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

All right. We'll get started. Hi, everyone. I'm Ryan Gravett from the Communications and Media research team here at UBS. For our next speaker, we have Mark Shapiro, President and Chief Operating Officer at TKO. Thanks for joining us, Mark.

Of course, good to see you, Ryan.

So it was a big year for TKO, new rights deals at UFC and WWE. You also laid a lot of the groundwork for your venture into boxing. But as we look ahead, what are the top priorities for the company as we get into the new year?

Yes. I would just say from an overview perspective, we're thrilled that the industrial logic of bringing these 2 core IP properties like WWE and UFC together, really, that industrial logic has been validated. In fact, we are a year ahead of schedule on our pro forma that we put together for the analysis of bringing these 2 together. And there's a real duality at play. We have a management team that is very focused on short-term priorities, but at the same time, setting the table for long-term growth and very focused on that. And we benefit from the fact that we are living in an experienced economy unlike no other. So that inerts to our benefit across the board with ticket revenue, with high-margin site fees, with premium hospitality. So you find yourself in a situation -- a fortunate situation where when you look at WWE and UFC, you're talking about businesses that are 50% margin businesses. And that doesn't include the margin accretion we're going to have when you start to factor in our new media deals next year that we've cut for WWE, of course, with the PLEs and ESPN and UFC and our deal with Paramount+. And so when you look at those deals, it's really in totality, $15 billion of deals, a $2 billion AAV. This is high margin. This is multiyear. This is very predictable, clearly high visibility and all have escalators. So we're sitting in a good position. And now it's all about executing on these deals and our business overall.

Mark, let's start off with one of those new deals on the UFC side with Paramount Skydance, who certainly making some bold moves of late, but...

I hadn't seen that.

Maybe you could discuss the decision to...

More bold moves.

Yes, exactly. Maybe you could talk to the decision to go with them as your new rights partner and how you think this deal positions the UFC for not just next year, but over the totality of the agreement.

I would tell you, we're thrilled and actually pleasantly surprised in the sense that when we were with ESPN, Ryan, it was ESPN such a great marketing machine, such a great destination for fans, and they were driving a lot of noise to our fights, a lot of attention, a lot of awareness, and they were growing our audience in a really significant way and most importantly, growing engagement. What we've seen so far with PSKY is, this isn't just about PSKY, I mean, meaning just Paramount+. This is about all of PSKY. I mean this is a priority handed down from David Ellison and Jeff Shell that the entire company is going to get around how they can support the UFC. Now of course, it makes sense from their perspective, they're paying a lot of money. So they want to monetize those rights. But we've been -- we're clearly the beneficiary. And we've had already several meetings with synergy heads across the company on how nontraditional areas of business are going to put a spotlight on UFC. So we're really optimistic about what this could be. We launched on January 24. And of course, the reason for going here beyond, obviously, the terrific rights fee, which is a 2x step-up, was that they're bold. They're dynamic. They're going to make moves, and you've seen that with TikTok. You've seen that with the way they're chasing Warner Bros. But for us, we're out of the Pay-Per-View business. That's the beauty. We're out of the double paywall. And remember, if you wanted to watch our premium content on ESPN, you would have to pay roughly $100 a month, sign up for ESPN+ and then sign up for $80 and growing for the Pay-Per-View. That's all gone now. You pay $7.99. That's what it is today, even if that goes up at some point a little bit, you're materially less, right? You're talking about -- you've got popular means out there showing $1,200 versus $150. So our fans, it's -- they're going to be able to get this content clear and clean and the feed the way it's supposed to be, not ripped off, not pirated. It's very, very fan-friendly. And it's going to allow us, especially when you look at the neighborhood of content that we now sit in, all the Taylor Sheridan shows, et cetera, it's going to allow us to grow our audience, expand our audience. It gives us broad reach. And that's what we're most excited about. And I'll just tell you, I don't know how this Netflix thing is going to play out. When I say Netflix, I mean the Chase, Netflix seems to be in the lead for now with Warner Bros. But if Paramount -- if PSKY is able to get that asset, I like a world in which we could potentially live on HBO. I like a world where we could potentially live on TNT because historically, institutionally, these are sports destinations, right? They've had their years of carrying premium sports, and they've shown not only that they can attract an audience for sports, but that they can convert an audience to sports.

