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

I think we'll get started. I'm Ryan Gravette from the research team here at UBS. Our next speaker is Mark Shapiro, President and Chief Operating Officer of TKO Group Holdings. Thanks for joining us. This here, Mark.

Absolutely, Ryan. Good to see you.

So we're almost at about 3 months since the close of the transaction to bring together WWE and UFC. What have been the key learnings since the close? And what are your top priorities as we head into the new year?

Look, this is a sort of a humming engine right out of the gate. I'm happy to say, just in the sense of the financial profile is extremely strong. We're super cash flow generative. EBITDA margins of 40% between the two properties, upwards higher than that. Comfortable manageable debt position, net debt position at 2.5x, certainly some opportunity to be flexible there if we saw fit. Low CapEx and a host of revenue and expense synergies that we're just starting to get our arms around. And we're 3 months into your point. So a lot of work to be done, but we've got a lot of best-in-class metrics that you have see like sponsorship. And we've got a lot of best-in-class metrics at WWE like digital content, social content and monetizing digital and social content. They've done an unbelievable job in that respect. So right now, we are just 100% nose to the ground working on our -- those efficiencies, those synergies. First, on the expense. So right now, merging our best-in-class teams to make sure we capitalize on the revenue monetization.

Got you. Maybe if we jump into some of the major revenue drivers. We've seen some major sports rights renewals in the market recently. We had NASCAR last week. But obviously, at the same time, there's pressure going on in the pay-TV ecosystem. So I guess just from a broad level, I'd love to get your take on just the state of the sports rights marketplace today.

Yes. I frequently talk about this because I think everybody is just -- first of all, [indiscernible] want to be careful, and I get that everyone is doing their models. But everybody is kind of waiting for the sky to drop on sports rights. And it's just not happening. Whether it's Friday, [indiscernible] [sale] on Amazon, which went for $100 million for one game or it's the new NASCAR deal, which you're talking about, which is a 40% increase. Our SmackDown deal was a 40% increase on an AAV are relatively much smaller, but NXT on the WWE side, we renewed at a 70% AAV increase. The NWSL, which is the new women's soccer league went for a nice increase. And I'm optimistic. Remember we're on the IMG side of this as well with Endeavor, we negotiate media rights for a living. And on the IMG side, they're right now in the middle of a renegotiation for all the NCAA properties. So not men's football or men's basketball, but everything else from wrestling to Volleyball to the women's final 4, which is going to go for a significant increase. And they're just in the exclusive window with ESPN. If and when it gets out the market, it will go even higher than I'm anticipating. So look, sports rights are urgent, they're immediate, they're live, they're water cooler, they're multitasking social, People like to chatter about them and route [indiscernible] to Florida State got screwed yesterday for the CFP or if it went down as it should have gone down. And as long as that continues, as long as these media companies, the behemoths are launching their own direct-to-consumer platforms, they're going to need sports if they want to either a, drive subs or; b, try price.

Got you. Yes. I mean you mentioned the NWS deal looks like it went to four different partners this time. Nascar to five different partners. NBA is probably going in a similar direction. I mean is that where the market is heading, just in terms of kind of spreading the cost across more partners and still kind of maximizing the right value for the holder?

Yes. I mean, look, what I would tell you is there's an argument to be in both ways, right? We benefit in UFC from having essentially one partner. We do everything with ESPN and ABC. We're across their direct-to-stream -- direct-to-consumer with ESPN+. We're in conversations about what happens when the flagship goes to right to consumer. We're on ESPN, ESPN2, even ESPN new, sometimes from a linear perspective. And then a lot of our weekend fights are bumped up to ABC. I mean it's a great place to be because they're a marketing machine. They're the best brand in sports. But having said that, the NFL has got an incredibly successful model, having kind of splinter their media rights for years across linear and now streaming networks. So it's a great time to be in sports overall. And I think that Steve Phelps, just speaking to him because he's most current, he's of course, the President of NASCAR. He went out there and maybe he found some linear networks like Fox and NBC that said, we love NASCAR. We want to be in the NASCAR business. We can't pay as much or as much of an increase, so we'll take less inventory. But that wasn't an issue because you could still put a lot of this premier content on the linear platforms. And at the same time, a lot of models to feed and a lot of folks lined up to be fed. And that's why he was able to go to CW and Amazon and the like. And I think we're in that similar position. On the WWE side, we've already renewed two of the three deals. We're in conversations on raw. Our deal with USA is not up until October of next year. So we've got time. We've got time to be flexible. We've got time to be creative. We've got time to develop different solution models for, depending on what the player may be. And we can also go before the NBA, if the price is right or we can go after the NBA if somebody gets left at the altar, it's a good place to be. And UFC, of course, we still have two more years of that deal, and we'll have a conversation with Disney first and foremost.

