World Wrestling Entertainment - Q3 2021

Transcript

Operator (participant)

Hello everyone, and welcome to the webcast entitled WWE Third Quarter Earnings. We have just a few announcements before we begin. First, please use the question mark icon in the upper right-hand corner of your web console for technical assistance. It is located with the four arrows pointing in different directions. You may ask a question anytime by typing your question into the question box located on the web interface and clicking Send. If you are listening to the phone line, you may ask a question verbally by pressing Star then one on your touch-tone phone. If you wish to be removed from the queue, please press star two. I will now turn the call over to Michael Weitz, SVP, Financial Planning and Investor Relations. Please go ahead.

Michael Weitz (SVP, Financial Planning and Investor Relations)

Thank you, and good to have investors and our shareholders on this WWE third quarter earnings call. I'm very glad to welcome everyone. Leading today's discussion are Vince McMahon, WWE's Chairman and CEO, Nick Khan, WWE's President and Chief Revenue Officer, Stephanie McMahon, WWE's Chief Brand Officer, and Kristina Salen, WWE's Chief Financial Officer. Their remarks will be followed by a Q&A session. We issued our third quarter earnings release earlier this afternoon and have posted the release, our earnings presentation, and other supporting materials on our website. Today's discussion will include forward-looking statements. These statements reflect our current views, are based on various assumptions, and are subject to risks and uncertainties disclosed in our SEC filings. Actual results may differ materially, and undue reliance should not be placed on them. Additionally, the matters we will be discussing today may include non-GAAP financial measures.

Reconciliation of non-GAAP to GAAP information is set forth in our earnings release and presentation, which are available on our website. You should note that all comparisons are versus the year-ago quarter unless otherwise described. Finally, as a reminder, today's conference call is being recorded and the replay will be available on our website later today. At this time, it is my privilege to turn the call over to Vince.

Vince McMahon (Chairman and CEO)

Good afternoon, everyone. As you can see, our solid financial results are pretty strong as a result of the global demand of all things WWE, including a return to live event touring, which is unlike any other media company. This is where the WWE brand really comes alive in so many different respects. As a result of this strong indication, we're gonna raise our guidance, our 2021 guidance. That's with the lack of 1 event in Riyadh. Normally we have 2, because of the COVID situation, we only have 1 again this year. Nonetheless, notwithstanding that, we're raising our guidance, which I think is pretty good. We saw a lot of positive trends which Stephanie will get to in a minute.

Even with the strong recovery, it's opened our eyes to many, many more ways that we can take advantage of our IP in the evolution of sports entertainment. That's basically it. With that, I'll turn it over to Nick.

Nick Khan (President and CRO)

Thank you very much, Vince. Thank you everyone for calling in. It's nice to speak with you all again. This quarter, I'd like to first offer perspective on our media segment, hitting on both near-term opportunities as well as our long-term position in a marketplace that continues to put a premium on live rights. After an update on media, I will run through a number of deals we closed over the past quarter that have created new revenue streams for WWE and increased the value of existing ones. Looking first at near-term media rights opportunities, we have two key negotiations in our sights that will drive value for our company. The first is our reair rights for Raw on Hulu, which expire in the back half of 2022. The second is the licensing of our direct-to-consumer service, WWE Network, in international markets, which we have discussed previously.

A competitive landscape has already formed around both initiatives. In terms of the Raw reair rights, we know from the data that there is a substantial and recurring audience who watch the program via delayed viewing week to week on Hulu. When we closed the Hulu deal in 2018, the media landscape was quite different, as we all know. NBCU was an active owner of Hulu, and Peacock was just a nascent dream. We now all know that in a 2021 world, NBCU is a passive Hulu owner, and barring exigent circumstances, NBCU's stake will be bought out by Disney at Hulu's 2024 valuation. Let's keep in mind what we all know. In addition to Disney's initial Hulu ownership percentage, Disney picked up Fox's ownership stake in Hulu with Disney's acquisition of a large majority of Fox 2+ years ago.

We also recently saw executive shifts from Hulu to Peacock, and we believe that in addition to all other platforms looking for event programming that resonates, that the battle for Raw's reair rights will be intense and fun. Regarding WWE Network, we continue to execute on a strategy to optimize our value across international markets. We have a model that buyers are responding to. As so many U.S.-based companies look to go international overnight, it sets up a competitive global landscape that none of us have seen over the course of our careers. We continue to believe that will garner great results. Outside of those media deals tied to our live rights, we are continuing to expand our original programming slate. This quarter, NBCU announced Miz & Mrs. would be returning for a third season.

