The Hamilton Ave Journal 08.09.08: Volume 1 – Issue 46

Posted by JP Prag on 08.09.2008

WWE releases Q2 results and disappoints the street, TNA prepares to open their new HD studio, ratings stay flat across the board, the Top Ten goes back to school, and the Editorials are filled with more ideas for the Brand Extension and WWE’s TV-PG rating.

THE HAMILTON AVE JOURNAL
By JP Prag

Volume 1 – Issue 46

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 Q2 Results (Part 1)

Last quarter, the WWE posted large revenue and earnings gains that seemed to make the street happy and made the WWE look unstoppable. But the Journal dug into those numbers and found that by excluding WrestleMania, the WWE was actually making the same to less bottom line on more revenue. That is, the WWE had to sell more product in order to make the same amount of money. This was a very precarious position to be in and it came back to haunt the WWE this quarter.

On an earning report released Tuesday, the WWE posted $129.7 million dollars in revenue, a drop of 6% from last year's $137.5 million. This was expected as WrestleMania occurred in Q2 in 2007 as opposed to Q1 in 2008, contributing $31.4 million in revenue last year. That means that revenue was actually up 22% from $106.1 million in comparable dollars. EBITDA, on the one hand, increased 31% from $12 million to $15.7 million. But there was an impairment charge related to the Condemned (the WWE wrote down the value of the asset since it did not live up to expectations) and WrestleMania. Excluding those items, EBITAD for 2007 was $18 million, representing a loss of 13%.

Looking at those totals, EBITAD / Revenue for comparable products showed a margin of 12% for 2008 compared to 17% for 2007. In other words, the WWE made less bottom line off of higher revenue—or they spent more money to make less. This then trickled down to the bottom line that ties last year at $7 million, or $0.10 a share. Analysts were expecting $0.12 a share, which sent the stock down in trading during the week. The analysts were fooled by the WrestleMania last quarter hiding these rising cost issues, but the Journal was not.

Because of these numbers, WWE CEO Linda McMahon was forced to admit that operating expenses were getting out of hand and making the company unwieldy. Says Mrs. McMahon:

"Although the rise in expenses broadly supports our top-line growth, the disproportionate growth in expenses is unacceptable. Therefore, we are implementing stronger cost control measures, reassessing our spending and the priority of our investments to drive increases in earnings and margins."

These measures should have been taken more proactively instead of reactively and show a lack of understanding of the company's financial situation that is surprising from management. The WWE has done a tremendous job in the past of growing the product and making large sums of money even when all other indicators point to disappointment. But Mrs. McMahon made several revelations on the earnings conference call that show she may have a lack of understanding of how the company functions at all. Specifically, she said that she did not know much about the creative end of the company, which drives the vast majority of the WWE's revenue. More details on this will be covered in the Editorials section below.

Still, despite these cost issues, there were many highlights at the top:

Live events revenue grew to $35.3 million from $30.1 million, despite last year also including $5.4 million for WrestleMania. The WWE held relatively the same number of domestic events (83 compared to 84), but added 5 international events taking the total form 26 to 31. International revenue actually increased a disproportionate $9.2 million and average international attendance jumped 52% from 6,000 to 9,100. Outside of the US is obviously where the strong growth is, but domestic numbers did well as average attendance rose from 5,800 (excluding WrestleMania) to 6,900 and ticket prices rose from $39 (again excluding WrestleMania) to $46.

Total PPV buyrates, excluding WrestleMania, grew from 916,000 to 1,063,000. All PPVs saw increased buyrates, most especially purchases of events from prior quarters and international buys. Although merging the brands together for all PPVs seemed questionable at the time, the WWE has proven to make it work thus far this year.

Home videos, licensing revenue (video games), and magazine publishing all saw significant gains, although digital media was down. As expected, DVD sales led the way, most especially WrestleMania 24 which has shipped 305,000 units. The Rock and Hardy Boyz DVDs shipped a combined 300,000 units as well.

WWE Studios recorded some revenue this quarter despite having to products out ($2.6 million). Last year, the WWE took a $15.7 million non-cash impairment charge for the Condemned.

