The Hamilton Ave Journal 05.10.08: Volume 1 – Issue 33

Posted by JP Prag on 05.10.2008

The Journal does an in-depth analysis of the WWE’s First Quarter Financial Results, the WWE’s stock takes a hit, TNA gains a new CMO, WWE announces a new video game and three movies, ratings drop again, and Sting finally makes it to the Top Ten.

THE HAMILTON AVE JOURNAL
By JP Prag

Volume 1 – Issue 33

ABOUT THE JOURNAL

The Hamilton Ave Journal is the only wrestling news report focused solely on the business of wrestling. Here in the Journal we not only look at the stories that are important to the investor and business-minded person, but also delve deeper into stories that most fans of wrestling would overlook. That is because the Journal is about getting the heart of the matters that affect the companies and outlooks of the wrestling world.

And where is Hamilton Ave? That is the location of the WWE Production Studio in Stamford, CT, and thus the most powerful place in the wrestling world. Besides, The East Main Street Journal just does not have the right ring to it.

Who am I? I am JP Prag: consultant, entrepreneur, businessman, journalist, and wrestling fan.

Now, ring the bell because the market is open.




WHAT'S NEWS

The Journal's front page area known as What's News isn't just about telling you what has happened. The stories in this section are about what will have an effect on the wrestling industry, individual federations, and the wallets of the fans.

LEAD STORY: WWE 2008 Q1 Analysis

On Tuesday May 6, 2008 the WWE filed an 8-K report, sent out a press release, and help a conference call concerning their 2008 Q1 financial results. The picture the WWE presented was a pretty one, with a 51% growth in revenue compared to the same quarter last year to $162.6 million from $107.4 million. Operating income, too, grew 32% to $27.1 million from $20.6 million. This led to final net income growth of 29% to $19.5 million to $15.1 million.

With such encouraging numbers, the WWE looks to be doing extremely well. But a more in depth analysis reveals that while the WWE is doing well, these numbers are inflated by a vast array of factors.

First and foremost, in FY2008 WrestleMania 24 took place in Q1 and most revenue associated with it is recognized in that quarter. In FY2007 WrestleMania 23 took place and was recognized in Q2, making a large gap in numbers. How large? WrestleMania 24 to date has over 1,058,000 buys (compared to WrestleMania 23's 1,116,000 buys, a difference of 58,000 buys) which generated $23.8 million in revenue alone. Add in the revenue form ticket sales, merchandise, and events leading up to the show and the WWE saw an additional $31.3 million in revenue ($7.1 million in operating income and $4.6 million in net income).

Subtracting these out, the WWE would seem to have a 22% in growth in revenue, a 3% decline in operating income, and a 1% decline in net income. So while revenue went up 51%, the cost of revenue (not including SG&A) increased 72% from $58.1 million to $100.0 million. In other words, the WWE made less income on more sales of the same product.

Except that would not be the end. This quarter the WWE also finally recognized revenue as part of WWE Films "See No Evil" and "The Marine" totally $11.9 million. Since costs for those films have already been amortized over other quarters, that means that comparable revenue was really $119.4 million, or an increase of 11% with still a decrease in the bottom line on comparable income.

When we start to break down the revenue by business segment is when the story gets even more interesting. First were live events which grew 35% to $24.6 million from $18.2 million. Again, this includes WrestleMania 24 with $5.9 million in revenue making the growth of comparable events less than 3%. There were 74 events in the quarter this year (73 events excluding WrestleMania) including 8 international events compared to 71 events including 8 international events in the same quarter last year. So, that means the 3% in earning from live events came from the 3% growth in number of events.

But here is where it changes again. Excluding WrestleMania, the average ticket price (North America) rose 5% to $38.08 while North American attendance dropped 9% to 6,300 per show. The WWE noted the decline in crowd size and said it was due to a change in touring schedule and going to smaller venues, thus there should be an increase in the following quarter. That will have to be watched to see if it is true, but declining house show sizes is a key performance indicator for the company's health that needs to watched closely.

The next large piece of revenue came from PPV buys giving the WWE a 161% jump to $41.2 million from $15.8 million. Excluding the $23.8 million for WrestleMania, that jump is 10% to $17.4 million. This is especially impressive considering the WWE dropped a whole PPV event (New Year's Revolution), which it turn helped the Royal Rumble grow by 9% to 533,000 buys and No Way Out by 51% to 329,000 buys. Additionally, the WWE saw a growth in prior event buys (events that took place in the prior quarter but had buys in the current quarter) with 113,000 this quarter. Seemingly, decreasing the number of PPVs per year has paid off in increasing overall buys. The cost increase on the PPVs and a separate HD PPV broadcast at a higher price also contributed to the growth.