Earlier in October, we debuted Escape The Undertaker on Netflix, an innovative interactive show featuring WWE Superstars. Six months ago, we merged our content units into one place, WWE Media. We recently completed a children's animation scripted project with a streamer, and will soon announce a slew of scripted and unscripted programming that demonstrates the weight of our content pipeline. This is an area that will continue to be a priority for us. We recognize these productions not only generate meaningful economic returns for our company, but that they also expand WWE's brand and help us establish relationships with myriad media companies while making sure that our programming remains young and diverse. All of this is directly related to our next U.S. rights negotiations.

We are as bullish now on those rights as we were when we went into the prior negotiations, which saw an increase in the U.S. from $130 million a year AAV to $470 million a year AAV for Raw and SmackDown. We have previously discussed numerous deals that demonstrate the continued rise in the value of live. These included recently negotiated media rights for the NFL, NHL, Major League Baseball, the SEC, LaLiga, and Wimbledon. Media rights that are coming up for renewal are also drawing interest from new buyers, which is expected to further the trend of meaningful increases for those rights. As an example, we know the English Premier League is looking to get $300 million a year annually for its U.S. rights, doubling the $150 million a year average annual value currently paid by NBCU.

That bidding process is expected to be highly competitive, due in large part to the combination of traditional buyers and new buyers like Amazon, ESPN+, and Peacock. They're all looking for live with dedicated fans to quickly build up their subscriber bases. Yesterday, Fox announced on its earnings call that they closed a multi-year deal with UEFA for its next two European championships in 2024 and 2028, and for over 1,500 soccer matches, a rights package in excess of what Disney currently pays for its portion of it. We have all read the rumors of Fox partnering with fuboTV, a virtual MVPD, on this rights deal. With this sort of tonnage, that partnership made complete sense to us, creative and smart. Live continues to dominate linear while helping to build other platforms, and we are seeing scripted content continue to migrate to streamers.

Both Apple TV and Amazon have been considered front runners for the NFL Sunday Ticket package. Ted Sarandos has publicly expressed that Netflix would rather buy than run sports properties. He seemed to be referring to Formula 1 coming off of the success of their Drive to Survive program. Speaking of Netflix, we have seen early cuts of our upcoming Vince McMahon multi-part Netflix documentary, which is executive produced by WWE and Bill Simmons, who did the acclaimed Andre the Giant documentary with us. The Vince cuts are out of this world. Amazing. Wait until you see it. As it relates to Bill Simmons, who some have referred to as the godfather of podcasts or the Podfather. This past quarter, we closed a deal with Spotify and The Ringer for Spotify to become the exclusive audio network of WWE.

The partnership jump-starts us in this all-important space while allowing us to leverage the resources and reach of Spotify and its 165 million subscribers. That partnership was announced this past August at SummerSlam when The Ringer hosted live shows for our fans in Las Vegas. We're confident that with Spotify's expertise alongside our library of intellectual property and our talent, that we will deliver an audio product that excites existing fans while also introducing WWE content to the millions of Spotify listeners. I would also like to discuss a new business with you. As we focus on extracting more value from our IP wheel, further establishing new businesses that expand WWE's brand and drives revenue is a key for all of us. We've had an active quarter creating new revenue streams and increasing the value of existing lines of business.

One area we've spent the last year examining is our strategic approach to pay-per-views. We've looked into all parts of that business and are making adjustments that we believe will enhance our results by making each pay-per-view a special event, not only in its content, but in all things surrounding each event. As promised last quarter, we recently announced our pay-per-view calendar for 2022. The dates, the cities, the venues. For the first time in our history, we're hosting at least 4 pay-per-view nights in stadiums in the United States. First, Royal Rumble on January 29 at the Dome at America's Center in St. Louis. A Saturday night where there was no real competitive programming on the sports calendar. Typically, we have done Royal Rumble a week later during Pro Bowl weekend.

However, this year, we wanted to support our NBCU partners and not go up against the Winter Olympics. Thus far, ticket sales are off the charts, tracking as well as this year's SummerSlam, where we ended up with a gate four times the gate of SummerSlam 2019. A clear sign of the value of bringing our tentpole events to major venues on the right night. Next, in terms of stadium events, a two-night WrestleMania at AT&T Stadium in Dallas, Saturday, April 2, and Sunday, April 3. In 2016, at AT&T Stadium, we had over 100,000 fans in attendance for WrestleMania. Let's see what two nights brings for our Super Bowl. Tickets go on sale next week. Our stadium event after that, another one of our big five pay-per-views, Money in the Bank.

