STOCK BRIEF | TKO 4Q23 EARNINGS

Ticker/Company: TKO Group Holdings (TKO) Headline: Takeaways from TKO 4Q23 Earnings Report (2/27/2024) Summary: On Tuesday, active long TKO (Click Here for Dec 2023 Black Book) reported their fourth quarter and full year earnings for 2023. The stock was down after hours after the company gave a full-year guide implying a slowdown in revenue and EBITDA margin compression. The company deliberately excluded fourth quarter 2024 revenues attributable to WWE Raw's media rights out of the guide due to the fact that they haven't secured a distribution partner/deal to bridge the gap between the end of the contract with Comcast/USA network at the end of Q3 and the onset of the Netflix distribution deal on January 1st, 2025 (Click Here for NFLX/TKO Flash Call). Adding back the implied run-rate revenue combined with tailwinds from comping an extra UFC event in 4Q23, the business fundamentals reveal that the business is still positioned to grow revenue and EBITDA year-over-year while expanding margins.  Full Year 2024 Guidance:  Revenue between 2.575B - 2.650B Adjusted EBITDA between 1.150B - 1.170B FCF conversion 'in excess' of 50% Position: TKO an active long

results

UFC

The UFC segment of the business had LSD % revenue growth and negative adjusted EBITDA growth after 3 straight quarters of mid-teens % growth in both revenue and EBITDA. 

• Q4 revenue of 282.2M grew 4.1% Y/Y compared to street estimates of 2.6% growth. Full year revenue grew 13.3% compared to street estimates of 12.85%. 

• Management noted the increase in live events revenue, which accelerated to 34.1% Y/Y in 2023 from 18.3% in 2022, was due to 5 additional events with live audiences and higher site fees. Additionally, media rights and content revenue grew accelerated to 9.6% Y/Y growth from 3.4% partly due to one additional PPV event that was delayed in 2022 due to COVID.

• Total UFC revenue decelerated from 16.7% Y/Y in Q3 to 4.1%Y/Y in Q4 but on a full year basis, total revenue grew 13.3% compared to 10.5% growth in 2022.

• Q4 adjusted EBITDA fell 7.3% Y/Y compared to street estimates for -4.8%. Full year UFC adjusted EBITDA increased 11% Y/Y compared to street estimates of 10.1%. 

• Management cited higher athlete costs, higher production costs from an additional PPV event as well as 5 additional international events as the main drags to UFC EBITDA in 2023. 

• Adjusted EBITDA margin fell from 59.7% in 2022 to 58.5% in 2023 after Q4 margin fell to 50.5% from 59.9% in Q3.

WWE

• Q4 revenue of 331.2M grew 1.8% Y/Y versus street estimates for 4.8% growth. For the full year 2023, WWE made 1,326.4M in revenue but the company only recorded post-merger revenues of 382.8M, representing 2.7% Y/Y growth compared to street estimates of 3.45%. 

• Management said international and domestic ticket sales drove live events revenue, which grew 17% Y/Y in 2023 as the live events schedule returned to normal. Media rights and content fees grew 1.2% in the year as contractual rate increases kicked in in Q4. 

• Sponsorships and consumer product licensing both accelerated sequentially, with the former growing 5% after declining 1.4% in Q3 and the latter growing 5% after declining 35.7% in Q3. On a full year basis, WWE revenue growth was driven by strength in live events, which posted mid-teens revenue growth in 2H23 after growing 176% in Q2 off of an easy COVID comp. 

• Q4 adjusted EBITDA was a bright spot, growing 4% for the full year against street estimates of 3.4% and growing 11.8% Y/Y in Q4 against estimates for 9.4%.

• Management cited content creation costs as the main drag on EBITDA, but those were offset by lower expenses related to 3P original programming and their digital retail/venue merchandise business transitioning to Fanatics.

