Wwe Report Martin

April 15, 2014

Market DataPrice (04/14/2014) $19.99

52-Week Range $31.98 - $8.56

Shares Out. (MM) 31.9

Market Cap. (MM) $638.2

Avg. Daily Volume 1,525,169.0

Cash & ST INV/Share $1.46

Total Debt/Cap. 10.03%

Stock Price PerformanceWorld Wrestling Entertainment, Inc. 04/15/14

$35.00

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$5.00

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-13

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-13

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14

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14

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-14

Apr-1

4

12

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Volume (mil.) Price (USD)

INITIATING COVERAGE

Stock Rating BUYPrice Target $30.00

Entertainment & Internet

Laura Martin, CFA(917) 373-3066

[email protected]

Dan Medina(212) 705-0295

[email protected]

FY 12/31/2013 FY 12/31/2014 FY 12/31/2015 Actual Old New Old New

Rev. (MM) 508.0E 587.4E 587.4E 780.0E 780.0EGrowth 15.6% 32.8%EPS: 1Q 0.04A (0.17)E (0.17)EEPS: 2Q 0.07A (0.07)E (0.07)EEPS: 3Q 0.03A (0.03)E (0.03)EEPS: 4Q (0.10)A 0.12E 0.12E

EPS: Year 0.04A (0.15)E (0.15)E 1.28E 1.28EGrowth (475.0)% (953.3)%

P/E Ratio NM NM 15.6x

World Wrestling Entertainment, Inc. (WWE)

Action, Passion, Multiple Expansion

INVESTMENT HIGHLIGHTS:We initiate Coverage of WWE with a Buy rating and 12-month target price of $30, nearly50% above current price levels. WWE combines the live aspects of sports (minimalDVR risk) with the passion of soap operas (long viewing times, loyal attendance). Withthe successful launch of WWEs OTT network in 1Q14, we now see WWE as a similarinvestment concept to Netflix, only easier because WWE: 1) owns all its copyrights so ithas no content cost risk and can scale globally faster; 2) includes downside protectionfrom 5-year contracts from TV ecosystems around the world; and 3) has loyal super-fans that drive venue attendance, merchandise sales, and OTT subscriptions.

We initiate coverage with a Buy rating, based on the following analytical building blocks:

Our research coverage focuses on content, offline and online. WWE is the first publiccompany to have significant revenue streams in both worlds, thanks to the launch ofits over-the-top (OTT) Network in February of 2014.

Not all revenue is equally valuable. WWE is replacing its PPV revenue stream witha subscription annuity revenue stream. Recently WWE launched the first 24-hourper day OTT serialized-sports network in the world. It is only distributed over theIntenet. On April 7 (about 6 weeks later) WWE announced that this OTT Networkalready had 667,000 subscribers, despite being the first of its kind. Currently, thisOTT Network is available only in the US, but WWE has announced plans to expandinto the UK, Canada, Australia, New Zealand, Singapore, Hong Kong and the Nordiccountries by 1Q15.

As OTT revenue grows as a percent of total revenue, WWEs valuation multipleshould rise by 2-3 turns, toward online content multiples. Why? Because onlinecontent companies are globally scalable, rapidly growing, and have high incrementalmargins. They also have direct contact with their viewers (i.e., they own theircustomers).

We think the best way to value WWE is to think of its two major old- economyrevenue streams (TV license fees and attendance) as a bond plus option valueupside potential from revenue growth and multiple expansion linked to WWEsnascent OTT Network.

More immediately, WWE appears inexpensive. WWE is currently valued at 2.5x FY14Sales, by our estimates, compared to an average of 3.5x for the old-economy contentcompanies we cover. We believe that WWE will first close the gap with old-economycontent companies and then, as its OTT Network scales globally, we expect WWE tobe increasingly viewed as a substitute for Netflix (with less content cost risk), whichis currently valued at 3.9x FY14E Sales.

Relevant disclosures begin on page 21 of this report.

Investment Thesis & Valuation

WWEs business model is the best of both worlds (our view) because it includes both predictable revenue streams plus revenue upside potential from its nascent over-the-top (OTT) Network. Our valuation analysis concludes that WWE has 2 large, visible/predictable/contractually obligated revenue streams that provide downside protection for investors plus one multiple expansion driver from WWEs new OTT Network. Therefore, the best way to value WWE (our view) is as a bond + warrant analysis.

The Bond

WWE has 2 major revenue streams that are visible because they are either: 1) contractually obligated; or 2) after 3 decades of operations, FCF growth from these sources can be modeled. We note that both of these visible revenue streams participate in enormous economic profit pools with long track records of growth. These predictable revenue streams should provide downside protection for investors.

What are WWEs visible revenue streams? In 2013, WWE reported total revenue of $508mm. Of this, TV Rights Fees represented $161mm, or 32%, plus Live Entertainment (including Venue Merchandise) represented $131mm, or 26%, Together, these two revenue streams represented nearly 60% of WWEs 2013 revenue.

Visible Revenue Stream #1: TV Rights Fees

WWE produces 7 hours of proprietary TV content every single week of the year. (Please see full details in the section of this report entitled Television Rights Fees.) WWE sells these weekly shows under 5-year contracts to linear broadcast and cable TV channels around the world. Key investment positives relating to this contractual revenue stream include:

Global Stats. In 2013, WWEs TV programming was viewed by 650mm homes in 150 countries, in 30 languages and generated 350mm live GRP (gross ratings points). RAW, on USA Network, is the most viewed show on US cable TV and is the longest running serialized show on television. SmackDown on Syfy is the second longest.

Economics. In 2013, WWE reported that total licensing fees for WWEs TV shows globally were $161mm of which the US was $106mm and the rest of the world was $55mm. Of this $55mm, we believe that Indias TV Rights Fees accounted for about $12mm in 2013. In addition, we estimate that total UK revenue was $36mm, of which the TV Rights Fees were about $10mm. (Other sources of revenue in the UK include live events, merchandising sales, and PPV fees). We calculate that WWE had licensing deals in 40 other countries, none of which was larger than $3mm annually.

2015-2019 Contract Payments Upside Potential.

International. WWE recently announced that it had entered into a new 5-year contract in the UK at triple the prior contract payment (implying $30mm/year, up from $10mm/year) and Thailands new contract rose seven-fold (implying $3.5mm/year, up from $500,000/year). These new contracts each begin on 1/1/15. Indias new contract term also begins on 1/1/15, and WWE is currently in negotiations.

Needham & Company, LLC April 15, 2014

Page 2 of 23World Wrestling Entertainment, Inc.

US. Of the $106mm that WWE announced came from the US in 2013, we estimate that NBC (which owns both USA Network which airs RAW- and Syfy which airs SmackDown) represents approximately $85mm annually (ie, 80%). The new 5-year contract term begins on 10/1/14 and, under the terms of the current contract, NBC has the right to match any third-party bid so long as that amount is less than about triple (our estimate of WWEs initial offer) its 2013 payment level. WWE has promised to disclose approximate increases under its new TV contracts during 2Q14. The balance of the US TV Rights Fees come from ION Media (airs Main Event) at $14mm and E (airs Total Divas) at $7mm, by our estimate.

How Big Could it Be? According to WWE, under its current US TV license deals, its content is priced at $0.50 per GRP (gross rating point) compared with MLB Baseball at $5.30, NASCAR at $3.90, NHL at $2.10 and NBA basketball at $1.80. This suggests to us that US license fees could double or triple with the contract that begins on 10/1/14. According to WWE, average variable margins for this revenue stream are 78%, before fixed cost allocations. WWE has guided to FY15 OIBDA of $125mm-$190mm. Our FY15 estimate for OIBDA is $182mm, which assumes a 50% increase in FY15 (plus another 50% increase in FY16) in WWEs TV license fee revenue.

