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

All right. Thank you, everyone. I'm Ryan Gravett of the communications research team here at UBS. And for our next speaker, we have Mark Shapiro, President and Chief Operating Officer at TKO. Mark welcome back to the conference.

Thank you, thanks for having us, and good to see you.

So a lot has happened in the first calendar year for TKO. You signed a landmark deal with Netflix for WWE content. You recently, announced an acquisition for some of the sports assets and Endeavor among many other items through the year. So maybe just to set the stage, can you talk about the key learnings over the past year and your top priorities as we go into '25?

Yes. Thank you. I would say that it certainly has been an eventful year. I don't think you'd expect anything less from a company run by Ariel Emanuel. What I would tell you, is what we closed the deal to merge UFC and WWE September of '23. And our conviction as it applies to the industrial logic of this merger has been affirmed. Record revenues, record EBITDA. We've raised guidance multiple times, we've got a strong balance sheet, significant free cash flow generation, experience economy, incredibly strong, not just holding up but robust in ways that I don't know, historically, we've seen in the last couple of decades. And that's also evidenced by all of our KPIs, where we're seeing attendance. We're seeing ticket sales, achieved record highs. We're seeing pricing power. We're seeing site fees real demand for our properties around the world, and our sponsorship is -- should be kicking about $375 million next year between the 2, including digital. So kind of a strong table we've set this year. And as you look to 2025, you've got, obviously, the UFC, the Netflix launch with WWE on January 6, to your point, which will be gangbuster. You've got the UFC renewal and where that goes, you've got further integration with not just the merger of these 2 where we're not done. There's still more we're going to get out of that beat our guided net savings of $100 million, but also integration of the Endeavor assets, as you said, and of course, our capital return program which a dividend and a buyback will all be getting underway. So a lot happening, strong table set and a bullish '25 in front of us.

Yes. So definitely, a lot of topics that I'd like to touch on. But maybe if we could start with the UFC renewal topic right now on investors' minds. So I mean maybe just from a high level, across the sports ecosystem, we've seen a lot of rights continue to see pretty substantial increases at renewal. So maybe if you could just give us your view on the health of the rights marketplace right now and how you think UFC is positioned for this renewal?

Yes. Look, I've been doing this for the better part of 25 years. The first part, majority as a buyer with ESPN. And then with the core production on the entertainment and music side, some sports as well as a seller. And I can tell you that I have personally never seen demand for premium content this high. And the #1 premium property by far is sports. And I think you've got 4 reasons for that. And it's really about the technological landscape and the shift in the transition from linear to digital. But just start with cable. Strong cash flow business needs to remain a strong cash flow business and companies are going to do what they can to build a moat around that cash flow business. Even if subs are at 50 million to 60 million homes, they have to fortify that. Meanwhile, network is still strong. I mean, take a look at this weekend, no better example. You've got Formula One setting the table that ESPN is going to put the finale on ABC because they want the reach. And meanwhile, college football landscape this weekend, as everybody tries to get into CFP, across the board, you've got the SEC championship playing on ABC, and you've got the big 10 championship playing on CBS. So more and more network because of the reach, I think broadcasting is having a bit of a resurgence. Then you just have the natural evolution of the marketplace. You've got David Ellison coming in with Skydance to buy Paramount and CBS. So there's change there. You've got Mark Lazarus spinning off the NBC assets, there's change there. You've got ESPN and flagship which will be launched in 2025, so there's change there. So just the dynamic winds of change on these platforms, technology, media, that's building demand for sports. And then finally, of course, streaming, where you've got Netflix to 285 million homes, not just looking to add more, but to keep what they have. You've got HBO on the precipice, Warner Bros. of getting rid of the password sharing, so they can join the club. You've got Amazon obviously doing their thing. You've got Apple and what they're doing with MLS. So the streamers see sports as a real recipe for success as they look to acquire and retain subs. And then you kind of turn over to the UFC. And what do you have there? You have a year-round property, year-round. There's no breaks. It's happening every single weekend. WWE, by the way, is the same thing. But just on the UFC side, that's what you have. That's a real antidote for churn. We're also the owner and the commissioner, throw the coach in there, too. There's no bureaucracy. There's no 32 teams. We have to meet in a hotel once a quarter, have a meeting to determine something. It's happening in one small office in Stanford or one small office in Vegas. And then finally, which shouldn't be overlooked, keep in mind, almost half of our audience for WWE and UFC is 18 to 34. And you know probably from your own household, if you can get folks to make buying decisions in that demo, there's a good chance they're going to hang on to that for the rest of the life. No different than Crust toothpaste. That's how it works. And there's all kinds of apps we bought in my house that I never even watch, but I don't think to cancel them. And you can use UFC to get those young folks into habit and signing up for your platform.

