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

Good morning, everybody. Welcome to Morgan Stanley's TMT Conference. I'm Ben Swinburne, quick disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. And I'm really excited to welcome -- kick us off here day 1, Slot 1, President and COO of TKO Holdings, Mark Shapiro. Mark, thanks for being here.

Always. Good to see you, Ben. Last few days. I didn't know if I was going to walk in and get Sean or not. Soon to come.

Soon to come. Soon to come. So last week, you reported your fourth quarter results. You provided 2026 guidance to the market. Maybe just to level set the audience here, talk about the outlook for next -- for this year and kind of the strategic priorities for the company as you look ahead.

Look, I think that we are barring everything else, we're a high-quality execution story, as we talked about on the earnings call with really multiple avenues and levers of outperformance. I think it starts with media rights. In our first couple of years being public here was what's going to happen with WWE renewal? What's going to happen with UFC renewals? Are you going to split it up? How many platforms? I mean, I would tell you that was probably the most popular question of any interview we did. And we came out of the shoot and we've done an aggregate of $15 billion of media deals across all of our properties over the next 5 to 7 years. So it's strong visibility, recurring, contractual and easy to model when you have that as driving the entire ship. Then you've got our partnerships, right, which we recently said where we had a guide out there or I should say, a target really that was $1 billion by 2030. And now we've raised that to $1.2 billion. And again, mostly contractual, recurring, high visibility, high margin. On the live events side, despite what's going on in the world, and I'm sure we'll talk about that, we're seeing this big pickup for our events, right? The experience economy is alive and kicking, and we have elasticity on pricing, especially at the WWE, which has been a good story for us. And we've announced a real target for our financial incentive packages, which are fees that are paid to us from local governments and municipalities to bring our show to town, sometimes hard cash, sometimes value in kind, sometimes just subsidies. But we put a target out there of about $380 million to $420 million by 2030. And at the same time, keep in mind, on a run rate right now, we're at $240 million -- $300 million, but take away some of the one-timers, we're at $240 million. So $240 million to $380 million is going to be a good story for us. I think you flip over to some of the smaller businesses that certainly round out the wheel and sort of our platform strategy, but aren't as high margin, you've got on location where Milan, I was there for the better part of the Olympics, just a sensational story. I think for sports overall, for culture, for the world, a nice peaceful time for a couple of weeks, which is the way it's supposed to be. And Milan was a big winner in LA28, I had a meeting with Casey Wasserman last week. They've got 7 million presale sign-ups for the Olympics, not tickets that have been bought, just folks saying, put me in line to buy tickets. That's triple what we had for Paris. So that's going to be a really strong story. IMG, of course, is in the media rights business. There's nothing bigger, more popular, more in demand than sports rights, and that's their business. So that's very strong and robust. And then, of course, on the new growth side, we're going to build boxing into a version of what the UFC is and get out the corruption, get out the confusion and make sure the best fighters are fighting the best fighters and being paid as they should to fight the best fighters. And then outside of that, we've got the White House event. So I think in totality, in summary, you've got a story here 3 ways. You've got high-quality execution. We're laser-focused on that. You've got new events, new growth, new initiatives like boxing, and we'll talk about that. And then, of course, you've got our capital return program, which we're really proud of because we're way ahead of schedule on that. And we've been very clear with our investor base that returning cash to shareholders is a priority.

That's a great setup. We'll talk about all those businesses. One thing I wanted to ask you about, Mark, I think you bought UFC, what, maybe a decade ago, something like that on the Endeavor side, WWE a couple of years ago. We've watched you guys run these businesses and even relative to the forecast, I think that you guys laid out, WWE is ahead of plan. So question is, is there like a sort of a reusable playbook in the Endeavor, TKO management team and that maybe allows you guys to do this across multiple premium live event assets as you think about allocating capital and deploying the management team in the future?

