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Hello, and welcome to the webcast entitled WWE Fourth Quarter Earnings. We have just a few announcements before we begin. [Operator Instructions]
I will now turn the call over to Michael Weitz, Senior Vice President of Financial Planning and Investor Relations. Please go ahead Michael.
Thank you and good morning everyone. Welcome to WWE's fourth quarter and full-year 2019 earnings conference call. Leading today's discussion are Vince McMahon, our Chairman and CEO, as well as Frank Riddick, our Interim Chief Financial Officer. Their remarks will be followed by a Q&A session. We issued our 2009 earnings and 2020 business outlook release earlier this morning and have posted the release, our earnings presentation and other supporting materials on our website, corporate.wwe.com/investors.
Today's discussion will include forward-looking statements. These forward-looking 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 as I mentioned, are available on our website.
Finally, as a reminder, today's conference call is being recorded and a replay will be available on our website later today. At this time, it's my privilege to turn the call over to Vince.
Good morning everyone. Thank you for joining us today. As you know, for the year, we achieved record revenue and profit, which reflected our new distribution agreements with Raw and SmackDown. However, our performance was at the low-end of original guidance as we work through our Middle East distribution agreement and our ongoing efforts to strengthen our brand and customer engagement.
FOX and USA Network provide powerful platforms for broadening our audience, driving growth, our engagement metrics, including our television ratings, as well as live event attendance, showed growth during the quarter with SmackDown TV ratings increasing 20%, live event attendance was up 15%.
As you know, the Board and I recently announced a management transition. This decision did not reflect a change in our strategy. It was made after careful consideration. We remain highly focused on growing the value of our content, furthering international expansion, and engaging fans across all platforms. The decision, of course, of management transition was based on the different view on execution and areas of focus. Over the 10 years, supported by a strong management team, George Barrios and Michelle made more than significant contribution to WWE. However, WWE change, we won't misspeak. We have a deep team of talented executives committed to our company who are more than capable of executing our strategy.
The fundamental sources of our long-term growth, including the ability to capitalize on the rising value of live sports content remains unchanged and strong. While we are providing perspective today and our business outlook for 2020, you should note we are pursuing initiatives that could substantially enhance our performance. These include the distribution of content in the Middle East and India, as well as the evaluation and execution of strategic alternatives for our direct-to-consumer service, which could be implemented quite frankly in the next quarter.
We’re currently changing the WWE culture to be more collaborative, more inclusive; developing initiatives to re-imagine our company and content; bringing in new ideas; and enhancing our executive team by recruiting our global talent. We remain extremely optimistic about our future and our long-term growth potential. Quite frankly I have more confidence than ever that we're going to exploit all of our opportunities.
So, I’d like to turn it over now to Frank Riddick, Interim Chief Financial Officer and long-standing member of the Board of Directors. Frank?
Thank you, Vince. There are several key topics which we like to review today. These include discussion of our financial performance, the progress of key strategic initiatives, and our business outlook.
In 2019, we generated record revenue of $960 million, reflecting significant growth from the start of our new content agreements in the United States. It became effective in the fourth quarter. Our adjusted OIBDA was $180 million as the growth in rights fees and lower incentive compensation were offset by weaker performance across other product lines and the impact of accelerating investments to support our core content creation.
Given both the changes in the media industry, increased disruption from new direct consumer services and heightened competition for viewers, as well as the challenges to our brand engagement, we believe that increasing our ability to create compelling content represented a prudent course of action. This was not a decision that was made easily, but ultimately the right thing to do.
As we transition SmackDown to Friday nights of FOX broadcast, our engagement metrics including TV ratings and lives event attendance showed marked improvement. Domestic TV ratings for smacked down, which declined 15% in first quarter of 2019, improved to a 20% increase in the fourth quarter with a 25% increase in December.
Similarly, domestic TV ratings for Raw, which declined 14% in the first quarter of 2019 saw a 5% increase in December. In the quarter, Raw outperformed the aggregate ratings performance of the Top 25 cable networks. SmackDown was the Number 1 rated Friday night broadcast program among the coveted 18 to 49 demo and outperformed the aggregate ratings of the Top 4 broadcast networks.