Other main product revenues included venue merchandise (8% growth to $5.6 million), television rights fees (10% growth to $24.0 million [this mostly on growth on international fees]), and WWE 24/7 (60% growth to $1.6 million due to availability in more markets).

Outside of the traditional core products, the WWE Consumer Products division saw strong growth of 16% to $43.4 million from $37.4 million. Although there was growth in home video sales (3% to $14.0 million) and magazine revenues stayed flay ($2.9 million), Licensing revenues jumped 27% to $26.2 million from $20.6 million; mostly fueled by videogame sales (SmackDown vs. RAW 2008). This most likely helped support the decision to add an additional title next year, as noted below in the Newsbites.

The continual rebranding of WWE.com has paid off as advertising revenues led the way to a 61% increase in revenues related to the website and wireless content. WWEShop, on the other hand, dropped 7% to $3.6 million including an 18% decrease in the number of orders (although this was made up in the average order increasing 5% to $51). WWEShop is covered further in the Money and Investing section below.

Over on the balance sheet, Assets increased 4% to $488.7 million, including a 33% jump in cash and cash equivalents to $180.4 million. Of interesting note, accounts receivable jumped 51% to $85.6 million. Normally, this would be an eyebrow raiser as having suppliers control that much funding would be a cause for concern of the WWE's control processes. But in this case, most of those receivables are related to WrestleMania 24 PPV buys, so that is less of an issue. The big drop came from Investment Securities which dropped 68%, most likely due to the realization of investments over time.

Overall, it was a good, though not fantastic quarter for the WWE. The rising costs are a bit of a concern, but the real issue is the WWE's attempt to hide the problems and others within the numbers. Instead of addressing these concerns head on and providing a strategic plan for change, the WWE has gone into denial mode and attempted to keep the issues a secret.

The Journal was not the only one that was concerned, as others read through the WWE's numbers to come to their own conclusions as well…


Investors react poorly to WWE Financial Results

Wall Street was not impressed with the WWE's financial numbers, seeing through the gains of WrestleMania and noting other issues. Steven Mallas on BloggingStocks particularly noted the free cash flow situation. Although the WWE has a large amount of cash on hand and recently increased its dividend, the difference in cash does not equal the amount of reduced cash flow.

The stock saw a huge surge in trading, seeing a 316% jump in volume on Tuesday leading to a close of $16.90, a near 8% decline. Once the stock hit that level, certain earnings targets were missed for investors which set off a rash of other sales. As of Friday, the stock closed at $16.09, down over 12% from the week's high of $18.36.

Most analysts are still maintaining keep or buy ratings on WWE with a $19-$20 stock target.

The decline of the stock price does not affect WWE earning and nor dividends (the WWE declared the quarterly dividend amount yesterday), but does change in the intrinsic net worth of members of the McMahon family and WWE executive team.


TNA gains CMO from struggling Midway

Midway, makers of the upcoming TNA iMPACT video game, have seen a number of organizational changes recently and had a quarter market with large losses due to no new titles being released. Just before promotions for some within the company were announced on April 14, both CFO Thomas Powell and Senior Marketing VP Steve Allison announced their resignation (this not long after CEO David Zucker stepped down earlier in the year). Originally announced on January 14, 2008, Mr. Allison was to stay with Midway in an advisory role until March 31, 2008. Although the turmoil within the company no doubt is having an affect on TNA iMPACT's release date, TNA is gaining something else in all of the changes. Mr. Allison will be joining TNA as their Chief Marketing Officer (CMO). According to Midway games profile on Mr. Allison:

Steven M. Allison joined us as Senior Vice President — Marketing and Chief Marketing Officer on December 22, 2003. Prior to joining us, he was Vice President of Marketing and Business Development, Atari/ Infogrames, from December 2001 to December 2003. Prior to that, he served as Infogrames' Vice President of New Business Development and Production Content, from 2000 to December 2001, Vice President of Licensing and Product Planning from 1999 to 2000, and Director of Product Marketing in 1999.

