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Wwe Report Martin

Wwe Report Martin

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Published by Michael Ozanian
initiating coverage on WWE
initiating coverage on WWE

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Published by: Michael Ozanian on Apr 15, 2014
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04/27/2014

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 April 15, 2014
Market Data
Price (04/14/2014)$19.9952-Week Range$31.98 - $8.56Shares Out. (MM)31.9Market Cap. (MM)$638.2Avg. Daily Volume1,525,169.0Cash & ST INV/Share$1.46Total Debt/Cap.10.03%
Stock Price Performance
World Wrestling Entertainment, Inc.04/15/14
$35.00$30.00$25.00$20.00$15.00$10.00$5.00
     M    a    y   -     1     3     J    u    n   -     1     3     J    u     l   -     1     3     A    u    g   -     1     3     S    e    p   -     1     3     O    c     t   -     1     3     N    o    v   -     1     3     D    e    c   -     1     3     J    a    n   -     1     4     F    e     b   -     1     4     M    a    r   -     1     4     A    p    r   -     1     4
121086420Volume (mil.) Price (USD)
INITIATING COVERAGE
Stock Rating
BUY 
Price Target 
$30.00Entertainment & Internet 
Laura Martin, CFA
(917) 373-3066lmartin@needhamco.com
Dan Medina
(212) 705-0295dmedina@needhamco.com 
FY 12/31/2013 FY 12/31/2014 FY 12/31/2015
 
 ActualOldNewOldNewRev. (MM)
508.0E587.4E587.4E780.0E780.0E
Growth
15.6%32.8%
EPS: 1Q
0.04A(0.17)E(0.17)E
EPS: 2Q
0.07A(0.07)E(0.07)E
EPS: 3Q
0.03A(0.03)E(0.03)E
EPS: 4Q
(0.10)A0.12E
 
0.12E
EPS: Year
0.04A(0.15)E(0.15)E1.28E1.28E
Growth
(475.0)%(953.3)%
P/E Ratio
NMNM15.6x
World Wrestling Entertainment, Inc. (WWE)
 Action, Passion, Multiple Expansion
INVESTMENT HIGHLIGHTS:
We initiate Coverage of WWE with a Buy rating and 12-month target price of $30, nearly50% above current price levels. WWE combines the live aspects of sports (minimalDVR risk) with the passion of soap operas (long viewing times, loyal attendance). Withthe successful launch of WWE’s OTT network in 1Q14, we now see WWE as a similarinvestment concept to Netflix, only easier because WWE: 1) owns all its copyrights so it has no content cost risk and can scale globally faster; 2) includes downside protectionfrom 5-year contracts from TV ecosystems around the world; and 3) has loyal super-fans that drive venue attendance, merchandise sales, and OTT subscriptions.We initiate coverage with a Buy rating, based on the following analytical building blocks:
Our research coverage focuses on content, offline and online. WWE is the first publiccompany to have significant revenue streams in both worlds, thanks to the launch of its over-the-top (OTT) Network in February of 2014.
Not all revenue is equally valuable. WWE is replacing its PPV revenue stream witha subscription annuity revenue stream. Recently WWE launched the first 24-hourper day OTT serialized-sports network in the world. It is only distributed over theIntenet. On April 7 (about 6 weeks later) WWE announced that this OTT Network already had 667,000 subscribers, despite being the first of its kind. Currently, thisOTT Network is available only in the US, but WWE has announced plans to expandinto the UK, Canada, Australia, New Zealand, Singapore, Hong Kong and the Nordiccountries by 1Q15.
As OTT revenue grows as a percent of total revenue, WWE’s valuation multipleshould rise by 2-3 turns, toward online content multiples. Why? Because onlinecontent companies are globally scalable, rapidly growing, and have high incrementalmargins. They also have direct contact with their viewers (i.e., they “own” theircustomers).
We think the best way to value WWE is to think of its two major old- economyrevenue streams (TV license fees and attendance) as a “bond” plus option valueupside potential from revenue growth and multiple expansion linked to WWE’snascent OTT Network.
More immediately, WWE appears inexpensive. WWE is currently valued at 2.5x FY14Sales, by our estimates, compared to an average of 3.5x for the old-economy content companies we cover. We believe that WWE will first close the gap with old-economycontent companies and then, as its OTT Network scales globally, we expect WWE tobe increasingly viewed as a substitute for Netflix (with less content cost risk), whichis currently valued at 3.9x FY14E Sales.
Relevant disclosures begin on page 21 of this report.
 
Investment Thesis & Valuation
WWE’s business model is the best of both worlds (our view) because it includes both
predictable revenue streams plus revenue upside potential from its nascent over-the-top (OTT) Network. Our valuation analysis concludes that WWE has 2 large, visible/predictable/contractually obligated revenue streams that provide downside
protection for investors plus one multiple expansion driver from WWE’s new OTT
Network. Therefore, the best way to value WWE (our view) is as a bond + warrant analysis.
The “Bond”
 