Yes. Maybe just following up on, one of your comments there, Mark. I think the UFC is unique because like you're saying you do have kind of full control over the amount of programming, what the lineup looks like. So you're doing around 42, 43 events per year right now. How are you thinking about the right balance going forward? And I guess within that, does that give you opportunities to perhaps put up the rights across multiple buyers this time around?

Yes, Ryan, I would tell you it's all of the above. I mean we're going to maximize price for our shareholders, and we're going to maximize brand and reach potential for our own properties. That means almost as much as price. I can't say enough, and I've said it a nauseam about ESPN and Disney in the way they've supported and grown and marketed and just creatively gotten behind the UFC. It's just been an extraordinary partner. And Fox, by the way, was an extraordinary partner before that. But ESPN just had so much reach. And obviously, the CEO of Disney, Bob Iger came up in sports. So he gets it. He gets the storytelling, He gets reach. He gets engagement. Jimmy Pitaro has been a phenomenal partner and so we'll be looking to maximize price, we'll be looking to also do what's right for the health of our brand. And if that means, to your point, splitting up the packages or creating new packages or potentially adding fights and dates, we're willing to do all of the above.

Okay. One last one on the UFC. The -- we've seen from the tech platforms, global rights are a key part of their business case.

Absolutely.

Going after sports rights. So maybe it'd be great to get your views if that's an avenue that the UFC could go around this -- this time?

That's right.

Or generally how the international rights marketplace is performing for you?

Look, I would tell you that, as you know, our WWE deal with Netflix, it will be global and as rights term off internationally, those rights will fall in to the deal. Different, to your point on UFC where internationally, we sell territory by territory. And that's been a great story for us. And the audience is significant, engagement just as strong, demos equally strong in that 18 to 34. And with the proliferation of folks moving from linear to digital or adding digital, I would say the marketplace is frothy. So we like where we are right there. It's one of the reasons, by the way, that we went and acquired IMG because they are the industry best, they are the market leader when it comes to monetizing rights internationally -- globally for that matter, but in this case, internationally, just like they do with the NFL, which is one of their many properties that they represent across 35 countries where they have boots on the ground. So we are anxious to continue that relationship. We are encouraged by the results we're achieving there and all that's ahead. But at this point in the process of UFC renewal, You never say no to anything. We're here to listen. We have a lot to learn about where ESPN, ABC and Disney are going with flagship and their kind of whole streaming and digital strategy. The same goes for what David Ellison plans to do with CBS and Paramount. You heard Jeff Shell come out publicly and say, we're going to lead with sports. No surprise to anybody. You see Peacock putting more and more emphasis into sports. We're the beneficiary of that right now with our PLEs and WWE. So a lot of change happening, a lot of dynamic wins. We're going to be patient. We're going to be thoughtful, we're going to be prudent, and we're going to do some listening before we start actually engaging in a negotiation.

Got you. Let's talk about the WWE, starts on Netflix in about a month. So maybe if you could let us know how you're feeling about the launch and especially after those Jake Paul and Mike Tyson numbers?

I didn't see it. What happened?

They were quite high. Yes. Where do you see the partnership going?

