UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the year ended December 31, 2017 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-16131
WORLD WRESTLING ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)
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Delaware |
04-2693383 |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1241 East Main Street
Stamford, CT 06902
(203) 352-8600
(Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
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Class A Common Stock, $.01 par value per share |
New York Stock Exchange |
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(Title of each class) |
(Name of each exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Aggregate market value of the common stock held by non-affiliates of the Registrant at June 30, 2017 using our closing price on June 30, 2017 was $770,348,077.
As of February 6, 2018, the number of shares outstanding of the Registrant's Class A common stock, par value $0.01 per share, was 42,540,288 and the number of shares outstanding of the Registrant's Class B common stock, par value $0.01 per share, was 34,609,438 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement for the 2018 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |
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Directors, Executive Officers and Corporate Governance |
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Executive Compensation |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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* Incorporated by reference from the Registrant’s Proxy Statement for the 2018 Annual Meeting of Stockholders (the “Proxy Statement”).
WWE is an integrated media and entertainment company. We have been involved in the sports entertainment business for more than 35 years, and have developed WWE into one of the most popular brands in global entertainment today. We develop unique and creative content centered around our talent and present it via our subscription network (“WWE Network”), television, online and at our live events. At the heart of our success are the athletic and entertainment skills and appeal of our Superstars, and our consistently innovative and multi-faceted storylines. Our WWE Network, live and televised events, digital media, home entertainment, consumer products and feature films provide significant cross-promotion and marketing opportunities that reinforce our brands while effectively reaching our fans.
Based on the strength of the Company’s brands and its ownership and control over its intellectual property, the Company has been able to leverage its content and talent across virtually all media platforms. We continually evaluate additional opportunities to monetize new and existing content, including our WWE Network, which is available in all international markets other than embargoed countries. The launch of WWE Network has been transformative to WWE; for example, WWE Network carries all of our pay-per-view events, and its annual revenues now greatly exceed prior annual revenues of our pay-per-view business.
"WWE" refers to World Wrestling Entertainment, Inc. and its subsidiaries, unless the context otherwise requires. References to "we," "us," "our" and the "Company" refer to WWE. The initials "WWE" and our stylized and iconic "W" logo are two of our trademarks. This report also contains other WWE trademarks and trade names as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.
Our operations are organized around the following principal activities:
Media Division:
Network
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Revenues consist principally of subscriptions to WWE Network, fees for viewing our pay-per-view programming and advertising fees. |
Television
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Revenues consist principally of television rights fees and advertising. |
Home Entertainment
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Revenues consist principally of sales of WWE produced content via home entertainment platforms, including DVD, Blu-Ray, and subscription and transactional on-demand outlets. |
Digital Media
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Revenues consist principally of advertising sales on our websites and third-party websites including YouTube, and sales of various broadband and mobile content. |
Live Events:
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Revenues consist principally of ticket sales and travel packages for live events. |
Consumer Products Division:
Licensing
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Revenues consist principally of royalties or license fees related to various WWE themed products such as video games, toys and apparel. |
Venue Merchandise
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Revenues consist of sales of merchandise at our live events. |
WWEShop
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Revenues consist of sales of merchandise on our website through our WWEShop internet storefront and on distribution platforms, including Amazon. |
WWE Studios:
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Revenues consist of amounts earned from investing in, producing, and/or distributing filmed entertainment. |
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Media Division
(represents 64%, 63% and 65% of our net revenues in 2017, 2016 and 2015, respectively)
WWE Network
WWE Network launched on February 24, 2014, becoming the first-ever 24/7 live streaming direct-to-consumer network. This subscription-based network is currently available in almost all international markets, including the United Kingdom, Canada, the Middle East, China and Australia, among others. Subscribers can access all of WWE’s live pay-per-view events, exclusive original programming and nearly 9,400 hours of our video-on-demand library. The inclusion of our monthly marquis pay-per-view events, including WrestleMania, and the access to original content and live specials are critical components of the programming which drives our viewer engagement and satisfaction. WWE Network content includes exclusive original programming, including, Holy Foley, Bring it to the Table and WWE 24, as well as exclusive live in-ring specials, including our 2017 broadcasts of the U.K. Championship Tournament and Mae Young Classic, and our live NXT Takeover specials, among others. Our strategy of creating compelling original content for broadcast on WWE Network has contributed to the growth and acceptance of WWE Network, which premiered nearly 300 hours of original content during 2017.
WWE Network is available on desktops and laptops via WWE.com. WWE Network is also available through the WWE App on Amazon Fire TV and Kindle Fire devices, Android devices, iOS devices, Apple TV, Roku streaming devices, gaming consoles, connected TVs, Blu-Ray players, Smart TVs, TiVo and Windows 10. As of December 31, 2017, WWE Network had 1,471,400 paid subscribers as compared to 1,403,000 subscribers at December 31, 2016, representing a 5% increase in our subscriber base. Following WrestleMania, WWE Network reached an all-time high of nearly two million subscribers. For domestic subscribers, the current subscription pricing of WWE Network is $9.99 per month with no minimum commitment, and new subscribers are currently offered a one-month free trial.
Network subscription net revenues were $183.7 million, $168.3 million and $138.8 million, representing 23%, 23% and 21% of total net revenues in 2017, 2016 and 2015, respectively.
Pay-Per-View Programming
Beginning in February 2014 with the launch of WWE Network, WWE’s monthly marquis pay-per-view events are included as part of the network subscription. Inclusion of these events as a part of the subscription to WWE Network has resulted in significant declines in our Pay-Per-View revenues, and this decline may continue with the ongoing growth and expansion of WWE Network.
Pay-per-views are live in eight languages, including Spanish, Portuguese, Russian, Japanese, Mandarin, German, Hindi, English and on VOD in French.
Pay-per-view net revenues were $14.2 million, $12.6 million and $20.6 million, representing 2%, 2% and 3% of total net revenues in 2017, 2016 and 2015, respectively.
Television
Leveraging our expertise in live event television production, we produce five hours of original weekly domestic television programming, RAW and SmackDown Live. RAW and SmackDown Live are licensed domestically under a multi-year contract with NBC Universal (“NBCU”). Second runs of RAW and SmackDown Live are also available on WWE Network 30 days after the original first run airing dates on television. We also produce reality shows and other programming. Our television programming is distributed domestically and internationally. Our domestic television programs currently are: RAW on USA Network with replays on NBC Universo and Uni HD; SmackDown Live on USA Network with replays on NBC Universo; and Total Divas and Total Bellas on E! Network. WWE’s TV programs reach over 9 million viewers in the United States during the average week. USA Network, E! Network and NBC Universo are owned by NBCU.
The Company's domestic television agreements covering RAW and SmackDown Live are coterminous and expire in September 2019. The distribution of our Raw and SmackDown Live programs domestically is a key component of the Company's business and operations. Failure to secure distribution of these programs on terms favorable to the Company could have a material adverse impact on the Company's outlook, liquidity, business and operating results. We expect that, during 2018, we will negotiate a renewal of this main agreement with NBCU or will negotiate one or more new video content licenses with other distributors to replace it, although no assurances can be given as to this timeline.
RAW is a three-hour live primetime program which ranks among the most watched regularly scheduled programs on primetime cable television. RAW celebrated its 25th anniversary on January 22, 2018. It is the longest running weekly episodic program in primetime TV history, with more than 1,200 original episodes, and anchors USA Network’s programming line-up, consistently helping make it the top-rated cable network.
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Beginning in July 2016, SmackDown Live became a two-hour live show for the first time ever and moved to Tuesdays on USA Network. In connection with this move, Raw and SmackDown Live each feature a distinct cast, unique storylines and a dedicated writing team. With more than 950 original episodes, SmackDown is the second longest running weekly episodic program in primetime TV history, second only to RAW.
Total Divas, a one-hour reality series on E!, was added to WWE's programming line-up in July 2013, and returned for its seventh season in November 2017. The reality based show explores life beyond the ring for several female WWE Superstars. Previous episodes of Seasons 1 through 5 are also replayed on WWE Network.
Total Bellas, a spinoff of the hit series, Total Divas, was added to WWE's programming line-up in October 2016, and launched a second season in September 2017. This reality based series airing on E! gives viewers exclusive access into the lives of The Bella Twins and their significant others, John Cena and Daniel Bryan. Previous episodes of Season 1 are also replayed on WWE Network.
WWE’s television programming can be seen in 170 countries and more than 20 languages around the world. Our international broadcast partners include: Sky in the United Kingdom; Ten Sports in India, Rogers Communication in Canada, and PPTV in China, among many others.
Television net revenues were $270.2 million, $241.7 million and $231.1 million, representing 34%, 33% and 35% of total net revenues in 2017, 2016 and 2015, respectively.
Home Entertainment
WWE distributes its home entertainment content in both physical (DVD and Blu-Ray) and digital formats. Content distributed through home entertainment channels has included themed compilations from the Company’s vast archives as well as releases of the Company’s pay-per-view events. Domestically, Warner Brothers Home Entertainment is the distributor of our home entertainment products. WWE’s home entertainment titles are generally sold through retailers, such as Wal-Mart and Best Buy and via digital outlets, such as iTunes, Amazon, and others. Outside the United States, third-party licensees distribute our home entertainment releases.
The gradual shift by consumers to digital formats downloaded or streamed over the Internet has negatively impacted our DVD and Blu-Ray sales. In addition, we believe the continued growth and expansion of WWE Network, which includes access to WWE’s video-on-demand library that includes many titles that are also available in DVD, Blu-Ray and digital formats, has contributed to the decline in our Home Entertainment sales. In 2017, we released 24 new home video productions domestically and, in the U.S., shipped 1.3 million DVD and Blu-Ray units, including catalog titles released in prior years. This compares to 1.6 million DVD and Blu-Ray units shipped in the U.S. in 2016, in which year we released 24 new home video productions domestically.
Home entertainment net revenues were $8.6 million, $13.1 million and $13.4 million, representing 1%, 2% and 2% of total net revenues in 2017, 2016 and 2015, respectively.
Digital Media
WWE utilizes the Internet and social media platforms to promote our brands, market and distribute our content and digital products, create a community experience among our fans and sell online advertising. WWE currently streams its video content on select social media platforms, such as YouTube and Facebook. WWE consistently ranks among the top viewed channels on YouTube, with nearly 15 billion views of WWE content in 2017. The Company receives advertising revenues from YouTube and Facebook based on viewership of our content. In 2017, WWE had 1.2 billion social media fan engagements across social media platforms such as Facebook, Twitter, YouTube, Instagram and Tumblr.
Our primary website, WWE.com, attracted an average of 13 million monthly unique visitors worldwide during 2017. These visitors viewed an average of 257 million pages and 22 million video streams per month. WWE wallpapers, ringtones, voicetones and videos are available through our mobile partnerships.
WWE currently has local language-based websites allowing fans to experience WWE in their native language with a concentration on local events and shows. Currently, the available languages are English, Mandarin, French, German, Polish and Arabic. We have relationships with local sales agencies to sell advertising on WWE.com, which allow a partner to sell advertising across a region of countries.
Total Digital Media net revenues were $34.5 million, $26.9 million and $21.5 million, representing 4%, 4% and 3% of total net revenues in 2017, 2016 and 2015, respectively.
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Live Events
(represents 19%, 20% and 19% of our net revenues in 2017, 2016 and 2015, respectively)
Our broad and talented roster of Superstars allows us to perform in numerous domestic markets and take advantage of the strong international demand for our events. Live events and the associated programming produced at our live events are our principal creative content and production activities. Our creative team develops compelling and complex characters and weaves them into dynamic storylines that combine physical and emotional elements. Storylines are usually played out in the ring and unfold on our weekly television shows, culminating in our monthly marquis events which air on WWE Network and are also available via pay-per-view.
In 2017, we produced 314 live events (excluding our NXT developmental division) throughout North America, entertaining 1.8 million fans at an average ticket price of $58.68. We hold many of our live events at major arenas across the country. In addition to providing content for our television and other programming, these events provide us with a real-time assessment of the popularity of our storylines and characters.
In 2017, we produced 70 live events (excluding NXT) internationally, reaching 400,000 fans at an average ticket price of $77.83. These events were spread over several international tours throughout Europe, the Middle East, Asia, Latin America and Australia.
Since launching NXT as a separate live event brand in 2013, it continues to grow into a global touring brand. In 2017, we produced 188 global NXT events, reaching 152,000 fans at an average ticket price of $39.27. These events include weekly taped broadcasts that are produced at Full Sail University in Orlando, Florida and air on WWE Network, as well as live event specials, such as NXT: Takeover. Additionally, the NXT brand held various live events throughout the U.S., as well as an international tour in the United Kingdom.