Yes, that's a very insightful question. I would say, first of all, it starts with having best-in-class operators. And I started my career at ESPN, so I've been kind of knee-deep and steep in sports for decades now, I hate to admit. But we have a good feel, a good grasp with best-in-class operators, and we really spare no expense in getting them on our team. And those that aren't performing are quickly off the team. We just -- we're running a mile a minute here. These are properties that are year-round across the board, right? UFCs year-round, WWEs year-round, PBRs year-round, and then IMG is selling sports rights, year-round, on location has an event, year-round. I mean there's no Christmas holiday when it comes to TKO. So we need best-in-class operators that are strong, insightful, intelligent killers, if you will, and really just work a hall, I hate to say it. But we do promote work-life balance. But course, that's hard to do.

Everyone who knows...

That's how you get to 40% margins, by the way. You work really hard. And I would say what we look for is we do look for properties that are year-round. It starts there. Strong high-quality IP that we can leverage, that's scalable, that's global. We look for businesses that give us a lot of operating leverage, very, very important. And you add all that up, and it's just a rinse and repeat cycle. That's how we play it out. And those are hard to find, right? They're not, some of these bigger leagues, some of the majors that we compete with, Major League Baseball and the NBA and NFL, they're not for sale. Teams are for sale, but not leagues. So if you can identify one of them and you see the upside of kind of putting it into our machine, you pounce.

Yes. All right. Last big picture question. The #1 focus in the space has been the Warner Bros. Discovery process now for some time. It appears to be at least coming to an end from an agreement perspective with Paramount announcing and discussing their acquisition this morning. From a TKO point of view, obviously, you have a new relationship with Paramount in a number of markets. But how would you -- when you look at this combination, assuming it goes through, what does it mean, if anything, for your business?

Super upside, frankly. And by the way, I would have listed several pros had Netflix in the winner here. And as you said, it has not yet closed. But I very much enjoyed their conversation this morning because what did it tell you more than anything else? They're going to take HBO and they're going to take P+ and they're going to merge them into one strong competitive platform. And that's only good for us. That's where it starts for me. When I look at the whole [ WBDD ] portfolio, there are 2 brands that are steep in sports tradition and have been appointment for many sports fans. And that's TNT, CBS as well, but TNT and HBO, especially in the boxing space. And now their portfolio of sports is second to none. I mean, I would say that it rivals ESPN, if not is better than ESPN. So they've got strong brands. They've got strong reach, strong engagement, a big sub base CBS still as a bellwether or a megaphone to grow sports and grow audience, and that will help us certainly starting with UFC, but potentially soon to be boxing. And they know how to work with great IP. We have a great relationship with them. We came out of the gate very, very strong, 7 million viewers for our first event. And this Saturday will be the first time that we have CBS simulcasting in a couple of hours of our UFC fight, which will bode well for new sign-ups in terms of subscribers for Paramount+. So we're really, really excited. David Berson runs CBS Sports. He came from ESPN and I worked with him, quite closely for many years. Like he gets it. He knows how to build sports. He knows how to promote sports. They clearly have shown they know how to market sports with those commercials they were running around the clock, tying in, right, the movie clips and scenes along with the UFC. So we're in a great position. Our house just got bigger.

Let's talk more about the UFC, and let's start with the CBS, Paramount relationship. So when the deal was announced, there was some discussion about clearly, Paramount+ benefits from UFC content. And if it's exclusive, it really benefits -- you guys benefit on the CBS side from all the reach. How do you -- now that you're into it, sort of how do we think about that balance between maximizing reach on CBS, which with what I'm sure Paramount's goals are, which is to grow Paramount+.

Look, they're paying us a hefty rights fee. So they're going to do what's best for their platform. But to their credit, they do it in concert with us, open conversations, not weekly meetings, daily meetings across each of the business verticals. And I mean content, but then also we're both out there selling ads and experiential and activation and social, and we're marketing together. So we have to work hand in glove. And I think David sets the tone at the top, and that's how they're working across the board, like they got the message, and they've made us a major priority, and we're always going to be a priority just by the sheer fact of how much they're paying to have UFC on the platform. They've been a super collaborator, terrific communicator. It's not any kind of attitude or not invented here or you don't understand our business, like UFC is new to them. So they're learning, combat sports are largely new to them. They're learning, they're asking questions, and we're finding the best ways to work together. As I mentioned, our first event was huge for them for sign-ups, I believe also strong for retention. And on top of that, keep in mind, whatever was reported in terms of their new subs is not even close to what they ultimately had in terms of new subscribers because you had -- you have C fans signing up for Paramount+ weeks in advance from that fight. So it wasn't just about that night. So I think we're bringing new eyeballs to their platform. They mentioned that their programming has been sort of symbiotic with UFC fans. They're finding a lot of UFC fans watching landman, driving viewership there and vice versa. So I think we've really tapped into something, and it's only going to grow when you add HBO content, premium content like that onto the platform and then you add all the other sports from TNT and CBS. I mean, really across the year from the Masters, the NCA Final 4 and reunifying that and of course, the NFL, we're sitting in a really enviable position.