The weekend going into July 4, we'll be back at Allegiant Stadium in Las Vegas. Over 400,000 people are expected to travel to Las Vegas that weekend to celebrate the fourth. We expect to see many of them at Money in the Bank. About a month later, SummerSlam at Nissan Stadium in Nashville. Again, on a Saturday, July 30. Have you been to Nashville in the summer on a weekend? It's booming and growing, and we're growing SummerSlam with it. What we found from this past SummerSlam in Las Vegas, of the 50,000 plus who attended, not one ticket was purchased from Tennessee. Not one. Many similarities between those two cities on the weekends. Not much crossover between those two cities on the weekends, and a robust ticket buying market in each for us to tap into and grow with.

One other item to highlight relating to our pay-per-view events. For the first time, we're holding an event on the night of New Year's Day at State Farm Arena in Atlanta. As we discussed previously, this upcoming New Year's Eve is a Friday. Both college football playoff games are on that Friday. Usually, the NFL will go to a Saturday and Sunday schedule once the college football regular season is over. That is no longer happening on Saturdays late in the season with the NFL's new 18-week regular season. Over 350,000 people are expected in Atlanta for that New Year's weekend. With the removal of NFL competition and a city packed with visitors, we thought it might be smart to have an event there the next night. Again, Saturday, January 1.

We expect to benefit from all of those weekend guests looking for entertainment the night after New Year's Eve. You may recall seeing Atlanta Hawks NBA All-Star, Trae Young, interfere in one of our matches at Madison Square Garden in September, all part of our Atlanta strategy. Look for more integration like that across our product. Another area where we've strategically pivoted in an effort to further grow our business is with a new trading card partner, Panini. As all of you know, the trading card market is booming right now, with a handful of companies competing for a select number of deals with the top sports properties. We received multiple bids from those companies. Panini, with their expertise, doggedness, and domestic and international knowledge, proved out to be the best partner for us in this space.

The deal is a considerable financial step up from our previous trading card deal. We also recently announced a new multi-year agreement with Fox to launch an NFT marketplace for licensed digital WWE tokens and collectibles. Fox is obviously our existing partner in the U.S. for SmackDown, and coming out of the pandemic, we've been able to spend considerable in-person time with Fox's senior executive team to think of additional ways to work together. As Lachlan Murdoch, Fox's Executive Chairman and CEO, said on their earnings call yesterday relating to Fox and WWE together in the NFT space, this type of deal will drive new business and the creative and entrepreneurial spirit in all of it. This new collaboration will create authentic NFTs that showcases WWE's catalog of digital assets, including iconic moments, legendary superstars, and premier events such as WrestleMania and SummerSlam.

With our wholly owned intellectual property, we have a competitive advantage in our ability to leverage the immense popularity of NFTs as well as the activities surrounding trading cards and other collectibles. It's been a busy quarter with a sustained focus on strengthening our existing businesses and establishing new revenue streams. At this time, I'd like to turn the call over to my colleague, Stephanie McMahon, recently named the number 2 most influential marketing executive in the world by Forbes. She will cover a number of items, including our significant growth in sponsorship over the past year. Thanks very much.

Stephanie McMahon (Chief Brand Officer)

Thank you, Nick. Unfortunately, everyone, I have to start with some bad news. WWE Superstar, The Miz, was eliminated from Dancing with the Stars this week. He did make it to the top 10, and his weekly appearance was seen by nearly 6 million viewers on ABC, raising awareness for both Miz and WWE. As Nick mentioned, we are changing from an arena-based touring model to a stadium-based touring model, allowing us to better align all lines of business around our key tentpole events. For example, SummerSlam was held at Allegiant Stadium, the first time SummerSlam has ever been held in an NFL stadium, attracting a record 51,000 fans and drawing a record gate. As Nick mentioned, more than four times greater than the last SummerSlam held with fans in 2019.

Merchandise was up 155% year-over-year, and more people watched SummerSlam across Peacock and WWE Network than any other SummerSlam in WWE history, with a viewership increase of 55% from 2020. SummerSlam also marks the finish of the Summer of Cena, a strategic move to use one of our biggest superstars to help kick off our return to live events that began on July 16. John Cena became our top-selling talent for merchandise, especially with youth audiences, and he increased ratings for audiences 2-17 and 18-49 by 20% and 10% during his appearances on Raw and SmackDown. An Instagram video featuring Cena became WWE's most-watched native Instagram video with 4.3 million views.

