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

Maybe just sticking on WWE. So the PLE agreement with Peacock, that is a little less than 2 years to go. Maybe you can discuss the uniqueness of the content that's available there. What role do those 16 events, I think it is, plus the archive play on that platform. Why is that so valuable in the streaming landscape?

We're thrilled about the potential for PLEs. I would tell you, I'm most excited to take this to market as anything else. Now having said that, we love Peacock. We love our partners of Rob who runs NBC Sports and Mark Lazarus, who runs NBC overall. I mean they're creative. They're, I think, with a marketing lens. They're all about building value. They're super flexible. And Peacock is growing fast. And Brian Roberts and Mike Cavanaugh have a clear strategy for it. their penetration is increasing. Their programming is bringing in more and more eyeballs, and that's a place we want to be. I want to be clear about that. The last WrestleMania was the most viewed event of all time on Peacock. So we'll take it and then some. Having said that, the PLEs will be in hot demand because there's effectively one a month, I think. There's 16 overall, if you include the 4 of at NXT, but there's essentially one a month for WWE. And the way that HHH, I didn't understand this, frankly, well enough until we were out pitching Raw to various buyers: Apple, Amazon, all the likes ultimately, of course, to the deal with Netflix. But as we were going into these meetings and I would listen to HHH give the pitch, and it sort of is like a soap opera, right? I mean that's the WWE story. You're following a year-long story. And then once a month, you have these big events. So storylines either start or wrap up, leading in and out of those big events. And he really looks at it that far out. He's got such a phenomenal writing team. And they really weave this web with these big tent pole events being the "aha" moments. So it brings in big viewers. It's a culmination/an origin for a lot of the stories and that in itself lends it to being kind of a musty event every month for the streamers. And what was interesting is Ari and I would walk out of these meetings and the takeaway would be the very first question is when are the PLEs up? No, no, we're not pitching the PLEs. We're pitching Raw -- I don't know, but one of the PLEs up. So it tells me that there's great demand as long as HHH keeps doing what he's doing.

Create a product.

It is, great product.

All right. I want to ship to UFC. You guys don't usually put out press releases on domestic viewership, but when we track the data, especially for the pay-per-view prelims, the numbers continue to show really strong gains. So what do you think is resonating for this content right now?

I think you have to look at -- you have to break down the UFC audience. As I mentioned before, it's the premier MMA organization in the world. It's a fast-growing sport. It's tailor-made for social, but break down just the makeup, the demos of the fan base at the UFC. You're talking about overall 700 million fans around the world. You're talking about a sport that is essentially in almost 175 countries. That equates to 975 million households that we're bumping the UFC into. We have 250 million social followers. And we have, by far, the best stable of fighters, men and women around the world, almost 600. And we have a pipeline of more fighters that are being funneled in every day, driven by the fact that we've built these performance institutes. So we've seen absolute deliverables and results from having a Performance Institute in Shanghai and now Mexico City and obviously, Las Vegas, and in discussions for potentially one in the Middle East. So that bodes well for us, not having to necessarily go out and find them or plug them from other competitors, but to actually build them from the ground up so that they stay inside the UFC family. That's been a great success story for us. But by and large, the biggest reason for our success is Dana White himself. I mean we have a great team behind him and management of Lawrence Epstein, who runs UFC day-to-day; and Craig Borsari, who does the production; and Pete Dropick who oversees the live events, but Dana White is all that and then some. He's a marketer. He's a star all by himself. He's an unbelievable leader. He's an incredible matchmaker. His social is growing arguably faster than the UFC itself. But the best thing he is, David, is he's a star builder. And in my years of being in sports, I've been with ESPN -- I started with ESPN in 1993. So I've seen it all. I don't want to date myself here. But the only other person I can equate him to in terms of star building is David Stern. And Stern was as good as it gets when it comes to star building. Bird and Magic and Michael Jordan, Shaq and Kobe Bryant, and he would see a star before anybody else. He would seize upon it. He would bring his marketing prowess to the table. He would get behind that star and there'd be a new following. So he would love having Anthony Edwards today. I'll tell you that. And Dana White is that. He sees men and women. He sees these potential stars, he gets behind them. They have to win on their own, but he puts them in a position to -- if they win, really explode. And that again works to our benefit.

Got it. So you noted recently, you'll have a 3-month exclusive window with ESPN starting in mid-January 2025 to negotiate a new agreement. You've been very positive on your relationship with Disney, what it's meant to the sport. How should investors think about you balancing that against what could be incremental interest from your partners?