Got you. In terms of the broader reach and the removal of the double paywall whether that's CBS or if it ends up on HBO, who knows. But what can that do to other parts of the business? How should investors think about the benefits that it can provide?

Well, I would tell you, it's just -- it goes into the thesis of why we chose going to PSKY, right? You're looking at, of course, the dollars and the step-up, but you're looking at reach and you're looking about what's good for your brand. And they will be drivers of all 3. And to your point on CBS, I should mention, I mean this deal calls for us to simulcast some of our premium content, either partially or in its entirety on CBS. So I think you could roughly expect half of our premium events, which is -- which are 12, one every month, if you include Abu Dhabi, there's 13 to have some semblance of CBS carrying our product, our properties, our IP, our fighters, Dana White to over 100 million homes, which should be really exciting and good for growth. And that's what we're trying to do. We're still a nascent sport. We haven't been around for 100 years like Major League Baseball or the NFL, right? We are 30 years old plus. So we still have a lot of educating to do when it comes to the sports fan on MMA, what that means, how the fights work, how you win, how you win a belt, what the BMF award belt means, if you will. And we believe that given that we have 700 million fans strong globally, that it will draw more attention. And then once you get a little taste to UFC, you're hooked, especially if you go to the event live and in person.

A large portion of that fan base is international outside of the U.S., a global sport, if you look at the athletes that are commuting. Where do you see the most opportunity to improve monetization outside the U.S.? And how should we think about international TV rights going forward?

Really excited about that. I mean, right. My CFO, Andrew Schleimer, myself, Adam Kelly, obviously, who runs IMG for us. We see this as a real opportunity going forward. We're going to make noise. The brand is going to grow. Engagement is going to increase. And that's going to bode well internationally for us. Keep in mind that we have fighters in totality that hail from 75 countries around the world. So there's already a built-in base around the world. We take about 11 to 13 fights a year on the road internationally. And we see real opportunity in Australia, in MENA, in LatAm, obviously, in Europe and China. I would say those are our 5 priorities. And what we're finding in all of these regions is there is budding streaming platforms that are popping up every day, looking to sort of take the same model as ESPN+, which is get an anchor tenant, make noise, make a name, quickly become a sports destination and then buy up other sports rights. So we're feeling pretty bullish about what we can do internationally. And it should be noted that generally, we have about 1/3 of our deals around the world coming up annually for renewal. So real opportunity with more competitors, but also real opportunities because some of these deals are significantly underpriced because they were cut years ago.

Lastly, on the UFC, there's a big event planned next year at the White House. Any early preview on what we should expect?

What we're trying to figure out right now is what we can and can't do with that event, which is scheduled to take place on a flag day. Somebody's birthday is that day as well. And we're -- it's going to be a spectacle. I mean this is -- if we thought the Sphere was a spectacle, this is a spectacle on steroids. We're getting requests. I'm not even talking like people that want to buy tickets because that won't be available. There will be no ticket sales. That will hurt us financially. But what this will do for brand, reach, engagement, notoriety, press, earned media, advertiser interest. This is an absolute monster. We're excited about it. Dana White and Hunter Campbell are hard at work at putting together a sensational fight card, don't know yet what the President's involvement will be, but judging from the draw day with World Cup, clearly, he's willing to get involved with those sports that he loves and take place on U.S. soil, not to mention the 250th birthday celebration in the United States. So it's going to be gangbuster, and we're just trying to understand structurally how we can do it and set it up and what we got to build in and replace the soil in the side and what we can sell from an advertiser standpoint. But the only thing we do know at this point is it is happening and there won't be ticket sales.

Got it. Okay. So Zuffa Boxing is also set to launch in early 2026. Can you frame the opportunity from a financial perspective, but also the broader plans you have around energizing the sport that is frankly quite fragmented today.