• WWE adjusted EBITDA numbers aren't apples-to-apples as reported. Headline EBITDA margin was 43%, but when you account for full-year 2023 results, WWE's margin was closer to 40.2%. Full year 2023 EBITDA margin of 40.2% was slightly better than 2022 margin of 39.7%, and we see room for this to grow in 2024 as cost synergies continue to work through the numbers and we factor in the impact of Raw's Q4 distribution deal. 

Revenue and Adjusted EBITDA guidance

When TKO dropped their earnings print, the stock took a dive after guidance implied a revenue slowdown at the midpoint and margin compression from 48.3% to 44.4%. The reported margin of 48% was based on 809.1M in adjusted EBITDA for the full year 2023 and 1,675M in revenue - numbers which don't include full-year WWE results. So at the onset, you can adjust those back to get a combined margin of 41.7% for 2023, which would imply margin expansion even before adjusting 2024 numbers for our two one-timers (Raw and 1 less UFC event). 

At the midpoint, the revenue guidance calls for 2.612B or -0.2% Y/Y growth vs 7.7% 2023 growth and 1.160B adjusted EBITDA or 44.4% margin. 

In our model, we added back two key items outlined by management on the call - 1) WWE Raw's Q4 media rights revenue and 2) the impact of a delayed UFC event in 2023 that was delayed due to COVID. 

On the first item, WWE Raw currently does not have a distribution deal for the fourth quarter of this year. The current deal with Comcast to air Raw on USA Network ends September 30th, 2024 and the new deal with Netflix doesn't begin until January 1st, 2025. Management is confident that they will find an interim solution/partner to bridge the gap, but urged analysts on the call not to assume a revenue number for the quarter. Due to this timing issue, management excluded this revenue item from their full year guidance.

"We believe Raw will, in the fourth quarter be aired. We have no further information than that. We feel pretty positive about it." - Ari Emanuel

"So look, we're going to get on the best platform we can that's best for the brand and the content, the programming, the viewership and our following, but don't assume any dollars. That's why we pulled it out of there" - Mark Shapiro

The run rate for Raw's media rights was given to us at 75M. Running that through our model and assuming 60% margins on that revenue (which we believe is conservative), we can add 75M to our 2024 revenue number and 45M to WWE/TKO adjusted EBITDA. 

The second item is 20M that we added back to the topline to make our 2024 numbers comparable to 2023. UFC had one additional live event in 2023 that they will not stage in 2024, and that is baked into their guide: 

"UFC performance will be impacted by the revenue recognition of its live events. In 2023, we benefited from the delivery of 1 live event we were not able to stage in 2022 due to COVID. This will impact comparability between our '23 and '24 results. Our guidance range is reflective of 2024, having 1 less pay-per-view from a U.S. media rights revenue recognition perspective. We estimate the impact to revenue and adjusted EBITDA to be approximately 20 million."

That 20M flows right through to EBITDA, allowing us to add a cumulative 65M back to our numbers.

All in all, the adjusted guidance has a midpoint of 1.225B, which adds 80 bps of margin. When you adjust for cost synergies, of which TKO should realize ~56M of in 2024 (assuming 75M total cost savings, 75% of which are realized in 2024), we get adjusted EBITDA margin of 43.2% or 220bps larger than 2023. Running that through our scenario analysis that includes the revenue acceleration from Smackdown/Raw rights renewal and the path to a 112 stock is still clear to us.

Notes from the call

Prepared Remarks

• Netflix deal is 5.2B over 10 years (headline was 5B when announced)

• UFC PPV prelims had highest ever average viewership on ESPN linear channels, grew 35% over 2022

• Completed international renewals in Canada (Sportsnet, TVA), New Zealand and Australia (ESPN), India (Sony), and emerging markets in Africa and Europe

• Added Anheuser-Busch as a UFC partner, renewed Monster and Toyo Tires

• 9 premium live events (PLEs) for WWE sold out

• Raw and Smackdown renewal deals in aggregate exceeded 1.4x AAV guidance given by management

• Announced 5-year partnership with Honda Center in Anaheim for live events for UFC and WWE

• Expect 5 UFC events with live audiences in 1Q24 compared to 6 in 1Q23

Q&A

• Netflix Deal / Guidance - expect to have Raw distributed? Quantify it?

