Shares of World Wrestling Entertainment fell more than 10% in afternoon trading Friday after the scripted sports giant reported disappointing Q4 results, stoking fears that higher expenses could eat up the benefits of its recent NBCUniversal deal in its first year.
WWE, like every other entertainment company, has been negatively affected by the pandemic. But the wrestling giant has been hit particularly hard as stay-at-home orders basically erased its live event revenue, which fell 97% in Q4 to $700,000 from $27.4 million in the prior year. Overall revenue dropped 26% to $232.2 million in Q4 and Operating Income Before Depreciation and Amortization (OIBDA, a measure of cash flow) fell 52% to $51.2 million. For the full year, revenue rose 1% to $974.2 million, primarily because of increased content licensing fees, and OIBDA increased 59% to $286.2 million, also due to higher licensing fees.
On a conference call with analysts to discuss Q4 results, WWE chairman and CEO Vince McMahon said he expected a gradual turn to live events and was excited about the NBCU deal. As part of that transaction, subscribers to Peacock’s ad-supported tier can get WWE Network for $4.99 per month, half the $9.99 per month WWE charged.
“This agreement is really awesome for our WWE fans,” McMahon said of the NBCU deal, adding it gives them greater value.
But despite that optimism, some analysts feared that management comments on increased expenses and the confusing nature of the NBCU agreement would pressure shares.
They were right.
WWE held the analysts’ call at 5 p.m. on Feb. 4 and the next day, the stock was immediately impacted, opening at $53 per share, $3 per share below its previous day’s close of $56. By the afternoon the fall had become more pronounced as shares sank as low as $48.87 each (down 12.7%, or $7.13 each), before closing at $49.22 per share, down 12.1% or $6.78 each, on Feb. 5.
In a research note, Evercore ISI analyst John Belton wrote that he was encouraged around solid guidance for 2021 and expectations for 2022, but expected investors to react poorly to some management comments around expenses and the NBCU deal.
“With the impact of COVID on WWE’s business better understood and with a guidance range for 2021 adjusted OIBDA established, focus has shifted to the business’s longer term earnings power now that a long-awaited licensing deal for the WWE Network has been reached with Peacock,” Belton wrote. “Unfortunately, we think investors will come out of the 4Q earnings cycle a bit disappointed by some of management’s comments around both higher than expected expense growth expectations beyond this year and the confusing nature of the Peacock agreement, and we are reducing our 2022E adjusted OIBDA forecast by ~4% to reflect this sentiment.”
WWE unveiled the NBCU deal in late January. According to that transaction, NBCU’s Peacock service would get exclusive streaming rights for WWE Network in the U.S. NBCU also would continue to air WWE’s Monday Night Raw on its USA Network.
WWE had launched the WWE Network in 2014 and had enjoyed some early success. But the streaming service peaked at 2.1 million subscribers in 2018 and by Q4 2019 that number had dropped to 1.5 million. Investors and analysts feared that WWE would throw in the towel on streaming, but Vince McMahon had continued to stress that a big deal was on the way. During a conference call with analysts in February 2020 to discuss Q4 2019 results, McMahon continuously interjected that “the majors” are “clamoring” for WWE content. If the company did decide to do a licensing deal, he said, it could announce it before the end of next month.
“We’d be announcing that deal, if we go that way, in the first quarter,” McMahon said at the time. “That’s how far along we are.”
The pandemic, which began to take hold in March of that year, no doubt put a damper on any deal being finalized. But with the new Peacock deal, there are still questions as to what impact it will have on the overall operations.
On the Feb. 4 earnings conference call, WWE chief financial officer Kristina Salen said that the first year would be the biggest in terms of revenue from the NBCU deal, because of the valuation for the subscribers and IP that will transfer over to Peacock.
“That will be all recognized in 2021, and then in 2022, you'll have the regular revenue recognition of the ongoing deal,” Salen said on the call.
She added that WWE expects a “significant” increase in expenses due to higher production costs associated with its ThunderDome virtual video conferencing crowd system for live events and the return of workers from furlough. Despite those increases, Salen said OIBDA is expected to be between $270 million and $305 million in 2021, due to the Peacock deal, more live events and the escalation of core content rights.
With OIBDA expected to be at best 7% higher or at worst 6% lower in 2021 than in 2020, most analysts saw that as an indication that increased costs would eat up most of the Peacock gains, at least in the first year.
Belton estimated that about 25% of the revenue in the five-year deal will be realized in year one, adding in his note that under those assumptions, WWE could expect a $30 million OIBDA tailwind in the first year, of which about $15 million potentially reverses in 2022. “From there we believe the agreement will more closely resemble a typical rights deal with contractual annual fee escalators,” he wrote.
Barclays Research media analyst David Joyce, was a little more optimistic, adding that investors likely have “written off” this year, but that the Peacock deal and live events expected to pick up in the second half of the year could bolster the outlook for 2022.
Joyce added that although the Peacock deal reduces optionality for the WWE Network, Comcast NBCU’s stronger balance sheet and distribution strength could open other doors globally.
“This backstop could also help WWE invest in more of a longer-term fashion in making content better at WWE, something that has been a source of operational volatility,” Joyce wrote.
In a Jan. 29 research note, Wells Fargo Securities media analyst Steven Cahall wrote that operating expenses will be the key. If 2021 opex is more skewed toward personnel, marketing and content, then 2022 OIBDA could reach $350 million. That estimate rises to around $400 million if 2021 opex guidance is conservative and has a lot of one-time charges.
Cahall added that he's bullish on the stock if it can reach the high end of his 2022 OIBDA forecast. But he cautioned that WWE wasn’t “quite out of the woods.” He pointed out that reaching that level would mean WWE would have to spend more to squeeze higher ratings out of an already corded entertainment field, and noted that in the past, WWE has underperformed investor OIBDA expectations.
“We think WWE gets the double-whammy up and down: higher multiple when OIBDA estimates move up, lower multiple when estimates come down,” Cahall wrote. “So, where opex goes, likely so goes the stock.”