Live events net revenues were $151.7 million, $144.4 million and $124.7 million, representing 19%, 20% and 19% of total net revenues in 2017, 2016 and 2015, respectively.
Consumer Products Division
(represents 14%, 15% and 15% of our net revenues in 2017, 2016 and 2015, respectively)
Licensing
We have established a worldwide licensing program using our marks and logos, copyrighted works and characters on a large variety of retail products, including toys, video games, apparel and books. Currently, we have relationships with more than 200 licensees worldwide that provide products for sale at major retailers. To maintain the distinctive style and quality of our intellectual property and brand, we retain creative approval over the design, packaging, advertising and promotional materials associated with these products. Additionally, we continually seek new opportunities to partner with best-in-class organizations to develop new products for our fans and further expand our licensing business.
Video games and toys are the largest components of our licensing program. We have a comprehensive, multi-year licensing agreement with Mattel, Inc. our master toy licensee, covering all global territories and a multi-year licensing agreement with Take-Two Interactive Software, Inc. ("Take-Two") who publishes our branded console video games. In partnership with Mattel, we launched a new girls’ product line, WWE Superstars, which featured the first-ever fashion dolls of our female Superstars. WWE branded video games currently include WWE 2K, available on PlayStation and XBOX platforms and on iOS and Android devices and WWE SuperCard which is available on iOS and Android devices. In 2017, we launched two new mobile games, WWE Champions and TapMania, which are both available on iOS and Android devices. The video game industry continues to migrate the availability of video games as downloadable content through an Internet connected device. Accordingly, our video games can be downloaded via the Internet and also contain subsequent downloadable content that can be purchased to add additional characters and game modes to enhance game play.
Music is an integral part of the WWE entertainment experience. We compose and record most of our music, including Superstar entrance themes, in our recording studio. In addition to our own composed music, we license music performed by popular artists.
Licensing net revenues were $52.1 million, $49.1 million and $48.9 million, representing 7%, 7% and 7% of total net revenues in 2017, 2016 and 2015, respectively.
Venue Merchandise
Our direct-to-consumer venue merchandise business consists of the design, sourcing, marketing and distribution of numerous WWE-branded products such as t-shirts, belts, caps and other novelty items, all of which feature our Superstars and/or logos. These items are offered for sale at our live events.
Venue merchandise net revenues were $23.8 million, $24.2 million and $22.4 million, representing 3%, 3% and 3% of total net revenues in 2017, 2016 and 2015, respectively.
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WWEShop
WWEShop is our direct-to-consumer e-commerce storefront. Additionally, WWE merchandise is distributed on other domestic and international e-commerce platforms, including Amazon. Utilizing these platforms, we processed 818,600 orders during 2017 as compared to 771,500 in 2016.
WWEShop net revenues were $37.8 million, $34.6 million and $27.1 million, representing 5%, 5%, and 4% of total net revenues in 2017, 2016 and 2015, respectively.
WWE Studios
(represents 2%, 1% and 1% of our net revenues in 2017, 2016 and 2015, respectively)
WWE Studios oversees the Company’s participation in the production and global distribution of filmed entertainment content, which may include movies for theatrical, home entertainment, and/or television release. The Company believes its movie business expands its brands by reaching new audiences and supports the Company’s investment in its Superstar talent.
Our WWE Studios business model focuses on the utilization of strategic partnerships, including production, distribution and acquisition relationships, to increase financial returns and mitigate risk. WWE utilizes its marketing and content platforms, especially its weekly presence on prime-time television, to support its movie projects.
In 2017, WWE Studios released nine films. Among the film projects, WWE Studios partnered with Blumhouse Productions to release The Resurrection of Gavin Stone, Sleight and Birth of the Dragon via theatrical distribution. WWE Studios also partnered with Sony Pictures to release Surf’s Up 2: WaveMania and Marine 5: Battleground, direct to DVD. In partnership with Warner Brothers Animation, WWE Studios released The Jetsons & WWE: Robo-WrestleMania! direct to DVD. Additionally, WWE Studios produced Fighting With My Family, based on the true personal story of WWE Superstar Paige and her family, which is scheduled to be released in theaters nationwide in September 2018.
WWE Studios net revenues were $18.6 million, $10.1 million and $7.1 million, representing 2%, 1% and 1% of total net revenues in 2017, 2016 and 2015, respectively.
International
Revenues generated outside of North America across all our business segments were $201.3 million, $189.3 million and $169.8 million, representing 25%, 26% and 26% of total net revenues in 2017, 2016 and 2015, respectively. Revenues generated in the United Kingdom, our largest international market, were $77.5 million, $78.5 million and $75.7 million for 2017, 2016 and 2015, respectively. During 2017, approximately 70% of WWE content was consumed outside of the U.S., including localized programming, such as WWE Saturday Night in Mexico, WWE Sunday Dhamaal in India and Wal3ooha in the Middle East. Global expansion of WWE Network and television distribution continue to be the primary drivers of growth for our international business.
See Note 19 of the consolidated financial statements included in this report for additional information by segment and by geographic area. In addition, see the Risk Factors related to our international business set forth in Item 1A of this Annual Report on Form 10-K.
Creative Development and Production
Headed by our Chairman and Chief Executive Officer, Vincent K. McMahon, our creative team develops compelling and complex characters and weaves them into dynamic storylines that combine physical and emotional elements. Storylines are usually played out in the ring and unfold on our weekly television shows, culminating in our monthly marquis events. We voluntarily designate the suitability of each of our television shows using standard industry ratings, and all of our in-ring television programming carries a PG rating, which is critical to maintaining the Company’s reputation for family friendly entertainment.
Our success is due primarily to the continuing popularity of our Superstars. We currently have approximately 200 Superstars under exclusive contracts, ranging from multi-year guaranteed contracts with established Superstars to developmental contracts with our Superstars in training. Our Superstars are highly trained and motivated independent contractors, whose compensation is tied to the revenue that they help generate. We own the rights to substantially all of our characters and exclusively license the rights we do not own through agreements with our Superstars.
Talent Development
We continually seek to identify, recruit and develop additional talent for our business. Our NXT division, which continues to grow in popularity, features developmental talent training to become WWE Superstars. NXT has produced approximately 80% of our current active main roster stars, such as Baron Corbin, Carmella, The Revival, Nia Jax, and Shinsuke Nakamura. NXT has now evolved into our
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third brand after Raw and SmackDown and has transitioned into a global touring brand broadcasting live specials on WWE Network throughout the year. In 2017, we continued our focus on recruiting international talent, resulting in approximately 40% of our developmental talent coming from outside the U.S., including China, India, Japan, Australia, Ireland, Brazil and Germany. Our international tryouts resulted in the signing of the first-ever female talent from India and the Middle East. NXT talent train at our WWE Performance Center in Florida, a state-of-the-art training facility, which was designed to cultivate our next generation of talent and has become the center of our talent development program.
Competition
While we believe that we have a loyal fan base, the entertainment industry is highly competitive and subject to fluctuations in popularity, which are not easy to predict. For our live, television, WWE Network, pay-per-view and movie audiences, we face competition from professional and college sports, other live, filmed, televised and streamed entertainment, and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise. We will face increased competition from websites and mobile and other internet connected apps delivering paid and free content, as streamed media offerings continue to expand. Many companies with whom we compete have greater financial resources than we do.
Trademarks and Copyrights
Intellectual property is material to all aspects of our operations, and we expend substantial cost and effort in an attempt to maintain and protect our intellectual property and to maintain compliance vis-à-vis other parties’ intellectual property. We have a large portfolio of registered and unregistered trademarks and service marks worldwide and maintain a large catalog of copyrighted works, including copyrights in our television and WWE Network programming, music, photographs, books, films and apparel art. We also own a large number of internet website domain names and operate a network of developed, content-based sites, which facilitate and contribute to the exploitation of our intellectual property worldwide.
We vigorously seek to enforce our intellectual property rights worldwide by, among other things, searching the internet to ascertain unauthorized use, seizing counterfeit goods and seeking restraining orders and/or damages in court against individuals or entities infringing our intellectual property rights. Our failure or inability to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively, or our infringement of others’ intellectual property rights, could adversely affect our operating results.
Financial Information about Segments
See Note 19 of the consolidated financial statements, which is included elsewhere in this Form 10-K, for financial information about each of our segments.
Employees
As of February 2018, we had approximately 850 employees. This headcount excludes our Superstars, who are independent contractors. Our in-house production staff is supplemented with contract personnel for our television production. We believe that our relationships with our employees are good. None of our employees are represented by a union.
Regulation
Live Events
In some United States and foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for performers and/or permits for events in order for us to promote and conduct our live events. If we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our live events in that jurisdiction. The inability to present our live events over an extended period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.
Television and WWE Network Programming
The marketplace for audio-visual programming (including cable television and Internet programming) in the United States and internationally is substantially affected by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. Certain Federal Communications Commission (“FCC”) regulations, such as closed-captioning, are imposed directly on the Company and/or indirectly through our distributors. Other domestic and foreign governmental and private-sector initiatives relating to video programming are announced from time to time. In addition, the delivery of WWE Network in international markets exposes us to multiple regulatory frameworks, the complexity of which
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may result in unintentional noncompliance. Any failure by us to meet these governmental policies and private-sector expectations could restrict our program content and adversely affect our levels of viewership and/or number of WWE Network subscribers and operating results.
Available Information
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our website at http://corporate.wwe.com as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Our reports are also available free of charge on the SEC’s website, http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. None of the information on any of our websites is part of this Annual Report on Form 10-K. Our Corporate Governance Guidelines, Code of Business Conduct and charters of our Audit, Compensation and our Governance and Nominating Committees are also available on our website. A copy of any of these documents will be mailed to any stockholder without charge upon request to us at 1241 East Main Street, Stamford, CT 06902, Attn: Investor Relations Department.
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There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described below are not the only risks and uncertainties that could affect our business. See the discussion under “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
Our failure to maintain or renew key agreements could adversely affect our ability to distribute our video content, WWE Network, our films and/or other of our goods and services, which could adversely affect our operating results. We expect to renegotiate or replace our major domestic television distribution agreement in 2018.
Our video content is distributed by cable, satellite and broadcast television networks and digital platforms around the globe. As detailed below, we depend on third parties for many aspects of the operation and distribution of WWE Network. Our films are generally also distributed by other, more established film companies. Because a large portion of our revenues are generated, directly and indirectly, from this distribution, any failure to maintain (such as due to a breach or alleged breach by either party) or renew arrangements with distributors and platforms, the failure of distributors or platforms to continue to provide services to us or the failure to enter into new distribution opportunities on terms favorable to us could adversely affect our financial outlook, liquidity, business and operating results. We regularly engage in negotiations relating to substantial agreements covering the distribution of our video content by carriers located in the United States and abroad. We have a substantial relationship with NBCU as they distribute the vast majority of our television programming domestically through their cable networks. This relationship constitutes a significant percentage of our revenues and the main agreement governing this relationship is currently set to expire in September 2019. We expect that, during 2018, we will negotiate a renewal of this main agreement with NBCU or will negotiate one or more new video content licenses with other distributors to replace it, although no assurances can be given as to this timeline. The number of subscribers and ratings of cable television networks and advertising revenues in general have been reported as being impacted by viewers moving to alternative video content providers, a process known as “cord cutting” and “cord shaving”. Many well-funded digital companies have been competing with the traditional television business model and, while it has been widely reported that they are paying significant amounts for video content, it is not clear that these digital distributors will replace the importance (in terms of money paid for content, viewer penetration and other factors) of television distribution to video content owners such as WWE. For this or any other number of reasons, including those detailed elsewhere in these Risk Factors, the Company may not be able to renew or replace our principal domestic television distribution agreement on terms favorable to us. Any resulting loss of revenue could be substantial. Moreover, to the extent that the price of the Company’s Class A Common Stock reflects market expectations of an improvement in future operating results due, in whole or in part, to this domestic video content negotiation, any failure to meet that market expectation could have a material adverse effect on our stock price. Many of our other goods and services, such as our toys, video games and home video offerings are manufactured and sold by other parties under licenses of our intellectual property or distribution agreements. Our inability for any of the reasons set forth in these Risk Factors to maintain and/or renew these agreements on terms favorable to us could adversely affect our financial outlook, liquidity, business and/or operating results.
The Company has spent, and plans to continue to spend, substantial amounts to produce content, build infrastructure and market our WWE Network. If, for any number of reasons, we are unable to continue to develop and monetize this distribution platform successfully, these additional costs, and the loss of very significant revenue, could have a material adverse effect on our operating results.
