global presence. Execution of these initiatives has been strong and our results demonstrate the successful ongoing transformation of our business model. Everyday, we have become more digital, more global and more direct to consumer. As Vince mentioned, we generated revenue of $729 million, representing the highest annual revenue in the company’s history, with record revenue from a majority of our business segments

[Michael Weitz:]

Thank you, George. Jennifer, right now please open the lines for questions.

[Operator:]

[Operator Instructions] And we will go first from Eric Handler from MKM Partners.

[Eric Handler:]

Thank you very much for the question. I wondered if you could talk about some of the metrics maybe around the WWE UK pay-per-view event that you had here, what type of momentum you got in terms of maybe free sub growth and how that’s trending since that time and how – did you see an uplift not just from the UK, but from other parts of Europe as well that we are able to see this in their own prime time. And then secondly, when you look at the WWE UK brand, how soon do you think you want to continue building on what you started here and maybe do a live weekly TV show on Sky or with one of your other partners or maybe do you take that on to the WWE Network?

[George Barrios:]

Yes, I will take part of it, Eric and by the way, welcome aboard, it’s great to have MKM having picked up coverage. Yes, the UK tournament did well both on subscriber metrics and engagement. We saw a lot of engagement in the UK. We did see an up-tick in ads in the UK specifically. And what was really interesting is we actually saw a lot of good consumption around the world of that tournament. And it gets back to what’s Vince said in his opening remarks about super serving our fans. We have a broad ecosystem that includes AVOD on YouTube and Facebook and includes traditional TV their long form live content and includes WWE Network, whereas Vince mentioned, it’s about super serving our most passionate fans. And one of the things we have learned is they will consume just about everything we throw at them.

[Eric Handler:]

And then the follow-up question was, how soon do you think you might look to capitalize on the momentum and look at look for maybe a weekly TV show be it on pay TV or your own WWE Network?

[Vince McMahon:]

Eric, we have already capitalized a number of individuals in that tournament, including the champion that we crowned made appearances in other WWE programming. As an integration of all of that talent, having the talent pool grow much larger, it helps us in so many different ways. We could easily morph that into a weekly show. It’s something that we are thinking about. Nothing we have announced yet. Our partners are very interested in that. The tournament and the buzz from the tournament was highly successful in the UK. And there might be other Europeans that might join in the future. There is a lot here in which the expansion which you are trying to get to and the expansion of that, it can be exponential.

[Eric Handler:]

Thank you very much.

[Operator:]

Thank you. And we will go next to Eric Katz from Wells Fargo. And you might check your mute function.

[Eric Katz:]

Thank you. So few questions on what I believe was the 3-month free trial you guys offered in November. First, just wanted to know what the rationale is behind 3 months instead of one? And was this purely experimental or new strategy you use more often? And then second, you called out 1.5 million paid subs as of January 31. And I am wondering if any of these sub that come up with the 3-month free trial would be included in that or is that be exclusive?

[George Barrios:]

Yes. On the first one, Eric, I think we talked about it on the last call, specifically on the promotion, I think as we get more and more sophisticated, I think you will see us try different promotions to encourage folks to come in and experience the WWE Network. So I think the way you described it, experimentation is a good way to do it. And when you kind of do the math, the 1.5 million that we had at January 31, includes some of those free to paid conversions.

[Eric Katz:]

Okay. And with regard to the Q1 guide, I am wondering if you can go to some of the puts and takes for expenses in the quarter and maybe the cadence of some of the strategic initiatives throughout the year? Thank you.

[George Barrios:]

Yes. Eric, can you repeat it? You got muffled a little bit when you just mentioned the cadence of something and I lost what you said here.

[Eric Katz:]

Sure. The cadence of the strategic investments paying throughout the year?