Yes. Look, I can't say enough about Netflix. I mean let's take a step back. This is a transformative deal for us. And I would say for the industry, with all humility, because nobody ever thought Netflix was going to get into sports. So it's a transformative deal. It's $5.2 billion over 10 years. It is visible, highly visible revenue, highly stable revenue, high-margin revenue. And with 285 million homes, they are a world-class marketer and by the way, that goes for anything they do that's a premium property, whether it's a Squid Games sequel which is coming out shortly or it's the Mike Tyson fight to your point, where they're doing 100 million folks tuning in almost 60 million concurrently. So we are really excited about this partnership, the reach, what it will do for our brand, what we're seeing in the marketing plans, but we just had a media day with them. That went extremely well, Nick Khan and HHH Paul Levesque, were on hand with Bela Bajaria, who, of course, oversees all programming. Going through all the creative, talking about a sustained plan over the course of the year. We're excited about that. January 6 itself, I'll be there at the intuit Dome in Los Angeles, and we're going to have CM Punk as a superstar there participating. We will have John Cena coming back, huge star, I mean, we know them very well, William Morris represents him. So we're very close to all that he's doing. Of course, from a superstar current perspective, you got Roman Reigns and Cody will be there. We've got Travis Scott doing music and a few other surprises. So that will be a big night for us. And we're working on a drive to survive right now with them. Our own version. So a lot happening on that front. I'm not worried about January 6. I tell this to Nick Khan and Paul and Andrew Schleimer, our CFO, all the time, we're going to be big on January 6. Let's be clear. I'm worried about June. I'm worried about July. When we're not the shiny toy when we're not the newborn how is Netflix going to treat us. And I'm getting all the right answers and commitments. And so I have no reason to be worried. But I'd like to kind of go about my business as if we're prepared for all events.

Got you. How do you think this deal can maybe help some of your other revenue lines? I'm mostly thinking about sponsorship here just given the likely expanded reach that you'll have and anything you can share in terms of how the economics might work with Netflix?

Well, look, I would tell you it also goes kind of hand-in-hand with your marketing question, right? We are working with Netflix day-to-day on sponsorship and advertising partners. So for example, we have a deal with Minute Maid where they are an official partner for the WWE. And as part of that, they are buying advertising on the AVOD platform for Netflix. We're in discussions with world-class brands like Mars to do the exact same thing. So a lot of opportunity on kind of every front. We view this Netflix partnership. I think the way you should, it's 10 years. We're going to be in business a long time. Anything we can do to kind of lift their tide lifts ours. So we're moving back and forth. But our sponsorship business has been incredibly strong on both fronts. I'd like to really determine it as global partnerships because it's more than just slapping your brand on something. I mean when we bought the UFC they were doing about $30 million, $40 million in sponsorship annually. And very similar to what WWE was doing. And now as we look to next year, you're -- as I said, you're in that range of about $375 million that we think we can do. And go further for you, Ryan, I think -- I'll just throw this out there for [indiscernible], especially. I think that as you look ahead, another 5 years or so to 2030, I mean, this is a business that combined can grow to $1 billion, and we are putting plans in place to do just that.

Got you. So maybe the -- if we stick with WWE for a minute, the -- you have another big rights renewal coming up, WWE Network deal currently with Peacock. Frankly, we don't get as much information on the viewership just given it's not readily available from Nielsen. So anything you can say in terms of how that's been performing for Peacock and NBCU and just how you're thinking about the renewal?

Yes. Look, I'm glad you raised it because we talk probably too often about what a great partner, ESPN and Disney are on the UFC front. And I would tell you that Peacock NBC and Comcast are equally great. on the PLE front. I mean, obviously, they have SmackDown now, and we brought back the Saturday night Main Event series on NBC, which is getting a lot of buzz and sure to be a crowd pleaser. But the PLEs, they're seeing significant audiences. The marketing around the events have been terrific. And I think that one in particular lends itself to even more suitors than UFC there I'd say, because the nature of the PLEs, which are once a month. So there's a lot of platforms out there that are looking for premium and also looking for volume. But other platforms are just looking for volume and even though a smaller subset, but still enough for us, are looking for low volume but high premium. And that is exactly what the PLEs are. Once a month, somewhere around the globe, we can schedule with our partner, depending on possibly what's of strategic interest to them in terms of sub growth and broadband growth or a new series they're launching or a new event on the ground, we again, owner commissioner. We have our hands on the wheel. And so the PLEs really are attractive in the sense that you're getting high-quality very high premium, but just once a month. So I think, obviously, we'll start those conversations at some point in the first half of next year with Peacock exclusively, but we're anxious to talk to some other suitors. And they know that, by the way.