Hidden Asset Value. At the end of every airing, all content rights revert to WWEs library. Some of the episodes air on Hulu after original viewing, but at the end of every license period, all rights revert to WWE. This creates a deep library from which WWE can choose on-demand product for its new OTT Network. In total, WWE has 130,000 hours of content in its library. This represents an important source of hidden asset value, in our view.

Visible Revenue Stream #2: Live Events

In 2013, WWE reported $508mm of total revenue, of which $112mm came from live event ticket sales plus $19mm for merchandise sold AT these live events. Therefore, we calculate that total revenue associated with live events was $131mm in 2013, representing approximately 26% of total WWE revenue.

Globally, WWE produced approximately 320 events globally in 2013, often lasting for 2-4 hours each. WWE has 30 years of weekly live event datapoints, suggesting that DCF modeling can accurately capture best case vs worst case scenarios. This deep well of data makes this revenue stream relatively predictable and therefore visible, in our view. (Please see Figure 7 for our Annual Projections.)

Upside Potential: OTT Network

On February 24, 2014 WWE launched the first 24-hour per day OTT scripted (or serialized) sports network in the world. It is distributed only over the Internet. On April 7 (about 6 weeks later) WWE announced that this OTT Network had reached 667,000 subscribers, despite being the first of its kind. Currently, this OTT Network is available only in the US, but WWE has announced plans to expand into the UK, Canada, Australia, New Zealand, Singapore, Hong Kong and the Nordic countries by 1Q15. All of these launches will be in English.

Although WWEs OTT Network is distributed over the Internet, rather than on the TV, it has a linear channel playing at all times when you enter the site (like TV), plus it has an enormous library of episodes available on-demand (1,500 hours of programming). Cleverly, although WWE owns a total of 130,000 hours of library content, only 1,500 hours are currently available online because WWE plans to refresh its on-demand library and stagger it over time so that subscribers dont tire of the on-demand product. The OTT Networks user interface is easy to use and intuitive, we believe.



The price to consumers of the WWE OTT network is about $10/month, with a 6 month minimum contract. We note that $60 is the identical purchase price of the single event called WrestleMania, which is included for free when consumers buy WWEs OTT Network.

We note that many countries, including Japan, Germany and the UK, have higher broadband penetrations than TV household penetrations. This suggests incremental upside subscriber potential for WWEs OTT Network above its TV subscribers.

Economic Impact of WWEs OTT Network

Historically, WWE has aired many Pay-Per-View events each year, generating a total of $83mm in PPV revenue in 2013. (Please see full details in the section of this report entitled Pay-Per-View Programming.) We expect the US portion (ie, 80%) of the PPV revenue stream to fall to zero by 12/31/14 as WWE moves its US PPV events onto its new OTT Network in an effort to maximize its subscription annuity revenue stream.

WWE has disclosed the following economics:

WWE has stated that, at 1mm subscribers at $10/month each for all of 2015, net revenue from the OTT Network would be $115mm and the OIBDA would break even with the OIBDA WWE will lose from eliminating Pay-Per-View events on television in the US.

At an average of 2mm OTT subscribers throughout FY15, WWE would generate revenue of $225mm and incremental OIBDA of $50mm above the US PPV OIBDA it reported in FY13.

At an average of 3mm OTT subscribers throughout FY15, WWE would generate revenue of $350mm and incremental OIBDA of $150mm above the US PPV OIBDA it reported in FY13.

Multiple Expansion Potential. WWE appears to be transforming from an old-economy media company into an online video company.

The valuation multiples of the old-economy content companies we follow currently range from 10 to 12x EV/FY14E EBITDA, which equates to an average of 3.5x EV/FY14E sales.

The Internet content companies we cover are currently valued at an average of 5.0x EV/FY14E sales. Netflix (NFLX, Buy), which we consider the closest comp to WWE, is valued at 3.9x EV/FY14E sales.

As of last Friday, WWE was valued at 2.5x FY14E sales, by our estimates, compared to an average of 3.5x for the old-economy content companies we cover. We believe that WWE will first close the gap with old-economy content companies, and then as its OTT Network scales globally, we expect WWE to increasingly be viewed as a substitute for Netflix (with less content cost risk), which is currently valued at 3.9x FY14E sales.

WWE Investment Positives

Our Buy recommendation is based on our SmackDown analysis below:

Sports. Sports fees are rising rapidly. WWE has many sports-like qualities including: 1) wrestlers are athletes; 2) the sport creates Superstars; 3) fierce loyalties develop in the fan base; 4) the competition has winners and losers at the end of 2-4 hours; 5) the outcome is UNknown to audiences (although known to WWE wrestlers); and 6) economically, virtually all WWE events are watched live (little DVR playback), which maximizes advertising revenue.



Marketing. There are few marketers who understand their fans and their product as well as WWE seems to, as evidenced by its longevity, enormous library of programming, and compelling economics. WWE is serialized TV entertainment, but its relevance has lasted (so far) 3x longer than most other hit TV series. This is TV programming that has remained relevant to an ever-evolving fan base.

Action with Passion. Like Fox News, which combines news with entertainment to reach loyal audiences, WWE combines sports and entertainment. The scripted nature of WWEs programming elongates viewer engagement, much like soap operas, which maximizes ad revenue and venue attendance over decades. In total, there are approximately 150 actors in WWEs talent pool. Talent spends 2-3 years training in Florida before they work their way up a rigorous live event schedule with 12 matches per week which showcase 24 wrestlers per match. Even if successful, it is extremely difficult to become a Superstar wrestler, but achieving this distinction allows for a long and prosperous career, as evidenced by the fact that John Cena has been a wrestling Superstar for the past 15 years, and The Rock has been at WrestleMania for the past 3 years, despite leaving the wrestling stage for films in 2002, 12 years ago. We note that both The Rocks and Vince McMahons fathers AND grandfathers were involved in wrestling.

Copyrights. WWE owns 130,000 hours of TV programming in its library, plus it produces about 320 new live events each year representing over 500 hours of new original content. In addition, WWE essentially has a monopoly on wrestling content because it acquired almost all wrestling videos ever made, dating back as far as 1945 (69 years ago) when Vince McMahon rolled up the disparate wrestling leagues across the US 30 years ago, when he took over the company from his father. The value of content libraries rises over time, thanks to technology and new devices. Content is not substitutable (ie, Shakespeare in Love is NOT the Avengers) and hits are very hard to produce. Therefore, content libraries have had ever-higher pricing power over decades as new technologies create new revenue streams and new paths to consumers around the world. We would argue that WWE owns the best library on Earth in the segment of TV content called wrestling.

Killer Brand. The WWE Brand is synonymous with wrestling. Owing to its deep library of proprietary content and ongoing creation of premium TV content, WWE is the best wrestling brand in the world (our view). It also has wide and deep moats around its business owing to its dominance in the programming vertical called wrestling. By implication, so long as WWE keeps writing scripts, we believe its premier wresting brand cannot be unseated by a new entrant.

Dynamic. Nielsen research indicates that offline and online video content are complementary. The TV dominates economics while the Internet attracts younger viewers and allows more viewing hours owing to mobile devices. The TV platform is a compelling marketing platform for the online product, and vice versa. In fact, if WWEs OTT channel proves successful, we expect other content companies we cover to launch an OTT channel that allows them to own their consumers. However, we think any OTT network would have to contain mostly new content not currently licensed to the TV ecosystem.

Offshore Expansion. WWEs programming is globally scalable today, and should become ever more so with the launch of the OTT Network worldwide over the next several years. WWE reported that 23% of its 2013 revenue came from outside North America. In 2013, WWEs TV programming was viewed by 650mm homes in 150 countries, in 30 languages and generated 350mm live GRPs. As evidenced by Chart A, approximately 5-15% of fans in



many countries are passionate about WWE programming. In addition, another 25% to 40% are casual fans. Based on Chart 1 from WWE, we believe that, in these 9 countries alone, there are 11mm households with passionate WWE fans that will purchase an OTT Network subscription plus another 32mm that are casual fans that may buy an OTT Network subscription. Our analysis presumes zero revenue from lapsed fans. The OTT network should be available in most of these markets within 24 months.