[George Barrios:]

Yes. So obviously, we targeted 100 million for the year, which implies significant growth year-over-year. Our guide for Q1 is – doesn’t have that same level of growth. So we expect the growth to come starting in the second quarter and then accelerating throughout the rest of the year. A lot of that driven by the cadence of sub adds that we expect for WrestleMania, then the monetization for the tail throughout 2017. So that’s on the revenue side. On the investment side, the quarter, there is some timing elements to it. So, the first quarter has slightly more year-over-year, which is also impacting the year-over-year guide. But as far as the rest of the year, as I mentioned in the prepared remarks, we are really focused on delivering on the $100 million, but we have also said that the big thing we work on everyday is balancing, driving the short-term results, but also investing for the future. So, we will continue to monitor and forecast for 2017 and then we will make decisions throughout the year about how much we want to invest in addition to what we are investing already.

[Eric Katz:]

Great. Thank you.

[Operator:]

Thank you. And we’ll go next to Curry Baker from Guggenheim Securities.

[Curry Baker:]

Hi, thanks guys. I have a couple of questions on the Live Events segment. One, you grew the number of live events from 344 to 300 – from 329 in 2015. Should we expect you to continue to grow the aggregate number of live events in 2017 and beyond? And if so, what markets are you targeting for additional live events? And secondly, you had 103 live events in the fourth quarter versus 82 last year with revenue up 17%, yet OIBDA declined 5%. Can you give anymore detail regarding why the live events in the fourth quarter appeared less profitable? Thanks.

[George Barrios:]

Sure. So, on the first part, we are going to do more events. As we have mentioned before, once we executed our brand extension and we had separate talent rosters from RAW and SmackDown. It allowed us to add an event on Monday night, a SmackDown Event Monday night, a broad live on Monday. And so that’s going to drive the increase. So the short answer is, yes, there will be an increase in events. We don’t believe there will be a material impact in profits in 2017, because we are also dealing with different stadium capacity for WrestleMania, which will offset some of the growth in attendance revenue that we will see from the additional events. So, obviously, we set a record at AT&T over 100,000. The Citrus Bowl has a smaller footprint, so you have a year-over-year comp. And then on the second element of your question where you talked about the profitability, we did increase our market spend in Q4 on the live events side, both for events in ‘16 in the quarter, but also for ‘17, we had obviously a really successful Royal Rumble at the Alamodome with over 50,000 in attendance. So you had some of the timing of that, because even though it’s for January ‘17 event, we expected in the period. So in essence, the answer to question is the profit was impacted by timing somewhat.

[Operator:]

Mr. Baker’s line disconnected on accident it looks like. So, we’ll go next to Brandon Ross from BTIG.

[Brandon Ross:]

Hi, good morning. Thanks for taking the questions. First, on the guidance for the year, last year, you very accurately predicted your subscriber growth for the year, before the year even started. Could you drill down a little more on your sub expectations for 2017 that are underpinning that $100 million OIBDA guide for the year? And then just on the Q1 guide in terms of subscribers, I think you finished the quarter, I mean, January at 1.5 million. Your guidance seems to imply basically though subscriber additions in February or March, which seems unlikely, are you just being conservative there? Then I have a follow-up.

[George Barrios:]

Yes. So I am going to correct the premise of the first question. We didn’t really predict the sub levels last year. We gave, in essence, a hypothetical construct, where we said, if the sub levels fell within the certain range, here will be the range of our OIBDA. To your point, it ended up those subs came in within that range, but we won’t take credit for being so accurate. We wanted to give people, given that we were given OIBDA guidance, give people a construct that they can lock into. This year, we feel more and more comfortable in our ability to forecast sub growth and that’s why we are just focused on giving the OIBDA guidance. So, we are not going to go into full year sub guidance, we will keep doing what we do, which is in the quarter. As far as Q1, we are not being conservative. There is the mechanics of the sub growth when you have a good month of sub add as you would expect for a really large amount like WrestleMania on a smaller scale, Royal Rumble, the kind of combination of future month sub growth versus the attrition that you see from that previous month kind of has an impact. So yes, we are not being conservative. As far as March, we are guiding to average daily paid. So any ads in March, the big gross ads coming in from the promotion wouldn’t affect average daily paid. It will affect the total, but not the average daily pace. You wouldn’t see that in the Q1 guidance. So there is some ins and outs there, but the main thing I would correct is if we are not being conservative, we feel the forecast, I mean, the point we have given is as best visibility as we have right now.

