Today the WWE released its second quarter financial report with strong Wrestlemania revenue being offset by the disappointing returns from the third WWE Film release The Condemned.   The WWE made it clear that if the film was not included in the financial figures then the WWE would have had a 19% increase in operating revenue (Shareholders were no doubt as happy with that assessment as the Titanic survivors who were asked how their voyage went other than the unexpected moonlight swim).   It should be noted that the WWE has not received its share of the profits from any of its films (including The Condemned) so its actual revenue may be higher once the film revenue is distributed (however it should also be noted that none of the films have been categorized as major successes).

The official press release can be found at the WWE's corporate website   You can also access the complete financial report there as well.   What follows are some highlights from the report along with an analysis of the figures.   To distinguish the WWE report from my analysis, I have italicized everything from the WWE report.   

(NYSE:WWE) today announced financial results for its second quarter ended June 30,

2007. Revenues totaled $137.5 million as compared to $119.3 million in the prior year

quarter. Operating income was $9.7 million as compared to $21.4 million in the prior

year quarter. Net income was $7.0 million, or $0.10 per share, as compared to $14.7

million, or $0.21 per share, in the prior year quarter. Earnings in the quarter were

negatively impacted by a $15.7 million impairment charge related to our revised

performance expectations of our feature film “ The Condemned ”.

Excluding the impairment charge discussed above, operating income would have been

$25.4 million as compared to $21.4 million in the prior year quarter, representing a 19%

increase. Net income would have been $16.9 million, or $0.23 per share, in the current

quarter as compared to $14.7 million, or $0.21 per share, in the prior year quarter.

“We achieved a broad based 15% revenue increase , posting higher revenues across all

key business lines in the current quarter. In addition to the top line growth, we achieved

EBITDA of approximately $12.0 million, or $27.7 million excluding the film impairment.

This $27.7 million represents an 18% increase over the prior year quarter,” said Linda

McMahon, Chief Executive Officer.”

“Live and Televised revenues were driven by the success of WrestleMania ® which set

WWE ® records for both the number of payperview buys and gross ticket sales.

Consumer Products revenues increased 29% over the prior year quarter, reflecting

improvements in our home video, licensing and magazine publishing businesses. Digital

Media revenues, which were up 30% over the prior year quarter, also benefited from

new partnerships, particularly for wireless content,” concluded Mrs. McMahon.

Results By Business Segment

The following chart reflects net revenues and profit contribution by segment for the three

months ended June 30, 2007 and June 30, 2006. (Dollars in millions)

Three Months Ended

Net Revenues

                                                                        June 30,2007                             June 30,2006

Live and Televised Entertainment.......................... $ 102.9                                  $ 92.6

Consumer Products............................................... 26.4                                                 20.4

Digital Media ......................................................... 8.2                                      6.3

WWE Films ...........................................................

Total......................................................................$ 137.5                                $ 119.3

Three Months Ended Profit Contribution

                                                                        June 30,2007                             June 30,2006

Live and Televised Entertainment ......................... $ 33.4                                    $ 33.0

Consumer Products ..............................................    15.8                                    10.9

Digital Media.........................................................       3.7                                     2.4

WWE Films...........................................................    (15.9)

Total profit contribution..........................................  $ 37.0                                       $ 46.3

Profit contribution margin ...................................... 27%                                                    39%

Live and televised entertainment i.e. WWE house show and PPV event ticket sales enjoyed a slight increase in revenue (undoubtedly buoyed by the success of Wrestlemania 23 ) but the real gains were in its consumer products, Internet sales, and TV rights.  The WWE enjoyed notable success in both its home video sales ($14.8 million this year compared to $12.1 million last year) and its licensing the WWE name ($7.7 million this year compared to $5.2 million last year).  Another noticeable improvement was WWE Magazine which enjoyed a 23% increase in net revenue from last year ($3.7 this year compared to $3.0 million last year).  Last year, WWE Magazine was given a makeover from its traditional layout to one more like Maxim so one would have to believe the retooling was a success.  The introduction of the ECW brand brought in additional revenue in terms of TV rights as the Rights Fees revenue jumped noticeably ($23.9 million this year compared to $20.8 million last year). 