Need to Attract, Retain and Replace Subscribers. We believe that WWE has a passionate fan base. However, the markets for entertainment video are intensely competitive and include many subscription, transactional and ad-supported models and vast amounts of pirated materials, all of which capture segments of the entertainment video market. These markets have and are expected to continue to be subject to rapid changes, and new technologies and evolving business models are developing at a fast pace. The Company expects this competition to continue to grow and the markets to continue to transform. Many players that have entered this space have vastly greater financial and marketing resources than the Company as well as longer operating histories, large customer bases and strong brand recognition. These competitors may secure better terms from suppliers, aggressively price their offerings and devote more technology and marketing resources. Offerings include subscription digital services from Amazon, CBS, ESPN, HBO, Hulu, MLB, Netflix, NFL Network, Nickelodeon, Showtime, YouTube and many others. Certain of these competitors have begun to bundle digital networks. Other competitors for viewers of video content include broadcast, cable and satellite television, many of which have so-called “TV everywhere”, stand-alone streaming and/or “on demand” content, online movie and television content providers (both legal such as iTunes and illegal (pirated)), ad-supported services such as YouTube and DVD rentals and sales. Viewers also commit viewing dollars to theatrical films, live events or other leisure activities. Our ability to attract and retain subscribers to WWE Network will depend in part on our ability to provide consistent high quality content and a high level of service that is perceived as a good value for the consumer’s entertainment dollars. We face intense competition with respect to service levels, content offerings, pricing and related features, which may adversely impact our ability to attract and retain these subscribers. In addition, subscribers are allowed to cancel their subscriptions at any time and could do so for a number of reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, unsatisfactory content (whether as a result of change in consumer tastes or otherwise), competitive
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entertainment at a lower price and customer service issues. This is commonly referred to as “churn.” Churn may be more pronounced in the periods following larger WWE events shown on WWE Network such as WrestleMania. We will need to add new subscribers continually both to replace subscribers who cancel and to grow our business. If too many of our subscribers cancel our service or if we are unable to attract new subscribers in sufficient numbers, our financial outlook, liquidity, business and operating results would be adversely affected.
Significant Ongoing Costs. WWE Network has and will continue to require significant capital expenditures, content cost (which is sometimes capitalized) and operating costs. Capital expenditures result in increased amortization and depreciation and may require impairment charges if the assets do not provide adequate results. We also intend to continue spending significant amounts on marketing, including promotional offerings to attract, retain and renew subscribers. Any and all such capital and operating costs, if not more than offset by revenues from WWE Network, could have a material adverse effect on our business and operating results.
Emerging Business. We believe that we entered the market for subscription digital streaming at a relatively early stage. We believe acceptance of this type of service is growing among users, that our fans are technologically sophisticated and that the market is not saturated. We could, however, find that we are unable to remain competitive in this emerging industry for any number of reasons. For instance, other new or more established players, many of whom have greater resources than we, could establish dominant positions in the market for this type of service. We could find that the growing number of offerings to consumers could limit subscribers for WWE Network due to market saturation. Alternatively, we could find that consumers choose to move away from subscription services generally. Under any of these scenarios, our ability to attract and retain subscribers will be adversely affected, which could have a material adverse effect on our business and operating results.
Reliance on Partners to Offer WWE Network. We offer subscribers the ability to receive streaming content through their PCs, Macs and other Internet-connected devices, including game consoles and mobile devices, such as tablets and mobile phones as well as smart televisions and Blu-Ray players. We intend to continue to offer WWE Network through available platforms and partners. We rely on BAMTech Media ("BAMTech"), an outside contractor, to develop and supply technology and infrastructure necessary to deliver our content and interact with the user. If we are not successful in maintaining or replacing our relationship with BAMTech or if we are not successful in entering into and maintaining relationships with platform providers, if the costs of maintaining these relationships increase materially, if we or our partners encounter technological, licensing or other impediments to streaming our content, or if viewers either upgrade existing platforms or migrate to new platforms in such a way that we or our partners do not or cannot deliver through the new or upgraded platform, our ability to compete successfully could be adversely impacted. Agreements with our platform providers are typically relatively short term in duration and our business could be adversely affected if, upon expiration, a partner does not continue to provide access to our service or is unwilling to do so on acceptable terms. Certain platforms, such as Amazon and Apple, offer their owned or licensed content as well as WWE Network and, therefore, may be disincentivized to promote and deliver WWE Network at the same level as provided for their content.
Possible Disruption of Systems Utilized in Our Operations. Our reputation and ability to attract, retain and serve our subscribers will depend on the reliable performance of our computer systems and those of third-parties that we utilize in our operations. Interruptions in these systems, or with the Internet in general whether due to fault by any party or due to weather, natural disasters, terrorist attacks, power loss or other force majeure type events, could make our service unavailable or degraded or could otherwise hinder our ability to deliver content or cause WWE Network to fail completely. We do not maintain entirely redundant systems. These service disruptions or failures could be prolonged. Delivery of video programming over the Internet is done through a series of carriers with switch-overs between carriers, and any point of failure in this distribution chain would cause a disruption or degradation of our signal. Service disruption or degradation for any of the foregoing reasons could diminish the overall attractiveness of our subscription service to subscribers, causing us to lose subscribers and/or credit subscribers affected by such disruption. We do not carry insurance that would fully cover us in the event of most types of business interruptions that could occur at WWE Network.
Our servers and those of third parties used in the distribution of WWE Network may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions and could experience directed attacks intended to lead to interruptions and delays in our service and operations as well as loss, misuse, theft or release of proprietary, confidential, sensitive or otherwise valuable Company or subscriber data or information. Such a virus, break-in, disruption or attack could remain undetected for an extended period, could harm our business, be expensive to remedy, expose us to litigation and/or damage our reputation. Our insurance may not cover expenses related to such disruptions or unauthorized access fully or at all.
Technology Enhancements. Enhancements and modifications to WWE Network technology from time to time become commercially necessary, and these consume considerable resources in capital and operating expenditures. If we are unable to acquire, maintain and enhance the technology to manage the streaming of content to our subscribers in a timely, efficient and user-friendly manner either through an outside party or ourselves, our ability to retain existing subscribers and to add new subscribers may be impaired. In addition, if our technology or that of third parties we utilize in our operations fails or otherwise operates improperly, our ability to attract and/or retain subscribers or add new subscribers may be impaired. Also, any harm to our subscribers' personal computers or other devices caused by software used in our operations could have an adverse effect on our business, results of operations and financial condition. We employ merchandising and search technology in WWE Network in an effort to maintain and increase member engagement
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with our service. We may experience difficulties in implementing refinements or interfaces that our subscribers enjoy or require, which could cause member dissatisfaction and negatively impact our business.
Impact of Government Regulations. The adoption or modification of laws and regulations relating to the Internet or other areas of our business could limit or otherwise adversely affect the manner in which we conduct our business. The growth and development of the market for online commerce may lead to more stringent consumer protection laws, which may impose additional burdens on us. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, this compliance could cause us to incur significant additional expense or alter our business model. In addition, the delivery of WWE Network in international markets exposes us to multiple regulatory frameworks and societal norms, the complexity of which may result in unintentional noncompliances which could adversely affect our business and operating results.
The adoption of any laws or regulations that adversely affect the growth, popularity or use of the Internet to access our programming, including laws and/or court decisions that have the effect of limiting Internet neutrality, could limit the demand for our subscription service and increase our cost of doing business. The FCC had adopted an “Open Internet” Report and Order and accompanying rules, which addressed various practices of broadband Internet access providers. Those rules, in substantial part, were recently reversed by the FCC “Restoring Internet Freedom” Declaration Ruling, Report and Order, replaced by what the FCC refers to as a “light-touch regulatory framework,” including modified customer transparency requirements. Numerous parties have indicated they will seek judicial review of the FCC’s rulings, and a number of states have already filed a petition for a review with the United States Court of Appeals for the District of Columbia. No assurances can be given as to the outcome of such challenges. To the extent that network operators engage in discriminatory practices, our business could be adversely impacted. As we expand internationally, government regulation concerning the Internet, and in particular, net neutrality, may be nascent or non-existent. Within such a regulatory environment, due to the political and economic power of local network operators, who may have interests that do not align with ours, we could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business.
Risks Relating to the Internet. We rely on the ability of WWE subscribers to access our service through the Internet. Any point of failure within the Internet infrastructure, whether caused by network hackers, force majeure type events or otherwise, could have a significant adverse effect on WWE Network. In addition, devices for accessing our content are manufactured and sold by entities other than the Company, and any transmission issues through these devices may result in consumer dissatisfaction with WWE Network and adversely affect our business. Technology changes may require that platforms and/or subscribers update their devices and any failure to do so, or the failure of us or our distribution partners to perform adequately through these updated devices could negatively affect our subscribers’ enjoyment of WWE Network which would negatively affect our business. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers (such as through tiered access or pricing), due to the heavy bandwidth use of audio/visual content, we could incur greater operating expenses and our subscriber acquisition costs, and subscriber numbers could be negatively impacted. Most network operators that provide consumers access to the Internet also provide consumers audiovisual programming. As a result, these companies have an incentive to use their network infrastructure in a manner adverse to our success. With the reversal of the FCC’s Open Internet Report and Order discussed above, to the extent network operators are able to provide preferential treatment to their traffic or otherwise implement discriminatory network management practices, WWE Network could be negatively impacted and it could have a material adverse effect on our business and operating results. In international markets, these same incentives apply and consumer demand, regulatory oversight and competition may not be as strong of a check on these practices as they are in domestic markets.
We Are Subject to Intellectual Property Risks. From time to time, third parties allege that we have violated their intellectual property rights. In connection with WWE Network, if we and/or our service providers are unable to obtain sufficient rights, successfully defend the use, or otherwise alter business practices in a timely manner in response to claims for infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business could be adversely affected. Many companies devote significant resources on patents relating to various aspects of streaming services. For example, there are numerous patents that broadly claim means and methods of conducting business on the Internet and we and/or our service providers have from time to time been named in lawsuits and other claims alleging violations of patents in connection with various aspects of our business. We have not searched patents relative to our technology. While we believe we have managed this process successfully to date, defending against intellectual property claims, whether they are with or without merit, can result in costly litigation and diversion of personnel. These types of claims could result in our inability to use technology as currently configured for WWE Network or as we configure it in the future and could significantly impact our operation and monetization of the service. As a result of this type of dispute, we and/or our service providers could also be required to develop non-infringing technology, make royalty or damage payments, enter licensing agreements, adjust merchandising or marketing activities or take other actions to resolve the claims, any of which could be costly or unavailable on acceptable terms.
International Offerings. We have made our U.S. based WWE Network available in international markets other than embargoed countries. We are not currently offering different content in different countries internationally and we may find that our United States product does not resonate with consumers in other nations. International expansion also entails greater infrastructure and differing legal and regulatory environments. Other risks relating to foreign operations could include difficulties and costs associated with staffing and managing foreign operations, management distraction, new and different sources of competition, compliance with U.S. and international
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laws relating, among other things, to bribery, less favorable foreign intellectual property laws, laws relating to repatriation of funds, lower levels of Internet availability, complexity of VAT and other local tax laws, and data protection (including the new European Union General Data Protection Regulation (“GDPR”), which becomes effective May 25, 2018), consumer protection, censorship, licensing and other regulatory matters. If we are not able to manage the growing complexity of our international operations, our business could be adversely affected.
Marketing Efforts May Not Be Successful. We intend to continue to spend significant amounts on marketing, including promotional offerings and data analytics, to attract, retain and renew subscribers domestically and internationally. We generally provide a promotion of one month free access to WWE Network for new subscribers. If companies we use to promote WWE Network believe that we could negatively impact their business, decide that they want to enter similar businesses or wish to support our competitors, we may not be given access to suitable marketing channels. We may decide not to use certain marketing sources or activities if they are, or are perceived by us to be, ineffective. If adequate marketing channels are not available or are too costly, for any reason, our ability to attract new subscribers, and/or our operating costs, may be adversely affected.
We May Be Liable for Fraudulent Payment Transactions. Even when the associated financial institution approves the payment of fees for WWE Network subscribers, from time to time, fraudulent payment methods are used to obtain the service. We do not carry insurance for these fraudulent transactions.
If We Are Not Able to Manage Change and Growth, Our Business Could Be Adversely Affected. We are expanding our operations internationally and scaling our streaming service to enable anticipated growth in both subscribers and features related to our service. Internationally, we are also subject to divergent and complex consumer customs and practices. This growth adds complexity to virtually every aspect of our business, including WWE Network, and if we are not able to manage this growing complexity, including improving, refining or revising our systems and operational practices, business may be adversely affected.
Our failure to continue to build and maintain our brand of entertainment could adversely affect our operating results.