Got you. Maybe just on the raw package. I think you kind of mentioned you could go before or after the NBA deal. Are there other milestones out there that investors should be watching other sports properties, I think, [couch] football playoff is on the horizon? Is there other things which...

No, I would have said that the one that was most analogous was NASCAR, but now that's done and ended in a very favorable place. Yes, there's CFP, there's always going to be something I talked about the NCA and there's a lot of traditional players lining up for the NCA and that will be a hefty price. So a lot to be figured out. But having said that, there's no necessarily shiny point of when or if we'll go. We have time. We can be flexible. We can be patient. Our job is to maximize the rights value of raw. And I would tell you, at the same time, just remember that we do all the production. So we just feed. You kind of take it in and you err it or you charge for it. So we can literally wait until the night before if we want to decide where we're going to go in the next deal.

Got you. And you mentioned it a bit, but just on the UFC side, a bit more time left before that deal is up as it's currently structured. And can you just talk to the plans, I guess, over the next couple of years to make sure that property is best positioned for renewal?

Yes. Look, we've got 2 years left on the UFC deal once we get past December here. We're flying high on the UFC. I mean it's just the linear ratings are extremely strong. The buys for ESPN have been extremely strong. We're developing new stars. Our social is very robust, and we're monetizing it like never before. Our sponsorship is up near $200 million when we bought the UFC at Andeavor, we were doing roughly $40 million in sponsorship. So that shows you the kind of opportunity and the size and the scale, the breadth of the UFC, the fan base, the way it's grown and the way we've been able to monetize alongside it. And that makes us very optimistic about what we can do for the WWE, which I'll remind you, has 5x as many events, right? There's 42 events that take place for UFC plus our pay-per-views plus the Dana White on tender series. But you've got over 300 events at WWE. Not only 170 are televised. But nonetheless, you've got sold-out shows across the board, wherever you're going from Cheyenne in Wyoming to the survivor series we just had in November in Chicago. So we've got a lot of opportunities for eyeballs, both in ratings and ad dollars. It's a good place to be. And when you think of the UFC, remember, we also have [FightPass], which is our analogous to our WWE network, which is our streaming service. That's something we own in totality. It's a proprietary product and platform, very much the way WWE was under Vincent until he decided to do a deal with Peacock for $250 million. So going forward, FightPass may be something we take to market. We may package it in with our current content vehicles. We may keep it the way it is and just continue adding more live sports to drive subs and reduce churn. That's all to be decided. And then, of course, the WWE network, the deal with NBC is up in March of 26. And that's something that, frankly, we can take the market all by itself. Or we could potentially package with the UFC as that -- they're in a similar time frame in terms of when they come up to drive value again. So it's sports rights are hot. The experience economy is hot. We're seeing it in attendance. We're seeing it in our ticket pricing. We're seeing it in premium experiences that we offer through on location. We're seeing in site fees, and we're certainly going to continue seeing it from a media rights price perspective.

Yes, there's definitely strong growth in that industry. I mean something that is coming up a lot is just competition in the MMA space. And just curious to get your take if the PFL's recent acquisition of Bellator, if that changes the dynamics at all?

Yes. Look, I have great respect not being politically correct. I think any entrepreneur that goes out there and launches a sports property that gets a chunk of audience, good for them. Can they turn it into a profitable business, a long term sustainable with big lifts. That's obviously the challenge. It's amazing what Dana White has done over the last 25-plus years. I mean, he took a struggling brand, a struggling property, a struggling sport. It wasn't legal anywhere for that matter and turn it into a mainstream major sports property. That's hard to do. But I'm excited because I think a rising tide lifts all boats. So PFL and Bellator coming together. It's good for the sport. It's good for MMA. It's good for ultimately kind of the media rights equation. I like the idea of having more MMA on ESPN that helps us. Often, they serve as a lead-in, and they're good competition. But make no doubt about it, they are the B squad.

Okay. Maybe on the international side, how have some of the -- your recent renewals performed and maybe your outlook there? And I guess, any opportunities around bundling rights across the WWE and UFC.