Also indicative of strengthening engagement, average attendance at our live events in North America, which declined 12% in the first quarter improved to an increase of 15% for the fourth quarter. Early indications in January, showed continued positive trends.
During the fourth quarter, strong revenue growth from our new U.S. distribution agreements was partially offset by the timing of original series absent a large-scale event, as well as lower subscription to WWE network. Importantly, the ongoing investment to support the creation of our content was balanced by a reduction in accrued management compensation associated with our full-year performance.
To review our business performance in the quarter, let’s turn to Page 5 of our presentation, which shows the revenue, operating income, and adjusted OIBDA contribution by segment as compared to the prior year.
Looking at our Media segment, adjusted OIBDA increased 62% or $44.5 million, driven by the escalation of domestic right fees for our Raw and SmackDown programs. Revenue growth was partially offset by the absence of mix matched challenge and original series license to Facebook last year, a reduction in network subscription and increased content related expenses.
WWE Networks average paid subscriber decreased 10% to approximately 1.42 million for the fourth quarter, driven primarily by the impact of lower subscriber additions earlier in the year. We have projected that the networks average paid subscribers will increase on a sequential basis to approximately 1.47 million for the first quarter of 2020.
Given the evolution of new streaming services and the increasing value of live content, we believe there maybe alternative strategic options for the WWE Network, which would enable us to further monetize on those valuable premium content. Thus we’re currently evaluating alternative strategic options.
During this quarter, we made important progress on other strategic initiatives that extended the reach of WWE brands. Specifically, we completed a free air distribution agreement with ViacomCBS’ Channel 5 in the UK and extended our agreement with SuperSport in Africa, which will create a dedicated WWE channel. We also premiered the second season of Miz & Mrs on USA Network and announced the fifth season of Total Bellas to air on E! beginning on April 9.
Turning to our Live Event business as shown on Page 7 of our presentation, adjusted OIBDA from Live Events declined $3.8 million, primarily due to the absence of Super ShowDown, a large scale event that we held in Australia in the fourth quarter of 2018. Although we had 14 fewer North American events in the quarter, this change had limited impact on adjusted OIBDA.
Despite the absence of Super ShowDown, we continued to successfully stage large scale events for our fans. We held our second such event in Saudi Arabia and shortly thereafter announced an expansion of our partnership to hold a second event in that country every year through 2027. Domestically, we staged Survivor Series, which anchored an extended weekend that attracted nearly 40,000 fans over the four-day period to the Allstate Arena in Chicago.
In our Consumer Product segment, adjusted OIBDA increased slightly from the prior year quarter as a reduction in video game loyalties was offset by lower operating expenses. During the quarter, we continued to drive growth on the distribution of mobile games, increasing installs to nearly 125 million across our game portfolio led by WWE Champions.
Page 9 of our presentation shows selected elements of our capital structure. As of December 31, 2019, WWE held approximate $250 million in cash and short-term investments. Additionally, we estimate that WWE has approximately $200 million in debt capacity under our revolving credit facility.
In 2019, we generated approximately $53 million of free cash flow, as compared to $154 million in the prior year. The decline was due to unfavorable changes in working capital related to our fourth quarter event in Saudi Arabia and the payment of prior year’s accrued management incentive compensation. Additionally, the change in free cash flow also reflected a $37 million increase in capital expenditures, the majority of which was laid into the execution of our workspace plan.
Notably, we returned more than $120 million of capital to shareholders in 2019 consisting of approximately $83 million in share repurchase and $37 million in dividends paid. This included nearly $75 million of stock repurchased in the fourth quarter, representing approximately 15% of the authorization under our $500 million repurchase program.
Looking ahead, over the next few years, we believe that WWE is well-positioned to take advantage of significant growth opportunities. These include the rising value of live sport content, the growth of media and entertainment in international markets, and the evolution of other businesses, specifically, WWE Network.
In 2020, the escalation of rights fees provides contractual revenue growth of approximately $185 million. We expect this growth will be partially offset by an increase in operating expenses from multiple sources, higher costs to develop new sources of revenue, the full-year impact of 2019 content related investments, the reset of performance-based management incentive compensation and the annual rise of staff costs.