But the big line item belonged to SG&A which jumped 50% from $25 million to $37.6 million. Of that $37.6 million, $3.5 million was for the "McMahon Million Dollar Mania" sweepstakes of which WWE Chairman Vince McMahon partially reimbursed the company, sans tax benefits. Another large chunk went into the expansion of International offices and positions and beefing up WWE Studios. This helped lead to a net cash provided by operations change of $3.0 million compared to $48.8 million last year.

The WWE has been sitting on a pile of cash for a long time, but when dividends are paying out $0.36 a share and cash flow is nowhere near that, it means the company is using the reserves to pay for the shareholders. As Steven Mallas of BloggingStocks.com points out:

However, a look at the cash-flow statement does not offer a lot of encouragement, to be honest. Operational cash flow declined massively, dropping 94% during the six-month period. And for both the quarterly period and the half-year period, there was negative free cash flow by management's own calculation. So, as can be seen, servicing a dividend with no free cash flow is like Rey Mysterio trying to body slam Andre the Giant.

Mr. Mallas does go on, however, to say he supports "pumping funds into [the] movie division" and believes in the long-term gains that can be associated with that. Since the WWE still has $138.1 million in cash and equivalents sitting around, there is not much to worry about there.

Overall, the WWE is still a highly profitable company and has been making significant growth in all product lines and markets. But costs are rising out of control and threaten company health in the long term. The WWE is no danger, though, due to large cash reserves and locked in contracts.

The Journal will continue to look at some of the numbers and the earnings report next week.


Newsbites

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

With little advertising, WWE's Saturday Night's Main Event on NBC scored a paltry 1.4 ratings, making NBC last for night in Prime Time. Another event is still scheduled for an unnamed date in the future, but that may not happen now or the show will be pushed back to non-primetime hours.

Insight Films out of Vancouver, BC, Canada has signed Steve Austin to a films contract and is looking to add several other wrestlers. No word yet how this deal is compatible with Mr. Austin's deal with WWE Studios (formerly WWE Films), which he signed a 3-picture deal with (one has been produced thus far).

John Cena and Randy Orton are both up for Nickelodeon Kid Choice Awards, a healthy sign for the WWE's Kidz Initiative.

With their new production studio in place, TNA will most likely switch to HD in the near future. As mentioned in the Journal in the past, TNA would have had a hard time switching to HD when Spike wanted them to and did the right thing by making the move slowly and building the facilities to work with the technology first. Says Kevin Sullivan, Director of Production for TNA:

"TNAtv is the next logical step in the growth of the company. The ultimate goal is to deliver the best product possible to the fans, and now we will have all the tools to do that."

At this time, it is unknown if they spent anywhere near the $20 million mark that the WWE did to upgrade to HD.

WWE has made a change to its board of directors. With the departure of Robert Bowman; Kevin Dunn, Frank Riddick, and Jeffrey Speed have been added to the board, expanding membership to ten. This story will be covered in depth in next's week edition of the Journal.


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 August 7, 2008, here are the current standings of our shows:





RAW
Close (This Week's Rating): 3.4
Open (Last Week's Rating): 3.6
Percentage Change: ▼ 5.6%
52-Week High: 4.1
52-Week Low: 2.5
All Time High: 8.1
All Time Low: 1.8

SmackDown*
Close (This Week's Rating): 2.4
Open (Last Week's Rating): 2.4
Percentage Change: UNCH
52-Week High: 2.9
52-Week Low: 1.6
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): 1.5
Open (Last Week's Rating): 1.4
Percentage Change: ▲ 7.1%
52-Week High: 1.7
52-Week Low: 0.6
All Time High: 2.3
All Time Low: 0.6

TNA iMPACT**
Close (This Week's Rating): 1.1
Open (Last Week's Rating): 1.1
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:

This week in ratings was relatively quiet with both SmackDown and iMPACT remaining unchanged ECW going up 0.1 and RAW dropping 0.2. All-and-all, this week is what could be called "stable".


