TKO Group Holdings, Inc. (TKO) Earnings Call Transcript & Summary

All right. Great. Thanks, everyone, for taking the time to join us today. Welcome, everyone, to the Communacopia and Technology Conference. My name is Stephen Laszczyk, and I'm the lead entertainment analyst here at Goldman Sachs. We are excited to welcome back to the conference, Mark Shapiro, the President and COO of TKO Holdings. Mark, thanks for being with us.

Thanks for having me, Stephen. Day after Labor Day. Thank you.

Happy to have you. Mark, it's hard to believe it's already been 3 years since TKO has become a company. Over that time, you've executed against a number of opportunities you've identified at the point of the original transaction between UFC and WWE, including media rights renewals, sponsorship integrations, driving efficiencies across the cost structure. As you look ahead, what do you see as the next chapter of growth for TKO now that many of those things have been executed on? And what are the top priorities and top focus areas you as a management team are focused on?

Look, it's been a whirl 1 to 3 years, that's for sure. And I think we clearly have benefited/capitalized on some strong secular tailwinds. I mean we sit squarely in the center of a growing ecosystem across sports, entertainment and really live events. And any which way you slice it, when you look at our company, I think, first from a financial profile and then from a fan composition standpoint, it's a strong profile. It's robust, in many ways, bulletproof, given where the market is going and where the environment is going when it comes to content and live events. We're sitting here with strong margins. This year, we'll be up 600 basis points at the midpoint of our guidance to 39.6%, and we will get further expansion in the years to come. We have a very healthy leverage ratio. We'll be below 2x by the end of the year. We're a geiser for cash, and that will just increase in the years to come. And our free cash flow conversion normalized is 60% plus, real strong operating leverage, best-in-class operating teams, and we're #1 in each of our sport properties, right? In professional wrestling, WWE is #1 in combat force, UFC is by far #1. PBR, #1, albeit smaller in bull riding across the globe. And our sports are more and more becoming globalized, right? We're going into new countries, new territories. We're in over 200 countries with our content, and we have almost 1 billion social followers. So real strong currency on that front. We're also a year of execution. We've stayed true to our word that we are going to spend this year improving our product, improving our content, improving our reach, improving our engagement, working with our new media partners with some extraordinary deals. And capitalize and execute on that. We put out a guide 2030 for our global partnerships that we'll do $1.2 billion across our properties. And of course, financial incentive packages are also another strong revenue generator for us, and we put out a guide that we'll do in the frame of $380 million to $420 million. Remember, what we do on financial incentive packages is we go territory to territory and see where it's best to bring our product, both for our brand and our audience, but also for the deal. And through in-kind and often cash because of the economic impact we bring to those territories, cities line up to have our events there, and we're trying to capitalize on that. And then I would say, finally, that we're good stewards of capital. And we are uniquely and laser-focused on returning capital to shareholders, albeit through the dividend and the way we've obviously expanded that and of course, by buying back stock. I mean we are in the market every day right now buying back stock. We believe in the story, and we think among the stories and narratives in sports and entertainment, you'd be hard-pressed to find really, and I say this with all humility, a rocket ship like TKO.

It's a great setup. I want to dig into each of those parts a little bit more. Maybe starting first with the media rights. You've seen WWE now operate with new media rights partners. You have Paramount, you have Netflix, you have ESPN. Can you maybe talk a little bit about how those newer media rights partnerships have evolved over the first year or 2 of being together? And then as you look ahead, where are there still opportunities to improve engagement and improve monetization?