• Can't quantify it - excluding Q4 income for Raw in guidance... would be 75M according to current deal terms

• Believe Raw will be aired... feel positive about this

• Don't assume any numbers. We will be on best platform we can. But don't assume any $$

• Capital allocation - you said holding off until 2025... mentioned potentially looking for special situations... if a large shareholder were to sell a lot of stock at once... would you buy it directly? You did global Netflix deal, but no real clarity on international markets NOT included...

• We expect to have meaningful cash flow / cash on hand in 2025, looking at Adj EBITDA range anticipate to build cash throughout the year and will have a meaningful cash position in 2025

• Fine point around cash balance

• Think we would be opportunistic and view any opportunity through creating shareholder value

• We bought 100M / 1.3M shares last time a large shareholder sold

• Obviously we are talking about Vince McMahon... still holds 20M shares and he will do whatever he does

• We have no idea on timing and we have no POV on motives or selling plans so we have same information as you do

• NFLX has right to all international territories when they come available, kicking it off with LatAm and Canada; other territories will roll in when/if they come available

• As the rest of the territories come out over time NFLX has shown they want to go and get them

• We exceeded our guidance... saw 1.4x across the board and exceeded it and got it with NFLX

• 5.2B deal --> more than 5B headline

• With respect to NFLX - how does this impact what you may/may not do with international brand expansion?

• Our NFLX deal doesn't preclude us from creating new content and events and programming internationally, they just have first look rights

• Talked in past about having B2B weekends w/ UFC and WWE... just did it in Anaheim... how do you think about revenue or cost synergies?

• Significant savings on box office

• In 2025, revenue you can imagine sponsorship, ticket packages, site fees, there's significant revenue opportunity

• Analogous to ABC having Sunday/Monday night football

• Significant cost savings for them

• Real halo effect for us on production side of cost synergies

• Sports right landscape, JV from legacy media, continued linear pressure, upcoming UFC WWE network renewals

• We have PLE and UFC deals coming up

• Many players in the market place - based on subs we have at CMCSA with PLEs and UFC on ESPN. Mark just completed CFP negotiation and our NFLX deal

• New entry of JV, industry moving to AVOD/SVOD services

• On JV - Ari and I have no comment.

• NBA think is going positively. Everything is on an upward trend

• Since we bought UFC, just been commentary on sports rights bubble, overvaluation. We faced a lot of these headwinds on WWE renewals

• Platforms WILL pay for premium content and we have premium content and several bidders. Pretty robust marketplace

• When you have volume + year round we are in a good place

• UFC class action lawsuit heading to trial? Any updates? What could happen with a second lawsuit?

• As we've always said, we believe strongly that the fact and law are on our side and we look forward to making our comments

• Been engaged in private mediation

• Are you worried about competing for DIS/ESPN programming budget in 2 years when they're funding several contract renewals and NBA amidst broader corporate commitment to reduce costs? And comments on PFL?

• PFL - look at ratings. We are happy with competition.

• We perform significantly better than them.

• NBA / DIS - we know how much UFC drives ESPN / ESPN+ and we are happy with our relationship and we feel very positively about it. All we will say right now

• NFLX deal - are there cost savings from having one distribution partner? Initial reception from sponsors on cross selling opportunity?

• Hit the nail on the head; deal with NFLX gives them lion share of international content and to the extent there is longer tail WWE Network in the market it will go to Netflix and we can sunset WWE Network and save costs there

• On partnership side of the business; among top 3 revenue synergies we see

• When we (EDR) bought UFC, they were doing 35M in partnership revenue

• Here we are now in 2024 and UFC has a clear line of sight to well over 200M in partnership revenue for the year

• Not only are the dollars, margins, recurring revenue good, we have great marketing partners

• Confident we can materialize the same results on WWE side