You should note that while we anticipate incremental investment over the long-term to support our growth initiatives, we are working to moderate that investment in 2020. We’re also pursuing several strategic initiatives that could increase the monetization of our content in 2020 and subsequent years. These include distribution of content in the Middle East and India and the evaluation of strategic alternatives for our direct-to-consumer service, WWE Network.
At this time, the outcome of these initiatives is subject to considerable uncertainty. Excluding the potential impact of these initiatives, we anticipate 2020 adjusted OIBDA of $250 million to $300 million. Management believes it has the potential to exceed this range, but we’re unable to provide additional guidance at this time.
Previously we discussed the step-up in capital expenditures in conjunction with our workspace strategy. For 2020, we estimate total capital expenditures of $180 million to $220 million, which includes approximately $130 million to $160 million to build out our new headquarter facility.
For 2021, we estimate total capital expenditures of $120 million to $140 million, including approximately $80 million to $100 million to complete construction. We expect total capital expenditures to return to approximately 5% of revenue by 2022, which is in-line with a historic range of approximately [4% to 7%] of revenue and is predominantly related to maintaining existing infrastructure.
For the first quarter of 2020, we estimate adjusted OIBDA of $60 million to $65 million, which represents approximately five times the adjusted OIBDA results achieved in the prior year quarter. The estimate reflects substantial revenue growth from our new content distribution agreements in the U.S., which became effective in the fourth quarter, and the February staging of a large-scale event in Riyadh, Saudi Arabia.
We also anticipate that first quarter growth will be partially offset by an increase in operating expenses associated with developing resources of revenue and reflecting the full-year impact of 2019 investments. The former includes higher costs to accommodate the production of SmackDown broadcast live on Friday nights, four rather than one day following Raw, and to produce an additional hour of the NXT program on Wednesday nights.
The fundamental elements of our growth strategy remain unchanged. As mentioned earlier, we believe we are well-positioned to take advantage of the rising value of life sports content, as well as strong media and entertainment growth in international markets. Additionally, we have confidence that we can grow our sponsorship business and leverage increasing digitization to expand and engage our audience.
With the escalation of content rights fees, we’ve seen an increasing share of revenue coming from contractual arrangements and we expect that trend to continue further transforming our business model. We’re in the process of evaluating several strategic initiatives that could materially impact our growth trajectory and we’re targeting a date by the end of the first quarter to communicate our long-term strategy. We’re committed to providing a comprehensive perspective on our roadmap for creating shareholder value and we look forward to meeting with you, our investors and analysts.
That concludes this portion of our call and I’ll now turn it back to Michael.
Thank you, Frank. Nicole, we’re ready for questions. Please open the lines.
Thank you, sir. We will take our first question from Ben Swinburne with Morgan Stanley.
Thank you. Good morning. Thanks for all the color. Two questions for you. First, I just want to confirm, your guidance for 2020 assumes, if I'm hearing you right, zero revenues associated with your rights, TV rights or media rights in India and the Middle East, just want to see if that's correct and if it is, I understand why you’d have to guide that way, but that seems highly unlikely since presumably there is a path to some distribution deal, so I just want to see if you could add some color so we can better understand the guidance. And then I have a follow-up.
Well, on media, you’re correct. On India, it would be the increment from the new deal because we have an existing deal in India that’s in place and what we’re – we have taken that out because of the uncertainty not about weather. We feel pretty confident that these new agreements will be put in place, and as I said, we have an existing agreement in India already. The uncertainty is around the timing of that and the ultimate value that we receive.
I see. And you work still on the air in India as of right now, right, in this first quarter, correct?
That’s correct. Yes, sir, that’s correct.
Okay, got it. Okay, great. And then secondly, on the strategic review for the network, what are you guys trying to achieve there? I mean is this a business that you think you can sell or you’re looking to maybe turn this into a license stream like your broader media business, sort of de-risk it with a partner like an ESPN+ or something like that? I don’t know if I’d say more color you can there, I realize it's sort of an ongoing review, but just would love to hear anything else you could share.