[Brandon Ross:]

Great. And then following up on Eric’s question on promotions, you experimented in the quarter with doing a bundling promotion with Crunchyroll. Can you tell us any takeaways from that offering? And a lot of SVOD services have seen huge less by allowing Amazon to sell their services, such as Stars recently commented on that at their Analyst Day. What’s your latest thinking on allowing third-parties to sell the network? Thanks.

[George Barrios:]

Yes. On the first one, we are going to stay away from commenting on individual promotions. Eric asked about the 3 months, mentioned the Crunchyroll, I think again, like I said, you will see us do different things throughout the year and probably more and more, but we are not – we are going to stay away from commenting about individual ones. We will learn from them on the ones that work well, we will do more like them. And the ones that don’t know, we will do less. As far as Amazon or any other third-party, our perspective on doing deals like that really come down to three things

[Brandon Ross:]

Right. So it would be accurate to assume that Amazon is not offering that data to you?

[George Barrios:]

I would be – we will be happy to assume that we haven’t gotten comfortable yet doing a deal like that across those three levers when we speak about one particular potential partner or not.

[Brandon Ross:]

Okay. Just one final question, you raised, what $215 million with the convert, what’s the rationale there for having that much cash you said to execute your long-term growth strategy, but could you give us more details on your cash needs there and any other reasons that holding so much cash would be strategic for you? Thanks.

[George Barrios:]

Yes. In additional to the general corporate purposes, we have said that we want to continue to invest in the growth strategy, which is about content, it’s about technology and it’s about expanding our global presence. And one example I mentioned on the CapEx guide be on the high end of our historical range, that facility we purchased back in the third quarter will begin retrofitting that facility out to serve our production needs. So that’s an example of us having what you did to convert to support that. And then finally, in addition to general corporate investing in our strategy, in the media sectors, you know Brandon, it’s fairly consolidated, which means that when we are talking to potential partners about potential commercial relationships, we are usually dealing with organizations that are much larger than we are. And what we found and we formed a perspective is that having the balance sheet with significant cash on it is good for us. I think it shows that we have the wherewithal to take advantage of a variety of options and how we execute into the future. So we think it’s beneficial for that purpose as well. So those are the three reasons we did it.

[Brandon Ross:]

Thank you very much.

[Operator:]

Thank you. And we will go next to Dan Moore with CJS Securities.

[Robert Majek:]

Good morning. This is actually Robert Majek filling in for Dan this morning. Following-up on a previous question, how much flexibility do you have in the cost structure to hit that $100 million target as subscriber growth continues to decelerate?

[George Barrios:]

Yes. As you know Robert, because I know you pay a lot of attention to what we are doing, we have made a lot of investments over the last few years. So we think there is flexibility in the cost structure, that’s something for us is always going to be. We are still bullish about the future as we want to make sure we are investing for the long-term. We have always said, we prefer a lumpy 15% CAGR than a straight line 10% CAGR. So we were willing to take hits in the short-term if we think over the long-term we can deliver bigger results. And by the same token, we wouldn’t have made a public commitment if we weren’t willing to do everything in our powers to deliver on that. So we will continue to balance those two things.

[Robert Majek:]

Thank you. And in terms of international markets, where is the strongest growth coming from in new subscribers?

[George Barrios:]

Yes. We don’t break the subscriber levels down by market. But what we have did if you think about WWE Network’s international presence, it’s an English-only network, it’s priced in U.S. dollars and it doesn’t have things like downloads, to go to functionality right now which you need in the markets that have low broadband penetration, so we always kind of talk about the international rollout as a soft launch, if you will. And then over time, we will figure out where we want to invest in the product to localize it more. And we are doing more and more localization. Starting last year, we were offering next day of our pay-per-views in multiple languages an example. Vince mentioned the UK Tournament, that’s another example. You will see us do more and more, but we don’t give out specific countries.

[Robert Majek:]

Thank you. And lastly for me, what are your tax rate assumptions for 2017?

[George Barrios:]

Well, as you know, there is a lot of discussion about corporate tax rates going on right now. We are a full taxpayer. So our assumption is that if any of the plans as they currently have been detailed were to be executed, we would be a beneficiary because we are at the top end of the tax rate. But we, I don’t want to start talking about specific assumptions because we need to let the federal government kind of sort that out.