Is the White House event on CBS or Paramount+ or TBD?

TBD on that. I know Dana had mentioned he thought CBS might have a role to play there. Look, I think from a news perspective, CBS should be there, right? This is a news event. This is a cultural event. This is going to be something, right? Right there on the South lawn, we're still putting our fight card together, but the President is and has always been a huge UFC fan, and we're excited to be part of the 250th America celebration.

Do you want to touch on sort of the financial piece of that event since we're on that topic?

Yes. We talked about that on our earnings call that where we're sitting today is we'll roughly spend $60 million on the event. That is inclusive of the fees we pay to the fighters. However, we're not done there yet because the card is not done. So I see that $60 million probably inching forward. But we expect today to capture $30 million, roughly half of the $60 million in inventory packages that we're selling to corporate sponsors. But we're doing that in full communication, obviously, with the White House. And if we inch above the $60 million, the revenue will come up commensurately. So we should be in a good position. And by the way, whatever we lose $30 million at this point on the event, are we really losing? I mean other properties would kill to have the opportunity we're going to have, and we're grateful to the President for wanting to do this and putting us front and center in our -- in the birthday celebration, if you will. This is going to be enormous in terms of attention, in terms of earned media, in terms of our fans being happy, the fight card is going to be off the charts, exceptional, fight to fight, not leading up to the championship fight. Each fight will be all-star caliber. And I would just say from a sampling perspective, given the promotion and press and the attention we're going to get the publicity, you're going to have so many viewers, content viewers, entertainment viewers, sports viewers that are just surfing and tuning in to see what this spectacle is all about. So we are going to fully capitalize on the stage that is the White House, but we're not going to capitalize on America. We will not profit from this event no matter what. We will not be making money on this event or exploiting the birthday of our country in any way, shape or form, it's going to be a massive celebration.

Mark, earlier, you mentioned site fees, which I think you're now describing as financial incentive payments.

Thank you. financial incentive packages. FIPs, created by my CFO, Andrew Schleimer, sitting right over there.

This has been an area that like -- I mean, I think 5, 10 years ago didn't even really exist. I mean there were some sports that were able to benefit. Speaker 3.

F1 was great. F1 still is great.

They sort of led the way. But can you talk a little bit what's happening among the customer base here, which I think are municipalities, venue operators, private public partnerships. And why all of a sudden is this -- maybe not all of a sudden, but a rapidly growing multi-hundred million dollar opportunity that years ago was not even the same, that's happening in the business structurally.

Yes. I just think overall, right, we're -- I'm just a big believer in the experience economy, right? The events win out. Your time is -- they're fighting for your time, right? Marketers are fighting for your time. Content is fighting for your time. Discretionary time around the weekends. It's just folks are looking for something to do, especially in this K-shaped economy where you have those that are struggling with affordability, looking for something to do to occupy time, to share time, to share experiences, largely driven by youth that share content socially, that live and die by FOMO. And they want to be a part of it. They want to be mixed. They want to feel it up and close. The #1 question that I got after spending a lot of time at the Olympics was, were you with the gold medal game, the men's gold medal game, right? Like you want to be there. It's something special. It's something unique. It's often dynamic, and you just can't replace it. And it's not just sports. Sports leads the way, but music, food festivals, fashion shows, book fairs. I mean you can go on and on. People -- we're social animals, right? We want those community, those communal events. And we are profiting and prospering from that and serving it in a fully enriched way. And I don't think that's going away anytime soon, right? And by and large, it's a good bang for your buck. So we're excited to be front and center, and we're constantly looking, to your point earlier, for those properties that would fit right into our platform strategy of supersizing content experiences for the consumer, all walks of life, right? You're not necessarily going to be able to get a ticket to the White House event, but you can certainly see the UFC in any city weekend after weekend or the WWE several times a week.