That's really when folks asked about the bundling rights opportunity, Ryan. I would say I'll put aside my aforementioned comments on WWE Network and UFC because I do think there's an opportunity there. There's a kindling -- for the most part, our leverage and our strategy around media rights and bundling these together will play out internationally, not so much domestically. These are hefty prices domestically and there's a lot for any one buyer to take down two entire properties or even subsets of those properties. Internationally, different story, right? Different cycles every year, a different region or different countries is coming up for renewal and we have a lot of opportunity to pair these two properties together and take them to market. Keep in mind, in most of these countries, where there are also dueling competitors, both streaming and linear folks trying to keep the linear platform going while the iceberg is melting a little bit, at the same time, where the streaming opportunity is growing in insatiable speeds. So it really plays into our favor the timing right now where we're coming up year-to-year. For WWE, we've got Poland, India and Bulgaria on the horizon. Those are kind of our nearest renewals. And then on the UFC side, we've just done a -- or excuse me, that's one -- that is the UFC side, Poland, India, Bulgaria. And on the WWE side, we've got Canada coming up, which we've just renewed on the UFC, so we feel really good about that. And then each year, we'll -- there are other territories or major territories on the horizon, and India will be coming up for WWE as well in the next few years.

Next few years. Okay. Great. Maybe if we could shift over to the live events portion of the business. Just curious to get your view on the state of consumer spending here, from your viewpoint? And what forward bookings look like for some of your bigger events?

Yes. Look, inflation is still a problem in this country. But from an experienced economy perspective, it's just -- we're just flat out not seeing it. For the UFC last quarter, we had six sellouts and set a whole mess of records from -- on our pay-per-view events at the gate, especially here in New York. We now have 1, 2, 3 and 4. We have the highest grossing events that have ever taken place at Madison Square Garden. That's something to be said for that. That's certainly a sign and a trend in the right direction. And beyond that, just Saturday night, we had an event in Austin and it was a fight [night], not a pay-per-view and it's the highest grossing sports event ever at the Moody's Center. I keep in mind, the Moody's Center has only been there for a few years, but it's the highest grossing fight night we've ever had domestically. So that's a harbinger of kind of what we're seeing. We're seeing premium prices on the ticket per caps. We're seeing our premium packages sell out from a on-location perspective. These are folks that aren't just looking to buy a ticket to the fight. They're looking to buy a ticket to the weigh in or meet Dana white or meet the fighters or take a picture with the fighters. Any kind of experiential add-on they can get. We're seeing sold-out shows and the yield just continues to go north. Now that speaks a lot to the popularity of the UFC fight because that's, again, not a pay-per-view card in Austin. That's just a regular fight night that is the brand. That's just a measurement of the 600-plus fighters we have at UFC, the best in the world fight in the UFC, and you can see them each and every week, whether it's a pay-per-view or it's a fight night, you can get a piece of them. And with the Dana white contender series really picking up steam on ESPN and the rating is going up there. We think the pipeline is very strong. And what you'll see from a live event standpoint will continue for a while.

Yes. I mean, just curious to get your take on whether you see a bigger opportunity around increasing the number of volume events, maybe having more fight night events audiences? Or is it around pricing and driving more of that.

It's a little all of that. I mean look, WWE, just as an example, though, let's remember, they have over 300 events a year with 170 televised. So there's probably, while all those other fights, there's a reason to have them those cards, those -- or excuse me, those superstar events on WWE. While there's a reason to happen because it's good for the brand, we're building audience. We're putting them on CnD counties. So we're really stretching the brand and we're kind of amassing a greater array of eyeballs from all demos. So it's good for our long-term growth. From a margin perspective, they are dilutive. So there's probably an opportunity as we go through our efficiencies and our synergy opportunities to cut back on some of those non-televised events which, of course, will push our margin up. So we're going through that exercise now. On the UFC side, I would -- or let's say WWE, let's stay there for one more second, and just tell you, when you talk about the experience economy there, we just put WrestleMania 40 on sale, in Philadelphia. And 24 hours later, we're sold out at the highest per cap we've seen. And our survivor series, which took place in November in Chicago, across the board, I got to report card the next morning. It was like I wish all business ran this way. Merch was up, ticket per cap was up. Ratings were up. Sponsorship was up. Local sponsorship was up. Our premium experiences were up insanely up, too. It's a good place to be if you're in the WWE game. And then back on the UFC side, we continue to see the same opportunities and an opportunity to add more fights beyond the Dana White contender series, to your point, beyond the pay-per-views, beyond the 42%, not just waiting for when we go to market. There's an opportunity in our ESPN deal right now to add more cars and work cards, and we're exploring that right now.

Any rough framework on how many more could it go to or...