[Robert Majek:]

Thank you.

[Operator:]

Thank you. We will go next to Laura Martin from Needham.

[Laura Martin:]

Hey there. Let’s bring Vince into the conversation. So Vince, a couple of things for you, this UK thing is really interesting, both because I am interested in how many markets you think you can do something comparable. And second, does that make you want to bring some of those – like that UK Champion back into WrestleMania as you have added some of the Asian talent. And then secondly for you, this is just a staggering amount of hours, it’s been watched by these subs and the only way you really get paid based on usage is to add ad revenue or that’s the best way and you sort of talked about ad revenue in the past, so could you talk about that potential revenue stream, so we could monetize some of this amazing viewing that you are getting?

[Vince McMahon:]

I will let George handle that aspect of revenue. But as far as UK Tournament, it doesn’t allow us to capitalize on specific as well as a much larger pool of talent. And again, it’s somewhat localizing obviously, for the UK. In May as I mentioned, developed more into a European type show, which again allows us to more localize yet in Germany, Italy, etcetera, etcetera. So we can do a lot more Live Events. We can do a lot more in terms of growth as far as specific talents to specific countries. So there is just so much opportunity out there on a global basis. We haven’t tapped into it really very much at all and this is our first venture into tapping through that specifically, notwithstanding the fact that Paul has done an extraordinary job of attracting talent from all over the world in an effort obviously, going back into the specific countries which they represent and continue to build a localized audience there as well. So our expansion there internationally as far as talent is concerned is mammoth.

[George Barrios:]

Yes. Laura, on the ad revenue question, we are not believers in the premise you laid out. We think the monetization of this kind of passionate fan base that we are super serving with the subscription service that the best path to monetization is to keep increasing the number of subscribers. For us, when you look at the way we monetize content, we have the subscription service, we license our content to partners and really our ad model is more on the AVOD platforms, on YouTube and our O&O, maybe some day other players, like Facebook and Snapchat and so we have incredible engagement as they build-out there ad tech. So that’s the way we think about advertising. We have a light advertising load on the network right now, but I wouldn’t expect that to grow.

[Laura Martin:]

Okay. And then just a follow-up for you, George, last year we had a 30-day free period had WrestleMania and are you guys going to do anything extra, I assume you are doing that again, but are you going to do anything extra to try to get people into WrestleMania, because you sort of convert these trial subs at the 70% to 80% level, so are you going to do anything extra to try to get more people into WrestleMania, which would then benefit the entire subsequent four quarters?

[George Barrios:]

Yes. Our expectation is we will keep the model we have had now for over 1.5 years of 30-day free for new subscribers, it’s for new subscribers only. And as we mentioned before in the discussion about promotions, we will continue to experiment. So the answer is yes, we will try some things around WrestleMania. Obviously, we think if you come in for our premier event, you will get a real good feel for the value of the network. So we will do some things.

[Laura Martin:]

Super helpful. Thanks guys. Great numbers. Thanks.

[Operator:]

Thank you. We will go next to Mike Hickey from The Benchmark Company.

[Mike Hickey:]

Hey Vince, George, Mike. Congrats on the quarter. Thanks for taking my questions. Curious if you have sort of gauge or measure of fan interest or momentum going into this year’s WrestleMania. Remember last year, there were sort of a lot of injuries on the roster and people are sort of scratching their heads on how exciting the event could be and of course proved to be hugely exciting, but this year, it looks like majority of your stars are healthy and then of course you have the Goldberg effect, which appears to be driving a lot of excitement, so any thoughts there would be helpful. And I am also sort of how you think about this year compared to last year in terms of fan momentum relative where you are in subs in January, where you are up pretty strong and you would think intuitively that momentum will carry you pretty well through quarter end relative to your sub guidance, which all-in does appear conservative? Thank you.