Chart A: WWEs Global Fan Base

Source: WWE

We note that WWEs Annual Letter to Shareholders (on page 3), WWE stated that More than 50% of television homes across WWEs top global markets (122 million homes) report some level of affinity for WWE content. Of these, 82 million homes are classified as active (passionate and casual fans), representing more than 170 million active fans. These global aggregates represent the upside total addressable market (TAM) for WWEs OTT Network, in our view.

WWE Shares - Key Stats. WWE has a strong balance sheet with $109mm of cash, $30mm of debt, and net cash per share of approximately $1.05 at 12/31/13. WWE currently pays a quarterly dividend of $0.12/share representing a yield of about 2.4%. According to Yahoo finance, there were 4.89mm shares short (about 3 days worth of trading volume) at 3/14/14, up from 4.23mm 30 days earlier. Institutions own approximately 68% of shares in the float.

Nielsen (NLSN, Hold) stats underscore the passion and popularity of WWEs programming:

The average 2013 primetime rating for RAW was 4.6, followed by SmackDown at 3.0, according to Nielsen. These were well above primetime ratings for other cable channels, the highest rated of which included the Disney Channel (rating of 2.5), ESPN (2.3), and Nickelodeon (2.1).

In the US, WWE average viewership per hour is second only to the NFL. For example, Nielsen (live + 7 days DVR) reports that in the 2012-2013 season, WWE delivered ratings of 3.7, above NASCAR at 3.5, NBA basketball at 3.4, MLB baseball at 2.2, NHL hockey at 1.1, UFC cage fighting at 0.9, and Premier League soccer at 0.2.

According to Nielsen Media Research, 36% of WWEs audience in the US is women (implying 64% men). In addition, of total US viewers, 21% are under 18, 23% are 18-23, 21% are 35-49 and 35% are over 50.



Risks to our Target Price

Biting the Hand that Feeds You. By going over-the-top, WWE has gone around the US TV ecosystem to establish a direct relationship with its consumers. The fight for who owns the customer is a fight over economics. We expect the US TV distributors to seek revenge by canceling all PPV events over their wires. This will cost the TV distributors $83-$93mm/year in lost revenue but may well scare the next content company into not making the choices that WWE has made. Essentially, WWE has declared war on the traditional TV ecosystem (our view), which may have negative economic consequences.

Governance. Consistent with many other media companies, WWE has two classes of Shares. The Class A common shares are the public shares. The Class B shares have supervoting powers, at 10 votes per share. Through his ownership of B shares, Vince McMahon controls 83% of the voting power in WWE. In addition, his affiliates control an additional 7% of the vote through their ownership of Class B super-voting shares. By implication, WWE cannot be sold unless Vince McMahon wants it to be sold. In addition, public shareholders have virtually no power to effect change. Finally, its a family business with daughter Stephanie McMahon in the de-facto COO role and her husband in charge of talent development.

Piracy and Theft. Digital technology, with its ease of use and low cost of duplication, represents the dark side of technology and a significant challenge to content owners in the form of Intellectual Property Rights management.

OTT Subscription Cancelations. Because the OTT network is new, it is unclear how many subscribers may stop subscribing after the required 6 months initial contract period. In fact, there is no data on whether subscribers will actually stop paying the $10/month within the first 6 months, even though they promised to pay this amount.

OTT Network Costs. Where will WWE get about 8,700 hours of programming (ie, 24 per day x 365 days per year) for its OTT Network? What will this cost? We note that, as stated above, WWE already produces more than 500 hours of new content each year. If WWE replays each hour of this original programming (that it is already paying for) each day for 7 days (ie, once each day of the week), that would account for about 40% (10 hours/day) of the OTT Networks required programming hours, leaving about 6 hours per day to program with new content. (We assume that the 8 hours from 12 midnight to 8am will be programmed with WWEs extensive library content.) We will be interested to learn what these 6 new hours per day of programming will cost to keep the OTT Network fresh and engaging. If WWE is willing to replay new programming hours 7 times per week, this would dramatically cut down the required hours of content.

Business Discussion & Analysis

WWE, based in Stamford, CT., is a global entertainment company. Over the past 30 years, WWE has created the dominant global brand in wrestling. Best known for its monthly live Pay-Per-View (PPV) shows, including the annual WrestleMania, as well as its weekly televised shows, RAW, SmackDown, WWE Main Event and Total Divas, WWE has built loyal audiences with millions of viewers and attendees.

On February 24, 2014, WWE launched its over-the-top (OTT) Network, called WWE Network. WWEs OTT Network is distributed only via the Internet. WWE Network is



currently available only in the US, at a price of $9.99/month, with plans to expand into 7 other countries over the next 12 months.

WWEs income statement breaks out four business segments:

Live and Televised Entertainment, which was about 75% of revenues and 75% of Segment OIBDA in 2013;

Consumer Products, which was about 15% of revenues and 23% of Segment OIBDA in 2013;

Digital Media, which was about 8% of revenues and 5% of Segment OIBDA in 2013; and

WWE Studios, which is 2% of revenues and negative 3% of Segment OIBDA in 2013.

Figure 1 includes WWEs segment financial information for the past 3 years.

Figure 1 Segment Financial Results, 2011A-2013A

$ in millions 2011A 2012A 2013AREVENUELive & TV Entertainment $340 $354 $382Consumer Products $95 $88 $76Digital Media $28 $35 $39WWE Studios $21 $8 $11

Total Revenue $484 $484 $508

International Revenue $133 $118 $116

% of Total 28% 24% 23%

OIBDA

Live & TV Entertainment $123 $126 $120

Consumer Products $51 $49 $41

Digital Media $7 $10 $8

WWE Studios ($29) ($6) ($13)

Segment OIBDA $152 $180 $156

Unallocated S,G&A ($117) ($117) ($125)

Total OIBDA $36 $63 $30

OIBDA Margin 7% 13% 6%

OIBDA Margin By Business Segment

Live & TV Entertainment 36.3% 35.7% 31.3%

Consumer Products 53.8% 55.4% 53.4%

Digital Media 25.3% 29.9% 20.5%WWE Studios -140.2% -69.6% -117.6%

Source: Company reports.

Live & Television Entertainment

The Live and Television Entertainment business segment consists of 5 line items including: Live Events; Venue Merchandise; PPV Programming; Television Distribution; and, WWE Classics on Demand (DVDs). Revenue streams in this segment are diversified with sales coming from live event ticket sales, merchandise at



events, television rights fees, sponsorship payments, Pay-per View revenue splits plus Video-on Demand fees from cable/satellite/telco operators. Figure 2 summarizes historical and projected financial results for the major groups contained within the segment entitled Live and Television Entertainment.

Figure 2 Live & TV Entertainment Details, 2012A-2016E

$ in millions 2012A 2013A 2014E 2015E 2016E

REVENUE

Live Events $104 $112 $128 $137 $148Venue Merchandise $19 $19 $22 $25 $29Pay-Per-View $84 $83 $46 $20 $15OTT $0 $0 $75 $216 $336Television Rights Fees $140 $161 $198 $253 $278Television Advertising $1 $3 $3 $3 $3Other (includes Classics on Demand) $7 $6 $0 $0 $0 Live & TV Entertainment $354 $382 $471 $654 $808

Source: Company reports, Needham & Company, LLC estimates.

Live Events

At $112mm, Live Events represented 29% of Live & TV Entertainment Segment revenue in 2013. WWE discovers, trains, and creates wrestling Superstars. WWE develops story lines for these Superstars that appeal to its loyal fan base. These story lines play out in the wrestling ring as well as on WWEs weekly television shows. After about 4 weeks, each story line culminates in a televised event, historically distributed on television via Pay-per-View (PPV).