All and all, Mr. Allison has a long history of working within marketing and development of struggling video game studios and finding some success. To understand Mr. Allison's marketing philosophy, here is a quote from an interview Mr. Allison had with Chris Faylor of ShackNews on May 9, 2007:

"The truth is that there is no correlation between review scores and commercial success," Allison wrote in a followup entry. "If there were, 'great' games Beyond Good & Evil, Ico, Okami, Psychonauts, Shadow of the Colossus, Freedom Fighters, Prey and Midway's own Psi-Ops would all have been multi-million unit sellers. The aforementioned games are all games that average review scores of nearly 90 percent out of 100, some even higher. The reality is none has sold more than 300,000 units at full price in the U.S. and a couple of these less than 250,000 units lifetime even with bargain pricing."

How Mr. Allison will change TNA's marketing philosophy remains to be seen, as well as how he will adapt to a very different business model.


Newsbites

Some items of note in the rest of the wrestling business world:

NBC, partner to the WWE, decided they were willing to negotiate with TNA wrestler Matt Morgan to get him involved with American Gladiators. A new contract is being drafted for a shorter period of time and that give TNA the first right on Mr. Morgan's time. No word on if there are any planned tie ins with TNA, but one would imagine that would not sit well with the WWE who has a contract with NBC/Universal through 2010 (although ECW's contract with SciFi expires in December).

WWE, THQ, and JAKKS Pacific announced in a joint release an upcoming "WWE Legends of WrestleMania" video game. The WWE and THQ are still in development of SmackDown vs. RAW 2009, so the availability of staff to build the new product seems questionable. At the same time, the WWE is parting ways with JAKKS in 2009 for Mattel to build their toy like (nonetheless the perpetual lawsuit with JAKKS). JAKKS may own many of the contracts of the wrestlers for the "legends" line, and therefore are being brought into these proceedings in order to get as many wrestlers on board as possible without having to build new contracts.

WWE has announced more stringent testing policies associated with the Wellness program after Afa Anoa'l Jr was suspended for cheating during the test. The testing company will now watch wrestlers give the sample. No word on if any wresters are pressing the case with management over privacy issues. Even though there are most likely no provisions to allow such changes in wrestlers' contracts, there was also no such provisions for dress codes. Wresters contracts remain incredibly one-sided in favor of the company.

The WWE is looking for a new company to help promote the brand in the UK and Italay. Current provider "The Outside Organization" is free to make a bid in the RFP, and the WWE will make a decision by July 1, 2008.

During the WWE conference call, the WWE released information on upcoming movie projects. Two direct-to-video releases in 2009 are expected to be "Behind Enemy Lines 3" and "The Marine 2", each with a budget of $5 million. Despite often mentioning a focus on direct-to-video releases, the WWE confirmed that "12 Rounds" starring John Cena will be a theatrical release and have a budget of $20 million.



MARKETPLACE

In the Marketplace we look at the trends in television ratings. This section is less for critical analysis by the Journal but more for the reader to see what is really going on and to draw their own conclusions.

As with stocks, here in the Journal we track the progress of television ratings. If ratings are the barometer by which we judge the product, then over the course of 52 weeks we should be able to see patterns, trends, and anomalies. Please note that gaps in the chart below are due to data not being released/available.

For the week ending Thursday May 8, 2008, here are the current standings of our shows:





RAW
Close (This Week's Rating): 3.2
Open (Last Week's Rating): 3.3
Percentage Change: ▼ 3.0%
52-Week High: 4.2
52-Week Low: 2.5
All Time High: 8.1
All Time Low: 1.8

SmackDown*
Close (This Week's Rating): 2.2
Open (Last Week's Rating): 2.4
Percentage Change: ▼ 8.3%
52-Week High: 2.9
52-Week Low: 2.2
All Time High: 5.8
All Time Low: 1.0

* SmackDown! ratings may include fast overnight if final ratings are not posted. Also, SmackDown! ratings are for the prior week as overnights are not available before this article goes to print.

ECW
Close (This Week's Rating): 1.1
Open (Last Week's Rating): 1.1
Percentage Change: UNCH
52-Week High: 1.8
52-Week Low: 0.6
All Time High: 2.3
All Time Low: 0.6

TNA iMPACT**
Close (This Week's Rating): 1.0
Open (Last Week's Rating): 1.0
Percentage Change: UNCH
52-Week High: 1.2
52-Week Low: 0.9
All Time High: 1.2
All Time Low: 0.6

** TNA iMPACT's are for the prior week as ratings may not be available at the time of the Journal's posting

Analysis:

Another down week for ratings with the overall audience shrinking amidst competition from the NBA playoffs, shows having a few new episodes this season, and a general lag in the products of all companies and brands. The WWE sent out a press release that RAW from a couple of weeks back defeated the NBA playoff game and the NFL draft in total number of unique viewers even though it had a lower rating (an odd phenomenon), that has not helped their actual numbers grow. Even on the WWE Conference Call CEO Linda McMahon and COO Michael Sileck claimed that the ratings were down due to the cycle of the business and that USA was perfectly happy with the ratings, the WWE continues to live in denial.