While the summer of Cena came to an end at SummerSlam, we began new storylines by surprising the audience with the return of The Man, Becky Lynch, and The Beast Incarnate, Brock Lesnar. Brock's return broke Cena's Instagram record at 4.5 million. Sales and sponsorship revenues for SummerSlam were up 18% year-over-year and 25% over 2019, featuring our first ever official water with BlueTriton's Pure Life, and our first ever official beer with Constellation's Victoria beer brand. We also had an array of sponsors across betting, gaming, wireless, energy, and credit card categories with DraftKings, 2K, Cricket Wireless, Cellucor C4, and Credit One. Just as WWE's overall business is nearly 80% contractual, we have shifted our sales and sponsorship strategy from transactional to contractual, pivoting to multiyear seven-figure deals.

In 2021, the number of these deals has increased 60%. Additionally, our client spend has increased 44% year-over-year with over 50% returning partners. In the quarter, gross sponsorship sales are up over 20%, excluding a 2020 YouTube bonus payment and partnership allocation. To help give perspective, there are four key areas of growth across sales and sponsorship: content integrations, superstar brands, digital social, and international. In terms of content integration, would you ever see a Pure Life truck drive into Arrowhead Stadium in Kansas City and have Patrick Mahomes spray down fans with a Pure Life branded super soaker as part of a touchdown celebration? Or have zombies replace the offensive line for one down? My guess is no, but you can in WWE.

Because we have all the exciting action of a live game, but are scripted like a great movie, we can write those integrations in ways that are fun and memorable for the audience and our partners. We can leverage our creative writing and media teams to create customized content across digital and social media that is relevant to that platform. Like we did with P&G's Old Spice when we introduced a new WWE superstar with the same name as their new scent, the Night Panther. We produced 16 pieces of original content that delivered over 500 million impressions and 40 million views, with 96% of our audience saying they would take action towards Old Spice. In terms of superstars, the best comparison I can think of is Disney's Marvel superheroes.

Each superhero is their own individual franchise, and WWE has just begun to unlock some of our incredible IP, which dates back generations, with each superstar being their own brand with their own story. Our biography series with A&E is one example. Xavier Woods' UpUpDown Down YouTube gaming channel is another. Becky Lynch on the cover of Golden Crisp or The Miz with his own reality show are just a few examples. International sales are just getting up to bat as we focus on creating more localized content. Additionally, engagement metrics continue to be strong for WWE, with a slight increase in television ratings for both Raw and SmackDown, despite tough competition from the return of live sports.

Digital consumption increased to a quarterly record of 410 million hours, and video views increased 38% to 12.8 billion, as compared to a prior year period that had benefited from COVID-19 related viewing trends. With our renewed emphasis on producing more content for emerging platforms and younger audiences, our video views on Snapchat and TikTok are up 22% and 29%, respectively, year-over-year. Speaking of TikTok, while it is a tight race, we are the number one sports brand on TikTok over the NBA with 14.5 million followers. With a continuing focus on innovation and interactivity, WWE was recently announced as one of three launch partners with Snapchat's new augmented reality division, Arcadia, in which we'll be creating fun and unexpected AR experiences for fans at upcoming events.

I would be remiss if I didn't recognize how excited we are for the launch of our console game, 2K22, in March 2022. On yesterday's earnings call, Take-Two President Karl Slatoff said it will be the biggest WWE 2K launch to date. We are pleased with our overall performance in the quarter, highlighting our ability to deliver on strategic initiatives, captivate a passionate audience, and drive value for our business partners and shareholders. Now I'll turn the call over to our CFO, Kristina Salen.

Kristina Salen (CFO)

Thank you, Stephanie, and hello to WWE shareholders. Today, I will discuss WWE's financial performance. As a reminder, all comparisons are versus the year-ago quarter, unless I say otherwise. In the third quarter, WWE generated solid financial results as we focused on optimizing our return to live event touring, thriving fan engagement and increasing efficiency in our content production. Total WWE revenue was $255.8 million, an increase of 15%, driven by higher ticket and venue merchandise sales associated with our return to live event touring, including SummerSlam. Adjusted OIBDA declined 8% to $77.9 million as the growth in revenue was more than offset by higher television and event-related production expenses. To review the third quarter performance in more detail, let's turn to slide 3 of the presentation, which shows revenue, operating income, and adjusted OIBDA contribution by segment.