In North America, WWE produced 256 live events that were attended by 1.54MM fans (6,000 average attendance per event) at an average ticket price of $48.63 in 2013. These events were held at major venues throughout the US. These live events are filmed in order to provide content for PPV, linear television shows and, going forward, WWEs OTT network. This format allows WWE to assess the popularity of its storylines and characters in real time, and to make changes to increase fan interest.

Internationally, WWE produced 65 live events for 382,000 fans (5,876 average attendance per event) at an average ticket price of $74.13 in 2013. Live events were held throughout Europe, the Middle East, Asia, Latin America, South Africa and Australia. Many of these countries will receive WWEs OTT Network within the next 12 months.

Venue Merchandise

At $19mm, Venue Merchandise represented 5% of Live & TV Entertainment Segment revenue in 2013. Venue Merchandise consists of the design, sourcing, marketing and distribution of WWE-branded products, including t-shirts, caps and other items that feature WWEs Superstars, Divas and/or the WWE logo. These are sold at the venues during the live performances globally.

Pay-Per-View (PPV) Programming

At $83mm, PPV represented 22% of Live & TV Entertainment Segment revenue in 2013. For the past 30 years, WWE has been a global leader in producing pay-per-view events. WWE typically televises one PPV event per month in the US. For example, in FY13 WWE televised 12 live PPV events in the US.



WWE has stated that its PPV events are among the highest selling live event programs in the industry each year. WWE charges $44.95 for all PPV events during the year, with the exception of WrestleMania, for which it charges $59.95.

For 2012, WWE disclosed that WrestleMania 29 achieved 1.1 million buys in the US and generated approximately $28mm in PPV revenue for WWE from that single PPV event. We note that this represents about half of the total revenue generated from WrestleMania, because we believe that the cable/telco/satellite distributor keeps over half of total revenue from PPV events.

In 2013, we estimate that WWE had 3.6mm viewers of its PPV events globally. Of the total PPV revenue of $83mm reported in 2013, we belive that $63mm of this related to the US and $20mm related to international PPV revenue.

WWE disclosed that total PPV viewers were 3.5mm globally in 2013. We estimate that 2.5mm viewers paid approximately $45 each (or $113mm, of which WWE kept about 45% at $50mm) plus 1.1mm viewers who paid $60 for WrestleMania (or $66mm, of which WWE kept about 50% at $33mm).

Internationally, WWE distributes its PPV events through partners such as BSkyB in the UK, SKY Deutschland in Germany, SKY Perfect TV! in Japan, SKY Italia in Italy, Main Event in Australia, among others.

As evidenced by our projections of this line item in figure 2 above, we expect PPV revenue in the US to move toward zero by 12/31/14 because we expect all PPV events to transition to WWEs OTT Network by 1/1/15. After that, WWE will retain only its international PPV revenue, amounting to about $15-$20mm per year, by our estimates.

Over-The-Top (OTT) Network

WWEs OTT Network did not exist in 2013. In February of 2014, WWE launched the first OTT Network that owns 100% of the programming it airs and the 1,500 hours library content it makes available on-demand. By implication, WWE OTT is the first OTT Network with almost no content cost risk. WWE plans to transition all of its historical PPV programming to this OTT network, as well as airing new behind the scenes interviews, training bouts, reality shows, and other programming not currently televised. On April 1, 2014, WWE announced that it had signed up nearly 700,000 subscribers for its OTT Network at $10 per month for a 6 month minimum.

Television Rights Fees

At $161mm, TV Rights Fees represented 43% of Live & TV Entertainment Segment revenue in 2013. In the US, WWE produces 7 Hours of TV content every single week of the year (yes, 52 weeks/year). More granularly, these 7 hours are made up of 3 hours of RAW aired on Mondays on USA Network plus 2 hours of SmackDown aired on Fridays on Syfy plus 1 hour of Main Event aired on Wednesday nights on ION Broadcast stations plus 1 hour of Total Divas aired on Sunday nights seasonally on E Network.

These shows are sold for 5-year license terms to broadcast and cable TV channels around the world. We estimate that, of the $161mm of total revenue from global TV Rights Fees in 2013, the US TV Rights fees represented approximately $106mm, the UK represented approximately $10mm, India represented approximately $13mm, and Thailand represented about $0.5mm. WWE has announced that it tripled its fees in the UK and Thailand contracts covering the next 5 years, beginning on 1/1/15.

WWE is currently in negotiations for the next 5 year contract in both the US and India. Our estimates assume WWE will succeed in nearly doubling its fees in both the US and India in the next 5 year contract.



Television Advertising

At $3mm, Television Advertising represented less than 1% of Live & TV Entertainment Segment revenue in 2013. This revenue stream is from digital ad sales. We note that WWE holds back zero advertising slots in its televised programing when it sells its TV rights globally.

Other

At $6mm, Other represented 2% of Live & TV Entertainment Segment revenue in 2013. Historically, this group was mostly Classics on Demand which was a subscription video on demand service offering past WWE programs, pay-per-view events, and specials. With the launch of the WWE Network, Classics on Demand ceased operations in January 2014. Going forward, we estimate zero revenue from this line item.

Consumer Products

The Consumer Products business segment consists of Licensing, Home Entertainment and Magazine Publishing. Figure 3 summarizes historical and projected financial results for the major groups contained within the segment entitled Consumer Products.

Figure 3 Consumer Products Details, 2012A-2016E


REVENUE

Licensing (includes WWE Music) $46 $44 $41 $43 $46Home Entertainment $33 $24 $10 $10 $12Magazine Publishing $6 $6 $6 $6 $6Other (includes Appearances) $3 $3 $3 $3 $3 Consumer Products $88 $76 $60 $62 $67


Licensing

At $44mm, Licensing represented 58% of Consumer Products Segment revenue in 2013. WWE licenses the rights to use its brands, logos, characters, and other copyrighted materials to create a myriad of products sold to consumers, including toys, video games, apparel and books.

In total, approximately 150 licensees worldwide distribute WWE products at major retail outlets. Toys and Video Games are the largest two categories of licensed goods for WWE. For example, WWE has a multi-year licensing agreement with Mattel which covers territories throughout the world for its toy products. Similarly, WWE has an agreement with Take-Two Software to publish video games. WWE also records and publishes music to accompany its live and televised entertainment programming.

Home Entertainment

At $24mm, Home Entertainment represented 32% of Consumer Products Segment revenue in 2013. WWE packages and distributes its content in both physical DVD and digital formats. In 2013, WWE released 28 new home video productions worldwide and shipped approximately 4 million DVD and Blue-ray physical units. Revenues in this segment have fallen at rates consistent with overall DVD market declines, and we project that this trend will continue.

Magazine Publishing



At $6mm, Magazine Publishing represented 8% of Consumer Products Segment revenue in 2013. This business segment publishes WWE Magazine, WWE Kids magazine and several special issue magazines.

Digital Media

The Digital Media Segment includes WWE.com and WWEShop. Figure 4 summarizes historical and projected financial results for the major groups contained within the segment entitled Digital Media.

Figure 4 Digital Media Details, 2012A-2016E


REVENUE

WWE.com $20 $23 $26 $29 $32WWEShop $15 $16 $18 $20 $23 Digital Media $35 $39 $44 $49 $55


WWE.com

At $23mm, WWE.com represented 59% of Digital Media Segment revenue in 2013. WWE has websites in 23 countries including China, France, Germany, India, Japan, Poland, Portugal, Spain and Russia. WWE.com promotes the WWE brand utilizing the internet and social media outlets, in addition to distributing online content and selling online advertising.

WWEShop

This segment is WWEs e-commerce storefront for all digital platforms. This group sells merchandise, toys, video games and any other copyrighted media or physical objects offered globally.