Financial results have been impressive and there is no doubt the WWE knows how to run a profitable business. Their operations are smooth and they are diversifying their product mix to keep up with changing technologies and tastes. But their core business is people watching wrestling and converting those viewers into attendees of live events and purchasers of PPV events. Declining ratings can be an indicator of declines in both of those categories. Denying there is a problem is not a solution to the issue. The WWE would be best served to admit that there is a problem with key performance indicators and address the issue. Though finances in the short term may be doing well, there are medium to long term issues to deal with. Unless something is done now, what is medium and long term today will soon be the immediate future.

As noted above, Wall Street saw some of these same issues. The WWE tried to pass off impressive financial results as the norm, but subtraction showed where the company stood on same-product results. Those indicators are a warning that the WWE has work to do, and the stock price now reflects the doubts from investors.


MONEY AND INVESTING

We all know that wrestling is a business, but we don't often pay attention to what sells and makes money. Money and Investing looks into the top selling items in the world of wrestling and any interesting figures that may have come out this week.

What are the top ten selling items for the WWE? From WWEShopZone.com:

1. Triple H Hammer T-Shirt
2. WrestleMania 24 World Heavyweight Champ Plaque With Ring Canvas
3. WWE Yearbook 2008 Magazine
4. Undertaker 16-0 T-Shirt
5. Hardys Twist of Fate DVD/T-Shirt Package
6. Jeff Hardy Armbands
7. John Cena 8-Bit T-Shirt
8. Hardys Purple Logo Pendant
9. WWE Black Gift Bag
10. Hardys Illustrated T-Shirt

This list might have to be called "How many of the Top Ten items belonged to the Hardys?". What will be interesting to see how the Hardy items move when Jeff comes back sometime in the next few weeks. Meanwhile, the WWE added a plaque item much like Samoa Joe's from last week. This one is for the Undertaker and is half the price, but has 500 units available. The Journal is glad to see both the WWE and TNA diversifying into new products and trying to create more high ticket items. That said, WWE ShopZone had a tough quarter with a drop in sales—and the WWE tried to cover it up with the increase in average order price. That seems to be par the course in the WWE: taking more money from less customers. There are some economies to support this model, but the WWE is teetering too close to the edge for it to be acceptable to shareholders and the Journal.

TNA releases a list of Top Ten selling items, but the list has not been updated to current products in quite some time. Until TNA updates the list, the Journal will be take the list of featured products and sorting by most popular. When done so, the list comes up as:

1. TNA Global iMPACT DVD
2. Samoa Joe Lockdown Special
3. AJ Styles "Unim Phenomenous" T-Shirt
4. Nash "Big Sexy Tour" T-shirt
5. Shark Boy 24:7 T-Shirt
6. Final Resolution 2008 PPV DVD
7. Samoa Joe "Drastic Times, Drastic Measures" T-Shirt
8. TNA "Cross The Line" T-Shirt
9. Sting "Logo" T-Shirt
10. Motor City & Machismo Autographed Pictures

As the LockDown Special package everything moved up one spot except Sting finally entered the Top Ten. As one of the most highly paid wrestlers in TNA, it would be better to see him on this list more often. Of interest are several items just below the Top Ten, notably three different types of TNA hats. TNA has been strong in creating new products, including the strong winter line they had. Hopefully these hats are the first in line for a Spring/Summer line to keep different products rolling.


PERSONAL JOURNAL

Wrestling isn't just about watching and reading. The best way to be a wrestling fan is to experience it live. Where is wrestling coming to in the next 2 weeks? The Personal Journal answers that question.

