Why WWE Network Subscriptions Might Not Be A Big Deal

World Wrestling Entertainment, Inc. WWE is scheduled to report its third quarter results on October 30 before market open. The company is expected to lose $0.17 per share on revenue of $133.2 million, according to consensus analyst estimates.

WWE reported its second quarter results on July 31. At that time, the company lost $0.18 per share, a penny better than expected, while revenue of $156.3 million fell short of analyst expectations by $1.6 million. The company disclosed it will record a one-time, pre-tax restructuring charge of approximately $4.5 million in the third quarter while guiding a $10-million reduction in full-year 2014 expenses.

Mangrove Partners Lays The Smackdown

Shares of WWE tumbled following a short thesis presentation by Mangrove Partners on October 22. The main thesis, based on an interview with CNBC, consisted of the belief that WWE would need to double its WWE Network subscription base to justify its $1-billion market valuation.

The fund also said that the company will not meet its subscriber targets for its over-the-top (OTT) network, and new subscriptions will be disappointing.

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The bearish thesis instilled panic among investors ahead of the company's earnings report, which will include business updates along with the closely-watched subscriber growth.

However, concerns over WWE's subscribers growth has been an issue Lemelson Capital Management has raised since it disclosed a short position in WWE shares on March 17.

"As far as the direct network is concerned, it seems while initial subscribers are likely to be strong, it is hard to foresee large numbers signing up on an ongoing basis," Lemelson Capital disclosed in its short case for WWE on March 17.

Lemelson Capital reiterated its position in April that WWE will have a hard time reaching its subscriber numbers for its OTT network, a view that has remained since.

On May 16, Lemelson Capital Management disclosed that it holds a long position in shares of WWE after reversing its short position.

Has The Short Ship Sailed?

Benzinga reached out to Reverend Emmanuel Lemelson, chief investment officer of Lemelson Capital Management.

Lemelson told Benzinga that "the short ship has sailed" with shares trading around $13, given the fact that shares traded as high as $31.98 within the past 52 weeks.

Lemelson added that WWE is "clearly an acquisition target" and that Mangrove's timing in shorting the stock at a $1 billion valuation is flawed. He believes that the WWE franchise was worth around $1 billion before the launch of the OTT network.

"The fact is you could give $1 billion to just about any management team in the world and they would have a very hard time recreating the WWE franchise -- even given nearly limitless time -- in terms of its extraordinary brand strength and customer loyalty," Lemelson told Benzinga.

Lemelson believes that WWE is in a "special situation" as the company has poor fiscal management, but excellent creative management. As such, he believes a new executive management team or the sale of the company is a likely scenario that will play out in the future.

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Third Quarter Expectations: Does It Really Matter?

If WWE discloses during its third quarter that it might not reach its subscriber targets, shares are unlikely to react violently downward, according to Lemelson. He believes the McMahon family is interested in selling the business, thus providing shares protection from further downside.

Lemelson said that WWE is not likely to meet its one million user subscriber goal for the year. Moreover, the company has already acknowledged that it will require more than one million users to be profitable.

"WWE is truly a piece of ‘Americana' with global appeal," Lemelson said, noting the international appeal of the brand provides "considerable opportunity" for any potential acquirer.

Investors concerned that troubling subscriber growth at Netflix, Inc. NFLX may prove to be a preview for poor subscriber growth at WWE may be mistaken.

"WWE's results are probably not going to shine, but it has nothing to do with Netflix," Lemelson said.

Bottom Line

Lemelson explained that a poor third-quarter result coupled with encouraging guidance is unlikely to have a significant impact on share price. The reverse holds true that a solid third-quarter result coupled with cautious guidance is likely to result in no significant movement in the stock price.

"The OTT network was a brilliant idea, but the timing and execution from a strategic partnership perspective were wrong," Lemelson concluded. "The real value of WWE is not the OTT network; it's the moat around its brand and prospective earnings power under the right fiscal leadership."