Well, we have a lot of options. We can continue on as we are now with an enhancement of a free tier and a more enhanced paid tier. But we have that as an option. We also have an option, I mean right now, there’s no more better time to exercise, you know, the selling of our rights, you know, to all the majors and, quite frankly, all the majors are really climbing for our content, so that could be a significant increase, obviously in terms of revenue.
Got it. Thank you very much.
Our next question comes from David Karnovsky with JP Morgan.
Hi, thanks for taking the question. I guess just a follow-up on that point Vince. When you think about what’s on the network now, would anything kind of be off limits, you know, with some of your more premier pay-per-views such as Wrestle Mania, Royal Rumble, you know, am I hearing you right when you say that it is interest from third or linear parties for that content, will you be willing to kind of move that over off the network?
I think there's nothing. You know obviously the devil is in the details in any of these arrangements, but, you know, at this point there's nothing that would – looks like there would be anything that would stop us from doing a different type of transaction with the network if we chose to.
Okay. And, you know, I asked this question [indiscernible] bunch of times, since last week from investors, but can you just say here definitively whether WWE plan to invest with, partner with or, you know, even merge with the [indiscernible] point in the future?
No, the XFL was a separate entity completely. You know about 400 employees kick off of course this coming Saturday. It’s completely separate.
Got it. Okay, thank you.
The next question comes on Laura Martin from Needham.
Hi, Vince, I have a sort of philosophical question like one of the things we did with NXT is we pulled that proprietary contract off the network and put it on USA for cash flow today, which de-risks it, but it also took away programming and your U.S. subs fell. In answer to Ben’s question just now, you said that there's people clamoring for rights and that that might be more valuable way to monetize the network, how do you think about the fact that you can take more cash, but it's coming from the linear TV eco-system which is dying in this country compared to OTT, which is structurally growing, but doesn't give you the near-term cash flow that maybe you can get in a different alternative?
So, Laura, as you know, there’s so many measures going into OTT. That’s what I was referring to. It’s – our network obviously is our most premium content and we like – we have subscribers, we have more, but nonetheless it’s another way for us to capitalize on a network. And again, as I said, there’s a very strong interest in all the major as it relates to OTT.
And you talked about adding ads in the past like sponsorships or advertising. It was something we talked about earlier when you were doing OTT, have you re-thought adding a second revenue stream to the OTT service?
That’s a possibility. We can leave that open, but again, right now if we continue one as the network pretty much is, then we’re definitely going to consider that. If in fact we’re looking to enhance revenue that will be up to our partners.
I see. That makes sense. Okay, great. And then, I think one of the questions we get most frequently is, what's taking so long for the MENA and India because we thought those were going to be done like early in 2019 and is there – do we have a – will they be done by the end – will we be done with those deals by the end of the first quarter when you're going to this comprehensive overview of WWE do you think?
Laura, really to answer the first part of your question, what’s taking so long. In India, there we did some regulatory changes that have complicated the negotiations, and so that is really the primary reason for the delay there. The MENA rights, just, you know, the infrequencies dealing with the Saudi Arabian government and their own ways of going about and doing business. I think we don't want predict a specific date, but as I said before, the uncertainties around the timing and the amount, not that these deals will eventually be done.
Thank you.
Let me just add that I’m making reference to OTT and the interests of all the major players. We’d be announcing that deal if we go that way in the first quarter, that’s how far long we are.
Thank you.
Okay. We’ll take our next question from Curry Baker with Guggenheim Securities.
Thanks guys. On the buy back, it looks like you guys were in the market more active in the fourth quarter. You know, I’d have to assume if you thought the stock was attractive then you have to think its significant undervalued here. Will you be more aggressive in the market at these levels under your current authorization and I guess, you know, following on, on that, will you consider using or leveraging the balance sheet to take advantage of near-term dislocation?
Well, answering the first – the last part of your question, I think, you know, the capital structure strategy isn’t going to change a lot. I don't – I think we believe having a flexible capital structure that allows us to have the resources to pursue growth opportunities is probably more important even in the short term and we do have a lot of liquidity right now. So, I don't think that we would leverage up in a significant way to buy stock.