Yes. The model of low volume, very high premium, do you think that continues to lend itself mostly to streaming distribution? Or is there another avenue there you could go?

It really depends on price. I can't tell you how many platforms I'll meet with. We're not looking for a lot of volume. Oh, really well because we have this available for you at this -- well, that I'll take. It comes down to price. Sure, they want premium so that they can bring in new subs and retain whom they have. And keep in mind, a lot of Netflix audience, a good portion of their audience has never even sampled WWE. That's why it was important to them. And for us, trying to broaden our audience, another reason why it was important for us to go there beyond the actual dollars. But as you kind of go around -- ring around the Rose with all these different partners here. Some are in one direction, some are in the other, and it's just finding kind of the right medium and again, the right marketing partner for the long-term health of your growth of your brand in your audience.

Then just in terms of the quantity of PLEs, WrestleMania is a multi-day event now. I think SummerSlam also going down that route. So -- is there opportunity to kind of expand these events to more than just single night or how are you thinking about the quantity?

It's definitely an opportunity for that. It's all a progression, a natural evolution. WrestleMania big hit for us to expand. And I think as you look at all these PLEs, again, depending on the partner, I think there's absolutely an opportunity to advance some of them to 2 days. But we're in a good place with our story lines. Remember, the way it kind of weaves through is WrestleMania is the culmination of everything and then kind of the new season begins. And you use Raw and you SmackDown and you use Saturday Night Main Events, and they use the PLEs, all to really weave a long-form story around multiple story lines and characters, superstars, driving that discussion and driving that narrative. And it also gives us an opportunity to launch new names and/or bring back names like we are with Punk and John Cena and at times, we have with the Rock. It's very sticky. I think I say Paul Levesque just does such a phenomenal job creatively working with Lee Fitting as well and their teams that draft these scripts, where all these superstars want to come back I mean WWE is the ultimate. It's the Tiffany product in the space. It hovers sports and entertainment. Believe me, you cannot be in it if you're not a superb athlete. These folks take a hit. But it's great because it gives us a long tail, whereas UFC, the number of years a certain fighter can compete, of course, is limited.

Got you.

More limited I shall say.

So maybe let's shift over to the live events portion of the business, started off by talking about how strong the experienced economy has been, can you talk to the sustainability of the demand you're seeing, anything in the forward bookings? And I think at WWE this year, there's been a nice inflection in terms of -- so any color you can provide on what...

Look, I think Ariel and I think a lot of what's driving it is the 4-day work week. And that's here to stay. I'm not saying I like it, but that's here to stay, whereas folks are -- if you're lucky in our company, there's a mandate. It's 4 days mandated in office attendance. That doesn't mean on Friday, you're not working, but you have flexibility to be remote. And just about everybody takes advantage of it. And -- or they might be on the road for WWE or on the road for SmackDown for UFC, you're on the road for whatever the Saturday Night Main Event is, whether it's a Fight Night or it's a Pay Per View. So it's just more discretionary time. Maybe some of the errands you were going to run on Saturday, you get done on Friday. So it really gives you a true weekend, if you're not chasing your kids around the soccer and baseball games. There's just more time to go out and do things. Whether that's movie theaters, which clearly are having a resurgence from Thanksgiving on or it's buying shows, on streaming or it's going to mass participation events or it's going to sporting events. I mean it's not just UFC or WWE. It's across the board in sports and the attendance baseball had a record year. The NFL as usual is on fire. NHL coming off another strong attendance year last year. And yield for us has been a big winner. So I would tell you, When we look at live events, it's really twofold. It's ticket sales and it's site fees. And on the ticket sales front, the Sphere was the highest grossing UFC event ever. And by the way, the highest grossing event ever at the Sphere. Our Madison Square Garden about this year, our card there was the second highest grossing event in Madison Square Garden history. And for WWE, put aside WrestleMania, which was obviously so successful in Philadelphia and will be through the roof in Vegas. Our SummerSlam last summer was the highest grossing non-WrestleMania event ever. So ticket sales really strong, and I would tell you that when you look at our live event revenue on the WWE side, while there's some site fees in there, it was predominantly driven by ticket sales. And in the second and third quarter, year-over-year, we were up 30-plus percent. In that live event revenue driven by ticket sales. So that's a good story, obviously, for the WWE and UFC clearly doesn't look to be slowing down. Now you move to the site fees part of it. And this is the way you need to think of it. And this is a real growth opportunity for us. So we have 24 marquee or premium events a year, 12 UFC, 12 WWE with the PLEs, 1 per month. And 4 of those are in the Middle East and 4 just for UFC are in Vegas. That's really our home. Our anchor hub is the T-Mobile Arena there. 1/3 of those 24 events, we're getting site fees on, roughly 1/3. So that leaves another 2/3 to sell. In fact, we've got a MetLife event we just sold next summer in Jersey, where we're getting a pretty strong site fee that we didn't expect. So all kinds of opportunity to get this high-margin revenue. And once you finish those 24, when we actually sell out of those -- by the way, and then you're selling title sponsors in terms of advertising like we did with Riyadh Season and the Saudis for the Sphere event, then you get to SmackDown, Raw and our Saturday night fight nights for UFC. And then we can start selling those. Now those are not going to sell from multimillion the way the premier events do. But whether it's cash or noncash incentives, those will sell. And it might be a St. Louis here for $1 million. It might be a Des Moines, Iowa here for $0.5 million, but we will go wherever it is best to, again, grow the brand, grow the audience and cash in on the site fees.

