WWE investments cuts into their profits again in the second quarter of 2013

Our performance was "lousy", but "we do know what we're doing, by the way." - Vince McMahon

Three months ago, we reported that WWE's profits were way down in the first quarter of 2013 despite a small uptick in revenue, partly due to increased spending on the company's developmental system and their preparations for a WWE network. Their second quarter unfortunately exhibited a broadly similar pattern.

Three months ago, we reported that WWE's profits were way down in the first quarter of 2013 despite a small uptick in revenue, partly due to increased spending on the company's developmental system and their preparations for a WWE network. Their second quarter unfortunately exhibited a broadly similar pattern, as reported yesterday by WWE in an official press release.

Revenues were up by an impressive 8%, i.e. $10.7 million, from the same quarter in 2012, thanks to the extra money generated from producing a third hour of Monday Night Raw and their new shows Main Event and Saturday Morning Slam, and also a larger WrestleMania gate. However, that's where the good news ended. Profits had been slashed by over 50% from $19.6 million in 2012's Q2 to $8.8 million this year, due to "increased staffing expenses" for WWE's new "strategic initiatives".

Inevitably, Vince McMahon was left having to persuade his stockholders that these growing pains would pay off in the long run for everybody involved:

"In the second quarter, we continued to make investments in both staffing and talent to support our long-term growth objectives. These initiatives, including the recent opening of a world-class performance training facility, and the highest grossing WrestleMania in our Company's history, demonstrate our commitment to develop our talent, build our brands, and provide a solid foundation for future growth. We continue to believe that these investments will enhance our ability to create new programs and to distribute all of our content in a way that optimises its value, through the renewal of key television contracts and the potential launch of a WWE network."

Speaking of the network, there was once again no announcement of a launch date, so McMahon was left scrambling in the Q&A session when asked about this. Clearly, investors are starting to get a little antsy about so much money being plunged into the project with no evidence that it's any closer to getting off the ground. Vince fobbed them off with meaningless statements like "every quarter, we get closer and closer" and "we're making investments that are necessary to bring that to fruition as soon as possible."

George Barrios, WWE's Chief Financial Officer, admitted the company's operating income in 2013 was expected to be in the lower range of earlier projections, about 10% down from the prior year.

Another factor in these gloomy forecasts, is that WWE has been unable to find new emerging markets overseas to expand their business. Indeed, revenues from outside North America declined 8% due to running less live events overseas, which was fortunately offset by a 13% increase in revenue domestically. Once a focus, WWE's expansionary efforts now lie elsewhere.

The great hope is that due to escalating rights fees for live sports content, WWE will be able to capitalise on this environment to get a financial boost when the deals for Monday Night Raw and Smackdown come up for renewal within the next 18 months. Vince McMahon boldly predicted that WWE was "poised more than any show out there to garner what we would hope would be double or who knows [what]" and floated the idea that sports networks may be willing to pick up their programming in a bid to diversify and add highly rated content.

I really think that is delusional thinking given the plethora of studies that have proven that WWE's audience skews low income and thus even much lower viewed sports are tons more valuable to broadcasters in terms of generating advertising dollars, but the company could strike it lucky if two major channels are willing to get into a bidding war for their flagship shows. However, that hasn't happened since the year 2000 when WWE's popularity was at an all time high. With WWE's ratings remaining consistently sluggish and Viacom seemingly content with using TNA as a vehicle to promote Bellator, it's hard to see history repeating itself in 2014/2015.

On a more positive note, WWE's movie division genuinely seems to be turning around, although they'll have to wait several months for the income to trickle in from the five movies they've already released this year. In particular, The Call is expected to make a $5.9 million profit on an initial investment of just $1 million. McMahon now believes that they "finally have the correct model" for their film division, due to a combination of lower risk, a change of management and being "far more selective ... to find what best fits what we do and our audience to bring our audience to these films."

In other things of note:

  • Live event revenues increased 13% to $40.1 million, wholly due to the strong performance of WrestleMania XXIX at the gate (the average ticket price for the show was 39% higher) and the timing of the Fan Axxess events held in conjunction with WrestleMania.
  • Similarly, venue merchandise revenues increased 28% to $6.9 million due to the timing of Fan Axxess.
  • Domestic house show attendance was down 2%, while per capita merchandise sales at those events were essentially unchanged.
  • Pay-per-view revenues declined by $3.7 million, mainly due to the timing of one less pay-per-view event in the quarter. Taking the extra show out of the equation, revenue from the equivalent three events declined just 3%, even though overall buys declined by 13%, but that was almost completely offset by a 12% increase in average revenue per buy, due to a 9% increase in the domestic retail price of WrestleMania and a greater proportion of high definition sales.
  • Television revenues increased 17% to $38.0 million, mainly due to the addition of an extra hour of Raw, Main Event and Saturday Morning Slam.
  • Licensing revenues of $6.7 million were essentially unchanged from the prior year quarter. A 15% increase in the royalties from toy sales was offset by a decline in video game revenue caused by a 65% decline in shipments of WWE '13 from THQ going out of business.
  • Home entertainment revenues declined 9% to $7.1 million.
  • Magazine publishing revenues of $1.3 million were essentially unchanged from the prior year quarter.
  • WWE.com revenues increased 27% to $6.1 million due to higher sales of advertising across their various digital platforms.
  • WWEShop revenues of $3.1 million were essentially unchanged from the prior year quarter.
  • WWE Studios revenue more than trebled to $2.1 million, but that still led to a loss on their books of $400,000.

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