by Tom the Actuary

Is the wrestling boom over in North America?

When Vince McMahon set out in the 1980's to make the WWF national and take over the old territories from the regional promoters, no one could have ever imagined just how successful he would ultimately be. The World Wrestling Federation, as of now, IS the wrestling industry in North America, or at least, the United States and Canada.

To see the if business is booming, then, let's look at the WWF.

Using published quarterly earnings reports, let's start by examining the WWF's net revenue for the last 2 and 1/2 years. Net revenue is a fancy accounting term for "money from stuff we sold".  All dollars shown are in millions.

WWFE has their own calendar for reporting purposes (fiscal calendar), and they've designed it so that their fourth quarter has Wrestlemania in it. Their next quarterly report will be for the period ending April, 30, 2001. You see that their yearly high for revenue is always in the fourth fiscal quarter.

During the last reported quarter (labeled Time Period 10) money from "live and televised events" contributed around 70% of net revenue and money from sale of "branded merchandise" the other 30%. "Branded merchandise" includes videos, CD's, books, and WWF New York, as well as an average of $7.29 in merchandise sales to every person attending a live WWF event.

Their "live and televised events" category includes selling tickets, television rights fees, advertising for commercial TV, and PPV's. Once again, that accounts for around 70% of the money they take in. If last year is any indication, about 30% of the money they take in under this "live and televised events" category (or 21% total) is from sale of PPV's. By the way, last year, the WWF had an estimated 6.8 million Pay Per View buys, so it appears that the WWF takes in around 11 or 12 dollars for each PPV buy, with the rest going to the distributors.

Another side-note: the WWF pretty frankly states in all their earnings releases that they have been increasing money from live events by both (a) increasing attendance; and (b) raising ticket prices.

The WWF's (really WWFE's) next quarterly statement will show the usual stuff, plus a very highly rated Wrestlemania, plus revenues from the XFL, so it should show a decent increase from the fourth fiscal quarter of last year. Remember, so far, we've only looked at net revenue (money coming in) and not expenses (money going out). So far, so good: now, on to expenses.

Their report is not very clear, but it appears that in the most recent reported quarter, offsetting the $111.2 million dollars coming in, was $87.8 million in expenses to do business going out, plus an additional $7.0 million of XFL setup costs to boot. The upshot of this: for every dollar the WWF took in, they kicked 85 cents right back out to pay expenses.

There are a few other items the Federation has to pay besides what are called "expenses" in financial reports. These include interest on debts, taxes, and some other stuff that's not worth talking about here. Extrapolating based on last year (since I can't find the data) we get net earnings (money the company gets to keep) of $11.7 million for the stockholders for that quarter.

You could say then, that the profit margin for WWF sales is 11.7 divided by 111.2, or 10.5%, as of their most recent reported quarter.

Where does that money go?

Well, it can go one of two places: it can be given out (as a dividend) to stockholders or reinvested in the company. For purposes of determining how well the company is doing, it can be used another way.

The company has around 73,000,000 shares of stock out there, and if you divide the $11.7 million dollars the company made for that quarter by the number of shares of stock there are, you get "earnings per share" (EPS) of $0.16. This is a measure a lot of analysts use in determining how profitable a company is. That being the case, let's look at EPS over the same period, or at least from the point the company started issuing shares:

Here, the company's performance can be categorized as erratic at best. In spite of increases in revenues, the website, publishing, a theme restaurant, etc., the company is not yielding any more profit for each share of stock held than they were two years ago.

As I stated earlier, their next quarterly report should show an increase in revenue over the same quarter last year. However, expenses for the XFL and for the purchase of WCW will probably dampen earnings per share more than ever.

Investors know all this, or course, because they can do the same research I did, and have. The upshot of all this can be seen looking at the recent stock performance for of WWF stock:

Before the XFL's launch and with soaring revenues, the WWF stock was doing well - not as well as a few months after the WWF first issued stock, but not badly. Now it's dropped 38% in three months.

"Okay, Tom, you've proven you're an actuary with all this. What does it mean? How is it relevant?"

It helps answer three questions, two obvious, and one not obvious because I haven't told you about it yet.

1. As to the question: "Why the XFL? Why WCW?" The answer is: because the WWF cannot continue to increase revenue at the rates they have without getting into some new lines of business. If you are basically selling out every show, 55 events per year, you've pretty much topped out there. The universe of PPV viewers is only so big. The WWF can increase its core business, but not at the rates they have been.

What this amounts to: if the WWF (or any other company) has level or decreasing revenues, stock prices fall and stockholders lose money. Keep that last point in mind: it's important.

2. As to the question: "Why keep recycling the same main event players time after time?" The answer is: fear. Let's say that the WWF had given some new players the spotlight in that last reported quarter and that advertising, PPV and merchandise revenue was 5% lower than they got - just 5%. Suddenly the $11.7 million earned is $7.3 million, and EPS drops to $0.10 per share. This is because a lot of expenses are pretty much fixed - salaries, building rentals, etc. - while revenue varies.

3. And finally, another piece of the "Why keep recycling the same main event players" puzzle can be found in the WWF's annual reports. In there, they describe an ongoing "incentive program" wherein almost 1,000,000 stock options last year (and more the year before) were issued as an incentive to key contract workers - i.e., top-name wrestlers.

These options ("call" options) give the performers the right to buy stock at a set price - say $17.00 per share - regardless of what the stock is selling for. The performers can make a fortune off of these, if the stock price is high enough. This can indeed be incentive, and the Steve Austins, Triple H's and Undertakers of the federation have a huge financial interest in keeping WWF performance high.

For example, if the WWF was able to grow it's current (13.3) stock price 25% per year over the next 6 years. 100,000 call options for $17 would be worth $3.4 million. (If this growth rate sounds unrealistic, the company I work for has done just that.)

So if I'm Triple H, or Austin, I want to do everything I can to protect my financial future. It may be one reason HHH's performance level has risen so much in the last two years.

Summing up, however, the wrestling business is doing well, but it's at greater risk right now of a bust rather than another boom. There is only so much WWFE can do with the WWF itself, and they haven't convince anyone that the XFL is going to take off.

So WCW may end up being the WWF's salvation, in the end. A new source of revenue in an area the WWF has expertise in. Previous to doing the research for this article, I thought the WWF would never really give WCW a go.

But now I see they have every reason in the world to.