We must continue to build and maintain our strong brand identity to attract and retain fans who have a number of entertainment choices. The creation, marketing and distribution of live events, programming, (including our television, WWE Network and other programming) and films, that our fans value and enjoy is at the core of our business. The production of compelling live, televised, streamed and film content is critical to our ability to generate revenues across our media platforms and product outlets. Also important are effective consumer communications, such as marketing, customer service and public relations. The role of social media by fans and by us is an increasingly important factor in our brand perception. If our efforts to create compelling services and goods and/or otherwise promote and maintain our brand, services and merchandise are not successful, our ability to attract and retain fans may be adversely affected. Such a result would likely lead to a decline in our television ratings, attendance at our live events, the number of WWE Network subscribers, our film viewership and/or otherwise impact our sales of goods and services, which would adversely affect our operating results.
Our failure to retain or continue to recruit key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment, which could adversely affect our operating results.
Our success depends, in large part, upon our ability to recruit, train and retain athletic performers who have the physical presence, acting ability and charisma to portray characters in our live events, video programming (including our television, WWE Network and other programming) and films. We cannot guarantee that we will be able to continue to identify and train these performers. Additionally, throughout our history, performers from time to time have stopped working for us for any number of reasons, and we cannot guarantee that we will be able to retain our current performers either during the terms of their contracts or when their contracts expire. Our failure to attract and retain key performers, an increase in the costs required to attract and retain such performers, or a serious or untimely injury to, or the death of, or unexpected or premature loss or retirement for any reason of, any of our key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment. Scheduling conflicts for talent services may also affect certain productions. Any of the foregoing issues could adversely affect our operating results.
A decline in the popularity of our brand of sports entertainment, including as a result of changes in the social and political climate, could adversely affect our business.
Our operations are affected by consumer tastes and entertainment trends, which are unpredictable and subject to change and may be affected by changes in the social and political climate. Our programming is created to evoke a passionate response from our fans. Changes in our fans’ tastes or a material change in the perceptions of our business partners, including our distributors, sponsors and licensees, whether as a result of the social and political climate or otherwise, could adversely affect our operating results.
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The unexpected loss of the services of Vincent K. McMahon could adversely affect our ability to create popular characters and creative storylines or could otherwise adversely affect our operating results.
In addition to serving as Chairman of our Board of Directors and Chief Executive Officer, Mr. McMahon leads the creative team that develops the storylines and the characters for our programming (including our television, WWE Network and other programming) and live events. From time to time, Mr. McMahon has also been an important member of our cast of performers. The loss of Mr. McMahon due to unexpected retirement, disability, death or other unexpected termination for any reason could have a material adverse effect on our ability to create popular characters and creative storylines or could otherwise adversely affect our operating results. Mr. McMahon has recently announced that he established Alpha Entertainment LLC, to explore investment opportunities across the sports entertainment landscapes, and Alpha Entertainment LLC has announced plans to launch a professional football league. While he has provided the Company assurances that his focus on WWE will not be diverted by these efforts, any such diversion or perception of such diversion could adversely affect our operating results and could have a material adverse effect on our stock price.
Changes in the regulatory atmosphere and related private sector initiatives could adversely affect our businesses.
Production of video programming by independent producers is generally not directly regulated by the federal or state governments in the United States. However, under FCC regulations in many instances we are responsible for closed captioning our television and internet programming and any failure to remain in compliance with these regulations could expose us to substantial costs and adverse publicity. The markets for programming (including television and WWE Network programming) in the United States and internationally may be substantially affected by government regulations applicable to, as well as social and political influences on, television stations and networks. We voluntarily designate the suitability of each of our television and WWE Network programs using standard industry ratings. Domestic and foreign governmental and private-sector initiatives relating to video programming are announced from time to time. Any failure by us to meet these governmental policies and/or private-sector expectations could restrict our program content and adversely affect our levels of viewership and/or the number of WWE Network subscribers, result in adverse publicity and/or impact our operating results.
The markets in which we operate are intensely competitive, rapidly changing and increasingly fragmented, and we may not be able to compete effectively, especially against competitors with greater financial resources or marketplace presence, which could adversely affect our operating results.
We face competition for our audiences from professional and college sports, as well as other forms of live and televised, streamed and filmed entertainment and other leisure activities in a rapidly changing and increasingly fragmented marketplace. The manner in which audio/video content is distributed and viewed is constantly changing. Changes in technology require Company resources including personnel, capital and operating expenses. Conversely, technology changes have also decreased the cost of video production and distribution for certain programmers (such as through social media), which lowers the barriers to entry and increases the competition for viewership and revenues. While we attempt to distribute our programming across all platforms, our failure to continue to do so effectively (including, for example only, our emphasizing a distribution platform that in time lessens in importance or becomes obsolete or our loss of, or other inability to procure, carriage on an important platform) could adversely affect our operating results. If other providers of video programming address the changes in consumer viewing habits in a manner that is better able to meet content distributor and consumer needs and expectations, our business could be adversely affected. For the sale of our consumer products, we compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise. Many of the companies with whom we compete have substantially greater financial resources than we do. Our failure to compete effectively could result in a significant loss of viewers, subscribers, venues, distribution channels or performers and fewer entertainment and advertising dollars spent on our form of sports entertainment, any of which could adversely affect our operating results.
We face uncertainties associated with international markets, which could adversely affect our operating results and impair our business strategy.
We are consistently negotiating and entering into new agreements and renewals and extensions of existing agreements for our products and services in international markets. In late 2014, we began making available our U.S. based WWE Network in international markets. Cultural norms and regulatory frameworks vary in the markets in which we operate and our products' nonconformance to local norms or applicable law, regulations or licensing requirements could interrupt our operations or affect our sales, viewership and success in the markets. Our production of live events overseas subjects us to numerous risks involved in foreign travel and operations and also subjects us to local norms and complex regulations (including visa obligations). In addition, these live events and the licensing and/or sale of our goods and services in international markets expose us to some degree of currency risk. International operations may be subject to political instability inherent in varying degrees in those markets. Other risks relating to foreign operations include difficulties and costs associated with staffing and managing foreign operations, management distraction, new and different sources of competition, compliance with U.S. and international laws relating to, among other things, bribery, less favorable foreign intellectual property laws, laws relating to repatriation of funds, lower levels of Internet availability, complexity of VAT and other local tax laws, and data protection, consumer protection, censorship, licensing and other regulatory matters. The GDPR, which becomes effective May 25, 2018 will apply to certain of our operations. The GDPR’s provisions are far reaching and noncompliance could result in significant fines,
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operational issues and/or harm to reputation. While we have committed significant financial and personnel resources toward the planning and initial implementation phases, no assurances can be provided that our efforts will be entirely successful. These risks could adversely affect our operating results and impair our ability to pursue our business strategy as it relates to international markets, which could adversely affect our business.
We may be prohibited from promoting and conducting our live events if we do not comply with applicable regulations, which could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.
In some United States and foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for performers and/or permits for events in order for us to promote and conduct our live events. Foreign jurisdictions require visas for personnel and talent at international live events. In international markets, third party promoters generally oversee permitting and regulatory matters. In the event that we fail to comply with the regulations of a particular jurisdiction, whether through our acts or omissions or those of our third party promoters, we may be prohibited from promoting and conducting our live events in that jurisdiction. The inability to present our live events in jurisdiction(s), in addition to the lost revenues and expenses of the missed event(s), could lead to a decline in various revenue streams in such jurisdiction(s), which could adversely affect our operating results.
Because we depend upon our intellectual property rights, our inability to protect those rights, or our infringement of others’ intellectual property rights, could adversely affect our business.
Intellectual property is material to all aspects of our business. We have a large portfolio of registered and unregistered trademarks, service marks, copyrighted material and characters, trade names and other intellectual property rights worldwide. We also own a large number of Internet website domain names and operate a network of developed, content-based sites, which facilitate and contribute to the exploitation of our intellectual property worldwide. We expend substantial cost and effort in an attempt to maintain and protect this intellectual property and to maintain compliance with other parties’ intellectual property. Our failure to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively, or our infringement of others’ intellectual property rights, could result in litigation, damage our brand or adversely affect our relationships with the companies that distribute our goods and services, any or which could adversely affect our business, financial condition and operating results.
While we generally own the intellectual property in our content, we generally do not own any intellectual property relating to the distribution of this content including through WWE Network. From time to time, third parties allege that we have violated their intellectual property rights. If we are unable to obtain sufficient rights, successfully defend our use, develop non-infringing technology or otherwise alter our business practices in a timely manner in response to claims against us for infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business and competitive position may be adversely affected. Many companies devote significant resources on patents relating to many aspects of our business including WWE Network. For example, there are numerous patents that broadly claim means and methods of conducting business on the Internet, and from time to time we have been named in lawsuits and other claims alleging that we violated patents in connection with various aspects of our business. We have not searched patents relative to our technology. While we believe we have managed this process effectively to date, defending ourselves against intellectual property claims, whether they are with or without merit can result in costly litigation and diversion of personnel. These type of claims could result in our inability to use our technology as currently configured or as we configure it in the future and could significantly impact our ability to market our services or merchandise our products. As a result of this type of dispute, we could also be required to develop non-infringing technology, make royalty or damage payments, enter into licensing agreements, adjust our merchandising or marketing activities or take other actions to resolve the claims, any of which could be costly or unavailable on acceptable terms.
Our distribution mechanisms for our goods and services are increasingly complex across various distribution platforms, various geographical areas and timing windows.
Our inadvertent grant of inconsistent rights to our intellectual property, goods and/or services or allegations of such inconsistent grants could result in claims of breach of our distribution agreements or licenses and/or result in litigation which could adversely impact our operations.
We could incur substantial liability in the event of accidents or injuries occurring during our physically demanding events.
We hold numerous live events each year. This schedule exposes our performers and our employees who are involved in the production of those events to the risk of travel and performance-related accidents, the consequences of which are not fully covered by insurance. The physical nature of our events exposes our performers to the risk of serious injury or death. Although our performers, as independent contractors, are responsible for maintaining their own health, disability and life insurance, we self-insure medical costs for our performers for injuries that they incur while performing. We also self-insure a substantial portion of any other liability that we could incur relating to such injuries. Liability to us resulting from any death or serious injury sustained by one of our performers while performing, to the extent not covered by our insurance, could adversely affect our business, financial condition and operating results.
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As noted below, we are the defendant in litigation claiming that professional wrestling as currently and historically performed by us has resulted in significant injuries to our performers including, but not limited to, chronic traumatic encephalopathy or "CTE".
Our live events entail other risks inherent in public live events, which could lead to disruptions of our business as well as liability to other parties, any of which could adversely affect our financial condition or results of operations.
We hold numerous large live events each year, both domestically and internationally. Certain risks are inherent in events of the type we perform as well as the travel to and from them, and we are required to expend substantial resources on safety matters such as security. Risks of travel and large live events include air and land travel interruption or accidents, the spread of illness, injuries resulting from building problems, pyrotechnics or other equipment malfunction, terrorism or other violence, local labor strikes and other force majeure type events. These issues could result in personal injuries or deaths, canceled events and other disruptions to our business for which our business interruption insurance may be insufficient. Any of these occurrences also could result in liability to other parties for which we may not have insurance. Any of these risks could adversely affect our business, financial condition and/or results of operations.
We continue to face certain risks relating to our feature film business, which could result in higher production costs and asset impairment charges, which could adversely affect our financial condition or our results of operations.
We have substantial capitalized film costs. The accounting for our film business in accordance with generally accepted accounting principles entails significant judgment used to develop estimates of expected future revenues from films. If expected revenue from one or more of our films does not materialize because audience demand does not meet expectations, our estimated revenues may not be sufficient to recoup our investment in the film. If actual revenues are lower than our estimated revenues or if costs are higher than expected, we may be required to record an impairment charge and write down the capitalized costs of the film. No assurance can be given that we will not record additional impairment charges in future periods. In addition, capitalized film costs are reflected net of certain production tax incentives granted by various governmental authorities. Our ability to realize these credits may be limited by changes in the laws and regulations relating to the incentives and/or the economic environment. The inability to realize these credits would have the effect of increasing our overall production costs.
In addition to the risks noted above relating to WWE Network, we could face a variety of risks if we expand into other new and complementary businesses and/or make certain investments or acquisitions.
We have entered into new or complementary businesses and made equity and debt investments in other companies in the past and plan to continue to do so in the future. We may also enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances. Risks of this expansion and/or these investments and transactions may include, among other risks: potential diversion of management’s attention and other resources, including available cash, from our existing businesses; unanticipated liabilities or contingencies; reduced earnings due to increased amortization; loss on investments due to poor performance by the business invested in; inability to successfully integrate a new business; revaluations of debt and equity investments as well as market, credit and interest-rate risks (any of which could result in impairment charges and other costs); competition from other companies with more experience in such businesses; and possible additional regulatory requirements and compliance costs which could affect our business, financial condition and operating results.