Looking at the WWE Media segment, adjusted OIBDA was $85.6 million, a decline of 16%, primarily due to the increase in production expenses, which I just described. That increase reflected, in part, the lower cost of producing televised content from our training facility in the prior year quarter. Media segment revenue increased slightly as the contractual escalation of WWE's core content rights fees from the distribution of Raw and SmackDown were partially offset by decrease in network revenue. The latter was driven by the timing of license fees associated with the delivery of WWE Network content to Peacock as compared to the recognition of subscription revenue in the prior year quarter. In mid-July, we transitioned our television and pay-per-view production from the Yuengling Center in Tampa Bay to the arenas and stadiums that are part of our touring model.

Recall that in the third quarter of 2020, we were producing a bare bones production out of our performance center in Orlando for much of the quarter until we established our WWE ThunderDome experience in late August of 2020. These changes in venue were the primary determinant of the year-over-year increase in production expense. Now let's turn to WWE's live event business on slide 5 of the presentation. Live event adjusted OIBDA was $9.3 million, an increase of more than 3x or $13.5 million due to a 39x increase in revenue with the return to live event touring, including the staging of SummerSlam. Recall that in the year-ago quarter, we staged no live events with ticketed fans. As we've said, we are thrilled by the return to live event touring.

During the third quarter, average attendance for our 38 events in North America was significantly above 2019, reflecting heightened consumer demand for our live events. For the fourth quarter, we continue to anticipate ticket demand and profit per event that is at least on par with 2019. Looking at WWE's consumer product segment on slide 6 of the presentation, adjusted OIBDA was $7.5 million, growing 34% due to higher sales of merchandise at our live event venues, including our record-breaking SummerSlam event. In our consumer products business, we've continued to develop new partnerships and products as we align with evolving consumer preferences, including the tremendous interest in NFTs, trading cards, and memorabilia. Earlier, Nick described our newly formed partnerships with Fox in the NFT space and Panini.

Importantly, we also extended our global master toy licensing agreement with Mattel, a partner whose popular WWE action figures and other toy products comprise a meaningful share of our licensing revenues. Now let's turn to WWE's overall cash generation as shown on slide 7 of the presentation. During the third quarter, WWE generated approximately $45 million in free cash flow, declining $66 million, primarily due to the timing of collections associated with our large-scale international events in the prior year quarter and, to a lesser extent, an increase in capital expenditures. Notably, during the third quarter, WWE returned $31 million of capital to shareholders, including approximately $22 million in share repurchases and $9 million in dividends paid. To date, we've repurchased approximately $200 million of stock, representing approximately 40% of the authorization under our $500 million repurchase program.

As of September 30, 2021, WWE held approximately $449 million in cash and short-term investments. Debt totaled $221 million, including $200 million associated with WWE's convertible notes. The company has no amounts outstanding under its revolving line of credit and estimates related debt capacity of approximately $200 million. Finally, a word on WWE's business outlook. In January, WWE issued adjusted OIBDA guidance of $270 million-$305 million for the full year of 2021. During this third quarter, key performance metrics demonstrated positive trends, and we continued to realize heightened demand for live events and better than expected television production efficiencies. Based on outperformance to date and revised expectations for the full year, we are raising our guidance.

Adjusted OIBDA is now expected to be within a range of $305 million-$315 million with the staging of one large-scale international event. The revised full-year guidance implies fourth quarter adjusted OIBDA of $75 million-$85 million as compared to $51.2 million in the fourth quarter of 2020. The projected year-over-year growth reflects the impact of staging one large-scale international event, which we were unable to stage in the fourth quarter of last year, contractual increases in media rights, and higher revenue and profits from the return to live event touring. These factors are partially offset by an expected increase in operating expenses. Turning to WWE's capital expenditures.

Through the first nine months of 2021, WWE has incurred about $24 million in capital expenditures, primarily to support our technology infrastructure and restart the construction of our new headquarters. While we continue to anticipate increased spending in the fourth quarter to support these initiatives, we also anticipate lower capital expenditures during the remainder of the year than previously estimated. For the full year 2021, total capital expenditures are expected to be within a range of $60 million-$75 million, lower than the previous guidance of $85 million-$105 million. The revised range does incorporate some potential supply chain disruption and associated potential timing-related changes in spending. In the third quarter, WWE generated better than expected revenue and adjusted OIBDA results.

The robust demand for our events and increased consumption of programming across platforms highlights the strength of our brand and reinforces our belief that continued innovation can enhance the value of our content and our products. That concludes our remarks, and I'll now turn it back to Michael.