On the existing program, you know the existing program has about $415 million or so of remaining authorization and we’re going to continue to run that program the way we have trying to buy a significant discount to what we feel is intrinsic value, you know, constrained only by regulatory and other, you know, regulations that we have – a disclosure on regulations we have to follow in the buyback. So, clearly right now with the stock trading where it is, it’s, you know, more attractive than it was.
Okay, thanks. That’s helpful. And then, maybe just one more on investments, in the buckets of investments, you’re looking at, you know, this year and over the next couple years, you know, I think in the past, managements focused on three main areas, you know, building out your data and technology capabilities, localization, which I think includes performance centers internationally, as well as, you know, continuing to, you know, pay the talent more etcetera. Any more color on, you know, how you’re think about each of these, as well as if there's, you know, maybe other, you know, investment opportunities that are also – that you’re considering?
I think the only other area that we – that has been looked at would be around enhancements to the network and of course that is, you know, somewhat dependent on where we end up on the strategic alternatives. So, the other areas continue to be the primary focus for investment because that’s where the growth opportunities are, international, you know, increasing the brand value and engagement with customers, so they’re setting up for continued rights and renewals and new products or new service or content that we can put in the market.
Is there any way you can put kind of an aggregate framework around, you know, the level of investment spending you’re expected for 2020 like a range or anything?
Well, I think what we said is that, you know, we’re looking to – you know we’re going to have the effect of the follow-on from the two 2019 investments in the full year, but we’re taking a hard look in 2020 at all the investments and to see – to try and find the right balance between investing in the business for future growth and shareholder value and maintaining financial performance at an acceptable level. So, I think we did say that 2021 we’d see more investment than 2020 and we are taking a hard look right now at all the investments, but the areas that will not change.
Okay, thanks guys.
Our next question comes from Brandon Ross with LightShed Partners.
Hi, guys. Good morning, thanks for taking the questions. I think first, since content is obviously the life blood of this company and the quality of your content is very strongly correlated with the success of your various business units. What have you done specifically over the last several quarters to improve upon the content and engagement? And then related how much input to Hayman and Richard have on Raw and SmackDown? And do you believe you need to spend much more on talent to help stimulate engagement trends?
A couple of things on that. We think that what we’ve done thus far in terms of television ratings in terms of with higher production value, better story lines, allocation of our top talent at the same time bringing on new talent is paramount. You can see again with the ratings, the current ratings notwithstanding what’s going to happen in the first quarter. You can see there is growth there and hence sort of like the investment.
At one time, we had a lot of talent that was injured. We don’t have that right now, and again, it’s a – it just takes a while to be able to put everyone in the right place, right story lines, right talent. And going into WrestleMania, we think we have exactly what we want and going forward as well.
Got it. And then maybe – I actually have two more, one is a clarification. So for India, did you actually zero out India in the guidance? Or are you attributing the rate of the prior deal in the guidance? I wasn't sure about that.
We left the current deal in the guidance. It would be the increment that we're expecting that we took out.
Okay. And then, just philosophically, one of the key aspects to the WWE Network has been that it allows you to have a direct-to-consumer relationship and access to real first part of the data, would keeping those be important in any strategic alternatives and do these still matter to you or do you think that was a misplaced priority in the past?
I think it’s misplaced. It was one of our goals, still continues to be, but when you’re playing with some of the majors, it depends on whether or not we can negotiate holding on to things of that nature. Sometimes, you know the big boys who want all of that for themselves, so it’s a matter of really negotiation is what we keep if we could keep it absolutely.
Right, but it's not a must-have for you?
Not what?
Must have.
Well, it’s not necessary.
Okay.
Nothing is a must have. You know we would deal with what's available, and again, it’s going to fluctuate somewhat, you know, with what the majors want to have this.
Okay, got it. Thank you.
Our next question comes from Eric Katz from Wolfe Research.
Thanks, good morning. One question on the 2020 guide of the $250 million to $300 million, it's a pretty big range when excluding, I guess, the increments from India and also the Middle East deal, what's driving that $50 million range? Is that mostly on the network strategy?
No. I would say that the reason for the ranges is, you know, the uncertainty around what level of cost structure we could actually achieve through cost reductions and other things, and you know, where the rest of the business is going to perform, including the network in the interim in terms of the number of subscribers that we get. So, we wanted to make sure that we provided guidance that was, you know, realistic with what we thought we could achieve.