[Vince McMahon:]

Well, let me just say, there is no one talent that makes this big wheel keep on turning. And it is a mixture of combinations and storylines and the resolution of those storylines at WrestleMania and Royal Rumble or SummerSlam or any other events and you will see some vacillation from one pay-per-view to the next and it’s just the nature of the business. As far as momentum is concerned, I think we have more momentum this year than we did last year. And as you mentioned, fewer individuals are injured. So that always gives us a longer talent pool and more players to deal with and more storylines. So there seems like there is more momentum coming into this year in WrestleMania.

[Mike Hickey:]

Thanks Vince. One last one for me, curious on your brand extension, I was wondering if you could sort of reflect on and maybe remind us what you are trying to achieve there and obviously, we have seen the pickup in Live Events, which seems very constructive, but curious if you think that’s been a success and how you think about maybe the TV ratings and how that ties into future TV rights, please? Thanks.

[Vince McMahon:]

Well, as far as the brand extension is concerned it’s working extremely well, that’s working exactly like we thought it would. If you would like the product on RAW, you are more likely to watch a product on SmackDown, here is some crossover and which is what we wanted. At the same time, we are building new viewers coming in. We are introducing new viewers in SmackDown. And that just in and of itself is what we are trying to do as well and are doing and more viewers come to SmackDown, then more viewers elect to watch RAW as well. So it’s a big wheel keeps on turning. So that’s our strategy. And also it’s like you have fresh talent coming from one brand to the next. So the different assets if you haven’t seen a Roman Reigns on SmackDown, then what he does, if and when he does come to SmackDown, then that’s really a big thing. So it freshens up talent and gives us a much longer range in terms of the use of those talents and the IP that goes with them. So that’s, obviously, that in addition to more Live Events. And more room for more talent to be able to rise to the top. If you have only one show in one with the same – two shows with the same talent, it’s difficult to create new stars because the tendency is just to keep the new larger talent on top all the time. So it allows other stars to be able to climb the ladder of success. So there are so many reasons why we got in multiple touring, again if it was just one show both RAW and SmackDown, you are limited to your international touring for argument sake. And we can have the SmackDown tour in December and a RAW tour three weeks later or the next month. So it allows us a lot more flexibility as far as the brand growth is concerned. And of course the other aspect of that is that SmackDown is now a live television show, television ratings for the SmackDown have been extraordinarily good, much better than previous years. RAW rating continues to decline somewhat, much like the NFL ratings.

[Mike Hickey:]

Thanks Vince. Good luck guys.

[Operator:]

Thank you. We will go next to Jamie Clement from Macquarie.

[Jamie Clement:]

Everyone, good morning. Thanks for taking my questions. George, I noticed on the Royal Rumble broadcast that you all highlighted all of the different language broadcast cables that you had there, I wasn’t really sure, is that something that you plan on doing more in the future having German language, Italian, languages other than English and Spanish and is the thought there to possibly build the backlog that you could populate the network with local ad content going forward?

[George Barrios:]

Yes. Jamie, we have been doing that now for about a year. So early in ‘16, we started making available within a few hours after the end of the broadcast, multiple language versions of the pay-per-view. And in Germany, if they want, they can enjoy it in German France and Spain or in the U.S., who prefer Spanish, can do that as well and they can do that live in Spanish. So yes, we have been doing that. We have got some surprises in store here coming up. But we think over time, you will just see more local – localization of all different forms.

[Jamie Clement:]

Okay. And then, George, a follow-up question is the direction of CapEx in terms of what you got planned for 2017, is most of the year-over-year increase is that going to the facility for your production needs or are there other destinations for this that we should know about?

[George Barrios:]

Yes. I mean, there is obviously other destinations, but if you looked at the increase…

[Jamie Clement:]

Yes, the increase.

[George Barrios:]

Yes, the increase is primarily around space. Obviously, we have grown the headcount quite significantly over the last 4 years and it’s a way for us to consolidate a lot of our creative folks. So we are excited about the build up. But yes, that’s the big driver of the year-over-year increase.

[Jamie Clement:]

Okay great. Thank you all for your time.

[Operator:]

And there are no further questions in the queue at this time.

[Michael Weitz:]

Thank you everyone. We appreciate you listening to the call today. If you have any questions, do not hesitate to contact us. Thank you.

[Operator:]

That does conclude today’s conference. Thank you for your participation.