Yes. Look, we're blessed with the media rights deals we have, tremendous partners across the board. USA has been with us forever. Obviously, they're part of [ Verisign ] now. Netflix Monster ad. I mean, we're top 10 in several countries every week with Raw. Of course, Paramount+ a massive deal and growing and giving us great exposure globally, and they're more and more launching in different territories internationally. And then, of course, ESPN and our WWE and our PLEs there. What I would say is, look, Paramount, let's start there because that's our bread and butter, if you will. First of all, they're just a terrific partner. They may be a bigger company, which we didn't plan on with more platforms in the months to come, depending how that negotiation goes. But there -- you go to their platform, you go to Paramount+, and you see we are front and center. We're not an old by the way. We're a focus. We're a focal point for them lined up right next to Lioness, which is Taylor Sheridan's big hit and doing extremely well this year. So you can't miss UFC, whether it's long form or live on Paramount+. It's been a big hit. We're driving acquisition. We're driving retention, and we're seeing terrific engagement. 25% of the viewers that watch Paramount+ also watch UFC. But our fans, the viewer for UFC is 15 years younger than the average viewer consumer that watches Paramount+ on a regular basis. The live event, of course, we had in Washington, D.C. for our country's anniversary birthday celebration is the biggest live event ever on the platform. So that's been a real winner for us. We'll keep driving that. Of course, Paramount+ is a bigger partner that we have a PBR deal with them. We have Zuffa Boxing with them. So we're all in on them. When you look at ESPN, the PLEs are performing well, but soon to get a lot better because they've recently announced a new carriage deal with YouTube TV, which will be big for our fan base, big for our audience, big for our brand, big for our reach, and we'll certainly increase engagement. And what I would say about both these companies, they're among the best marketers in the world when it comes to content. We love our neighbors on Paramount+. And CBS, Masters and the NFL. And of course, ESPN, I mean, just take a look at this weekend, no better example, ESPN Unlimited was out of this world this past weekend. College Football launched, and you go to ESPN Unlimited, and you just have a platform and abundance of games on top of everything else they have like the U.S. open and of course, the NFL launches this week. So we're in a really good position, and we're working with each of those platforms every single day on storylines and building stars. The last thing I would say, Stephen, which I know is important to you is on the international front. Now we don't break out international numbers specifically. And frankly, the media revenue we do internationally is tiny compared to our domestic deals. Having said that, this year alone, we've closed China, Japan, Korea, France and Canada. The average uptake, increase on our rights fee from those 5 deals alone was a 1.7 step. And even though that's small, and again, you have to proportionalize that with our domestic deals, what it does is it drives the brand, it drives the audience. It ultimately supports and enhances financial incentive packages we are offered and global partnerships really drives that. This past weekend, we had a massive event in France, total sellout. Sold a lot of great local partnerships across France to add to the global deals that we bring in there. And I would also tell you, look no further than the outcome, right? We had a card that has a majority of finishes. And the main event was headlined by a first-time fighter, first time in the UFC. Now granted he was French born, but we sold out based on a fighter that was fighting for the first time in a main event. That's never happened before. So we are strong and kicking and Dana White and his team are second [indiscernible].

Maybe touch on sponsorship for a moment. You've outlined ambitions to reach $1.2 billion of sponsorship revenue by 2030. I guess as you think back and think ahead, where have you been the most successful in the sponsorship front. And then as you look ahead, where do you still see the largest long-term opportunity across the portfolio? Is it within a particular vertical? Or is it on one side of the house, UFC versus WWE and the other?

Yes, I think strategically, we have been very transparent in terms of detailing our journey in the global partnership front. If you recall, when we cut the new WWE deal with ESPN and the new UFC deal at Paramount+, we negotiated and ultimately received a good amount of ad inventory. So for the first time, we're selling media. We're selling 30-second spot. Now we told the investor community, "Hey, give us some time. We need to build the team. We need to build a programmatic platform, and we also don't want to get out in front of Paramount+." Now we're well into the deal, and we're beginning to see real traction on the ad inventory front on CPMs and the value. The reach has been strong. The engagement has been strong. And frankly, it's becoming more of a call us versus us calling out. So we are going to have an Investor Day at the end of Q1, just post earnings, I would say. And at that time, if we continue tracking on this front on global partnerships and ad inventory, the way it's going, we are going to revisit that $1.2 billion by 2030. So we're feeling really good about where that's going. And we're working well with our partners. And we're seeing all kinds of different new categories open up to us. I do want to focus on WWE for a second because to your point, where do we see the real upside. There's been a lot written about WWE and, hey, are they getting the same kind of traction they're getting in UFC is it "decelerating". And there's nothing wrong with those questions because we haven't provided that detail. But what I would tell you is the reason why you're mostly seeing some skepticism is because our ad our partnership revenue for Q1 and Q2, we're up 2% and 8%, respectively, versus last year. This is after being up almost 92% going from '24 to '25. So folks are saying, hey, is it slowing down? Are they not getting the traction? Is it not selling through? Couldn't be farther from the truth. The fact is we have a lot of international events in the first half of the year, and that slowed us down. I will tell you that for the year, WWE partnership alone will be up in excess over of 20% versus last year. And what that means is we're going to have a big back end of the year for WWE. And by the way, that's with having 3 fewer events in the third quarter.

Is there a particular thing that's driving that acceleration in the back half of the year and new sponsorship signings that happened midway? Is it the cadence of the fleet and the next year of the plan?

Yes, exactly. It's all of that. It's just timing of when some of these deals actually take up. It's having more domestic events for them to kind of plow into its holistic packages that we're selling with add inventory in them. And we're just -- frankly, we're scoring on the family first message. Remember, WWE is a different audience than UFC. And when it comes to going after families, that's our audience. And the advertisers are starting to see that. And frankly, I'm excited for '27 because we're working with the Walt Disney Company on some special events around Disney and WWE and bringing those 2 audiences together since, of course, what do they have in common, family.

One of the other big opportunities you've highlighted is on the live event side, the premium, lot events roughly or so between the WWE and the UFC. Just talk a little bit about where we are in terms of the cycle of monetizing those events, both on the FIP side of the house as well as in premium hospitality, which seems like there's no shortage of opportunity on the [indiscernible].