We face various risks relating to our computer systems and online operations, which could have a negative impact on our financial condition or our results of operations.
The Company faces the risk of a security breach or disruption, whether through external cyber intrusion or from persons with access to systems inside our organization. The Company commits significant personnel and financial resources to maintain the security of its computer systems, including implementing various measures to monitor and manage the risk of a security breach or disruption, and to plan for the mitigation of losses if such breach or disruption were to occur. There can be no assurance that these security efforts will be effective or that attempted security breaches or disruptions would not be successful or damaging or that the Company would be promptly aware of them or able to mitigate damages from them, if any such breach or disruption were to occur. The Company also utilizes third party service providers in several aspects of its operations (including WWE Network), and these third parties are also subject to risks of security breach or disruption. The Company is not able to assure the effectiveness of security among our service providers. The Company and certain of its third party service providers receive personal information through web services including WWE Network. In many instances this information is subject to the Company's privacy policies. Personal information received by our service providers includes credit card information in certain instances, most notably WWE Network, our live event merchandise sales and WWEShop, the Company's internet retail operations. The Company expends significant effort to ensure compliance with its privacy policy and to ensure that our service providers safeguard credit card information including contractually requiring those providers to remain compliant with applicable PCI Data Security Standards. However, a significant security breach or other disruption involving the computer systems of the Company or one or more of its service providers could disrupt the proper functioning of these systems and therefore the Company's operations (for which we likely will not carry sufficient insurance); result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information; require significant management attention and resources to remedy the damages that could result (if, in fact, they can be remedied), and subject
16
the Company to litigation or damage to its reputation. Implementation of the GDPR may enhance this risk. Any or all of these could have a negative impact on our financial condition or results of operations.
Our businesses entail certain risks relating to privacy norms and regulations.
We and our partners collect certain data supplied by our fans including WWE Network subscribers. We utilize this data in certain ways including our marketing efforts. We face complex legal obligations domestically and internationally regarding the manner in which we treat and use such information, including, without limitation, the GDPR, which will become effective May 25, 2018. Certain of these legal obligations, including the GDPR, carry substantial monetary penalties if breached. Unintentional noncompliance by us or our partners of these regulations could have an adverse effect on our business. If we were to disclose or use data about our fans in a manner that is objectionable to them or is contrary to applicable law, our business reputation could be adversely affected. We could also face potential legal claims that could impact our operating results.
A decline in general economic conditions or disruption of financial markets may, among other things, reduce the discretionary income of consumers or erode advertising markets, which could adversely affect our business.
Our operations are affected by general economic conditions, including consumers’ disposable income, which has a direct material impact on the demand for entertainment and leisure activities. Declines in general economic conditions could reduce the level of discretionary income that our fans and potential fans have to spend on our live events, programming (including WWE Network), films and consumer products, which could adversely affect our revenues. Volatility and disruption of financial markets could limit the ability of our sponsors, licensees and distributors to obtain adequate financing to maintain operations and result in a decrease in sales volume that could have a negative impact on our business, financial condition and results of operations. Our television partners derive revenues from the sale of advertising. We also sell advertising directly on our website, on WWE Network and, depending upon the distribution methods used to monetize additional content, we may have additional advertising to sell. We sell sponsorship packages to our live events and certain other of our services. Softness in the advertising markets due to a weak economic environment or otherwise, could adversely affect our revenues or the financial viability of our distributors.
Our accounts receivable represent a significant portion of our current assets and relate principally to a limited number of distributors and licensees, increasing our exposure to bad debts which could potentially have a material adverse effect on our results of operations.
Substantial portions of our accounts receivable are from distributors for WWE Network, pay-per-view, television and home video programming and from licensees who produce consumer products containing our intellectual property. The concentration of our accounts receivable across a limited number of distributors and licensees subjects us to individual credit risk with respect to these parties who could become insolvent or declare bankruptcy, rendering collection impossible. Certain of the parties are located overseas which can make collections more difficult and, at times, economically unfeasible. Additionally, adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our debtors, including our key distributors and/or licensees. This could increase our exposure to losses from bad debts and have a material adverse effect on our business, financial condition and results of operations.
Servicing our debt will require a significant amount of cash, and we could have insufficient cash flow from operations or lack of access to sources of financing to meet these obligations and/or our other liquidity needs.
Our total consolidated debt, including the $200.0 million aggregate principal amount of 3.375% convertible senior notes due 2023 that the Company issued in a private offering in December 2016 (the "Convertible Notes"), is significant. In January 2017, pursuant to the exercise of an over-allotment option, an additional $15.0 million aggregate principal amount of the Convertible Notes was issued. We also have availability under our $100.0 million revolving credit facility (the "Revolving Credit Facility"). Through certain of our subsidiaries, the Company also has in place a term loan secured by the Company’s jet and a real estate mortgage in the principal amount of $23.0 million secured by the related real estate (the “Asset-Backed Facilities”).
We believe we have sufficient liquidity for at least the next twelve months for our needs (including the payment of our dividend). However, our ability to make scheduled principal and interest payments on the Convertible Notes and under the Revolving Credit Facility, the Asset-Backed Facilities and any other indebtedness that may be outstanding at the time will depend on our future performance, which is subject to economic, financial, competitive and other factors beyond our control, including the items described elsewhere in these Risk Factors. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and provide for all our other uses of cash including capital and operating expenditures and paying our dividend. If we are unable to generate sufficient cash flow, we could be required to adopt one or more alternatives which, assuming they are, in fact, available, could be onerous, dilutive or otherwise affect our operations and/or the market price of our Common Stock. Such alternatives could include, for example, substantially reducing our cost structure, selling assets, reducing or eliminating our dividend, obtaining additional equity capital and/or refinancing/replacing the indebtedness. We may not be able to engage in any of these activities on desirable terms or at all due to our then existing financial condition, market conditions, regulatory matters or contractual obligations (including, for example, any restrictions under our Revolving Credit Facility or other credit agreement or debt instruments that may exist at that time).
17
Any failure to make a required payment under our indebtedness may constitute a default under that indebtedness and under other indebtedness due to cross-default provisions and could trigger acceleration clauses causing the obligations to become immediately due and payable. The occurrence of one or more of these risks could materially and adversely affect our financial condition and operating results.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
Under ASC 470-20, Debt with Conversion and Other Options, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our Consolidated Balance Sheets, and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We will report lower net income in our financial results because ASC 470-20 will require interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the trading price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected. Conversion of our Convertible Notes and the exercise of related Warrants may cause economic dilution to our stockholders and dilution to our earnings per share.
We could incur substantial liabilities if litigation is resolved unfavorably.
The Company has been named as a defendant in lawsuits alleging, among other things, that performers received traumatic brain injuries while performing for the Company and may have CTE. One such suit also alleges that the Company misclassified its talent as independent contractors rather than employees. The Company strongly disputes the merit of this type of case and moved to dismiss the lawsuits, which were consolidated for most purposes. Several of the claims have been dismissed, and the Company has moved to dismiss or for summary judgment on all remaining claims. If our current dispositive motions are not granted, or if any dismissals are reversed on appeal (once an appeal can be taken), the Company plans to continue to defend itself vigorously (including, if necessary, opposing class certification in the two cases filed as putative class actions). In the ordinary course of business we become subject to various other complaints and litigation matters.
By its nature, the outcome of litigation is difficult to assess and quantify, and its continuing defense is costly. Any adverse judgment or settlement could have a material adverse impact on our financial condition or results of operations.
The final impacts of the Tax Cuts and Jobs Act could be materially different from our current assessment.
The Tax Cuts and Jobs Act (“Tax Act”), which was signed into law on December 22, 2017, makes significant changes to the taxation of U.S. business entities. These changes include a permanent reduction to the federal corporate income tax rate. The Tax Act required a remeasurement of our deferred tax asset and a recognition of $11.3 million of expense in the fourth quarter of 2017. The Tax Act is expected to have a favorable impact on our effective tax rate and net income as reported under generally accepted accounting principles both in the first fiscal quarter of 2018 and subsequent reporting periods. However, we are still assessing the impact of the Tax Act and there can be no assurances that it will have a favorable impact. In addition, any future federal or state law tax changes, whether arising from actual or perceived loss of tax revenue to the taxing authority due to the Tax Act or otherwise, could materially and adversely impact our results from operations.
Failure to meet market expectations for our financial performance could adversely affect the market price and volatility of our stock.
We believe that the price of our stock generally reflects certain market expectations for our future operating results, including expectations for a substantial improvement in operating results due, in whole or in part, to the upcoming domestic television negotiation. Any failure to meet or delay in meeting these expectations, including as a result of the domestic television negotiation, the failure of
18
WWE Network to achieve expected subscriber numbers or as a result of any other events, conditions and/or circumstances set forth in these Risk Factors could cause the market price of our stock to decline significantly.
Through his beneficial ownership of a majority of our Class B common stock, Mr. McMahon can exercise control over our affairs, and his interests may conflict with the holders of our Class A common stock.
We have Class A common stock and Class B common stock. The holders of Class A common stock generally have rights identical to holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Holders of both classes of common stock generally will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by applicable Delaware law.
A substantial majority of the issued and outstanding shares of Class B common stock is owned beneficially by Vincent K. McMahon and, as a result, he controls a majority of the voting power of our common stock and can effectively exercise control over our affairs. His interest could conflict with the holders of our Class A common stock. McMahon’s voting control could discourage or preclude others from initiating potential mergers, takeovers or other change of control transactions. As a result, the market price of our Class A common stock could decline.
Our dividend is significant and is affected by a number of factors.
Our Board of Directors regularly evaluates the Company’s Common Stock dividend policy and determines the dividend rate each quarter. The level of dividends, if any, will continue to be influenced by many factors, including, among other things, our liquidity and historical and projected cash flow, our strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends (including under our revolving credit facility), general economic and competitive conditions and such other factors as our Board of Directors may consider relevant from time to time. All of these factors are subject to the various contingencies listed in the other Risk Factors included in this Form 10-K. We cannot assure our stockholders that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past. Any reduction in our dividend payments could have a negative effect on our stock price.
The Company’s dividend distributions have in recent years represented a return of capital for tax purposes, and shareholders as a result will recognize an increased capital gain upon a subsequent sale of the Company’s Common Stock.
The Company’s aggregate dividend distributions paid in 2014 and 2013 were in excess of its current and accumulated earnings and profits calculated under applicable Internal Revenue Code (“IRC”) provisions. This may be the case for 2018, as well, due to the recently enacted federal tax law changes. Under the IRC, distributions in excess of both the Company’s current earnings and profits and the Company’s accumulated earnings and profits constitute a return of capital and reduce the stockholder’s adjusted tax basis in its Common Stock. If a stockholder’s adjusted basis in its Common Stock is reduced to zero, these excess distributions thereafter constitute a capital gain to the stockholder.
A substantial number of shares are eligible for sale by Mr. McMahon and members of his family or trusts established for their benefit, and the sale of those shares could lower our stock price.
All of the issued and outstanding shares of Class B common stock are held by Vincent McMahon and other members of his family including certain trusts set up for family members. Sales of substantial amounts of these shares, or the perception that such sales could occur, may lower the prevailing market price of our Class A common stock. If any sales or transfers of Class B common stock are made to persons outside of the McMahon family, the shares automatically convert into Class A common stock.
Our Class A common stock is volatile and has a relatively small public "float."
The price at which our common stock has traded has fluctuated significantly, especially in the past two years. The price may continue to be volatile due to a number of factors beyond our direct control, including our number of WWE Network subscribers, operating results (especially where different from the expectations of securities analysts, investors and the financial community), market volatility in general and short interest in our stock. Given the dynamic nature of our business and all other factors that limit the predictability of the future, any of our forecasts, outlook or other forward-looking statements could differ materially from actual results which could cause a decline in the trading price of our common stock.
Historically, as a result of our relatively small public float, our Class A common stock has been less liquid than the common stock of companies with broader public ownership, and the trading prices for our Class A common stock have been more volatile than generally may be the case for more widely-held common stock. Among other things, trading of a relatively small volume of our Class A common stock may have a greater impact on the trading price of our Class A common stock than would be the case if our public float were larger.
19
Item 1B. Unresolved Staff Comments
None.
We have executive offices, television and music recording studios, post-production operations and warehouses at locations in or near Stamford, Connecticut. We also have sales offices in New York, Orlando, Atlanta and Chicago and have international offices in London, Tokyo, Shanghai, Mumbai, Munich, Mexico, Singapore, and Dubai. We own three buildings in which our executive and administrative offices, our television and music recording studios and our production operations are located. We lease space for our sales offices, WWE Studios office and other facilities.