Today’s figures indicate remarkable growth for its WWE; 24/7 product.   The on-demand product brought in $1.3 million this year compared to $0.7 million last year.   While the amount of revenue is not staggering, it shows that there are some new revenue sources for the WWE to target.   Likewise, WWE’s website  brought in additional revenue in 2007, gathering $4.6 million this year compared to $2.9 million last year.   Part of this growth was attributed by the WWE to its foray into content for wireless devices.

Where things turn disappointing is in the pay-per-view portion of the WWE’s business as the success of Wrestlemania 23 was the exception to generally disappointing buy rates.

Live and Televised Entertainment

The details for the number of buys (in 000s) are as follows:

Events (in chronological order) Three Months Ended June 30, 2007 Three Months Ended June 30, 2006

WrestleMania ® .......................................... 1,188                                              958

Backlash ® ................................................. 194                                                213

Judgment Day ® ........................................ 242                                                238

One Night Stand ® ..................................... 186                                                294

Vengeance ® ............................................. 243                                                 339

Prior events ............................................... 51                                      185

Total ...................................................... 2,104                                                 2,227

The PPV figure paints a good example of how the WWE is doing overall.   While Wrestlemania continues to be lucrative for the WWE, their PPV business continues a downward slide.   With the exception of Wrestlemania 23 and Judgment Day (which had a slight buy rate increase from last year’s show), buy rates were down rather noticeably.   Fortunately for the WWE, they had the benefit of an extraordinary Wrestlemania buy rate as well as increased revenue from their PPV’s jumping from $35.95 to $39.95 beginning with the 2006 One Night Stand.

Despite the boost from Wrestlemania, PPV buy rates for 2007 were down from 2006 and the WWE needs to take a close look at addressing this problem.   Recent shows have indicated the WWE recognizes that their PPV’s need some sort of change hence the move from brand exclusive shows to shows featuring all three brands.   Rumors abound that the number of PPV’s are being scaled back as there is a feeling that there are too many shows and that PPV’s have lost their sense of being special.   Whether either one of these moves helps the PPV buy rates go up remains to be seen.   One would imagine the option of raising PPV prices further would have to be ruled out as there’s the risk of people not buying shows they feel are overpriced.     

Looking at the various figures, it appears that the WWE is treading water.   The corporation made some increases in revenue in new and expanding sectors but they also lost revenue in others.   While part of the blame for the drop in revenue can be attributed to the costs of The Condemned, you can’t discount the fact that PPV buy rates continue to fall, a situation that needs to be taken very seriously.  

Barring unforeseen profits from The Condemned, the WWE needs to focus their attention on the core product.   While new ventures such as WWE 24/7 and wireless content have proven successful, it appears that fans are only willing to go so far with their money when it comes to the WWE brand.   The WWE certainly deserves credit for pursuing new sources of revenue but the cost of producing a film is certainly larger in scale than most of their new ventures.  

In the end, the WWE can build new revenue sources as they have done with WWE 24/7 and their Internet products but their proverbial bread and butter lies in people going to live events, ordering PPV’s, and purchasing WWE merchandise.   While their ticket sales increased this quarter, one can’t help but speculate that the fan base continues to diminish (based on PPV buy rates and TV ratings).   As their fan base diminishes, so will their overall revenue.   As their fan base increases, their overall revenue will increase and it seems likely that ancillary products such as WWE 24/7 and Internet products will flourish likewise.  

While the WWE can pursue new ventures in order to increase revenue, they have to develop a long-term strategy at regaining the fans they lost after the end of the Monday Night War.   The Wrestlemania product has proven to be a consistent earner but everything else indicates that more and more people are tuning the WWE out.   Unless this shrinkage is reversed, the law of diminishing returns could lead to serious concerns by stockholders in the near future.