On locations have in a day these days. Look, all I would say on that, you have our guide, and we'll certainly get into more detail at Investor Day. But live events are hot. I mean, sports is piping hot and it's not slowing down anytime soon. Why is that? I mean sports is real-time. Sports is unpredictable. Sports is physical. So you can't turn away for it. It's appointment viewing. When you put sports on your calendar, your personal calendar, you're putting in an ink. And these are big headline events that fans line up for. I would also tell you that live events are the infrastructure for premium in a digitized world. And then beyond that, social platforms have turned have really turned live events into broadcast stages for personal identity. So attendance is a social currency. And we're capturing that and we're seeing that in our business. We're ahead of our internal forecast on live events. We're seeing volume across the board. PBR is having more selloff than it's had in the last 5 years alone. And we're getting yields. So it's really been a good story for us. Obviously, still a lot of wood to chop. And remember, we don't always bring our events to where we're going to get maximum profitability. Don't get me wrong, that might sound like a bad business strategy. But we have to balance the 2. We need to go to cities and territories where, yes, they're going to be the most profitable from a global partnership from a live event ticket sales perspective, premium hospitality to your point, financial incentive packages. But we also need to go to cities that we either have a strong fan base and they need to be able to touch the product or we're growing the product the content, the fighters, the superstars in territories where we think there's real upside. And France was a real example of that with the UFC this past week.

One of the areas of the world, we are particularly in questions on at the moment in the Middle East. And I think that's both for the valuable in the region as well as you look out into the next year's slate, in particular, on the WWE side of the house with WrestleMania moving over into the region. Could you talk a little bit about the opportunity in the Middle East, maybe how you see the cadence of events evolving over the near to medium term and then the opportunity as it relates to next year?

Yes. I mean, obviously, nothing bigger next year than WrestleMania being in Saudi Arabia, which will be one to remember and one not to miss. And of course, our partners in Saudi bring the UFC in WWE to their region because they're trying to draw attendance from -- not just around the globe, but certainly in the Middle East. All I would tell you is when it comes to the Middle East, despite what's going on, despite how much longer that may go on they're open for business. And frank -- in fact, I would tell you they're more hungry to bring live events, not just sports but concerts to the Middle East to show the world and tourism and fans that they're open for business, and they're not slowing down. So we've stayed on track with our events for this year. We still have 2 more events this year. We may actually announce a couple more this year. That's how much demand we're seeing. And I think that's ultimately the headline among the lines when it comes to TKO and where we sit in the sports entertainment ecosystem. Demand is outstripping supply.

One of the other questions we had on the Live Events business more on the week-to-week side of the house is around the performance of gate the past 6 or so months. Could you maybe just talk a little bit about what you're seeing at the gate side week-to-week in some of the medium run events that you host and maybe think a little bit more broadly or talk to us about how you think a little bit more broadly about balancing things like pricing and volume on that front?

I mean I think we've covered a good amount of that. I mean at the end of the day, we're -- as I said, we're ahead of internal forecast. Where we have clear price elasticity. Where we -- sells have been strong across all of our properties, including Zuffa Boxing, where we've staged 10 events, we mostly do them, Stephen, at the Apex and Las Vegas. But where we have taken the show on the road 3 times it's been sell on. And that's for a new property, right? I mean Zuffa Boxing is just getting introduced to the average sports consumer around the globe. So we're pleased with where we sit. And more importantly, it's not just that they want to buy tickets that, that business is healthy, it's that the premium hospitality is so strong. Because when we talk about premium hospitality, most investors, and I think press focus on the 1% that they just imagine the 1% wants those special goodies. That's not what's happening. What's happening is the average sports fan who's going to go to 1 to 5 events per year wants to make those experiences count for them and whoever they're bringing friends or family. They want front-of-the-line access. They want personalization. They want customization. And that's why On Location really sits in an enviable position. And we're coming off a very strong [indiscernible] Olympics, a very strong World Cup. And it's been a contributor to the beat and raise that we gave for the full year following Q2 earnings. Now we would have still done that beat and raise without [indiscernible] performance at World Cup. But certainly, that was a contributor. And remember, when we went into the World Cup, all you were reading about was tickets aren't selling hotels [indiscernible] empty is not living up to its promise I think it more than delivered by the time we got to the end. Now we benefited from the big players like Argentina, getting to finals, et cetera, in the U.S. doing so well, but that's the business. I think it took the country by storm and I think the Women's World Cup will do the same thing next year.

[indiscernible] not retired, but an Andre, could you talk a little bit about how you're approaching talent development on both sides of the business? And maybe even taking a step back, thinking about the financial implications of this is your largest expense, how you're thinking about balancing talent expense and maybe the marketing support that goes behind marketing the [indiscernible].