Our principal properties consist of the following:
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|
|
|
|
|
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|
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|
|
Facility |
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Location |
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Square Feet |
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Owned/ |
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Expiration Date of Lease |
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Corporate offices |
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Stamford, CT |
|
94,200 |
|
Owned |
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— |
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Warehouse space |
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Norwalk, CT |
|
121,500 |
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Leased |
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January 2020 |
|
Production facilities, office and warehouse space |
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Stamford, CT |
|
203,200 |
(1) |
Owned |
|
— |
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Corporate offices |
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Stamford, CT |
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33,100 |
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Leased |
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Various through May 2020 |
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WWE Performance Center and warehouse space |
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Orlando, FL |
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47,800 |
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Leased |
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Various through November 2020 |
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Sales offices |
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Various |
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28,200 |
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Leased |
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Various through December 2026 |
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WWE Studios office |
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Los Angeles, CA |
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13,200 |
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Leased |
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April 2020 |
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Warehouse space |
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Stamford, CT |
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5,600 |
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Leased |
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December 2026 |
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(1) |
Includes 96,200 square feet of space leased to other tenants within the office building. |
All of the facilities listed above are utilized in our Media Division, in Live Events, in our Consumer Products Division and in our Corporate and Other segment, with the exception of the WWE Studios office in Los Angeles, which primarily focuses on our WWE Studios segment.
On October 23, 2014, a lawsuit was filed in the U. S. District Court for the District of Oregon, entitled William Albert Haynes III, on behalf of himself and others similarly situated, v. World Wrestling Entertainment, Inc. This complaint was amended on January 30, 2015 and alleged that the Company ignored, downplayed, and/or failed to disclose the risks associated with traumatic brain injuries suffered by WWE’s performers and seeks class action status. On March 31, 2015, the Company filed a motion to dismiss the first amended class action complaint in its entirety or, if not dismissed, to transfer the lawsuit to the U.S. District Court for the District of Connecticut. Without addressing the merits of the Company's motion to dismiss, the Court transferred the case to Connecticut on June 25, 2015. The plaintiffs filed an objection to such transfer, which was denied on July 27, 2015. On January 16, 2015, a second lawsuit was filed in the U. S. District Court for the Eastern District of Pennsylvania, entitled Evan Singleton and Vito LoGrasso, individually and on behalf of all others similarly situated, v. World Wrestling Entertainment, Inc., alleging many of the same allegations as Haynes. On February 27, 2015, the Company moved to transfer venue to the U.S. District Court for the District of Connecticut due to forum-selection clauses in the contracts between WWE and the plaintiffs and that motion was granted on March 23, 2015. The plaintiffs filed an amended complaint on May 22, 2015 and, following a scheduling conference in which the court ordered the plaintiffs to cure various pleading deficiencies, the plaintiffs filed a second amended complaint on June 15, 2015. On June 29, 2015, WWE moved to dismiss the second amended complaint in its entirety. On April 9, 2015, a third lawsuit was filed in the U. S. District Court for the Central District of California, entitled Russ McCullough, a/k/a “Big Russ McCullough,” Ryan Sakoda, and Matthew R. Wiese a/k/a “Luther Reigns,” individually and on behalf of all others similarly situated, v. World Wrestling Entertainment, Inc., asserting similar allegations to Haynes. The Company again moved to transfer the lawsuit to Connecticut due to forum-selection clauses in the contracts between WWE and the plaintiffs, which the California court granted on July 10, 2015. On September 21, 2015, the plaintiffs amended this complaint and, on November 16, 2015, the Company moved to dismiss the amended complaint. Each of these suits seeks unspecified actual, compensatory and punitive damages and injunctive relief, including ordering medical monitoring. The Haynes and McCullough cases purport to be class actions. On February 18, 2015, a lawsuit was filed in Tennessee state court and subsequently removed to the U.S. District Court for the Western District of Tennessee, entitled Cassandra Frazier, individually and as next of kin to her deceased husband, Nelson Lee Frazier, Jr., and as personal representative of the Estate of Nelson Lee Frazier, Jr. Deceased, v. World Wrestling Entertainment, Inc. A similar suit was filed in the U. S. District Court for the Northern District of Texas entitled Michelle James, as mother and next friend of Matthew Osborne, minor child, and Teagan Osborne, a minor child v. World Wrestling Entertainment, Inc. These lawsuits contain many of the same allegations as the other lawsuits alleging traumatic brain injuries
20
and further allege that the injuries contributed to these former talents’ deaths. WWE moved to transfer the Frazier and Osborne lawsuits to the U.S. District Court for the District of Connecticut based on forum-selection clauses in the decedents’ contracts with WWE, which motions were granted by the respective courts. On November 23, 2015, amended complaints were filed in Frazier and Osborne, which the Company moved to dismiss on December 16, 2015 and December 21, 2015, respectively. On November 10, 2016, the Court granted the Company’s motions to dismiss the Frazier and Osborne lawsuits in their entirety. On June 29, 2015, the Company filed a declaratory judgment action in the U. S. District Court for the District of Connecticut entitled World Wrestling Entertainment, Inc. v. Robert Windham, Thomas Billington, James Ware, Oreal Perras and various John and Jane Does seeking a declaration against these former performers that their threatened claims related to alleged traumatic brain injuries and/or other tort claims are time-barred. On September 21, 2015, the defendants filed a motion to dismiss this complaint, which the Company opposed. The Court previously ordered a stay of discovery in all cases pending decisions on the motions to dismiss. On January 15, 2016, the Court partially lifted the stay and permitted discovery only on three issues in the case involving Singleton and LoGrasso. Such discovery was completed by June 1, 2016. On March 21, 2016, the Court issued a memorandum of decision granting in part and denying in part the Company’s motions to dismiss the Haynes, Singleton/LoGrasso, and McCullough lawsuits. The Court granted the Company’s motions to dismiss the Haynes and McCullough lawsuits in their entirety and granted the Company’s motion to dismiss all claims in the Singleton/LoGrasso lawsuit except for the claim of fraud by omission. On March 22, 2016, the Court issued an order dismissing the Windham lawsuit based on the Court’s memorandum of decision on the motions to dismiss. On April 4, 2016, the Company filed a motion for reconsideration with respect to the Court’s decision not to dismiss the fraud by omission claim in the Singleton/LoGrasso lawsuit and, on April 5, 2016, the Company filed a motion for reconsideration with respect to the Court dismissal of the Windham lawsuit. On July 21, 2016, the Court denied the Company’s motion in the Singleton/LoGrasso lawsuit and granted in part the Company’s motion in the Windham lawsuit. On April 20, 2016, the plaintiffs filed notices of appeal of the Haynes and McCullough lawsuits. On April 27, 2016, the Company moved to dismiss the appeals for lack of appellate jurisdiction, which motions were granted and the appeals were dismissed with leave to appeal upon the resolution of all of the consolidated cases. The Company has filed a motion for summary judgment on the sole remaining claim in the Singleton/LoGrasso lawsuit. The Company also filed a motion for judgment on the pleadings against the Windham defendants. Lastly, on July 18, 2016, a lawsuit was filed in the U.S. District Court for the District of Connecticut, entitled Joseph M. Laurinaitis, et al. vs. World Wrestling Entertainment, Inc. and Vincent K. McMahon, individually and as the trustee of certain trusts. This lawsuit contains many of the same allegations as the other lawsuits alleging traumatic brain injuries and further alleges, among other things, that the plaintiffs were misclassified as independent contractors rather than employees denying them, among other things, rights and benefits under the Occupational Safety and Health Act (OSHA), the National Labor Relations Act (NLRA), the Family and Medical Leave Act (FMLA), federal tax law, and various state Worker’s Compensation laws. This lawsuit also alleges that the booking contracts and other agreements between the plaintiffs and the Company are unconscionable and should be declared void, entitling the plaintiffs to certain damages relating to the Company’s use of their intellectual property. The lawsuit alleges claims for violation of RICO, unjust enrichment, and an accounting against Mr. McMahon. The Company and Mr. McMahon moved to dismiss this complaint on October 19, 2016. On November 9, 2016, the Laurinaitis plaintiffs filed an amended complaint. On December 23, 2016, the Company and Mr. McMahon moved to dismiss the amended complaint. On September 29, 2017, the Court issued an order on the motion to dismiss pending in the Laurinaitis case and on the motion for judgment on the pleadings pending in the Windham case. The Court reserved judgment on the pending motions and ordered that within thirty-five (35) days of the date of the order the Laurinaitis plaintiffs and the Windham defendants file amended pleadings that comply with the Federal Rules of Civil Procedure. The Court further ordered that each of the Laurinaitis plaintiffs and the Windham defendants submit to the Court for in camera review affidavits signed and sworn under penalty of perjury setting forth facts within each plaintiff’s or declaratory judgment-defendant’s personal knowledge that form the factual basis of their claim or defense. On November 3, 2017, the Laurinaitis plaintiffs filed a second amended complaint. The Company and Mr. McMahon believe that the second amended complaint fails to comply with the Court’s September 29, 2017 order and otherwise remains legally defective for all of the reasons set forth in their motion to dismiss the amended complaint. Also on November 3, 2017, the Windham defendants filed a second answer. The Company does not know if the Laurinaitis Plaintiffs and Windham Defendants submitted the affidavits required under the Court’s September 29, 2017 order. On November 17, 2017, the Company and Mr. McMahon filed a response that, among other things, urged the Court to grant the motion for judgment on the pleadings against the Windham defendants and dismiss the Laurinaitis plaintiffs’ complaint with prejudice and award sanctions against the Laurinaitis plaintiffs’ counsel because the amended pleadings fail to comply with the Court’s September 29, 2017 order and the Federal Rules of Civil Procedure. The Company believes all claims and threatened claims against the Company in these various lawsuits are being prompted by the same plaintiffs’ lawyer and are without merit. The Company intends to continue to defend itself against these lawsuits vigorously.
On August 9, 2016, a lawsuit was filed in the U.S. District Court for the District of Connecticut entitled Marcus Bagwell, individually and on behalf of all others similarly situated v. World Wrestling Entertainment, Inc. The lawsuit alleges claims for breach of contract, breach of fiduciary duty, unjust enrichment and violations of the Connecticut Unfair Trade Practices Act, C.G.S. §42-110a, et seq., principally arising from WWE’s alleged failure to pay royalties for streaming video on WWE Network. On September 7, 2016, a motion for leave to amend was filed along with a proposed amended complaint that, among other things, sought to add Scott Levy as an individual plaintiff and WCW, Inc. as a defendant. On November 4, 2016, the Court granted plaintiffs’ motion for leave to amend and plaintiffs filed their amended complaint on November 7, 2016. On December 2, 2016, the Company moved to dismiss the amended complaint. On May 5, 2017, the Court granted in part and denied in part the Company’s motion to dismiss. The Court dismissed plaintiff’s declaratory judgment, unjust enrichment and successor liability claims, as well as all claims asserted against WCW, Inc. The Court also granted plaintiffs leave to file a second amended complaint, which plaintiffs filed on May 19, 2017. Plaintiffs then sought
21
leave to file a third amended complaint to correct certain errors by plaintiffs’ counsel, which the Court granted and plaintiffs filed their third amended complaint on June 15, 2017. The third amended complaint continues to assert claims for breach of contract, breach of fiduciary duty, and violations of the Connecticut Unfair Trade Practices Act, C.G.S. §42-110a, et seq. against WWE. Following the depositions of Plaintiffs Bagwell and Levy, Plaintiffs’ counsel advised that they intended to voluntarily dismiss Plaintiffs’ remaining claims against the Company. On December 7, 2017, the parties filed a Stipulation of Dismissal pursuant to which all of Bagwell’s and Levy’s claims were dismissed with prejudice. No money was paid by WWE in consideration for the dismissal with prejudice. On December 8, 2017, the Court granted the parties’ Stipulation of Dismissal and closed the case.
In addition to the foregoing, from time to time we become a party to other lawsuits and claims. By its nature, the outcome of litigation is not known, but the Company does not currently expect this ordinary course litigation to have a material adverse effect on our financial condition, results of operations or liquidity.
Item 4. Mine Safety Disclosures
Not Applicable
22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock trades on the New York Stock Exchange, under the symbol "WWE". Our Class B common stock is not listed on any exchange.