Sunday	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday
11 (May) TNA Sacrifice Orlando, FL RAW Live East Lansing, MI SmackDown/ECW Live Dayton, OH	12 RAW Detroit, MI SmackDown/ECW Live Toledo, OH TNA iMPACT Orlando, FL	13 SmackDown/ECW Grand Rapids, MI TNA iMPACT Orlando, FL	14	15	16 TNA Live Binghamton, NY	17 TNA Live Poughkeepsie, NY
18 WWE Judgment Day Omaha, NE TNA Live Wallingford, CT	19 RAW Kansas City, MO	20 SmackDown/ECW Des Moines, IA	21 RAW Live Monterrey, Mexico	22 RAW Live Queretaro, Mexico	23 RAW Live Mexico City, Mexico	24 RAW Live Mexico City, Mexico SmackDown/ECW Live Cheyenne, WY

Do you know a wrestling event coming up? Send one in to The Hamilton Ave Journal and we'll be sure to add it to the list.

EDITORIALS

The Editorials section is designed for you, the readers, to respond to the views presented in the Journal, send an important news item, or talk about another overlooked business related item in wrestling. Just beware: the Journal reserves the right to respond back.

From the commentary section last week, Rob W presented an interesting theory into why ECW's rating was so low last week:

The reason the ECW rating was so low is because GTA 4 came out that day and I'm no expert but I bet there's a strong correlation between people who watchwrestling and people who play video games...

GTA 4 is the top gross video game of all time, and the fastest selling in history, so you theory may have some credence. On the other hand, players must still be addicted to the game 24/7 as ratings retained that same low level this week. Although it is quite possible that the normal ECW audience is more entertained by their own games than by watching ECW itself.

Csonkaholic would like to weigh in on the continual question about the selling power of the Hardys:

A lot of the Hardy stuff is always cheaper than other items. I'm sure that greatly benefits their sales. Not saying they can't move merchandise because their DVD is number 2, but the armband is 15 dollars, the shirt is about 10 dollars and the pendant is 10 dollars. Most of the other items on the list [with the exception of those cards and the bag] are more expensive.

Agreed; The typical John Cena T-shirt goes for $25, so a $10 pendant would need to have volumes 2.5 times higher to match the revenue. As noted several times in the past in the Journal, the Hardys tend to move a greater variety or products at a lower price and lower overall volume than a higher prices single item of John Cena's or even Triple H. Revenue and profit margin wise (a t-shirt at the volume of John Cena's cost $2.50 to $3.00 to make), John Cena is still doing better than the Hardys.

On a different front, JayhawkEvans wants to know more about Time Warner's lawsuit against the WWE for the trademark on "Tazz":

I'm wondering now that Smackdown is coming to an end on the CW network and the WWE will no longer be business partners with Time-Warner, could that in some way have sparked Warner Bros. interest in the use of the name "Tazz"? It would seem that it is more than coincidence that more than 2 years after Tazz appeared on a Warner-related entity would they call for legal action on the name. Your thoughts?

While entertainment distribution companies like NBC/Universal, Newscorp, and ABC/Disney are run as tight, amalgamated ships with strong controls over their divisions, Time Warner is hardly a ship that has anyone in control. Each division runs in its own world with little ability to share resources between them. Although there have been improvements in corporate governance in the last year, the company has a long way to go. With that said, it is hard to believe that Time Warner has been that organized as to launch a case against the WWE in such a short amount of time, especially since Time Warner inherited the relationship through the UPN/WB merger to make the CW.

More than likely, a paralegal or an intern had the job to research any proposed or existing trademarks that were similar and put this one on the list. The latest trademark of Tazz was filed on September 25, 2007 and there was no opposition until April 30, 2008 (to be fair, it was not published for opposition until March 11, 2008). Meanwhile, other more recent users of "Tazz" (for example there is an agricultural chemical that goes by the name) have not had any opposition. The example cited above was last trademarked on November 19, 2007 and Time Warner nor WWE has made any motion against the trademark.

Plenty more was written, so be sure to take a look. Also worth your read this week is:

When the Wrestling Doctor Scott Thomason needed someone to advise him on the numbers, he came right to this reporter.

The surprise is ruined anyway so you might as well know Chris Lansdell will no longer be telling you the way he sees it and instead will be telling you the way he reads the news every Sunday.

In case you forget when TNA was the alternative, be sure to read Matt Peddycord's review of the Best of X Division – Disc 1

Then Disc 2.

And, of course, a week would not be complete without a good dose of JP Prag's own HIDDEN HIGHLIGHTS!!


CLOSING BELL

This concludes Issue #33 (Volume 1) of THE HAMILTON AVE JOURNAL. Join us next week as we get ready to ring the bell again.

Till then!