WWE Studios

This business segment focuses on the production and global distribution of filmed entertainment content. WWE takes on strategic partners for its films, in order to mitigate WWEs financial risk. Strategic partnerships may include financial support for production, distribution and/or acquisitions.

WWE uses its movies to showcase and promote WWE Superstars globally. Releases in 2013 included The Call, with Halle Berry and WWE Superstar David Otunga, No One Lives and Dead Man Down.

WWEs upcoming slate of films seeks to build on well known TV franchises, such as its two animated films produced in conjunction with Warner Bros featuring Scooby Doo and The Flintstones.

WWE has stated that it intends to dedicate more resources to this division in FY14 and FY15 and could spend up to $20mm per year for a slate of 6-10 films each year.

12-Month Target Price of $30

We initiate coverage of WWE with a 12-month target price of $30. Our target price of $30 is based on a DCF valuation. We use a WACC of 9.4% for WWE and a long-term nominal GDP growth rate of 1%. The standard DCF is widely used on Wall Street



because it is a rigorous bottom-up valuation of the enterprise based on discounting its long-term cash flows and removing the impact of non-cash accounting conventions. Positives and negatives of this valuation methodology are highlighted beside the calculation in Table 5.

Our $30 target price embeds a 10-year EBITDA growth rate of 10% annually beginning in FY15 and represents a 12.2x multiple of forward year (2016E) EBITDA.

Valuation

Our BUY rating is based on several forms of valuation, summarized in Figure 5 below.

Industry

Average*

1 EV/Sales 2.5 3.5

2 EV/OIBDA 144.9 25.5

3 P/E (134.8) 0.9 Breakeven DCF 7.2%

4 FCF/Share ($0.87) $3.06 Calculated as the

5 EV/FCF (22.8) (0.4) 10-Yr EBITDA CAGR required

6 FCF Yield -4% 4% to justify current share price.

* Represents the averages of CBS, DISCA, DIS, MSG, FOXA, SNI, TWX, VIAB and WWE.

Source: Needham & Company estimates.

Figure 5 WWE: Valuation Summary

WWE

The Breakeven DCF valuation methodology uses the current share price to calculate the markets growth expectations for the enterprise, including capital efficiency trends. This valuation methodology concludes that WWE must achieve a 10-year EBITDA compound annual growth rate of approximately 7.2% to justify its current share price. (Please see Figure 9.)

In Figures 10 and 11, we summarize several valuation multiples including EV/Sales. EV/EBITDA and P/E, plus several FCF metrics.

Key Management

Vince McMahon, Chairman of the Board and Chief Executive Officer. Mr. McMahon is part of wrestling dynasty and is a third generation wrestling promoter. Under his leadership, WWE has grown into a global media entity. He has created programs such as RAW, SmackDown and Total Divas, that are followed by millions of viewers on a weekly basis. He is also a well known personality on many WWEs shows. Mr. McMahon is 68 years old.

Stephanie McMahon, Chief Brand Officer. The daughter of Vince McMahon, Stephanie McMahon is responsible for leading WWEs efforts to further enhance its brand reputation among advertisers, media, business partners and investors. She is also responsible for overseeing creative development of all WWE television, pay-per-view programming, print, digital and social media. She is married to Paul Levesque (also known as Triple H).

Paul Levesque, Executive Vice President, Talent, Live Events & Creative. Mr. Levesque oversees talent relations and development of WWE Superstars and Divas. He is manager of worldwide recruitment and live global events. He is also very involved with the creative direction and storylines of WWEs programming. Prior to WWE, he was a Superstar wrestler known as Triple H.



George Barrios, Chief Strategy & Chief Financial Officer. Mr. Barrios joined WWE in 2008 and is responsible for WWEs strategic planning, financial management, television operations, corporate technology and travel operations. Prior to joining WWE, Mr. Barrios worked at The New York Times Company as VP and Treasurer.



Figure 6 Quarterly Financial Projections, FY14E

$ and shares in millions, except per share data 3/31/14E 6/30/14E 9/30/14E 12/31/14E 2014E Q1 Q2 Q3 Q4 2014E

REVENUE

Live Events $20.0 $46.1 $30.0 $31.8 $127.8 -5% 15% 20% 25% 15%

Venue Merchandise $5.2 $8.6 $4.2 $3.6 $21.6 2% 25% 5% 5% 11%

Pay-Per-View $16.0 $15.0 $10.0 $5.0 $46.0 6% -60% -32% -68% -44%

OTT $3.0 $20.0 $24.0 $28.0 $75.0

Television Rights Fees $41.3 $41.8 $48.5 $66.1 $197.6 10% 10% 10% 60% 23%

Television Advertising $0.2 $0.8 $0.7 $0.8 $2.6 5% 5% 5% 5% 5%

Other (includes Classics on Demand) $0.3 $0.0 $0.0 $0.0 $0.3 -67% -100% -100% -100% -94%

Live & TV Entertainment $85.9 $132.4 $117.4 $135.2 $471.0 8% 6% 31% 54% 23%

Licensing (includes WWE Music) $20.2 $7.2 $6.2 $7.8 $41.3 -16% 8% 8% 8% -5%

Home Entertainment $3.99 $3.00 $2.0 $1.0 $10.0 -43% -58% -62% -80% -59%

Magazine Publishing $1.7 $1.3 $1.5 $1.3 $5.7 5% -2% -2% -2% 0%

Other (includes Appearances) $0.6 $0.7 $1.1 $0.7 $3.0 -5% 10% 10% 10% 7%

Consumer Products $26.4 $12.2 $10.7 $10.7 $60.0 -20% -22% -20% -24% -21%

WWE.com $6.3 $7.0 $6.6 $6.6 $26.5 15% 15% 15% 15% 15%

WWEShop $3.9 $3.6 $3.3 $6.9 $17.7 10% 15% 15% 15% 14%

Digital Media $10.2 $10.6 $9.9 $13.5 $44.1 13% 15% 15% 15% 15%

WWE Studios $2.1 $2.4 $2.1 $5.8 $12.3 10% 15% 15% 15% 14%Total Revenue $124.6 $157.6 $140.1 $165.1 $587.4 0% 3% 24% 39% 16%OIBDA

Live Events $4.4 $16.83 $5.9 $3.75 $30.8 -2% 3% 4% 4% 2%

Venue Merchandise $1.8 $3.0 $1.9 $1.4 $8.2 3% 12% 11% 10% 9%

Pay-Per-View $5.6 $6.6 $6.0 $3.0 $21.2 -15% -33% -28% -68% -38%

OTT ($15.0) ($7.0) $0.0 $7.0 ($15.0)

Television Rights Fees $13.2 $13.4 $15.5 $32.0 $74.1 4% 12% -29% 162% 26%

Television Advertising $0.1 $0.3 $0.3 $0.3 $0.9 -63% -58% -63% -63% -62%

Other (includes Classics on Demand) $0.1 $0.0 $0.0 $0.0 $0.1 -102% -100% -100% -100% -101%