And again, these numbers – let me just add, you know, just some color to that because I think these numbers are certainly conservative and if any one of these deals takes place, it’s going to be a big deal. It’s going to be transformative.
Okay, understood. And it sounds like – I guess just to be clear on some of the other comments and questions we’ve gotten so far, it sounds like there could be anything from a dual revenue stream where you still monetize the network just in a different way or there's even a scenario where the network is completely shut down, but I guess what I’ll try to figure out is it sounds like whatever you decide and the timing sounds like potentially before this event at the end of the quarter, the economics will be better than your current structure. I mean is that generally a fair assessment? And is that from both the revenue and expense perspective?
I think if we successfully achieve what we’re trying to with the majors in terms of other desire for OTT. Again, as I said, just a minute ago, it’s transformative. I mean, [indiscernible] that would be available.
Okay. I guess maybe what will be helpful is, do you have a number on the profitability for the network currently? Is it, you know, in the $40 million, $50 million range?
We don’t provide that information.
Okay. Well, I guess my last question would be based on your comments for 2020 investments moderating, should we then assume the investments in Q4 are not a run rate for the entirety of 2020?
I think we were talking about the level of increment in 2020. Obviously, as we said, we have investments in 2019 that are going to continue into 2020 because they were made during 2019. I would say that the run rate – the existing run rate isn’t going to go down in the first quarter, if that’s what you’re asking.
Okay, thank you.
Our next question comes from Eric Handler with MKM Partners.
Good morning and thanks for the question. Wonder if you could just give a little bit of color on the TV deals. You talked about $185 million incremental there in 2020, but if you take out the U.S. step-up, which I believe is, you know, north of $200 million, you know, maybe you can reconcile. Does that mean UK, China, Latin America were all down? And then is NXT in that number on the free-to-air money?
Basically all that excludes is the component around or assumptions around MENA and the increment around India. So, everything else is included in that. There’s a small portion that we’d exclude that, you know, is built into our forecast around contracts that renew, but I haven’t been contracted yet, but the vast majority relates to the other deals that you mentioned. [Indiscernible]. Sorry, go ahead.
Did UK, China and Latin America grow?
Eric, we wouldn’t get into specifics around terms of specific terms and contract and specific deals.
Okay, fair enough. And then a second question, with the WWE Network, late in 2019, you did do a beta of a free tier, is that continuing now? Can you give us maybe some color and how it's performed in terms of maybe down – incremental downloads?
It wasn’t…
The tier was launched in December. I think it’s too early to say exactly what the results of that have been. We’re going to continue to analyze and we have something. When we feel like we have good data around, you know, what effect its having, we’ll put that out there.
And again it was a [softer one].
Right. Okay, thank you very much.
Our next question comes from Vasily Karasyov with Cannonball Research.
Thank you, good morning. What to say a clarifying question on the guidance, and specifically about the initiatives you mentioned in the Middle East and India. So, first of all, because the decision been made to go ahead with those initiatives and if not, what's the timeline? And then, do I understand correctly from your prepared remarks that if they were to go ahead that would be an upside to the EBITDA for 2020? Do I understand it correctly or would that require more of a spending which would be a negative for the EBITDA for the year?
Yes. We’re still pursuing those new agreements and, you know, from our perspectives as quickly as we can get them done, and that's what we’re aiming for. And I think as I explained earlier, the India rights are already – we already have existing India rights and they are in the guidance because we’re already – do it – being paid under that arrangement. It would be the increment on India, but yes, there's – for MENA it would be an addition to their guidance.
Alright, thank you very much.
Our next question is from Jason Bazinet with Citi.
Thanks. So, there's a lot of investors who are speaking with it, are interested in your stock, but they're very nervous about what I’ll call x factors, you know, something – some sort of curveball. and so, can I – I know this is a bit unorthodox, but can you just take a second and just maybe address some of the things that are out there in the marketplace just to put them to bet. So, I’ll give you two and feel free to add others, one is anything related to the XFL, that’s what we hear? And then, the second one is, is there anything in the Fox and Comcast agreement that’s not a fixed payment, in other words some sort of flexible payment that turns on the trajectory of the viewership? And whether can investors, sort, of count on those dollars whatever they are? Or is there an embedded surprise potentially?