Michael Weitz (SVP, Financial Planning and Investor Relations)

Thank you, Kristina. Kristina, please open the line for questions.

Operator (participant)

First, we'll go to Eric Handler with MKM Partners. Your line is open.

Eric Handler (Managing Director, Media and Entertainment Analyst)

Good afternoon, thank you very much for the question. Two questions for you. First, Nick, since you mentioned the Day 2 rights for Raw and the DTC international rights for WWE Network, do you have a timeframe on when you'd like to have those deals done by? I'll follow up.

Nick Khan (President and CRO)

Thanks, Eric. Couple things. On the day two rights, the deal is up latter half of 2022, so certainly it's gonna be done by then, perhaps sooner. On the international rights, you know, the lack of ability to travel, which has obviously freed up over the last couple of months, slowed down what would've been a quicker process, but that process is now sped up. We're confident we're gonna come back to you with news in short order.

Eric Handler (Managing Director, Media and Entertainment Analyst)

Great. Thank you. The second question I guess also for you, Nick. You know, historically with WWE Studios, the profitability was rather negligible for a lot of this programming. Is that changing now? Are you looking at some type of cost plus model? What's sort of the economic model behind all of these TV programming events?

Nick Khan (President and CRO)

I remember in the last call you had asked about scripted and unscripted content as well. Thank you for that question. It's a total flip of the model from a few years ago. Instead of self-financing films and sequels to films, it's about licensing our intellectual property and content in the scripted and unscripted space. Obviously no risk. There's no investment by us. It's a paid project, paid to us. As you know, in the television and streaming space, great success means great profit. Mediocre success still means profit. In either scenario, we got a lot going on, a lot of closed deals that we haven't yet announced, that we will announce, and it should work out okay.

Eric Handler (Managing Director, Media and Entertainment Analyst)

Thank you very much.

Nick Khan (President and CRO)

Thank you.

Operator (participant)

Next we'll go to Laura Martin from Needham. Your line is open.

Laura Martin (Managing Director, Senior Internet and Media Analyst)

Hi. A couple. Maybe Kristina for you. My recollection is that social media has a lot of exposure on YouTube and Snap, and you guys talked about the increase of 22% on Snap. I was wondering if you were affected by the drama of the iOS 14.5 upgrade and whether you're seeing negative consequence to your ad revenue coming out of your social media advertising revenue stream.

Kristina Salen (CFO)

Hi, Laura. Thank you for the question.

Laura Martin (Managing Director, Senior Internet and Media Analyst)

Hi.

Kristina Salen (CFO)

The quick answer is no, we weren't affected. We haven't seen impacts on our advertising revenues coming from social to the negative. In fact, our revenue streams from social continue to grow very nicely.

Laura Martin (Managing Director, Senior Internet and Media Analyst)

Okay. Great. My other one is you guys have mentioned NFTs a couple times. You know, could you size that for us? Sort of more generally, how do you feel about this, the role of the metaverse and going into the digital online world? Do you sort of think that is metaverse gonna be actually

A bigger deal like you guys really work in the live world, physical world. How do you feel about the metaverse? Within that context, how big do you think NFTs could be as a part of the new metaverse?

Nick Khan (President and CRO)

We think it's robust now. We think it's gonna continue to evolve and become perhaps even more robust, and we think it's here to stay.

Laura Martin (Managing Director, Senior Internet and Media Analyst)

Okay, thanks.

Nick Khan (President and CRO)

Thanks, Laura.

Operator (participant)

Next, we'll go to Brandon Ross from LightShed Partners. Your line is open.

Brandon Ross (Partner and Media and Technology Analyst)

Hi, guys. Good afternoon. OVer the past several quarters, it seems like there's been a lot of turnover at the mid to upper levels of management, and you took some one-time restructuring and, or severance charges. Can you talk about what the organizational goals are that you're trying to achieve with new blood and to what extent you're trying to become a leaner organization from a cost perspective? If there are additional changes we should expect? I have follow-up.

Nick Khan (President and CRO)

Sounds good. Brandon, how you doing? It's Nick.

Brandon Ross (Partner and Media and Technology Analyst)

Hi.

Nick Khan (President and CRO)

A couple things. We want the most efficient business model possible that produces the best amount of high-end content possible. To us, it's about having the right people in place to do those jobs. Over the last year and change, we've all collectively looked at it and made sure that it's the right eyes, the right brains focused on the right things. It seems to be working in terms of raising guidance while only doing one big international event when the guidance was based on two international events. We think you're seeing the profitability across the board here. We're happy with the way it's going and, you know, hope it continues. You had a second question, you said?