Nothing to report now. I mean, we've done some pay per views where we've done one extra year we'll have a year of '13 or maybe even '14. There's probably an opportunity to do that on a regular run basis, adding another 1 or 2. But I think there's certainly more opportunity for more fight nights and I know ESPN would love that. And we love it from an event perspective. And remember, we sell the international, not just the right international pay-per-view. So there's an opportunity to get a lift there as well. It's kind of all part of the puzzle that we're putting together for the new TKO.

Yes. Maybe just mentioned international, what does the road map here look like for both businesses internationally? It seems like there's an emphasis on having more events abroad...

The good news is we're really seeing an uptick in the site fees that we're getting. So if you want us to bring one of these to town, you're going to have to pay. And that's been going extremely well on the UFC side, and we're just getting going on WWE. In particular, we've just done a deal in Australia with the government there for $16 million to bring really a combination of events to Australia. As you know, we did a deal for roughly $20 million to bring a fight card. Again, just a fight night, not a championship pay-per-view night, just a fight night for $20 million in Saudi Arabia. We get roughly $25 million every time we do an event in Abu Dhabi, just site fees. And WWE is getting over $100 million for the two events they do in Saudi Arabia every year. So I'm going to tell you, there is a long line of bidders that want one sports events in their countries. And this just doesn't go. I'm speaking here overall in sports right now. As you know, Endeavor owns IMG. And so we sell 160 sports properties into 160 territories annually. So we're seeing a wide canvas of demand, geography, region, platform and live events are just in vogue. So if you can bring them with Taylor Swift concert. Great. Second place would be anything in sports.

Is there any way to quantify how many markets might be eligible for you securing site fees here in the market?

Roughly 20, I would say that are interested in various levels of paying just to bring the circus to talent.

Got you. Okay. Great. And then maybe shifting over on the sponsorship side. We saw a nice pickup in growth last quarter on the UFC side on sponsorship revenues. I guess would you say that was more driven by renewal increases you're seeing in renewal or incremental verticals that you're tapping into? And just how much opportunity is left there?

Look, it's -- the UFC is -- until we get over $1 billion in sponsorship, I won't be happy. I mean we should be playing where the NBA and the NFL are playing. It's been an incredible journey. It's been a fast journey, but there's an enormous upside, both in inventory categories and, to your point, renewal pricing. WWE is -- as my CFO likes to put it, it was religion for Vince, he just didn't want to commercialize the venue for the most part. The mat was clean, the ropes were clean. There just wasn't a lot of signage or activation because it's advertisers don't just want to put their banner up there anymore. They want activation. We specialize in that -- at UFC, and we're going to bring that same strategy to the WWE, and there are no rules. Those gates or that kind of -- that manifesto has been thrown out and we're going to take the right opportunity to make sure brands from all walks, shapes and sizes, get the kind of exposure they're looking for when it comes to our audience, which is a WWE specifically, very diverse, 40% female and heavy family.

On the activations for the WWE side, I mean, when does that start? Is that already in progress now or...

What we've done is we've merged our two global partnership teams, which resulted in some layoffs. So obviously, some headcount labor savings there. But we come into this integration with no prejudice. We just want best-in-class we don't have it, we're going to go get it. But most likely between the two, we have it, it might be someone in this division that's the best at UFC and someone in this division is the best at WWE. And that's really the science and the method we've applied for this integration, and our global partnerships is probably leading the pack, which is take the best WWE has to offer in terms of their people, sales, fulfillment, ideation, pricing, marketing and put them together with the UFC side, and hopefully, you're selling two properties all once. So we won't be walking into many advertisers or categories where we aren't pitching both properties.

Got you. Okay. Maybe just on the synergy topic. You laid out that you're planning to realize 75% of the high end of the $50 million to $100 million target next year. I guess now that you're a couple of months into the integration, I mean, are there more opportunities you're looking at? And could we see that $100 million go higher?

Yes. Look, we've guided the Street to a $50 million to $100 million kind of net savings on the cost side, we expect to be at the top end of that range and realize 75% of those savings by the end of '24. Frankly, I think there's a lot more. I know there's a lot more just from a production standpoint. Just think about how many events we televise we put on, we bring the show on the road, we're bringing trucks out to different cities, whether it's a cloud or it's cameras or it's tape machines, replay, graphics, operators, stuff we can do AI back at our headquarters in either Vegas for UFC or our Stanford production facility for WWE, there are a lot of production efficiencies. Even if our production chiefs want to tell me there's not. Frankly, I worked at ESPN for 12 years, I oversaw all production. I've been through all the song and dance with every producer who treats every tape machine and camera like it's a baby and doesn't want to give it up. And we're here to improve our margins. So we are going to be -- we're going to scrutinize every dollar on the production end of every single one of these events and every single one of these telecasts and we're going to realize substantial savings. What's beyond the $100 million? We haven't yet forecasted, but we'll share more of that as we get into '24.