The following table sets forth the high and the low sale prices per share of our Class A common stock as reported by the New York Stock Exchange and the dividends declared per share of Class A and Class B common stock for the periods indicated:
Fiscal Year 2017
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|
|
Quarter Ended |
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|
|
March 31 |
June 30 |
September 30 |
December 31 |
Full Year |
||||||||||
|
Class A common stock price per share: |
|||||||||||||||
|
High |
$ |
23.14 |
$ |
22.57 |
$ |
23.57 |
$ |
33.28 |
$ |
33.28 | |||||
|
Low |
$ |
18.00 |
$ |
19.12 |
$ |
20.09 |
$ |
21.22 |
$ |
18.00 | |||||
|
Class A dividends declared per share |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.48 | |||||
|
Class B dividends declared per share |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.48 | |||||
Fiscal Year 2016
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|
Quarter Ended |
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|
March 31 |
June 30 |
September 30 |
December 31 |
Full Year |
||||||||||
|
Class A common stock price per share: |
|||||||||||||||
|
High |
$ |
18.93 |
$ |
19.72 |
$ |
21.55 |
$ |
21.30 |
$ |
21.55 | |||||
|
Low |
$ |
14.20 |
$ |
15.55 |
$ |
17.80 |
$ |
16.77 |
$ |
14.20 | |||||
|
Class A dividends declared per share |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.48 | |||||
|
Class B dividends declared per share |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.12 |
$ |
0.48 | |||||
There were 7,461 holders of record of Class A common stock and three holders of record of Class B common stock on February 6, 2018. Vincent K. McMahon, Chairman of the Board of Directors and Chief Executive Officer, controls a substantial majority of the voting power of the issued and outstanding shares of our common stock, and as a result, can effectively exercise control over our affairs.
Our Class B common stock is fully convertible into Class A common stock, on a one for one basis, at any time at the option of the holder. The two classes are entitled to equal per share dividends and distributions and vote together as a class with each share of Class B entitled to ten votes and each share of Class A entitled to one vote, except when separate class voting is required by applicable law. If, at any time, any shares of Class B common stock are beneficially owned by any person other than Vincent McMahon, Linda McMahon, any descendant of either of them, any entity which is wholly owned and is controlled by any combination of such persons or any trust, all the beneficiaries of which are any combination of such persons, each of those shares will automatically convert into shares of Class A common stock.
Our Board of Directors regularly evaluates the Company’s Common Stock dividend policy and determines the dividend rate each quarter. The level of dividends will continue to be influenced by many factors, including, among other things, our liquidity and historical and projected cash flow, our strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends (including under our Revolving Credit Facility), general economic and competitive conditions and such other factors as our Board of Directors may consider relevant from time to time. We cannot assure our stockholders that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past. Any reduction in our dividend payments could have a negative effect on our stock price.
The Company has an amended and restated $100.0 million senior unsecured revolving credit facility ("the Revolving Credit Facility"). The Revolving Credit Facility restricts our ability to pay dividends if a default or event of default has occurred and is continuing thereunder. As of December 31, 2017, we were in compliance with the provisions of the Revolving Credit Facility and, as a result, we are not restricted from paying dividends to our stockholders. Whether or not our Revolving Credit Facility is available, we believe we have sufficient liquidity for our operating needs and payment of our dividend for at least the next twelve months.
23
Cumulative Total Return Chart
Set forth below is a line graph comparing, for the period commencing December 31, 2012 and ended December 31, 2017, the cumulative total return on our Class A common stock compared to the cumulative total return of the Russell 2000 Index and S&P Movies and Entertainment Index, a published industry index. The graph assumes the investment of $100 at the close of trading as of December 31, 2012 in our Class A common stock, the Russell 2000 Index and the S&P Movies and Entertainment Index and the reinvestment of all dividends.
|
|
||||||||||||
|
|
Period Ending |
|||||||||||
|
Index |
12/31/12 |
12/31/13 |
12/31/14 |
12/31/15 |
12/31/16 |
12/31/17 |
||||||
|
World Wrestling Entertainment, Inc. |
100.00 | 220.13 | 169.34 | 251.93 | 266.69 | 452.54 | ||||||
|
Russell 2000 |
100.00 | 138.82 | 145.62 | 139.19 | 168.85 | 193.58 | ||||||
|
S&P Movies & Entertainment |
100.00 | 155.57 | 183.29 | 166.34 | 183.60 | 192.81 | ||||||
24
Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our consolidated financial statements. You should read the selected financial data in conjunction with our consolidated financial statements and related notes and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report.
Financial Highlights: (in millions, except per share data)
|
|
|||||||||||||||
|
|
For the year ended December 31, |
||||||||||||||
|
|
2017 (1) |
2016 (2) |
2015 (3) |
2014 (4) |
2013 (5) |
||||||||||
|
Net revenues |
$ |
801.0 |
$ |
729.2 |
$ |
658.8 |
$ |
542.6 |
$ |
508.0 | |||||
|
Operating income (loss) |
$ |
75.6 |
$ |
55.6 |
$ |
38.8 |
$ |
(42.2) |
$ |
5.9 | |||||
|
Net income (loss) |
$ |
32.6 |
$ |
33.8 |
$ |
24.1 |
$ |
(30.1) |
$ |
2.8 | |||||
|
Earnings (Loss) per share, basic |
$ |
0.43 |
$ |
0.44 |
$ |
0.32 |
$ |
(0.40) |
$ |
0.04 | |||||
|
Earnings (Loss) per share, diluted |
$ |
0.42 |
$ |
0.44 |
$ |
0.32 |
$ |
(0.40) |
$ |
0.04 | |||||
|
Dividends declared per Class A share |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 | |||||
|
Dividends declared per Class B share |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 |
$ |
0.48 | |||||
|
|
|||||||||||||||
|
|
As of December 31, |
||||||||||||||
|
|
2017 |
2016 |
2015 |
2014 |
2013 |
||||||||||
|
Cash, cash equivalents and short-term investments |
$ |
297.4 |
$ |
267.1 |
$ |
102.4 |
$ |
115.4 |
$ |
109.4 | |||||
|
Total assets |
$ |
614.5 |
$ |
600.9 |
$ |
409.1 |
$ |
382.6 |
$ |
378.5 | |||||
|
Total debt (6) |
$ |
213.5 |
$ |
202.7 |
$ |
21.6 |
$ |
25.9 |
$ |
29.6 | |||||
|
Total stockholders’ equity |
$ |
253.0 |
$ |
239.7 |
$ |
209.3 |
$ |
205.9 |
$ |
265.9 | |||||
|
(1) |
Operating income includes $5.6 million of expenses related to non-recurring legal matters and other contractual obligations and impairment charges on our feature films of $5.5 million (See Note 7 to the consolidated financial statements). |
|
(2) |
Operating income includes impairment charges on our feature films of $0.8 million (See Note 7 to the consolidated financial statements). |
|
(3) |
Operating income includes impairment charges on our feature films of $0.5 million (See Note 7 to the consolidated financial statements). Operating income also includes a $7.1 million non-cash abandonment charge to write-off costs relating to a media center expansion project (See Note 6 to the consolidated financial statements). |
|
(4) |
Operating income includes impairment charges on our feature films of $1.5 million and $4.2 million in restructuring charges of which $2.4 million relates to severance and other costs and $1.8 million relates to the impairment of gamification assets and is included in depreciation and amortization expense. Operating income also includes a $1.6 million adjustment to reduce the carrying value of the former corporate aircraft to its estimated fair value and is included in depreciation expense. Net income includes a $4.0 million impairment of an equity investment and is included in other expense. |
|
(5) |
Operating income includes impairment charges on our feature films of $11.7 million and $10.7 million of costs associated with our emerging content and distribution efforts, including WWE Network, partially offset by the positive impact of $3.4 million resulting from the transition of our video game business to a new licensee. |
|
(6) |
Total debt includes $177.9 million and $161.0 million of convertible senior notes outstanding as of December 31, 2017 and December 31, 2016, respectively. We completed a private offering and sale of $200.0 million and $15.0 million aggregate principal amount of 3.375% convertible senior notes due in 2023 in December 2016 and January 2017, respectively. The balance represents the liability component, net of unamortized debt discount and debt issuance costs (See Note 11 to the consolidated financial statements). |
25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report.
Our operations are organized around the four principal activities:
Media Division:
Network
|
· |
Revenues consist principally of subscriptions to WWE Network, fees for viewing our pay-per-view programming, and advertising fees. |
Television
|
· |
Revenues consist principally of television rights fees and advertising. |
Home Entertainment
|
· |
Revenues consist principally of sales of WWE produced content via home entertainment platforms, including DVD, Blu-Ray, and subscription and transactional on-demand outlets. |
Digital Media
|
· |
Revenues consist principally of advertising sales on our websites and third party websites including YouTube, and sales of various broadband and mobile content. |
Live Events:
|
· |
Revenues consist principally of ticket sales and travel packages for live events. |
Consumer Products Division:
Licensing
|
· |
Revenues consist principally of royalties or license fees related to various WWE themed products such as video games, toys and apparel. |
Venue Merchandise
|
· |
Revenues consist of sales of merchandise at our live events. |
WWEShop
|
· |
Revenues consist of sales of merchandise on our websites, including through our WWEShop Internet storefront and on distribution platforms, including Amazon. |
WWE Studios:
|
· |
Revenues consist of amounts earned from investing in, producing, and/or distributing filmed entertainment. |
Corporate & Other:
|
· |
Revenues consist of amounts earned from talent appearances. Expenses are presented in two categories comprised of Corporate Support and Business Support. Corporate Support expenses primarily include our corporate general and administrative functions. Business Support expenses include our sales and marketing functions, our international offices, and talent development function, including the costs associated with our WWE Performance Center, as well as business strategy and data analytics support. Additionally, Corporate and Other includes all intersegment eliminations recorded in consolidation. |
26
Results of Operations
The Company presents OIBDA as the primary measure of segment profit (loss). As a means to summarize the OIBDA measure, we also present total consolidated OIBDA, divisional OIBDA for certain groupings of our segments (discussed further below) and OIBDA as a percentage of revenues. The Company defines OIBDA as operating income before depreciation and amortization (excluding feature film and television production asset amortization and impairments, as well as the amortization of costs related to content delivery and technology assets utilized for our WWE Network). The Company believes the presentation of OIBDA is relevant and useful for investors because it allows investors to view our segment performance in the same manner as the primary method used by management to evaluate segment performance and make decisions about allocating resources. Additionally, we believe that OIBDA provides a meaningful representation of operating cash flows within our segments.
OIBDA is a non-GAAP financial measure and may be different than similarly-titled non-GAAP financial measures used by other companies. A limitation of OIBDA is that it excludes depreciation and amortization, which represents the periodic charge for certain fixed assets and intangible assets used in generating revenues for our business. OIBDA should not be regarded as an alternative to operating income or net income as an indicator of operating performance, or to the statement of cash flows as a measure of liquidity, nor should it be considered in isolation or as a substitute for financial measures prepared in accordance with GAAP. We believe that operating income is the most directly comparable GAAP financial measure to OIBDA. See Note 19, Segment Information, in the accompanying consolidated financial statements for a reconciliation of OIBDA to operating income for the periods presented.
We record certain costs within our Corporate and Other segment since the costs benefit the Company as a whole and are not directly attributable to our other reportable segments. These costs are presented in two categories, Corporate Support and Business Support. Corporate Support expenses primarily include our corporate general and administrative functions. Business Support expenses include our sales and marketing functions, our international offices, talent development costs, including costs associated with our WWE Performance Center, and our business strategy and data analytics functions. Revenues from transactions between our operating segments are not material. Included in Corporate and Other are intersegment eliminations recorded in consolidation.
While the reporting of our financial results is done at a segment level, we provide divisional sub-totals for revenues and OIBDA for our Media and Consumer Products Divisions. The Media Division is comprised of our Network, Television, Home Entertainment and Digital Media segments and represents the monetization of WWE content assets across various distribution channels. The Consumer Products Division is comprised of our Licensing, Venue Merchandise and WWEShop segments, which derive their revenues from the monetization of our intellectual property through royalties, license fees and the sale of WWE branded merchandise. We believe the divisional construct is relevant as we continually evaluate the best manner to exploit our content and intellectual property through various channels in a rapidly changing media landscape.