No, the contracts are what they are. That’s not to say we couldn’t do more programming, you know, with them and/or others. We certainly couldn’t and what was your question on XFL?
Whether it’s just there's concern that in some way your personal investment in XFL will somehow get swelled up into the sort of investment case for WWE, the public equity?
No, there is none of that. Basically, it’s all – you know again I said, we have like 400 employees over there. It’s run by itself and there is no investment whatsoever hardly in, you know, WWE.
Yes. So, I think – you know just – there's no plan to put the XFL back into the – as a part of the WWE investments you’re asking. It’s a completely independent entity.
Okay, thank you.
And Steven Cahall from Wells Fargo has our next question.
Thank you. I was wondering if you could provide a little bit more color on some of the operating expenses that are driving the 2020 guide. You mentioned developing new sources of revenue, so I was wondering if you could give us a little more color on what those might be. And you also mentioned resetting that performance-based management incentive comp. why did that increase cost in 2020 as well maybe especially given that the stock is down quite a bit over the last 12 months? And then, I got a quick follow-up. Thank you.
So, the cost areas, you know, increasing in 2020 are around, you know, the production. Again we talked about the fact that we now do SmackDown events, four days later, we’re going to have a full-year effect of that. We have higher cost relative to some of the initiatives and I think we did say – in the third quarter, we talked about the increase in talent expense and that will roll over. There are considerations around new production developing new content, and there are some costs in for that as well. What was your second question?
The second part of that was in …
Restating on the MFP is quite straightforward. Because of the relative performance in 2019, the payoffs under the management incentive plan were lower than targeted and when we build the plans for 2020, we – of course we put it in at a rate where we would achieve the target. So, that accounts for the increment. That's for the short-term, the cash bonus plan. The stock component is not in adjusted OIBDA. So, clearly, stock compensation might be lower if the stock stays lower, but it’s not an adjusted OIBDA anyway so it doesn’t explain any of the difference.
Okay. And then, Vince, you just mentioned that India or MENA contracts could be transformative, I was wondering if you could tell us what you meant by that, could those be more than just TV rights deals. Any more color there? Thank you.
I believe Vince was referring to a net potential – network transaction will be transformative.
Okay, thanks.
And John Belton from Evercore has our next question.
Thanks, Vince, I was hoping you could give us some updated thought on the [technical difficulty] whether it’s about year-end to that promotional launching and you’ve been competing with the Wednesday nights for about four months. Basically, they're trying to do, fill a niche with more edgy content, how do you feel about a strategy? What has it done for the category? How has AEW in general changed their content and your business?
AEW has not changed our content at all because it’s all about characters and the storylines and resolutions. So, it really hasn’t changed our point of view in terms of what we present and we don’t need a more edgy, as you call it content, PG, one of the few programs out there that really is PG. So, as far as NXT, you know, we're competing NXT. It's competing on Wednesday night with AEW doing extremely well and we’re confident that NXT will continue on those success.
Got it. Thank you.
And we have a question from Bernie McTernan with Rosenblatt Securities.
Great, and good morning. Thanks for taking the question. I was wondering, you know, based on the increased investment, what the return thresholds will be? Or how that’s thought about? And over what time frame? Is it all about being in a better position for the next rates renewal in the U.S.? Or can we see those returns prior?
Of course, we look at the return on investment for all the incremental investments, but they are largely tied to building the brand and building the content quality and engagement with fans to get the payoff in the next content renewals. So that’s the objective. It’s always a healthy tension around how much do you invest for the future pay off and what the landscape is going to look like at that time and – but those were the judgments that are made.
Got it. And then just a follow up on talent cost, so I believe the talent what you pay the WWE Superstars is based on potential revenue, has that rate that you pay has gone up or is the impact just because of revenue increasing as well.
It is mostly revenue increasing. We’ve always done percentages with our talent generally speaking the more revenue, the more money they linked and conversely the talent cost has gone up and we are so proud of it.