Live & TV Entertainment $10.2 $33.1 $29.5 $47.5 $120.3 -52% -14% -17% 96% 1% Live & TV Ent. Margin 11.9% 25.0% 25.1% 35.1% 25.5% -56% -19% -36% 27% -18%Licensing (includes WWE Music) $14.1 $5.1 $4.3 $4.3 $27.8 -30% 18% 31% 19% -11%Home Entertainment $2.2 $1.2 $2.2 $0.2 $5.8 -31% -61% 16% -72% -34%Magazine Publishing $0.2 $0.2 $0.2 ($0.1) $0.5 100% 50% 100% -50% 350%Other (includes Appearances) $0.1 $0.1 $0.1 $0.3 $0.6 0% 0% 0% 0% 0% Consumer Products $16.7 $6.5 $6.8 $4.6 $34.7 -29% -14% 26% 8% -15% Consumer Products Margin 63.4% 53.5% 63.5% 43.4% 57.8% -10% 11% 58% 42% 8%WWE.com $1.3 $1.4 $3.3 $0.3 $6.3 11% 40% 6% 64% 15%WWEShop $1.0 $0.5 $0.6 $0.8 $2.9 20% 25% 20% 14% 19% Digital Media $2.3 $1.9 $3.9 $1.1 $9.2 15% 36% 8% 25% 16% Digital Media Margin 22.5% 18.0% 39.2% 8.4% 20.9%WWE Studios $0.0 ($2.3) ($2.3) ($2.3) ($6.9) -100% 475% -69% -2400% -46%Segment OIBDA $29.2 $39.2 $37.9 $50.9 $157.3 -30% -17% 2% 73% 1%

Unallocated S,G&A ($42.0) ($40.0) ($35.0) ($30.0) ($147.0) 37% 24% 28% -15% 17%

Total OIBDA ($12.8) ($0.8) $2.9 $20.9 $10.3 -213% -105% -70% -474% -66%

OIBDA Margin -10% 0% 2% 13% 2%

Total D & A $6.8 $6.8 $6.8 $6.8 $27.0 30% 11% 4% 2% 11%

Op Income ($19.5) ($7.5) ($3.8) $14.2 ($16.7) -420% -185% -220% -216% -383%

Net Interest ($0.2) ($0.2) ($0.2) ($0.2) ($0.8) -85% -50% -300% -167% -38%

Income Before Tax ($19.7) ($7.7) ($4.0) $14.0 ($17.5) -511% -192% -223% -218% -480%Provision for Taxes ($6.9) ($2.7) ($1.4) $4.9 ($6.1) -484% -184% -257% -222% -422%

Effective Tax Rate 35% 35% 35% 35% 35%

Net Income ($12.8) ($5.0) ($2.6) $9.1 ($11.4) -527% -196% -209% -215% -521%

Diluted EPS - Contg Ops ($0.17) ($0.07) ($0.03) $0.12 ($0.15) -526% -196% -209% -215% -518%

Avg. Dil Shs Out. 75.5 75.5 75.5 75.5 75.5 0% 0% 0% 0% 0%

Sources: Company Reports, Needham & Company estimates.



Figure 7 Annual Income Statement Details, 2012A-2016E


REVENUE

Live Events $104 $112 $128 $137 $148Venue Merchandise $19 $19 $22 $25 $29Pay-Per-View $84 $83 $46 $20 $15OTT $0 $0 $75 $216 $336Television Rights Fees $140 $161 $198 $253 $278Television Advertising $1 $3 $3 $3 $3Other (includes Classics on Demand) $7 $6 $0 $0 $0

Live & TV Entertainment $354 $382 $471 $654 $808Licensing (includes WWE Music) $46 $44 $41 $43 $46Home Entertainment $33 $24 $10 $10 $12Magazine Publishing $6 $6 $6 $6 $6Other (includes Appearances) $3 $3 $3 $3 $3

Consumer Products $88 $76 $60 $62 $67WWE.com $20 $23 $26 $29 $32WWEShop $15 $16 $18 $20 $23

Digital Media $35 $39 $44 $49 $55

WWE Studios $8 $11 $12 $14 $19

Total Revenue $484 $508 $587 $780 $949

OIBDA

Live Events $26 $30 $31 $52 $55

Venue Merchandise $7 $8 $8 $9 $10

Pay-Per-View $45 $34 $21 $9 $7

OTT $0 $0 ($15) $71 $111

Television Rights Fees $53 $59 $74 $144 $159

Television Advertising $1 $2 $1 $2 $2

Other (includes Classics on Demand) ($6) ($13) $0 $0 $0

Live & TV Entertainment $126 $120 $120 $287 $344

Live & TV Ent. Margin 36% 31% 26% 44% 43%

Licensing (includes WWE Music) $32 $31 $28 $30 $32

Home Entertainment $15 $9 $6 $2 $3

Magazine Publishing $1 $0 $0 $0 $0

Other (includes Appearances) $0 $1 $1 $1 $1

Consumer Products $49 $41 $35 $34 $36

Consumer Products Margin 55% 53% 58% 54% 54%

WWE.com $8 $6 $6 $7 $8

WWEShop $2 $2 $3 $4 $5 Digital Media $10 $8 $9 $11 $13 Digital Media Margin 30% 21% 21% 23% 23%

WWE Studios ($6) ($13) ($7) $0 $5

Segment OIBDA $180 $156 $157 $332 $398

Unallocated S,G&A ($117) ($125) ($147) ($150) ($150)

Total OIBDA $63 $30 $10 $182 $248

OIBDA Margin 13% 6% 2% 23% 26%

Total D & A $20 $24 $27 $30 $30

Op Income $43 $6 ($17) $152 $218

Net Interest Expense ($1) ($1) ($1) ($3) ($3)

Income Before Tax $43 $5 ($17) $150 $215

Provision for Taxes $11 $2 ($6) $52 $75

Effective Tax Rate 27% 41% 35% 35% 35%

Net Income $31 $3 ($11) $97 $140

Diluted EPS - Contg Ops $0.42 $0.04 ($0.15) $1.28 $1.84Avg. Dil Shs Out. 74.9 75.4 75.5 76.0 76.0




Figure 8 Target Price Calculation - Traditional DCF, 2015E-2024E

$ and shares in millions, except per share data

Valuation Conclusions % of Total Standard Discounted Cash Flow (DCF) Valuation

Sum of PV of Free Cash Flow 1 $984 41% Why We Calculate: DCF is a rigorous bottoms-up valuation

PV of Terminal Value Discounted at WACC 1 $1,279 54% of the enterprise focusing on cash flows (not accounting) Value of Operations (WACC Method) $2,263 95% StrengthsPlus: Excess Cash at 12/31/13 $109 1 Focuses on operations. Removes financingPlus: Non-Consolidated Assets (From PMV) $0 2 Focuses on FCF. Removes non-cash accountingLess: Minority Interest $0 3 Explicitly forecasts capital needs (WC & CapX)

Less: Unfunded Retirement Liabilities $0 3 Uses a levered beta (widely available) Enterprise Value $2,372 100% 4 Ent value focus captures entire business modelLess: Debt at 12/31/13 ($30)Less: Lease Obligations ($42) WeaknessesLess: Preferred Stock Outstanding $0 1 Many assumptions. Valuation can be manipulatedLess: Value of Options & Restricted Sk, After-tax ($11) 2 Terminal value big & based on low visiblity projections Common Equity Value $2,290 97% 3 Model assumes constant debt/equity ratioFully Diluted Shares Out, 2014E 76 4 Complex to calculateDCF Value/Share $30.33 5 Calculates the enterprise value first, then equity valueCurrent Share Price @ 4/11/14 $20.29Upside Potential (DCF-Current Price/Current Price) 49%

1 Calculation of the Value of Operations (WACC Method) CAGR

FYE 12/31: 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E '15-24EOIBDA (after sk comp exp &

corp): $10 $182 $200 $219 $240 $263 $288 $316 $346 $380 $416 9.6%

- Depreciation ($27) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30) + Option Exercise Proceeds $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1+ Int & Inv Income only $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2EBIT ($14) $155 $173 $192 $213 $236 $261 $289 $319 $353 $389Cash Taxes (at 35%) $2 ($47) ($52) ($58) ($64) ($71) ($78) ($87) ($96) ($106) ($117)Plus: Depreciation $27 $30 $30 $30 $30 $30 $30 $30 $30 $30 $30Plus: Sk Based Comp Exp $6 $7 $8 $8 $8 $8 $8 $8 $8 $8 $8Working Capital Change ($25) ($17) ($17) ($13) ($13) ($13) ($13) ($13) ($13) ($13) ($13)Less: Capital Spending ($43) ($43) ($43) ($33) ($33) ($33) ($33) ($33) ($33) ($33) ($33)FCF from Operations ($46) $86 $99 $127 $142 $158 $175 $195 $216 $239 $265 13.3%

