WWE Running out of Options and Burning Cash (could run out of money within 2 years)
In 2011 World Wrestling Entertainment (NYSE:WWE) reached an impasse with its dividend: Management could no longer afford to both pay a dividend and continue investing heavily in several new ventures. The company decided to continue its content investment and slashed the dividend by two-thirds.
Fast forward to today. WWE faces the exact same dilemma. Profitability is declining, the company is still investing in several new ventures and is burning through cash once again. This article analyzes WWE's financial position, with special attention paid to various cash flow metrics and some of the company's recent most important objectives. Money In The Bank
Source: Morningstar
In the above chart, the green bar above represents cash on hand while the solid blue line represents free cash flow. Free cash flow can be found by taking operating cash flow (which is the excess cash a company generates) and subtracting capital expenditure (which represents spending on new projects). Free cash flow is important because WWE's dividend must come either from free cash flow, cash on hand or borrowings. In this case, free cash flow represents WWE's ability to pay its dividend.
As you can see, free cash flow has been below zero since 2013 and the dividend to investors has essentially been coming straight out of WWE's bank account for the last couple years. cash on hand is now only $68 million. At this rate WWE would run out of money in two years if it continues paying its current dividend of twelve cents per share. Therefore, I believe WWE will suspend its dividend and will do so sooner than later.
Source: Morningstar
If there's one important thing to take away from this chart it's this: WWE is not a declining business. In fact, revenue has been steadily growing since 2009. This revenue growth has been driven by international expansion to Europe and East Asia, improving television rights and growing live event revenue. Over the last ten years, international revenue has grown at a 6% compounded rate, television rights revenue has grown at 8% compounded and live events revenue has increased by 5% compounded.
But I'm afraid I have some bad news: Operating cash flow has continued to decline and is now near zero. In other words, business operations are no longer generating excess cash. Furthermore, operating income margins (before depreciation and amortization) are on the razor's edge; declining from 15% a year ago to just 4% as of last quarter.
Why has profitability declined so much? The short answer is that ventures outside of wrestling have drained profits and the company's transition from pay-per-view to network subscriptions has yet to prove fruitful.
One obvious example of this is WWE Studios, which managed to post $0.9 million in operating income over the last twelve months, but has been swimming in red ink for most of its existence. In 2013, WWE Studios posted over $12 million in negative operating income.
WWE Network is largely responsible for the company's decline in profit margins. Management has invested significantly in new content on the WWE Network. This costs money, and the return thus far has been negligible to zero because WWE Network has yet to sustainably reach breakeven numbers.
The WWE Network has also cannibalized a once-integral source of cash flow - pay-per-views. Pay-per-view revenue is down by 70% from the same period last year. A quick look under the hood explains why overall profit has declined so much. A single WWE pay-per-view event typically costs between $30 and $50. However, a subscription to the WWE Network can be procured for the bargain basement price of just $9.99 per month. And the WWE Network contains not only all live pay-per-view events but also original content, all of which costs money to produce.
To put a number on this effect, over the past twelve months, operating income (before depreciation and amortization) from pay-per-views has declined by $5.1 million. Much of that decline, I believe, is due to a migration over to the WWE Network. The Millions, And Millions?
The understood 'rule of thumb' regarding the WWE Network is that it needs 1 million subscribers to breakeven (this does not seem to account for cannibalization from pay per view events). While the company generated headline buzz from the announcement that the network recently reached 1 million subscribers, we will see that this 'snapshot' is likely irrelevant.
Source: WWE
While these numbers are a bit old, and will be updated when WWE announces its fourth quarter and full-year earnings in a couple weeks, we can see that the WWE Network has a very high 'churn' rate, where cancellations have nearly equaled adds for two quarters.
Anyone familiar with wrestling can tell you that interest peaks just before big pay-per-views and troughs during the "off-season." In WWE's case, interest in content will be greatest during the period from Royal Rumble to Wrestle Mania, between late January and early April. Interest should again spike in August for Summerslam.
Therefore, citing subscriber numbers in the immediate wake of Royal Rumble, will likely prove to be an irrelevant snapshot. Subscriber interest seems to peak during this time of year, anyway (it certainly did last year). My educated guess is that the bulk of cancellations, during both quarters, come after major pay-per-view events. With subscribers able to cancel at any time, I suspect the churn rate will continue to be substantial and I also suspect that the subscriber base will be significantly below one million by the end of the first quarter. And This Is The Bottom Line
At this rate of cash burn, WWE will be out of liquid funds in 24 months or so. Therefore, I believe that the company will suspend its dividend and will do so sooner than later. Looking at the bigger picture, investment in new content and ventures into other entertainment markets have drained the company's war chest of cash and have jackknifed operating profits to near zero.
For things to remain as they are for WWE, the company's content investment, such as the commentary programs and reality shows which the company now produces, will have to begin generating cash flow. The same goes for WWE Studios. Also, the WWE Network will have to become profitable, not only on an absolute basis, but also in a way that provides a viable alternative to the traditional pay-per-view business model.
I'm skeptical either effort will be successful. First, I don't believe these peripheral shows will ultimately pique interest in WWE's flagship programming. If anything, it's the flagship programs, Raw and Smackdown, which must make exciting and engaging content to pique interest in the spinoff shows, not the other way around.
WWE's ventures outside of wrestling will cost investors their dividend. Furthermore, if WWE Studios continues to bleed money while the WWE Network ultimately delivers only very thin profit margins, then the company will be due for an attitude adjustment within the next couple years. There simply won't be enough cash laying around to fund these projects. At that time, many of these programming ventures will either get scaled back or receive the big boot altogether.