Got you. And I guess, just on the production efficiencies. I mean do you have any plans here in the near future around bringing maybe not together on the same day, but throughout a weekend, having events at UFC, WWE and is that also an opportunity for savings...

Huge opportunity. And not Yes. savings, there is an opportunity if we have two events from both properties on the same weekend, but just think of the revenue upside. That's the real opportunity. Brands, sponsorship, if it's an incremental event, the media rights around it. The international media rights around it. The premium experiences we can sell, the two tickets for one deal we can sell. I mean it's -- you're selling on every UFC event and setting records at the gate and with per caps. And meanwhile, WrestleMania Survivor Series are just two of our recent PLEs that we just see no slowing down, it makes a lot of sense to find the right weekend. Maybe it starts with 2 a year, maybe we can do on a quarter, but we're absolutely looking to capitalize on that, on two 2 on the same weekend. It's just really a calendar scheduling situation. And also, we want to make sure we get the right site fee to do that. If you -- we're getting sizable offers to bring a UFC fight to your town on a Saturday night. If we're going to do a combo, it's 1 plus 1 equals 4.

And I guess, related to that, but thinking beyond the initial synergy uplift, I mean how are you thinking about margin expansion opportunities from here and just driving incremental operating leverage in the business?

Well, we'll get it in a number of different ways. We'll get it from pruning the WWE live event portfolio [indiscernible] talked about, you got at the non-televised portfolio. And then you'll get it from, obviously, the cost synergies we're going to see. And it's going to be a great story when we see the kind of revenue uplift, top line uplift on our sponsorship at all at WWE, the way we've seen at the UFC. So I think there's a real opportunity across the board to drive that. And we know that that's something that's clearly not just important to the growth of the brands and the future of the business. But obviously, the Street and our investors. And we're -- that's a priority for us. I mean we're -- be above 40% out of the gate with these two sports. And I'd like to see that over time, we can drive that back to the low 50s, which is what we've been getting for the UFC. Over the last number of years under endeavor stewardship. So I think maximizing and really leveraging the Endeavor flywheel, let's not forget that. Where we've got WME and we've got IMG and all these live events that we do and on location on the premium experiences and this huge infrastructure to help out the margins by not having to hire the labor at TKO because Endeavor can do it with the current staff they have on board. That formula, that's a key part of this equation. It's having -- not just integrating these two properties. It's integrating endeavor into the mix, wherefore it's international rights, it's the domestic deal for the meetings we're having now on raw, endeavor is doing all the analytics for those meetings, presentations, videos, sizzles, all the psychographics and data these platforms are asking for in terms of where they can, how they can ultimately monetize our property. We're doing that side of endeavor, and it's allowed us, frankly, to wipe the entire analytics group at WWE. -- there is done. They get it from endeavor, and that's what UFC has been doing for a number of years. That's just a small example. But when you have the infrastructure endeavor that plays across sports and music and fashion and culture and content IP and celebrity stars, there's a lot you can tap into.

Yes. So you're benefiting from that infrastructure, and it seems like both companies and putting them together is pretty substantial cash generation opportunity.

I thought you'd close it that.

And I know you're planning to provide an update on capital allocation plans at the next earnings call. But -- maybe if you could just talk to the cash generation profile you see and the opportunities that...

Well, we'll get into specifics, as you said, on our February call, where we provide some guidance and we articulate our plans on capital return. But I just want to be clear that, that's the priority here. We're not looking to do acquisitions. We're not looking to bring on other sport properties. Having said that, calls come in, and we're open for business. We'll take every call. I don't want to be on the outside looking in, and I don't want anybody to think we're not willing to explore something so that they stop calling. I never want to be in that position. But be very clear, we are not looking to acquire a new sports property at the moment or for the foreseeable future. We are focused on the integration and integration works both ways. It's the Endeavor flywheel, it's the cost efficiencies and obviously, it's the revenue synergies. That's our focus period. And if we do that, -- the way we're going to do it, we will have significant free cash flow, as you mentioned, and terrific conversion. What we do with that will be are we buying back debt and lowering ourselves to 2x? Or are we area-shareholder buyback plan and share by propane or a specific dividend increase. That's what we're exploring. But I would tell you we lean towards returning capital to our shareholders in a very long sustained pronounced way.

Got you. All right. I think that's a great place to end it. Thank you, Mark.

Thank you, Ryan, for the time.