PV Discounted at WACC 2 $79 $83 $97 $99 $101 $102 $104 $105 $106 $108

Sum of PV of Free Cash Flow $984

Terminal Value of 2024E FCF 3 $3,147

PV of Terminal Value at WACC 2 $1,279Discount Period 1 2 3 4 5 6 7 8 9 10

2 Calculation of WACC: (Updated 8/20/11) 3 Calculation of Terminal Multiple (WACC Method)

10-Year Risk Free Rate ("RFR") 2.0% WACC 9.4%Equity Risk Premium (Ibbotson-Arithmetic) 6.0% Long-term Nominal GDP Growth 1.0%Beta (Yahoo Finance) 1.70 WACC-GDP Growth 8.4%Target Equity/(Debt + Equity) 70% FCF Terminal Multiple [1/(WACC-Growth Rate)] 11.9 Debt Rating BBB- EBITDA Terminal Mutiple 7.6Debt Spread 2.5%Marginal Tax Rate ("T") 35.0%WACC 9.4%

(RFR+(Equity Risk Premium x Beta)) x Equity/Total Capital +

((RFR + Debt Spread) x (1-T) x Debt/Total Capital). Sources: Company Reports, Needham & Company estimates.



Figure 9 Breakeven Discounted Cash Flow (DCF) Valuation Calculation, 2015E - 2024E

$ and shares in millions, except per share data

Valuation Conclusions % of Total Breakeven Discounted Cash Flow Valuation

Sum of PV of Free Cash Flow 1 $792 49% Why We Calculate: BE DCF uses the current share price to

PV of Terminal Value Discounted at WACC 1 $717 44% calculate the market's growth expectations for the enterprise. Value of Operations (WACC Method) $1,510 93% StrengthsPlus: Excess Cash at 12/31/13 $109 1 Makes no assumption about growth for first 10 yearsPlus: Non-Consolidated Assets (From PMV) $0 2 Prevents over-optimism by working backwards Less: Minority Interest $0 3 Data widely available and model well understood

Less: Unfunded Retirement Liabilities + Residual Costs $0 4 Explicitly forecasts capital needs (WC & CapX) Enterprise Value $1,619 100% 5 Uses a levered beta (widely available)Less: Debt at 12/31/13 ($30)Less: Lease Obligations ($42)Less: Preferred Stock Outstanding $0 WeaknessesLess: Value of Options & Restricted Sk, After-tax ($11) 1 Terminal value big & based on low visiblity projections Common Equity Value $1,536 95% 2 Model assumes constant debt/equity ratioFully Diluted Shares Out, 2014E 76 3 Complex to calculateBreakeven DCF Value/Share $20.35 4 Calculates the enterprise value first, then equity valueCurrent Share Price @ 4/11/14 $20.29Discount to DCF Value (DCF-Current Price/DCF) 0%

1 Calculation of the Value of Operations (WACC Method) Required LT

FYE 12/31: 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E Growth RateOIBDA (after sk comp exp &

corp): $10 $182 $195 $210 $225 $241 $258 $277 $297 $318 $341 7.2%

- Depreciation ($27) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30) ($30)

+ Option Exercise Proceeds $1 $1 $1 $1 $1 $1 $1 $1 $1 $1 $1

+ Int & Inv Income only $2 $2 $2 $2 $2 $2 $2 $2 $2 $2 $2

EBIT ($14) $155 $168 $183 $198 $214 $231 $250 $270 $291 $314

Cash Taxes (at 35%) $5 ($47) ($51) ($55) ($59) ($64) ($69) ($75) ($81) ($87) ($94)

Plus: Depreciation $27 $30 $30 $30 $30 $30 $30 $30 $30 $30 $30

Plus: Sk Based Comp Exp $6 $7 $8 $8 $8 $8 $8 $8 $8 $8 $8

Working Capital Change ($25) ($30) ($35) ($25) ($25) ($25) ($25) ($25) ($25) ($25) ($25)

Less: Capital Spending ($43) ($43) ($43) ($33) ($33) ($33) ($33) ($33) ($33) ($33) ($33)

FCF from Operations ($43) $73 $78 $108 $119 $130 $142 $155 $169 $184 $200 PV Discounted at WACC 2 -412% $67 $66 $83 $83 $83 $83 $83 $82 $82 $81

Sum of PV of Free Cash Flow $792

Terminal Value of 2024E FCF 3 $2,379

PV of Terminal Value at WACC 2 $717

Discount Period 1 2 3 4 5 6 7 8 9 10

2 Calculation of WACC: (Updated 8/20/11) 3 Calculation of Terminal Multiple (WACC Method)

10-Year Risk Free Rate ("RFR") 2.0% WACC 9.4%Equity Risk Premium (Ibbotson-Arithmetic) 6.0% Long-term Nominal GDP Growth 1.0%Beta (Yahoo Finance) 1.70 WACC-GDP Growth 8.4%Target Equity/(Debt + Equity) 70% FCF Terminal Multiple [1/(WACC-Growth Rate)] 11.9 Debt Rating BBB- EBITDA Terminal Mutiple 7.0Debt Spread (10 Year, Bonds Online) 2.5%Marginal Tax Rate ("T") 35.0%WACC 9.4%

(RFR+(Equity Risk Premium x Beta)) x Equity/Total Capital +

((RFR + Debt Spread) x (1-T) x Debt/Total Capital). Sources: Company Reports, Needham & Company estimates.



Figure 10 Summary Valuation Multiples Figure 11 Free Cash Flow Valuation Metrics

$ and shares in millions, except per share data $ and shares in millions, except per share data

Valuation Conclusions 2014E Valuation Conclusions 2014E

Market-Based Enterprise Value 1 $1,494 FCF/Share 2

($0.87)

2014E Sales (From Annual Projections) $587 Current Price 4/11/14 $20.29

EV/Sales 2.5 FCF Yield -4%

Market-Based Enterprise Value 1 $1,494 FCF 2

($66)

2014E OIBDA (From Annual Projections) $10 2014E OIBDA (From Annual Projections) $10

EV/OIBDA 144.9 FCF Conversion Rate (FCF/OIBDA) -636%

Target Price $30.00 Market Based Enterprise Value 1

$1,494

Target Price EV/2015 OIBDA 12.2 FCF 2

($66)

EV/FCF (22.8)

Current Price 4/11/14 $20.29 Net Debt/OIBDA (7.7)

2014E EPS (From Annual Projections) ($0.15) Net Debt ($80)

P/E Ratio (134.8) Net Debt/Market Cap -5%

1 Calculation of Market-Based Enterprise Value 2 Calculation of Free Cash Flow

Year End 12/31: 2014E Year End 12/31: 2014E

Current Share Price 04/11/14 $20.29 OIBDA $10

Fully Diluted Shares Out 76 Plus: Option Exercise Proceeds $1

Market Capitalization $1,532 Less: Cash Interest Expense ($1)

Minority Interest $0

Less: Excess Cash ($109) Less: Preferred Dividends $0

Less: Non-Consolidated Assets $0 Less: Operating Cash Taxes ($4)

Plus: Unfunded Retirement Liabilities $0 Less: Change in Working Capital ($30)

Plus: Debt at 12/31/13 $30 Less: Capital Spending ($43)

Plus: Lease Obligations $42 Free Cash Flow ($66)

Plus: Preferred Stock Outstanding $0 Less: Dividends ($35)

Plus: Options & Restricted Sk Outstanding $11 Free Cash Flow After Dividends ($101)

Market-Based Enterprise Value $1,494

Sources: Company Reports, Needham & Company estimates. Shares Outstanding 76

FCF/Share ($0.87)

FCF/Share After Dividends ($1.33)

Sources: Company Reports, Needham & Company estimates.