Brandon Ross (Partner and Media and Technology Analyst)

I wanted to focus on NXT a little, because you've definitely made some changes over, I think, the last month or so. I wanted to see how you felt about the progress and whether you felt like you were achieving the goals of the revamp.

Nick Khan (President and CRO)

We think it's all starting the way that we wanted it to start. We wanted a younger, fresher, in-ring approach. We think we have it. You've already seen some talent from the new NXT elevated to the main roster. There's gonna be more of that. Our recruiting efforts, which we can go through at a later date, which are spearheaded by Paul Levesque and Bruce Prichard and a number of other folks here, are focused on young athletes who may not, at this moment in time, be in the quote-unquote wrestling space. We think all of those results will come to fruition in the right way, and that NXT will continue to build the way it's already building.

Brandon Ross (Partner and Media and Technology Analyst)

Great. Thanks so much, Nick.

Nick Khan (President and CRO)

Thank you.

Operator (participant)

Your line is open.

Speaker 11

Hi, guys. It's Marianne on for Ben. Just two questions on my end. First, can you talk about your international content rights expectations, especially as it relates to your larger territories like India and the U.K., in the context of your, like, revamped international distribution strategy for your streaming products? And is there any possibility that you will maybe ink a deal in the MENA region as well?

Nick Khan (President and CRO)

Sure. Thank you for the question. This is Nick. Keep in mind, our existing India deal with Sony is an all-encompassing deal that includes the premium rights, so that's a deal that's already in place. In the U.K., BT, our existing partner, Raw, SmackDown, and NXT, there's currently conversations about what the best plan is for WWE Network in that territory. We should have some news soon. In the MENA region, we continue to work on it. Progress, not done yet, but certainly something that we remain optimistic and bullish on.

Speaker 11

Got it. Thank you. My follow-up question is on your general programming strategy, how do you think about the trade-off between keeping IP on WWE Network versus linear, thinking specifically about a show like NXT that has moved kind of between both mediums? Thank you.

Nick Khan (President and CRO)

Thanks for that question, as well. It's a fine line. It's something that we're in constant dialogue about. What is best on WWE Network on Peacock in the United States, agnostically in other international territories with certain international partners in different international territories, and what's better to sell to third-party companies? It's all about eyeballs and exposure and, of course, over-delivering for our partners. There's not a science to it, but there's certainly a lot of dialogue behind all the decisions that are made.

Speaker 11

Understood. Thanks so much.

Nick Khan (President and CRO)

Thank you.

Operator (participant)

Next, we'll go to Curry Baker from Guggenheim Securities. Your line is open.

Curry Baker ('Live Entertainment Equity Research Director, Media)

Hey, thanks for the question. One on sponsorship. Can you guys maybe help us size the the opportunity there? I know, you know, it's an area I think the company's historically under-monetized and looking at other sports comps. Can you maybe help us think about the ultimate opportunity and maybe the strategy to get there over the next couple of years?

Stephanie McMahon (Chief Brand Officer)

Sure, Curry, this is Steph. Thank you for the question. There's no reason why in the next 3-5 years we couldn't be in the hundreds of millions of dollars. In terms of the strategy-

Curry Baker ('Live Entertainment Equity Research Director, Media)

Okay. That's yep.

Stephanie McMahon (Chief Brand Officer)

Sorry. In terms of the strategy, it's really the four key buckets that I laid out earlier in my remarks, the content, our talent, digital, social, and international.

Curry Baker ('Live Entertainment Equity Research Director, Media)

Okay. No, that's helpful for framing. Maybe a quick one for Kristina. On the guide for the fourth quarter, you obviously have, you know, if we look at where you were fourth quarter last year, $51 million EBITDA, you got a number of positives, the Saudi event, live events, and then also cost escalators on the contracts. Can you maybe help us think about incremental expenses in the fourth quarter?

Kristina Salen (CFO)

Incremental from the third quarter, you mean?

Curry Baker ('Live Entertainment Equity Research Director, Media)

Yes. Yes, exactly.

Kristina Salen (CFO)

I think if we can talk a little bit about third quarter versus fourth quarter, Curry, I think what you see is the driver will continue to be live events from a top-line perspective. When we compare the third quarter versus the fourth quarter, remember that we'll have fewer pay-per-views in the fourth quarter, in part because of the great decision that we made to move our December pay-per-view to January first, to Day 1 in Atlanta. When we look at the first quarter, we'll have more, potentially three pay-per-views in the first quarter of next year. From a fourth quarter perspective, sequentially, live event OpEx will follow in line with from a pay-per-view perspective as well.