All right. I've been very consistent with this. We love Disney. And I'd say that objectively, full disclosure. Obviously, I started my career there and worked there for 12 years. I love the way it operates. The man that was in charge at that time is still the man in charge in Bob Iger. I think Jimmy Pitaro and Brock Magnus and Ross Durant are doing a fantastic job in a very fast-changing evolving climate and landscape. They've got Linear going. They've got ESPN Plus going and soon to have direct-to-consumer flagship. So the waters are a little choppy. There's no question, but they are the destination for sports, appointment viewing for all fans. What they say matters. When news breaks in sports, it generally breaks on their network as evidenced by this weekend's kerfuffle with Scheffler and his little road incident at Valhalla in the PGA Championship. They were there. They were covering the story at 5:00 a.m. They were breaking the news. They were explaining how it all happens. That's where we want to be. We love the neighbors on ESPN, those that lead into us and those that lead out of us. Having said that, we have grown into a position where we are now under monetized. That's just the fact. Not when we did the deal, it was a record deal, very exciting. It was triple what we were getting at Fox, but we are now under-monetized given the viewership, given the ratings, given the demos, and we look forward to having those conversations.

So maybe we'll stay on that. So the pay-per-view aspect of the UFC deal is highly unique. It provides Disney with a third revenue stream for their assets. So when you caught that deal, how did you think about balancing any participation in the pay-per-view buys against what was a -- what ended up being a more predictable fixed payment? And is it a priority to build in, in the next deal for some pay-per-view buy participation even if that's at a really high threshold, right? That seems like something Dana would see as a worthy challenge, I would think?

I think Dana -- and speaking for Dana and Ari, I would tell you, we're going to be very flexible in the next negotiation, just like we were in this one, remember. I mean we sold our pay-per-view rights after all those years with the UFC doing month-to-month pay per views through DIRECTV and cable. We ultimately sold those pay-per-view rights to ESPN. And before that, we're in conversations to do the same with Amazon. We ultimately went with ESPN. Well, we got pretty far down the road with Amazon. Now it's an evolved landscape. As we've discussed, ESPN is on the verge of launching their own direct-to-consumer flagship. Peacock is trying to increase their penetration. Paramount+ is using sports to increase their penetration. We've talked about Apple, Amazon, YouTube, a lot of healthy places for us to be. But we will be flexible so that we are giving any prospective partner or current partner, the best programming for the most ideal windows so that they can grow their base and retain their subs, very important. So if I was, for example, launching flagship direct-to-consumer ESPN, I might think about just buying out the pay-per-view and putting it right on that flagship channel, like you can only get it just like ESPN Plus. If you have flagship -- if you're trying to launch ESPN flagship and whatever they might call it, that's the working title, and you're trying to charge $29, $39, $99, whatever it might be, what better than to have a monthly "pay-per-view" that sits exclusive to that platform. Now we haven't had those conversations with ESPN. But that's just an example of the kind of flexibility we're going to bring to the conversations. We know we have A-list programming. We know we have premium content. We know we have a volume of premium content. And we have enough that will fit many pipes without becoming tonnage. So when I look at some other sports, and I'll leave some brands out, some of them have really strong post season, but the regular season, there's just too much there and it just becomes white noise. We don't suffer from that. We're premium content in the regular season, if you will. And then we're double premium, if you will, when you get to those pay-per-views of those premium live events. That's a good place to be. And at the same time, we want to be accommodating because it has to work both ways. We need these platforms to grow our audience, to grow our brand, to grow our followers globally. And they need us for acquisition and retention and price hikes. So it should be a very healthy marriage.

Got it. One other interesting synergy coming off the merger is the ability to package. You have seen WWE events to arenas or even countries. I think we probably overly focused initially on potential for events on the same weekend. But what's the opportunity to go to market with both assets in terms of driving site fees or like even negotiating rent concessions with venues?

Big opportunity. And a big part of our strategy. I spoke upfront that our major KPIs were working which is attendance and pricing and site fees. Look, if we're going to bring the show to town, we are looking for an incentive package. It doesn't always have to be straight cash, but it has to be a significant incentive package. Because once again, demand is outstripping supply. So you've seen us monetize site fees with the likes of Saudi Arabia for WWE. You can look for us to expand our current deal in the next 6 to 12 months. Very happy with MBS and the partnership we have there. We have 2 events a year but we're already in discussions. Nick Khan is leading that for us and expanding that to more events. We also have a phenomenal deal in Abu Dhabi with the UFC, where we're getting significant site fees and incentive packages there. And we've now expanded our partnership with them for other affiliate events, if you will, in the Middle East that they would participate in as we sell them to different countries. We've now expanded our Saudi Arabia relationship by not just having a UFC fight this June, but announcing for almost double the rights fee, another event next year. And I would tell you, David, we would be doing a longer-term deal with Saudi Arabia if we already had one event under our belt. So that's another way of saying, as long as everything goes well in June, which we anticipate, I think Dana White would be very amenable to doing a much longer-term deal in Saudi Arabia. On top of that, we're getting site fees for our pay-per-views in the UFC, significant, by the way, here in the U.S. and internationally, but specifically here in the U.S. And we're going to start asking for those same incentive packages to bring Raw to town, to bring Smack down to town, to bring our fight nights to town. So we just had UFC fight night a week ago in St. Louis. We did the highest gross for a fight night in the history of the UFC in St. Louis, highest ever. We're just talking just a regular card. I was actually there. Budweiser is our partner. That's their home, tremendous event. And that's what happens when you haven't had the UFC there since pre-pandemic. The demand and thirst is so insatiable that the audience is willing to come out and spend record sums on tickets. And we want to see incentive packages in order for us to bring those fight nights to talent. So I think there's tremendous upside. We've got a team working on this around the clock. And we have high hopes and frankly, strong demands from management to see that we execute on this strategy.