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. Hardys Messenger Bag ($35)
2. WWE Ultimate Rivals Trading Cards ($2)
3. Jeff Hardy Armbands ($15)
4. WWE Superstars Folder ($5)
5. WWE Superstars Spiral Notebook ($5)
6. Hardys WWE Shop and Jakks Pacific Exclusive Action Figure ($34.99, on sale $24.99)
7. John Cena You Can't See Me Backpack ($25)
8. Hardys Purple Logo Pendant ($10)
9. John Cena Camoflauge Backpack ($25)
10. WWE Black Gift Bag ($3)

Is it back to school time in the WWE or what? Backpacks, notebooks, folders, action figures—you can see exactly what is going on now. Many schools in the south go back in session in mid to late August with schools in the west and northeast heading back after Labor Day. The big winner this week is once again Jeff Hardy who brought in a high-priced messenger bag that is making a good margin for the WWE. John Cena is of course right there with two totally different backpacks. Will kids switch off which WWE bag they wear to school each day? All this reporter knows is that while in the local K-mart, the kids were wearing matching Jeff Hardy T-shirts.

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 ($19.99)
2. The Phenomenal AJ Styles Deal of the Century ($79.95)
3. AJ Styles "Unim Phenomenous" T-Shirt ($19.99)
4. Complete 100 Card Set ($24.99)
5. Nash "Big Sexy Tour" T-shirt ($19.99)
6. Samoa Joe "Drastic Times, Drastic Measures" T-Shirt ($19.99)
7. Sting "Logo" T-Shirt ($19.99)
8. Bound for Glory 2008 FanFest Tickets ($40, on sale $35)
9. Blaster Pack ($24.99)
10. TNA "Cross The Line" T-Shirt ($19.99)

TNA finally saw some movement on their charts as two new items helped push Curry Man out of the Top Ten. AJ Styles becomes one of the few men in TNA to ever have two items on the chart at the same time with the addition of a large lot item (although that item will not be around for long as only 100 are available according to Don West). The other new item to hit the list is the Bound for Glory FanFest tickets, a healthy sign for PPV attendance in Chicago this October.


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
10 (Aug) TNA Hard Justice Trenton, NJ RAW Live Salisbury, MD SmackDown/ECW Live Binghamton, NTY	11 RAW Richmond, VA SmackDown/ECW Live Reading, PA	12 SmackDown/ECW Norfolk, VA TNA iMPACT Orlando, FL	13 TNA iMPACT Orlando, FL	14 TNA Live Estero, FL	15 WWE SuperShow Rockford, IL TNA Live Dallas, TX ROH Live Cleveland, OH	16 WWE SuperShow Valparaiso, IN TNA Live Lawton, OK ROH Live Chicago Ridge, IL
17 WWE SummerSlam Indianapolis, IN TNA Live Muskogee, OK	18 RAW Chicago, IL	19 SmackDown/ECW Moline, IL	20	21	22 RAW Live Bridgeport, CT TNA Live Salina, KS	23 RAW Live New York City, NY SmackDown/ECW Live Erie, PA TNA Live Topeka, KS

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, the debate continued on the WWE going TV-PG. Kris starts off with the counterpoint about how this could be good for the business:

Being family friendly won't hurt the WWE product. They must attract young fans. In all likelihood, they are going to simply tone down the Diva garbage and limit the foul language. After all, adults who watch wrestling for the Divas could just as easily look at pornography. There is no point in turning off a large, young demographic for the sake of foul language and a few trashy Divas.

They have much more to gain by attracting a young audience that will grow with the product. And if the matches are compelling and the storylines are entertaining, the current fans will remain watching regardless of the rating.

Yes Kris, the Journal absolutely agrees that the WWE needs to attract a younger audience since the older generation is leaving and not being refilled. In the past, the Journal has praised the efforts of the WWE Kidz magazine, children-focused programming, and merchandise like the backpacks that are selling well now. That said, the WWE should not JUST try to be a kids show because they will alienate their existing audience. But being completely kid focused brings up a similar issue that as Whiteburbia points out:

I think I'm part of the older generation that watches wrestling and is being phased out. Don't forget WWE: While kids have parents to buy them your merchandise and PPV's, my demographic makes money, decides where to spend it, and has more disposable income than any ankle-biter.