27
Year Ended December 31, 2017 compared to Year Ended December 31, 2016
(dollars in millions)
Summary
The following tables present our consolidated results followed by our OIBDA results:
|
|
|||||||||
|
|
Increase |
||||||||
|
|
2017 |
2016 |
(decrease) |
||||||
|
Net revenues |
|||||||||
|
Media Division: |
|||||||||
|
Network |
$ |
197.9 |
$ |
180.9 | 9 |
% |
|||
|
Television |
270.2 | 241.7 | 12 |
% |
|||||
|
Home Entertainment |
8.6 | 13.1 | (34) |
% |
|||||
|
Digital Media |
34.5 | 26.9 | 28 |
% |
|||||
|
Total Media Division |
511.2 | 462.6 | 11 |
% |
|||||
|
Live Events |
151.7 | 144.4 | 5 |
% |
|||||
|
Consumer Products Division: |
|||||||||
|
Licensing |
52.1 | 49.1 | 6 |
% |
|||||
|
Venue Merchandise |
23.8 | 24.2 | (2) |
% |
|||||
|
WWEShop |
37.8 | 34.6 | 9 |
% |
|||||
|
Total Consumer Products Division |
113.7 | 107.9 | 5 |
% |
|||||
|
WWE Studios |
18.6 | 10.1 | 84 |
% |
|||||
|
Corporate & Other |
5.8 | 4.2 | 38 |
% |
|||||
|
Total net revenues (1) |
801.0 | 729.2 | 10 |
% |
|||||
|
Cost of revenues |
|||||||||
|
Media Division: |
|||||||||
|
Network |
119.4 | 123.3 | (3) |
% |
|||||
|
Television |
129.5 | 120.1 | 8 |
% |
|||||
|
Home Entertainment |
5.4 | 6.5 | (17) |
% |
|||||
|
Digital Media |
10.4 | 9.4 | 11 |
% |
|||||
|
Total Media Division |
264.7 | 259.3 | 2 |
% |
|||||
|
Live Events |
106.2 | 99.2 | 7 |
% |
|||||
|
Consumer Products Division: |
|||||||||
|
Licensing |
12.7 | 13.5 | (6) |
% |
|||||
|
Venue Merchandise |
13.0 | 12.8 | 2 |
% |
|||||
|
WWEShop |
27.0 | 24.8 | 9 |
% |
|||||
|
Total Consumer Products Division |
52.7 | 51.1 | 3 |
% |
|||||
|
WWE Studios |
17.6 | 5.8 | 203 |
% |
|||||
|
Corporate & Other |
17.8 | 14.6 | 22 |
% |
|||||
|
Total cost of revenues (2) |
459.0 | 430.0 | 7 |
% |
|||||
|
Selling, general and administrative expenses |
|||||||||
|
Corporate & Other (3) |
189.0 | 168.3 | 12 |
% |
|||||
|
All other segments |
51.4 | 50.8 | 1 |
% |
|||||
|
Total selling, general and administrative expenses |
240.4 | 219.1 | 10 |
% |
|||||
|
Depreciation and amortization |
26.0 | 24.4 | 7 |
% |
|||||
|
Operating income |
75.6 | 55.7 | 36 |
% |
|||||
|
Interest expense (4) |
14.7 | 3.0 | 390 |
% |
|||||
|
Investment and other income, net |
3.1 | 0.5 | 520 |
% |
|||||
|
Income before income taxes |
64.0 | 53.2 | 20 |
% |
|||||
|
Provision for income taxes (5) |
31.4 | 19.4 | 62 |
% |
|||||
|
Net income |
$ |
32.6 |
$ |
33.8 | (4) |
% |
|||
28
|
(1) |
Our consolidated net revenues increased by $71.8 million, or 10%, in 2017 as compared to 2016. This increase was primarily driven by $26.2 million in incremental revenues associated with the contractual escalation of our television distribution agreements and the timing impact of our licensed reality based television series, and $15.4 million of increased subscription revenues related to the growth of our WWE Network. Our WWE Studios segment recognized $8.5 million in incremental revenue in 2017, driven by the timing and performance of our film portfolio. In addition, the impact of 34 additional domestic events contributed $8.4 million to our live events revenues, while digital media advertising revenues increased by $7.6 million. For further analysis, refer to Management’s Discussion and Analysis of our business segments. |
|
(2) |
Our consolidated cost of revenues increased by $29.0 million, or 7%, in 2017 as compared to 2016. The $11.8 million increase in our WWE Studios segment was primarily due to higher film amortization, including $5.5 million of film impairment charges resulting from revised ultimate profit expectations for several of our feature films. In the current year, we incurred $9.4 million of additional costs in our Television segment, primarily associated with the use of additional production elements on our weekly live episodic shows. The $7.0 million increase in cost of revenues in the Live Events segment was driven by an increased number of events, including international events. For further analysis, refer to Management’s Discussion and Analysis of our business segments. |
|
(3) |
Refer to the Corporate & Other section within Management’s Discussion and Analysis for a detailed analysis of the changes. |
|
(4) |
Interest expense increased by $11.7 million in 2017 as compared to 2016, as the convertible notes and the assumed mortgage were entered into during the second half of 2016. Refer to Note 10, Long-Term Debt and Credit Facilities, and Note 11, Convertible Debt, in the Notes to Consolidated Financial Statements for further discussion. |
|
(5) |
Our provision for income taxes increased by $12.0 million, or 62%, in 2017 as compared to 2016, primarily driven by the impact of remeasurement of our deferred tax asset as a result of the Tax Cuts and Jobs Act (the “Tax Act”). Refer to Note 12, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion. |
|
|
|||||||||
|
|
Increase |
||||||||
|
|
2017 |
2016 |
(decrease) |
||||||
|
OIBDA |
|||||||||
|
Media Division: |
|||||||||
|
Network |
$ |
64.2 |
$ |
43.0 | 49 |
% |
|||
|
Television |
139.4 | 119.8 | 16 |
% |
|||||
|
Home Entertainment |
1.6 | 5.3 | (70) |
% |
|||||
|
Digital Media |
10.2 | 4.6 | 122 |
% |
|||||
|
Total Media Division |
215.4 | 172.7 | 25 |
% |
|||||
|
Live Events |
42.3 | 41.8 | 1 |
% |
|||||
|
Consumer Products Division: |
|||||||||
|
Licensing |
31.1 | 27.4 | 14 |
% |
|||||
|
Venue Merchandise |
9.1 | 9.8 | (7) |
% |
|||||
|
WWEShop |
8.3 | 7.3 | 14 |
% |
|||||
|
Total Consumer Products Division |
48.5 | 44.5 | 9 |
% |
|||||
|
WWE Studios |
(3.6) | (0.2) | (1,700) |
% |
|||||
|
Corporate & Other |
(201.0) | (178.7) | 12 |
% |
|||||
|
Total OIBDA |
$ |
101.6 |
$ |
80.1 | 27 |
% |
|||
|
|
||||||||||||
|
|
2017 |
2016 |
||||||||||
|
Reconciliation of Operating Income to OIBDA |
% of Rev |
% of Rev |
||||||||||
|
Media Division: |
||||||||||||
|
Operating income |
$ |
203.6 | 40 |
% |
$ |
161.3 | 35 |
% |
||||
|
Depreciation and amortization |
11.8 | 2 |
% |
11.4 | 2 |
% |
||||||
|
Media Division OIBDA |
$ |
215.4 | 42 |
% |
$ |
172.7 | 37 |
% |
||||
|
Consumer Products Division: |
||||||||||||
|
Operating income |
$ |
48.5 | 43 |
% |
$ |
44.5 | 41 |
% |
||||
|
Depreciation and amortization |
— |
— |
% |
— |
— |
% |
||||||
|
Consumer Products Division OIBDA |
$ |
48.5 | 43 |
% |
$ |
44.5 | 41 |
% |
||||
|
Consolidated: |
||||||||||||
|
Operating income |
$ |
75.6 | 9 |
% |
$ |
55.7 | 8 |
% |
||||
|
Depreciation and amortization |
26.0 | 3 |
% |
24.4 | 3 |
% |
||||||
|
Total OIBDA |
$ |
101.6 | 13 |
% |
$ |
80.1 | 11 |
% |
||||
29
Media Division
The following tables present the performance results and key drivers for our segments within our Media division (dollars in millions, except where noted):
|
|
|||||||||
|
|
Increase |
||||||||
|
|
2017 |
2016 |
(decrease) |
||||||
|
Revenues - Media Division |
|||||||||
|
Network |
$ |
197.9 |
$ |
180.9 | 9 |
% |
|||
|
Subscriptions |
$ |
183.7 |
$ |
168.3 | 9 |
% |
|||
|
Pay-per-view |
$ |
14.2 |
$ |
12.6 | 13 |
% |
|||
|
Number of paid subscribers at period end |
1,471,400 | 1,403,000 | 5 |
% |
|||||
|
Domestic |
1,065,200 | 1,032,600 | 3 |
% |
|||||
|
International (a) |
406,200 | 370,400 | 10 |
% |
|||||
|
Number of average paid subscribers |
1,532,700 | 1,417,900 | 8 |
% |
|||||
|
Domestic |
1,127,700 | 1,062,600 | 6 |
% |
|||||
|
International (a) |
405,000 | 355,300 | 14 |
% |
|||||
|
Television |
$ |
270.2 |
$ |
241.7 | 12 |
% |
|||
|
Home Entertainment |
$ |
8.6 |
$ |
13.1 | (34) |
% |
|||
|
Gross units shipped |
1,342,500 | 1,594,400 | (16) |
% |
|||||
|
Digital Media |
$ |
34.5 |
$ |
26.9 | 28 |
% |
|||
|
Total |
$ |
511.2 |
$ |
462.6 | 11 |
% |
|||
|
(a) |
Metrics reflect subscribers who are direct customers of WWE Network and estimated subscribers under licensed partner agreements, which have different economic terms for WWE Network. |
|
|
|||||||||||||||
|
|
Increase |
||||||||||||||
|
|
2017 |
2016 |
(decrease) |
||||||||||||
|
OIBDA - Media Division |
% of Rev |
% of Rev |
|||||||||||||
|
Network |
$ |
64.2 | 32 |
% |
$ |
43.0 | 24 |
% |
49 |
% |
|||||
|
Television |
$ |
139.4 | 52 |
% |
$ |
119.8 | 50 |
% |
16 |
% |
|||||
|
Home Entertainment |
$ |
1.6 | 19 |
% |
$ |
5.3 | 40 |
% |
(70) |
% |
|||||
|
Digital Media |
$ |
10.2 | 30 |
% |
$ |
4.6 | 17 |
% |
122 |
% |
|||||
Network revenues, which include revenues generated by WWE Network and pay-per-view, increased by $17.0 million, or 9%, in 2017 as compared to 2016. WWE Network revenues increased by $15.4 million, or 9%, in 2017 as compared to 2016, driven primarily by the increase in paid subscribers. During the year ended December 31, 2017, WWE Network had an average of 1,532,700 paid subscribers, compared to an average of 1,417,900 subscribers in 2016. During the year ended December 31, 2017, there were 1,803,700 gross additions to WWE Network’s subscriber base, partially offset by churn of 1,735,300 subscribers. Gross additions include unique new subscribers and win-backs (subscribers that previously churned out and subsequently renewed their subscription). The subscription pricing of WWE Network at December 31, 2017 is $9.99 per month with no minimum commitment. Pay-per-view revenues increased by $1.6 million, or 13%, primarily driven by an 11% increase in pay-per-view buys. The increase in Network OIBDA as a percentage of revenues in 2017 as compared to 2016 was driven primarily by the increase in revenues, coupled with lower programming related costs of $5.0 million driven by our focus on in-ring programming which has higher margins than our original content.
Television revenues, which include revenues generated from television rights fees and advertising, increased by $28.5 million, or 12%, in 2017 as compared to 2016. This increase was driven primarily by $26.2 million due to the contractual increases associated with distribution agreements and the timing impact of our licensed reality based television series. The increase in Television OIBDA as a percentage of revenues in 2017 as compared to 2016 was driven primarily by the increase in revenues, partially offset by additional costs incurred associated with the use of additional production elements on our weekly live episodic shows, Raw and Smackdown Live.
Home Entertainment revenues, which include revenues generated from the sale of WWE produced content via home entertainment platforms such as DVD and Blu-Ray discs and digital downloads, decreased by $4.5 million, or 34%, in 2017 as compared to 2016. The decrease was driven by the impact of a 16% decline in units shipped, coupled with a 5% decline in the average price per unit sold. The decrease in Home Entertainment OIBDA as a percentage of revenues in 2017 as compared to 2016 was primarily driven by the decrease in revenues, including the impact of declines in our higher margin international business.
30
Digital Media revenues increased by $7.6 million, or 28%, in 2017 as compared to 2016, primarily due to increased advertising revenues. The increase in Digital Media OIBDA as a percentage of revenues in 2017 as compared to 2016 was primarily driven by increased revenues.
Live Events
The following tables present the performance results and key drivers for our Live Events segment (dollars in millions, except where noted):
|
|
|||||||||||
|
|
Increase |
||||||||||
|
|
2017 |
2016 |
(decrease) |
||||||||
|
Revenues - Live Events |
|||||||||||
|
Live events |
$ |
148.1 |
$ |
141.1 | 5 |
% |
|||||
|
North America |
$ |
115.1 |
$ |
104.8 | 10 |
% |
|||||
|
International |
$ |
33.0 |
$ |
36.3 | (9) |
% |
|||||
|
Total live event attendance (1) |
2,170,200 | 2,101,800 | 3 |
% |
|||||||
|
Number of North American events (1) |
314 | 280 | |||||||||