Got it. And thank you. And lastly, Vince, just wondering if you’re – you know with the management turnover changing, anywhere you’re spending your time on a day-to-day basis short-term and you expect a change over the next few years?
At the moment I have a few more reports, direct reports, but going forward that will not be case in terms of allocating my time. I have a pretty broad shoulder and I can handle a lot.
Thank you.
And we have a question from Alan Gould with Loop Capital.
Thank you. Can you be able to open up a divergence between some of the domestic trends in the international trends especially with respect to live events and the domestic ratings have been improving, Domestic average attendance was up, but international average attendance has been trailing domestic average attendance in terms of percent changes, is it just a function of allocations you have been going, but it looks like always there is something going on internationally.
No, I think the difference in international is really mixing venue. What country, what venue and number of events which is a little more variable in the international because of the logistics associated with it, but that is the primary. There is nothing fundamentally different between the U.S. and international at this point.
Thank you.
And we have a question from John Healy with Northcoast Research.
Thank you. Just wanted to ask a question about the corporate leadership structure going forward, rightfully so the company has always had a very unique structure, I was hoping if you could give us a little bit of thought on terms of what ideally you would like the C-Suites to kind of look like over the next couple of years and additionally, you know how long it might take to maybe get to where you want to be with the transition of leadership?
Well, I think that's for sure, in terms of changing or reimagining a culture in the way we do business it is going to be far more inclusive and quite frankly with that in our strong management team currently as well as going forward we are attracting world-class individuals to our company. Who wouldn’t want to work with WWE? Tell me, come on, it is exciting, we air on the 75% assets of what the value of an executive is on a 50/50 [indiscernible] you get what you pay for. So, it won’t take us long however to implement all that.
Thank you.
Our next question comes from Ray Stochel with Consumer Edge Research.
Great. Thank you for taking my question, could you be more specific about any explicit disagreements around strategy that you may have had with prior exec team members to give us a sense of how you’re thinking about the business going forward with some more granularity? It sounded like it was execution related, but just wanted to be clear there.
A lot of it was execution related. Not lot of it is the – you know focus as well. And as well as reallocation of resources. Again, looking at the way we do business it is going to be different and more successful.
Great. Thanks and then another one on capital allocation, so aside from XFL, you do have a venture portfolio, how do you think about that when it comes to capital allocation and what would be the potential for non-XFL related acquisitions over the next few years? Thanks.
Well I think we will continue to make small equity investments meaning not taking a small equity stake in technologies and businesses that where there are enhancements to or learning’s that can be put into the WWE organization, I don’t think that those are going to be material and – because of the size of the – instance of the size of those investments, so, but I do think it is a valid strategy and has created some opportunities for the business. So, I think we will continue that at a modest level.
I think you just mentioned XFL again, you know there is a totally separate entity.
Great. Thanks again.
And we have a question from Brandon Ross with LightShed Partners.
Hi. Just a couple of clarifying questions, where any WWE network profits excluded from the guidance or do you assume that the network continues as is for the purpose of the guide?
We didn’t assume that any of the strategic options that we are looking at with respect to the network would be achieve and impact of the guidance.
Right, but…
Obviously, ongoing business in the network and our operating plan would be ….
So, you are assuming it is a contributor?
Correct. But nothing new, not in the sense of any new strategic deal or any major change in the way we are doing business in the network or who we are partnering with that would not be included. But we have an ongoing business, you know and that business will continue until we make a change in how it's operated. So, we build our plans and we give our guidance, it is included.
Okay, got it. And then, can you explain a little more specifically who is going to fill George and Michelle's roles within the company? Are you bringing in additional Senior Executives? I think that’s’ what you said, or the business unit leader is going to take on additional responsibilities? How are you going to fill those roles?
We’re in search now with an exceptional talent to come in. At the same time, we have huge faith in our current role in terms of our management team.
Okay. Got it. Thank you.
[Operator Instructions]
Thank you, everyone. We appreciate you listening to the call today and if you have any questions, please do not hesitate to reach out to us. Thank you.
Once again, ladies and gentlemen that concludes today’s conference. We appreciate your participation today. You may now disconnect.