Very true, the older demographic has the disposable income, so it serves the WWE to cater to them. At the same time, an important point that was brought up last week needs to be reiterated here: kids grow up! If the WWE remains focused on being a "kids" show, then where those kids reach their teens they will no longer want to watch because it will seem childish. At that time, it will cost the WWE a lot more to gain new kids viewers than to keep their existing ones. That is why layered programming is one way of going about having a show that caters to multiple audiences. But if the WWE does not want to go that route, Brett has a solution that kills two birds with one stone:

it seems odd to make every brand seemingly the same. I always hear people say they should end the brand split, but what they should do is enforce it, and make each brand different. They have three brands and yet they are all virtually the same.

That's like if a snack food company decided to only make crackers, but they made three different brands of crackers, with their own logos and ads. All the company has done is split up their sales of crackers 3 different ways. They would probably make more money if instead they made crackers, chips and pretzels. At the very least they could figure out what sold best.

I've said before that SD! should be for kids, ECW for adults, and RAW for anyone. That way, WWE can get those young fans that they want, and KEEP them instead of the kids deciding at the age of 12 that wrestling is lame and for "little kids", because then all the money and work that went into making that kid a fan just went right out the window, yeah the WWE probably got some money out of the kid, but if they built their brands in a similar manner to what I suggest, ideally, they could make that kid a loyal fan and keep the dough rolling in for years to come, from just that one fan.

The section above was highlighted because it needs to be taken back to WWE management and creative. Brett is exactly right: the WWE is taking the same product and just splitting their audience instead of developing different audiences with different products. As noted above, WWE CEO Linda McMahon actually said she is not involved in the creative end of the company and doesn't even know what is going on in that end. The creative end is 70% of the revenue! How can the CEO of a $450+ million company not know what is going on in70% of it? That is a major issue that stockholders should be up and arms about.

At one point, RAW and SmackDown only shared 30% of the audience and had 20% higher ratings. Now they share 75% of the audience. In the 2007 year-end conference call, Mrs. McMahon actually highlighted the latter figure as a triumph rather than the degradation of the customer base that it was. The problem is the WWE has done tediously well financially and it does not behoove the CEO to take note of trends like this. As far as she is concerned, it would seem, so long as the company makes money than the direction is fine in her books. The long term picture is the WWE has homogenized their products, cut their market size, and set themselves up for more of the same in the future.

The saving graces of the WWE are international expansion and DVD/New Media sales. With these, the WWE looks to be growing while the domestic market shrinks. If the WWE wants to be internationally and past focused, that is fine; but they claim to be domestic based and forward thinking. The results are not matching the message, and the management continues to take the wrong execution of the right ideas.

The Balanced Scorecard Collaborative has a saying: the most effective strategy, if executed poorly, will fail. But a mediocre strategy, executed effectively, will at deliver expected results.

Shifting gears completely, Brett also wanted to know:

Why does WWE get to decide their rating, I thought ratings were determined by a board, or is that just movies?

That is just movies. The television rating system is actually a completely voluntary system developed by the industry due to pressure from groups like the PTC. At that, only over-the-air stations are the only ones subjected to the non-defined FCC "decency" standards. Cable stations do not have to regulate their content in any way but only actually do so at their own whim. So the WWE can change their ratings any way they see fit since it is up to them to say what their content is.

With another unrelated question is Dingo:

Just got a question… Do you know if the following statement is true (read it on another site):

An argument made in CM Punk's favor is that he is more popular than he should have been given his push, not to mention that he sells far more merchandise than someone in his position should.

Would you have details in how much he sells?

Well, CM Punk has yet to appear in the Top Ten, so it is difficult to judge how well he does at live events sales. His "position" is the interesting comment which, until recently, was an ECW wrestler who only a year and half prior had been called up from development. CM Punk most likely does sell more than, say, Carlito, Finlay, John Morrison, the Miz, and event the Big Show (this reporter used to sell wrestling t-shirts and the Big Show does not move). He's not putting up Triple H, John Cena, or Jeff Hardy numbers, but he's probably doing quite well for someone with a low downside guarantee. Let's just say when CM Punk's contract is up he'll have a lot of negotiating power.

Plenty more was written, so be sure to take a look. 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 #46 (Volume 1) of THE HAMILTON AVE JOURNAL. Join us next week as we get ready to ring the bell again.

Till then!