All right. You're going to make sure to cover capital allocation. So TKO was a strong free cash flow profile. You've talked about a target of 60% conversion on a normalized long-term basis. The company is yet to be specific on cash use though you've highlighted a long term target leverage range. Mark, you said it yourself in the last earnings call, investors are eager to hear more here. So maybe you can update on the priorities.

Yes. No news to break here. What I would say is give us a minute to actually generate the free cash flow. But I think when you look at our profile, and I understand the investor impatience, if you will, in wanting to see us return capital to shareholders or at least make a statement on what we're going to do. Look, our profile is strong. We're growing revenue. We're in a good position on net debt. As you mentioned, our adjusted EBITDA margins are very, very healthy. We're a low CapEx business. And what that translates and equates into is significant free cash flow generation in the long term, which gives us significant financial capacity. Having said that, we're going to be thoughtful and deliberate and patient about how we deploy that capital, but we will deploy it in 3 ways. First is high ROI projects, organic ROI projects. Second is select M&A, very select. We have to be very thoughtful, very prudent about this. It's got to be inside of the sports ecosystem in a meaningful way, control. And third is, of course, returning capital to shareholders through dividends and buybacks. And I will tell you, unequivocally, we're committed to all three and we will roll out a specific time frame and plan as this evolves as we generate that free cash flow. We're proud of our margins. We're proud of where the business is. We're stoked by all that's ahead. We have 2 big renewals coming up. We've gotten past our antitrust litigation and lawsuits in a very favorable way and we have open roads. And right now, it's about executing and it's about continuing to monetize those synergies we talked about when it comes to bringing the 2 leagues together and that's where we stand.

On M&A, I think at earnings, you had said the opportunities would be confined to premium sports and live events, a fairly limited set of premium sports that are privately owned. I think live events kind of a considerably broader vertical. Can you speak to any type of assets that would interest you there?

Look, we took a look at Moto GP. I think that's the best example you have. Seth Zaslow, my inside IR guy, probably wouldn't even want me to bring it up and I'm doing it just for him, just to tweak him a little bit. But we -- look, we hung around the rim there. I don't think that -- I think there was a foregone conclusion that if they sold, which is a big question because Bridgepoint has been challenged for many years and confronted for many years on selling Moto GP and didn't want to do it. And finally, if they were going to come around, it was probably going to be F1. F1 are cars, F1 are motorcycles. It made a lot of sense. But we wanted to get in there and explore and evaluate and show our interest. And I'll tell you, I think we could have done wonders for that sport in a way that I don't think Liberty will do as well as we would have, just because we've done it with UFC, we're doing it with WWE and this one kind of played right into it. All the monetization opportunities around the flywheel of sponsorship and site fees and incentive packages, consumer products, licensing, monetizing social and then, of course, the domestic and international media deals. And oh, yes, leveraging UFC and WWE. I think it really played well for a strategic advantage. They didn't want to go there. We never really got serious and that was that. And now they'll try and get their approval and get past regulatory hurdles. If they don't though, we'll stand kind of waiting and listening. But having said that, those are few and far between. I mean those are unicorns. So if there are others that are out there that we can really see synergistic opportunities both from the cost structure perspective, operating leverage. And from a revenue synergy perspective, we will be opportunistic, and we will jump.

Got it. All right. We've got time for probably one more. Margin target this year or margin guide this year is 45%, strong increase from last year. Cost synergies play into that, I think, but how should investors think about the long-term profitability of WWE and UFC?

Yes. I think that you hit it earlier. I mean, our -- we expect to have free cash flow conversion north of 60% starting next year and for a long-term basis, but we're 45 this year for a lot of different factors and one-timers. But we're sitting in a strong position, and we're growing revenue in mid-single digits, but we've got 2 huge renewals in front of us. So if you're looking for a growth story, you really certainly in the content space, aren't going to find too many better opportunities in TKO because of what we're doing, both with the cost structure and the synergies there, but monetizing all those all those revenue levers. We'll do it with the 2 domestic renewals/the UFC deal, which is -- could be global, you never know. And then obviously, sponsorship and across the board on all the other factors that we've discussed. But it's really all at our fingertips. This is -- I'm not going to say it's not hard. We're out there pounding the pavement every day and things can change from a macroeconomic environment to impact us. But where the sports ecosystem sits today and the demand for premium content, and the experience economy where consumers and audience are looking for premium, experiential opportunities, not just a ticket to go to the game, but everything that comes with it, you'll find no better than WWE and UFC.

Right. Great way to end it. All right, Mark, thanks so much for being here.

Great to see you.