WWE has 2 major revenue streams that are
“visible” because
 they are either: 1) contractually obligated; or 2) after 3 decades of operations, FCF growth from these sources can be modeled. We note that both of these visible revenue streams participate in enormous economic profit pools with long track records of growth. These predictable revenue streams should provide downside protection for investors. What are
WWE’s visible
revenue streams? In 2013, WWE reported total revenue of $508mm. Of this, TV Rights Fees represented $161mm, or 32%, plus Live Entertainment (including Venue Merchandise) represented $131mm, or 26%, Together, these two revenue streams represented nearly 60% of
WWE’s
2013 revenue.
Visible Revenue Stream #1: TV Rights Fees
WWE produces 7 hours of proprietary TV content every single week of the year.
(Please see full details in the section of this report entitled “Television Rights Fees”.)
WWE sells these weekly shows under 5-year contracts to linear broadcast and cable TV channels around the world. Key investment positives relating to this contractual revenue stream include:
 
Global Stats
. In 2013,
WWE’
s TV programming was viewed by 650mm homes in 150 countries, in 30 languages and generated 350mm live GRP (gross ratings points).
RAW,
 on USA Network, is the most viewed show on US cable TV and is the longest running serialized show on television.
SmackDown
 on Syfy is the second longest.
 
Economics
. In 2013, WWE reported that total licensing fees for
WWE’s TV
shows globally were $161mm of which the US was $106mm and the rest of the world was $55mm. Of this $55mm, w
e believe that India’s TV Rights Fees
accounted for about $12mm in 2013. In addition, we estimate that total UK revenue was $36mm, of which the TV Rights Fees were about $10mm. (Other sources of revenue in the UK include live events, merchandising sales, and PPV fees). We calculate that WWE had licensing deals in 40 other countries, none of which was larger than $3mm annually.
 
2015-2019 Contract Payments Upside Potential
.
 
International.
WWE recently announced that it had entered into a new 5-year contract in the UK at triple the prior contract payment (implying $30mm/year, up from $10mm/year) and Thailand
’s
new contract rose seven-fold (implying $3.5mm/year, up from $500,000/year). These new contracts each begin on 1/1/15.
India’s new contract
term also begins on 1/1/15, and WWE is currently in negotiations.
Needham & Company, LLC
 April 15, 2014
Page 2 of 23World Wrestling Entertainment, Inc.
 
 
US.
 Of the $106mm that WWE announced came from the US in 2013, we estimate that NBC (which owns both USA Network
 which airs
RAW-
 and Syfy
 which airs
 SmackDown)
 represents approximately $85mm annually (ie, 80%). The new 5-year contract term begins on 10/1/14 and, under the terms of the current contract, NBC has the right to match any third-party bid so long as that amount is less
than about triple (our estimate of WWE’s initial offer) its 2013
payment level. WWE has promised to disclose approximate increases under its new TV contracts during 2Q14. The balance of the US TV Rights Fees come from ION Media (airs
Main Event)
 at $14mm and E (airs
Total Divas)
at $7mm, by our estimate.
 
How Big Could it Be?
 According to WWE, under its current US TV license deals, its content is priced at $0.50 per GRP (gross rating point) compared with MLB Baseball at $5.30, NASCAR at $3.90, NHL at $2.10 and NBA basketball at $1.80. This suggests to us that US license fees could double or
triple with the contract that begins on 10/1/14. According to WWE, “average
variable margins for this revenue stream are 78%, before fixed cost allocations
. WWE has guided to FY15 OIBDA of $125mm-$190mm. Our FY15 estimate for OIBDA is $182mm, which assumes a 50% increase in FY15 (plus another 50% increase in FY16)
in WWE’s
TV license fee revenue.
 
 
Hidden Asset Value
. At the end of every airing, all content rights revert to
WWE’s
 library. Some of the episodes air on Hulu after original viewing, but at the end of every license period, all rights revert to WWE. This creates a deep library from which WWE can choose on-demand product for its new OTT Network. In total, WWE has 130,000 hours of content in its library. This represents an important source of hidden asset value, in our view.
Visible Revenue Stream #2: Live Events
In 2013, WWE reported $508mm of total revenue, of which $112mm came from live event ticket sales plus $19mm for merchandise sold AT these live events. Therefore, we calculate that total revenue associated with live events was $131mm in 2013, representing approximately 26% of total WWE revenue. Globally, WWE produced approximately 320 events globally in 2013, often lasting for 2-4 hours each. WWE has 30 years of weekly live event datapoints, suggesting that DCF modeling can accurately capture best case vs worst case scenarios. This deep well of data makes this revenue stream relat 
ively predictable and therefore “visible”
, in our view. (Please see Figure 7 for our Annual Projections.)
Upside Potential: OTT Network
On February 24, 2014 WWE launched the first 24-hour per day OTT scripted (or serialized) sports network in the world. It is distributed only over the Internet. On April 7 (about 6 weeks later) WWE announced that this OTT Network had reached 667,000 subscribers, despite being the first of its kind. Currently, this OTT Network is available only in the US, but WWE has announced plans to expand into the UK, Canada, Australia, New Zealand, Singapore, Hong Kong and the Nordic countries by 1Q15. All of these launches will be in English. Although
WWE’s OTT
Network is distributed over the Internet, rather than on the TV, it has a linear channel playing at all times when you enter the site (like TV), plus it has an enormous library of episodes available on-demand (1,500 hours of programming). Cleverly, although WWE owns a total of 130,000 hours of library content, only 1,500 hours are currently available online because WWE plans to refresh its on-demand library and stagger it over time
so that subscribers don’t tire of the
 on-demand product.
The OTT Network’s
user interface is easy to use and intuitive, we believe.
Needham & Company, LLC
 April 15, 2014
Page 3 of 23World Wrestling Entertainment, Inc.

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