All that being said, our live event demand continues to be, as I mentioned in my remarks, at least at par with 2019, in both in terms of ticket sales and per event profitability. We continue to see a lot of strength for our live events. Another thing to remember sequentially as well is how we allocate network revenue, as it relates to our Peacock partnership, and that's directly correlated with the number of pay-per-views we have in any given quarter. For that reason, if you'll recall, second quarter with WrestleMania is our largest allocation. Third quarter with SummerSlam is a large allocation.

When we get into fourth quarter, of course we have our one large-scale international event, and we have a Survivor Series, but it will be a lower allocation relative to WrestleMania and SummerSlam. Those are all the sequential puts and takes to consider, as we move from third quarter to fourth quarter. Again, our guidance, our adjusted OIBDA guidance relative to year-over-year indicates a strong growth coming in the fourth quarter.

Curry Baker ('Live Entertainment Equity Research Director, Media)

Okay. Thanks, Kristina.

Kristina Salen (CFO)

Is that helpful, Curry?

Curry Baker ('Live Entertainment Equity Research Director, Media)

It was. Thanks.

Kristina Salen (CFO)

You bet.

Operator (participant)

Again, if you have a question, please press star one at this time. Next, we'll go to David Joyce from Barclays. Your line is open.

David Joyce (Media and Entertainment Equity Research Analyst)

Thank you. A couple of questions. First, on licensing, there was some pull forward due to moving on to Peacock earlier this year, but it seems like it was later this quarter. Was there going to be more volatility in the licensing comparability going forward, or is there more of a smooth kind of visibility path there? Secondly, I wanted to ask about the shift to more of a stadium model. What will that do to overall event volume, given that you've got you know weeklies for Raw, SmackDown, and NXT? Is there gonna be any, you know, are the larger scale events going to you know replace some of those effectively or is there something incremental here? Thanks.

Nick Khan (President and CRO)

If good by you, David, we'll go in reverse order there. Last time you had asked about MMA consolidation, so I take it you're satisfied with that at this moment in time, which is great. In terms of our stadium events, no, it's not gonna have any impact on the frequency or tonnage of Raw, SmackDown, or NXT. Those remain 52 weeks a year, barring exigent circumstance, three times a week. These pay-per-views are separate above and beyond that. We just have seen the appetite for more fans in right cities at the right time on the right night. The model is based on that. Thus far, it's proven out with SummerSlam. We believe it's gonna continue to prove out in 2022.

Kristina Salen (CFO)

David, just to clarify, your licensing question, you were referring to the licensing of the network to Peacock?

David Joyce (Media and Entertainment Equity Research Analyst)

Well, there was some licensing movement in your results this quarter. You know, there were some comparability changes there. I was just wondering, you know, should we expect some, you know, volatility in that line going forward?

Kristina Salen (CFO)

If you're referring to the licensing of the network to Peacock, as I mentioned before, we allocate the cash we receive in any given quarter from Peacock the same. We allocate that revenue based on the contribution of the pay-per-view events in any given quarter. A WrestleMania quarter is the greatest allocation, followed by SummerSlam, and so on and so on. That's how we think about licensing of the Peacock allocation. If you're talking about licensing generally, what I would say is a number of the things that Nick mentioned in his remarks over the course of the next year will have a positive impact on licensing of our products and our brands. He mentioned, for example, NFTs and the partnership we have with Fox. He referenced Panini.

In my remarks, I referenced our extension with Mattel, our toy licensing partner. There are a number of positive impacts on licensing that, from a year-over-year perspective, will have a positive contribution going forward. Does that answer your question, David?

David Joyce (Media and Entertainment Equity Research Analyst)

Yeah, yeah, that's fine. Thank you.

Kristina Salen (CFO)

Great. Thank you.

Nick Khan (President and CRO)

I believe that's our last one.

Operator (participant)

With no further questions in the queue, I'll turn it back to Michael Weitz for closing remarks.

Michael Weitz (SVP, Financial Planning and Investor Relations)

Thank you, everyone. We appreciate you listening to the call today. If you have any questions, as always, please do not hesitate to contact me, Michael Weitz, at 203-352-8600.

Operator (participant)

That does conclude our call for today. Thank you for your participation. You may now disconnect.