Table 12: Laura Martin & Dan Medina Coverage List - Comparative Valuation Analysis$ and shares in millions, except where noted & per share data 04/11/14

Ticker Rating

Mkt Cap

($B)

Break-even

DCF

EV

($B)

EV/ '14

Sales

EV/ '14

EBITDA 2014 P/E

Target

Price

Current

Price

Target/

Current

Online Content

1 AOL, Inc. AOL BUY $3.4 0% $4 1.6 7.9 17.1 $57 $41.72 37%

2 Bankrate, Inc. RATE BUY $1.7 9% $2 3.4 12.4 23.5 $25 $16.03 56%

3 Demand Media, Inc. DMD HOLD $0.4 6% $0 1.3 9.3 41.0 NA $4.40

4 Facebook FB BUY $147.6 13% $136 12.2 19.7 46.0 $80 $58.53 37%

5 Netflix NFLX BUY $20.5 8% $21 3.9 32.2 67.3 $525 $326.71 61%

6 Pandora Media P BUY $5.8 23% $6 5.2 84.9 87.4 $41 $25.31 62%

7 TripAdvisor, Inc. TRIP BUY $11.8 9% $12 8.1 19.2 28.7 $125 $78.99 58%

8 Worldwide Wrestling Ent. WWE BUY $1.5 7% $1.5 2.5 145 (135) $30 $20.29 48%

9 Yahoo! YHOO HOLD $32.8 -6% $31 6.9 21.9 19.9 NA $32.87

Average 5.0 39.2 21.8

Offline Content

10 CBS CBS BUY $30.8 6% $40 2.6 10.2 15.1 $83 $58.68 41%

11 Discovery Communications DISCA HOLD $26.8 6% $32 4.9 12.1 21.6 NA $77.67

12 Disney DIS HOLD $128.6 6% $139 2.7 9.3 16.8 NA $77.01

13 Madison Square Garden MSG HOLD $4.2 10% $4 2.8 11.4 24.3 NA $54.04

14 21st Century Fox FOXA BUY $71.1 5% $78 2.3 10.0 17.4 $36 $31.91 13%

15 Scripps Networks Interactive SNI BUY $10.6 6% $11 5.0 11.3 18.8 $100 $73.46 36%

16 Time Warner Inc TWX HOLD $57.1 6% $78 5.3 10.6 16.0 NA $62.76

17 Viacom VIAB HOLD $33.6 5% $45 3.0 9.4 12.9 NA $81.94

Worldwide Wrestling Ent. WWE BUY $1.5 7% $1.5 2.5 145 (135) $30 $20.29 48%

Average 3.5 25.5 0.9

Content-Adjacent Value Drivers

18 Nielsen Company BV NLSN HOLD $16.5 6% $23 3.6 11.7 27.5 NA $42.68

19 Synacor SYNC HOLD $0.1 22% $0.1 0.6 20.1 -38.9 NA $2.53

20 Time Warner Cable TWC HOLD $37.8 3% $62 2.8 7.4 17.6 NA $133.08

Income Statement Balance Sheet FCF Data

Revenue

2014E

EBITDA

2014E EPS 2014E Net Debt

Debt

Ratin

g WACC

FCF/

Share EV/FCF

FCF

Yield

Dividend/

Share Div. Yield

Conflicts

Disclosure

1 AOL, Inc. $2,474 $500 $2.43 ($207) BBB- 10% $5.10 9.4 12% $0.00 - B

2 Bankrate, Inc. $527 $147 $0.68 $67 B 10% $0.45 38.6 3% $0.00 - B

3 Demand Media, Inc. $365 $52 $0.11 ($57) B 10% $0.03 199.4 1% $0.00 - B

4 Facebook $11,133 $6,906 $0.94 ($11,449) BBB 10% $2.18 24.7 4% $0.00 - B,G

5 Netflix $5,352 $654 $4.86 ($700) BBB 10% $7.01 47.9 2% $0.00 - B,G

6 Pandora Media $1,106 $67 $0.29 ($344) BBB- 10% $0.36 69.9 1% $0.00 - B

7 TripAdvisor, Inc. $1,189 $614 $2.22 ($114) BBB- 10% $3.19 24.6 4% $0.00 - B, G

8 Worldwide Wrestling Ent. $587 $10 ($0.15) ($80) BBB- 9% ($0.87) (22.8) -4% $0.48 2%

9 Yahoo! $4,446 $1,409 $1.65 ($3,408) A- 11% $0.42 57.2 1% $0.00 - B, G

Average $1.98 49.9 3%

10 CBS $15,272 $3,871 $3.41 $7,939 BBB- 10% $5.47 13.8 9% $0.48 0.8% B

11 Discovery Communications $6,565 $2,689 $3.59 $6,141 BBB 10% $4.83 19.4 6% $0.00 - B, G

12 Disney $48,313 $14,832 $4.05 $11,004 A 10% $4.33 19.2 6% $0.86 1.1% B

13 Madison Square Garden $1,481 $390 $1.81 ($155) BBB- 11% ($0.46) (124.0) -1% $0.00 - B, G

14 21st Century Fox $31,250 $7,736 $1.45 $12,427 BBB+ 10% $2.04 17.1 6% $0.25 0.8% B, G

15 Scripps Networks Interactive $2,716 $994 $3.92 $748 BBB+ 10% $2.94 26.5 4% $0.80 1.1% B

16 Time Warner Inc $14,734 $7,331 $3.91 $18,303 BBB 9% $2.87 29.8 5% $1.27 2.0% B

17 Viacom $13,743 $4,784 $5.52 $10,469 BBB+ 10% $6.38 17.3 8% $1.20 1.5% B, G

18 Worldwide Wrestling Ent. $587 $10 ($0) ($80) BBB- 9% ($0.87) (22.8) -4% $0.48 2.4%

Average $3.06 (0.4) 4%

19 Nielsen Company BV $6,400 $1,986 $2.49 $6,076 BBB- 10% $2.74 21.9 6% $0.80 1.9% B

20 Synacor $103 $3 ($0.06) ($36) B 10% ($0.18) (12.1) -7% $0.00 - B,G

21 Time Warner Cable $23,067 $8,327 $7.56 $24,527 BBB 10% $9.90 22.0 7% $3.00 2.3% B

Sources: Needham research, Company documents, FirstCall, Yahoo Finance. Questions: Laura Martin, CFA. (917) 373-3066. [email protected]



Valuation (Price Target: $30.00) We initiate coverage of WWE with a 12-month target price of $30. Our target price of $30 is based on a DCF valuation. We use

a WACC of 9.4% for WWE and a long-term nominal GDP growth rate of 1%. Our $30 target price embeds a 10-year EBITDAgrowth rate of 10% annually beginning in FY15 and represents a 12.2x multiple of forward year (2016E) EBITDA.

Potential Upside Drivers WWEs business model is the best of both worlds (our view) because it includes both predictable revenue streams plus

revenue upside potential from its nascent over-the-top (OTT) Network. Our valuation analysis concludes that WWE has 2large, visible/predictable/contractually obligated revenue streams that provide downside protection for investors plus onemultiple expansion driver from WWEs new OTT Network. Therefore, the best way to value WWE (our view) is as a bond +warrant analysis.

Risks to Target Risks include: 2 classes of shares which enable Vince McMahon to control 83% of the votes, piracy and theft of WWE's content;

and OTT subscription levels and timing are unpredictable.

April 15, 2014


ANALYST CERTIFICATION

I, Laura Martin hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company (ies) and its (their) securities.I, also certify that I, have not been, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report.

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April 15, 2014


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April 15, 2014


Wwe Report Martin

Documents

Transcript of Wwe Report Martin