Do you think the time line is for penetrating that remaining 2/3 of the major events that don't have site fees today?

I'm not ready to put a timetable on it just yet. But I -- we have a dedicated team to doing just this. Also, they work with our legal group and our government relations groups. So I'd like to think we can be fairly quick about it. But it will all be in '25. That's for sure if that's what you're asking.

Okay. Song sponsorship, a $375 million for next year?

You're locked right in on that.

I wrote it down.

We're trending to that number.

I guess what's the -- what have been the drivers? It seems like WWE started to get some traction in the last quarter, more in ring sponsors. Can you talk about what's driving that?

That and all of the above. From a digital standpoint, the content we control, our social and our social channels, I mean, the audience for WWE and UFC is enormous and young and active. But you've got in ring, you've got in the Octagon. You've got all the ancillary events we do around the actual fights themselves, meaning like the weigh-ins for the UFC, I mean, all kinds of opportunities. And now we're open to actually title sponsoring a lot of our events, which we had never really done until the Sphere. So title sponsorships, in ring, outer ring, ancillary events, social and digital in-store where you can use our marks, official brand marks. So a lot of opportunity here, and we're -- we announced obviously a historic Budweiser deal for us earlier this year. And we're -- we're putting finishing touches right now on a massive renewal with Monster Energy for the UFC.

Are there still more verticals to tap on the UFC side?

Yes. Yes.

Okay. Great.

I could go through 9 or 10 different categories we should be scoring but not yet. And then also renewals. When that Monster Energy comes up, there's a host of other players looking to take their spot in the same way there was Budweiser you surfing Modelo. Modelo wanted to come back, had a very strong offer on the table. Budweiser beat them out. And frankly, Budweiser was a better global partner for the UFC.

So maybe we can talk about the sports assets from Endeavor that will be coming over. Maybe just at a high level to start, Can you talk about why these assets make sense within the TKO umbrella?

Yes. Look, we're extremely excited about these assets and first and foremost, it allows us to stay true to what we've always said about TKO, which is sports, pure, play. IMG does sports media rights on location, does sports ticketing and premium experiences. PBR is another sports league. It's not the size of the UFC or the WWE, but it has its own distinct following in kind of Western lifestyle. So we're staying true to that. It's value accretive. They're all industry best assets. We know them extremely well because we have a lot of history through Endeavor. And I'll remind you, no matter 85% to 90% of our adjusted EBITDA going forward will still be WWE and UFC. These assets are about powering the machine. And that machine is obviously sports rights, but it's all those KPIs I talked about. It's ticket sales, it's pricing and packaging power. It's leveraging the databases, the CRM of these collective leagues it's site fees, it's sponsorship, it's digital content. All of these are ways in which IMG, especially through the media rights and on location, in particular, will power the other 3 leagues.