Yes. Maybe last question. I want to tie the UFC to your margin guidance. You gave margin guidance for '26 last week. One of the big focus areas, as you know, has been fighter pay and sort of how much you guys think you'll be investing back into particularly talent with all these big media rights step-ups. So maybe now that you're into '26 and you're starting to look at the year and you've got a budget, can you talk a little bit about how you thought about investing in fighter talent, et cetera, with the margin expansion?

Yes. I would start picking up a little bit before you left off on the financial incentive packages, right? Given all this demand for these events and everybody -- every city/country wants events that are going to bring massive audiences, they're willing to pay. And pay doesn't just mean cash, write me the biggest check. We make a decision on where we're going to go based on, yes, what the financial incentive package might be, and it might be no cash. It might be value in kind. But we also are trying to serve our thirsty fans that want to taste and want to touch our properties. It's really important to us because it's not just about the check. We have to grow the brand. We have to expand our audience. And as it relates to fighter pay or superstar pay on the WWE side, our margins last year were on adjusted EBITDA, 33.5%. We've announced at the midpoint of our guidance, we're going to be roughly 39.6%, so 40%. And that margin is inclusive of increase in fighter and superstar pay. And we take that very seriously. Right out of the gate after our CBS, Paramount deal, Dana White doubled the performance bonuses for fighters, and we're talking 8 figure. And one by one, we'll be looking at this, and we are focused on really all the ingredients that make our events as great as they are. And that starts with fighters and superstars. But whatever increases we have and we will have increases, they are inclusive of the margin guidance we have targeted.

Let's talk about WWE then. Moving from Peacock to ESPN on the premium live events front in the U.S. How is that relationship evolving? What does ESPN do for WWE? And maybe you can fold in, Mark, their new unlimited tier and how you think that might impact, if at all, WWE's reach and popularity?

Well, it definitely impacts us. I will tell you this. Just think of it this way. When the WWE first went to Peacock, the same questions were asked. Are you worried about it disappearing? Are you worried about their subs because their sub base was a lot less than it is today. Are you worried you get lost? Are you worried people have a hard time finding you? Are you worried they'll take up the sub price too high, so the cost of entry will be prohibitive and Peacock ended up being a total success long term, and we play the long game for WWE, and that's what we're doing here with ESPN. It's kind of like starting over. I'll remind you, when we took the UFC to ESPN+, ESPN+ was in 3 million homes. That's it. And by the time we were done, it was in 25 million homes, and we are proud to play a part in that growth. It's the same thing here. ESPN Unlimited is a phenomenal package. It really is. It's worth every penny if you're a sports fan. And if you're watching ESPN, you are some level of a sports fan, if not a Die-Hard sports fan. We've got some work to do here. Look, things will immediately get better once they strike their deal with Comcast, YouTube and DISH, specifically those 3 that allows viewers to authenticate. So I'm at home. I have DIRECTV as an example. And because I have DIRECTV, I authenticate on ESPN Unlimited. It's a very easy process, and it costs me 0 bupkis to get ESPN Unlimited. If you don't have ESPN -- or excuse me, DIRECTV or you have Comcast and ESPN hasn't closed out their deal yet, well, then you have to pay $29.99. And that is, I believe, somewhat prohibitive, especially in today's economy and the struggles that certainly middle-income and low-income earners are having with affordability. So they have to get those deals done. And until they do, that will affect our audience. But I believe they're going to get them done. Jimmy Pitaro has promised us they're on the heels of getting them done. And when they do, ESPN Unlimited will be the same appointment viewership destination that it is today on the mothership. So we're excited about that ultimately getting done. And I should tell you this, very important here, Ben. We had a massive event in Chicago this weekend, Elimination Chamber, one of our big premium live events, PLEs as we call it. And we saw a significant increase in audience from the first event we did last year with ESPN, which was Wrestlepalooza. So they're already making strides. Are they where Netflix was last year? Not yet. Are they where Peacock was after all those years? Not yet. But inching closer, and I was optimistic -- I am optimistic, and I was super encouraged by the numbers that Nick Khan was sending me by the hour this past week. Nick Khan, of course, is the President of WWE.

You mentioned partnership revenues before and your long-term ambitions. When you bought WWE, that was not a big business for them, and you ramped that quickly. But what's the opportunity still ahead for that property? And how do you think about going to market combined versus sort of selling stand-alone inventory?

I would say, first off, unless it's a new category for the WWE, meaning UFC already has the category and WWE doesn't, then we might just go in with WWE or Professional Bull Riders. But if it's a category where it's not taken yet, we always go in with the triple, always. And it's no different really than my days at ESPN. If you want to buy Sports Center, which everyone wants to buy, you have to buy outdoor programming on Saturday morning, fishing because otherwise, we have a tough time selling fishing and hunting. And that package serves as leverage and proved to be a successful equation and model. And that's really what we do here. We go in with a boat load of value for a certain advertiser or marketer that ties to all 3 properties that keeps them going year-round with disparate and endemic audiences and hopefully run the table in a way that creates value for our partner and at the same time, helps our growth on the partnerships front from a dollar perspective, but once again, straddles the fence of growing the brand, marketing. Some of these deals, I mean, they are chock full of marketing opportunities in aisles or grocery stores or institutional inventory or just simple marketing materials that many of these brands send out to their consumers on a daily basis digitally and socially. We want to be tied to that. We need to grow our audience, and we still need more sampling across each of our sports. Some of our sports, of course, are nascent sports. So that's really important to us. And I think on this front, we're out there. There's still more categories we can sell. And we're also benefiting from the fact that some of these deals are lapsing and we're renewing them for higher prices, but also that gives us an opportunity to bring in one of the other properties. So it's the UFC category that they've had for years, but the deal is up in the renewal, we'll bring WWE into. Some fit, some don't. But to your point, there's a great deal of upside on the WWE and the PBR front, and we have put out a target as I said, by 2030, this will be a $1.2 billion bucket for us, high margin.

Yes. Okay. I want to make sure we touch on a couple of other things before we run out of time. So on location, part of the Endeavor portfolio brought into TKO last year. Can you talk a little bit -- I don't know if you have the numbers yet, but Milan's performance versus plan and anything you learned now that you've had Paris, Milan going into L.A. on the Olympic front, just to make sure you maximize that opportunity as well.

With 7 minutes and 45 seconds, I could never tell you all that we learned because both Paris and Milan have been massive learning lessons, leading up to what will be -- what I believe the greatest Olympics of a generation and certainly in my lifetime. It's going to be just extraordinary. And I'll remind you, this will be the last event barring all rules and laws are obliged that the President touches before he leaves office. So this will very much be President Trump's Olympics, and he's been a phenomenal partner, if you will. So we are leading up through it, tons of learnings. Milan was, I would say, a little behind plan, not much, but a little behind plan. And that literally was driven only by the fact that, unfortunately, the consumer couldn't be sure there were even going to be hockey games. I mean we're talking about an arena that wasn't finished, what, 48, 72 hours beforehand. And if you walked around the arena, like I did, you're in hallways where they don't even have carpeting in yet. I mean they literally did what they needed to do to pass inspection and then they put on glorious games. And I'm just grateful they got it done and that the water was running because we're selling suites and 72 hours beforehand, there was no plumbing. So this was tough. There was a lot of bad press on that and bad press on facilities not being ready ultimately is a sales prevention for selling tickets. And by the way, once they finish, the news got out that basically everything was done, except for the gondolas that never did finish in terms of fans getting up the mountain to enjoy the event in a premium experience way, experiential way. Our ticket sales went through the roof. I mean those last few days were insane in terms of the packages we were selling. So we almost got to our target. We were just off. But nonetheless, we will hit our guidance, which was $130 million of adjusted EBITDA between the 2 Milan and the Los Angeles games. So we're on target for that and excited about being able to focus on that once we finish the World Cup.

Right, right. Anything you want to highlight on the World Cup other than the plumbing being ready to go?

First of all, one of the learnings, I'll give you the biggest learning is really tough to do international events. I mean we'll do them here and there. But by and large, we would like on location to stick with U.S. soil events. And the World Cup is showing that. We're ahead of plan. The demand has been insane, and they haven't even really started marketing it in a big way. And we expect to stick with our -- stick and hit our guidance, which is $75 million of adjusted EBITDA on the World Cup.