Maybe diving more into the PBR. And talk about a similar league-level asset, a little bit different structure. You moved to the team series model a couple of years ago. Can you talk about the financial profile, what the major drivers are over the next few years? And I think margins are kind of in the mid-teens right now. What's the opportunity?

Look much smaller, much more nascent. I mean, they've got a history -- but there -- obviously, it's not mainstream. It's Western lifestyle. It's cowboy country. But we've made no secret of our desire to get our arms around leagues where we can continue to own holistically all the spokes and monetize all the spokes inside of the larger TKO ecosystem. And PBR just has a lot of low-hanging fruit from media rights to international rights to, frankly, more events to sponsorship to monetizing -- they have a terrific digital and social that heretofore, we haven't had a dedicated team to just selling that for PBR. So that will now be equipped inside of TKO and with IMG's help. And then of course, site fees. There's no reason why in the space of 2 weekends, we can't be doing like what we do in Anaheim now in the beginning of the first quarter of next year, which is you go in Anaheim you're doing a UFC fight and then you're doing a WWE event followed by a PBR 2-day event or created just for those cities where we can kind of fit the puzzle with the days. So PBR is the lowest hanging fruit and on location on IMG will be kind of serving to power those businesses for all 3 sports and entertainment properties.

For our location, maybe outside of the owned properties, I mean, where are we in terms of penetration of these hospitality offerings in major sports events, and...

A lot of elasticity here. There's so much pricing power ahead of us here. I mean, look, on location is by far the industry leader. We've got the Olympics, Milan and L.A. coming up. We've got the World Cup. Obviously, we're already across the final 4. We'll be doing Rose Bowl this year. The NFL partnership is second to none. It's the Super Bowl, it's the draft, it's international events. You'll hear the commission or the NFL talk about getting up to as many as 18 international games. All the premium experiences will all be powered by on location. So a huge opportunity. And if you look at just the Olympics, and the World Cup alone over the frame, right, because it's multiple years and there's some pre-spend. And we'll be very transparent about this when we ultimately segment the business. But between the Olympics and the World Cup, we'll do just over $200 million in EBITDA across the 2 Olympic Games and the World Cup. And that's on roughly $2.1 billion of revenue. So a big opportunity. And I will tell you, we don't get the Olympics without the Super Bowl. We don't get the World Cup without the Olympics. And there are a lot of other players in the space. Liberty went out and paid a fortune to get Quint. That's one of our competitors, but we are doing laps around the competitors right now, and we intend to keep it that way. And we are always on the hunt to your question, from new properties.

Yes. Maybe just to wrap up, anything else out there that I think makes sense under the TKO umbrella -- boxing is an opportunity that's in some press?

Yes. Look, I think Boxing could -- especially with Fight Pass, right? We own our own direct-to-consumer platform with the UFC, where we put a lot of preliminary bouts from our fight cards with Karate, jujitsu, we're doing more in wrestling. I mean, Fight Pass is our owned and operated, if you will, and we think we can put some boxing in there and really drive subscription growth for Fight Pass. But we're not going to get into boxing by buying anything, be clear about that. We've got a lot to integrate right now. we're not on the hunt. I mean we always keep our eyes open because we're not ignorant and stupid and foolish and we don't let any hubris get inside our walls like, oh, we're all good. No, we have to be opportunistic. But we've got a lot to integrate. We've got to keep our eye on the ball. But if something is there, we'll certainly take a look. Boxing is something we would do organically. So nothing to buy, just something we'd start up and likely take a partner from the Middle East that would serve as an investment partner for us. So that's something we're exploring right now, nothing to announce. But we -- we're focused, obviously, on our free cash flow, which I think when you get to normalized is running at about 60% free cash flow conversion and obviously, margin accretion. And UFC, I think, is the envy of a lot of properties in terms of the 55% to 60% EBITDA margins, they do annually and WWE has a lot more room to go, but we're making progress.

Great. I think that's a great place to wrap it up. Thanks, Mark.

Thank you, Ryan. Thanks for having me.