Okay. Let's talk boxing. This is sort of, I guess, the next project for the company to sort of build something kind of from scratch with partners. What's the thesis here for putting capital to work behind boxing...

Look, I'm proud of this one, because when things -- after we finished the Paramount deal and the ESPN deal for WWE, we had a lot of questions from our investors, okay, you've got great momentum and now you're going to execute. Like what's -- where is the growth beyond that, right? It's never enough. That's how we all have to operate. What have you done for me lately? And now we have something specifically to point to. Boxing is a massive opportunity. It's not like we have to go out and buy it. I mean, certainly, we have to sign up fighters and we have to pay fighters. But this is ripe with opportunity. For years, confusion in the marketplace, fights that cost too much money from a pay-per-view perspective, knee-deep and corruption. #1 doesn't fight #2, Champion doesn't fight #1 rank. Like it's really -- I'm surprised it's gone on for this long. Too many promoters, backroom deals. We are cleaning that up, and we are going to create a real league here where we can market the personalities. We can create the next Sugar Ray Leonard. Nobody better to do it than Dana White and Nick Khan, who know boxing backwards and forward and grew up fight fans before there was ever a WWE or a UFC. And of course, Lawrence Epstein, the President of UFC, plays a big role in there as well. So we're -- like we are ready for battle. And we're signing some big stars as evidenced by recently signing up Conor Benn to a big super fight, and we hope to get him exclusively in the Zuffa League, which is Zuffa Boxing, that's the name of the league. And we'll cut media deals and we'll cut partnership deals, and we'll get them into our financial incentive packages, and we'll have consumer products and licensing, and we'll take the show outside of the U.S. Even in the first year, we'll likely go to the U.K. for a couple of fights. So we're coming out gangbusters, guns of blazing. And this is a huge opportunity. And if we can just build boxing in the next 5 years -- 5 to 10 years, excuse me, into half of what the UFC is or WWE, well, then we're a growth story that you want to jump into.

Got it. Okay. Maybe in the time we have left, Mark, you guys announced buyback plans for the year. You have a ton of cash flow. You've got leverage -- a leverage framework. Maybe you could just talk a little bit about how the company balances turning capital, delevering the business, investing organically when you think about your capital allocation priorities?

We're very comfortable with our leverage position and certainly can expand that depending on timing and desire. What I would say is just look at what we've done. I mean it's all about putting your money where your mouth is. We launched a dividend in, what, Q1 of last year. We doubled it in Q3. And there's more work to do there. And I would be excited to see us move the ball further on that front in the next 12 months. Not committing to anything, but would like to see it progress in that fashion. On the same token, we announced our intention to launch a share repurchase to the tune of $2 billion over the next 3 to 4 years in October of '24. We then commenced that at the end of last year, leading into our earnings and got to approximately the [ first $1 billion ] and then came right back on our earnings and announced we're moving on the [ second $1 billion ]. So we are committed. I mean there's no other way to say it. We're not drunken sailors. We're not going to go acquire and buy things for the sake of buying them. We're ruthless when it comes to costs and expenses and our margins. We want to be one of the best-run businesses that an investor could ever find, and we're going to stick on that track. So we have room, and we expect to move on the [ second $1 billion ], if you will, that share repurchase fast. And we will stay committed to this, whether it's share repurchases or dividends, we will stay committed to that over the next few years.

And where does M&A fit or not fit in, Mark, into the capital allocation framework that you guys have? You talked a little bit about that last week...

Look, there's a reason why we put a comment on M&A right at the top of Ari's prepared comments on our earnings call because we get this question often. We want to be prudent. We want to be responsible. We have a history at Endeavor of just buying a lot of stuff that I think made the story, the narrative, the model confusing to investors, and that's not going to happen here. So we will always explore. We will always evaluate, but we will be prudent. And if there's something that we can be opportunistic about, we will do such a thing. But right now, it's execute, high-quality execution, focus on the operations. It is boxing new growth, and it is capital return.

Great. Well, we are out of time. Mark, thanks so much for coming. Great to see you.

Thank you so much, and thanks to you.