Yes, you're right. It's really twofold when you look at boxing. But I think I would start the headline for us is we're going to build a promotion similar to UFC. So you have a sport using your words, is fragmented. Others might use -- has suffered from corruption over the years or too many promoters or too many sanctioning bodies. We're not going to cast judgment on any of that. Our plan is to build a promotion where we have a stable of 200 or so fighters that we are hard at work signing up and fans see the fights they want to see, which means the best fight the best. You move up in the rankings, you fight someone else that has moved up in the rankings. That's really what we're building here with Zuffa Boxing. We are planning to launch our first fight on January 23, which is the night before our first UFC fight on PSKY. So back-to-back, nights, big weekend for TKO to say the least. And the way that we're going to build value here is, on one hand, you've got this partnership that we have with our friends in Saudi Arabia, who, by the way, have been spectacular partners, spectacular, right? They say what they mean and they do what they say. And we're going to run it like we do the UFC, bring the whole platform in and sell tickets and sell media rights and sell partnerships and marketing and ultimately, consumer products and licensing off of our brand and our individual fighters and ultimately monetize the site fees the way we do UFC and WWE. Real opportunity there. And to do that, as you know, we're not taking any risk. We're being paid a management fee. And we're going to build firm value. And in the space of a couple of years, after hitting some thresholds that we're well on our way to hitting, we will roughly be at about 50-50 on ownership of that JV. And when you look at UFC, which is staying with firm value, $20 billion plus and WWE, $20 billion plus. There's a real opportunity to follow that road. Now I'm not here telling you we're going to turn Zuffa Boxing overnight into another $20 billion enterprise asset. But it can be something pretty strong, Ryan, because what it has that the UFC didn't have is you need to be educated on the UFC. You need to understand how the sport works, MMA, grappling, karate, jiu jitsu, boxing, I mean, all that goes into it. Boxing, everybody gets. It's been around for 100 years. It's a gladiator sport, 1 of the 3 biggest sports as far back as the roaring 20s. And it's 2 individuals get in a ring and try to knock the other one out. It's pretty simple and everyone relates to a good grudge match like that. So we think there is enormous upside once it's run the way it should be run, which will benefit not just fight fans, but the fighters themselves. We're excited about that. And I would just say before we leave this topic, the other opportunity is we're going to have 2 to 4 super fights a year, similar to the Canelo Crawford championship bout we had at Allegiant Stadium a few months ago in front of 70,000 fans on Netflix where they did incredible numbers. They were thrilled. They want to stay in the fight game business. And we're going to put 2 to 4 fights like that together per year for Netflix or whoever else wants to get into the bidding with our partners from Saudi Arabia and Sela, GA. And we're going to be paid to do what we do, which is sell tickets and market and put the fights together and sell media rights. And we've been telling the Street that, that roughly per fight, we make about $10 million a fight, and I think there's upside there going forward as well because we've proven the model.

Got you. And just lastly on Zuffa, the JV structure today and you referenced over time getting to a 50-50 split over the next few year -- few years, excuse me. Will there be updates along the way for -- from an investor standpoint so we can monitor the progress and how that asset is performing?

Great question. Absolutely. We're -- we'll put our guidance out in February. And Ariel Emanuel and Andrew Schleimer and myself are very, very focused on more granularity to whatever level that is, we understand and we listen to feedback from the Street. And I'm sure we're going to talk about global partnerships as well, our partnership is marketing, and we want to do the best we can, can give all the answers and show all the recipes, but we want to be able to help our investor base and attract a greater investor base through more detail for their model.

Great. That's great. Mark, you started the conversation with referencing on the WWE side, a lot of the industrial logic in terms of the deal coming together. I mean I think that -- we started to see that in the numbers this year in terms of sponsorships and live events. So I mean, how much runway do you see from here at the WWE?

Well, this one has been around a lot longer, not as long as baseball, obviously, but it's been around a couple of decades more than the UFC. But just monster runway because a lot of the revenue streams you're now seeing us create and generate just weren't tapped into years past, namely on the partnerships and marketing side. We think there's huge runway here. And we've got great partners. I mean Netflix and ESPN, I mean not to mention with the power that USA still has because it's been a destination for WWE for so long. So sports fans, sports and entertainment fans know to go there. We just couldn't be better primed really on the media rights side, on the partnerships and marketing side, on the margin side, on the creative side, Nick Khan is doing a fantastic job running that business, growing that business, assembling a best-in-class team. And Paul Leveck is a creative force, absolute force in creating new superstars, pitting the right superstars and storylines, framing that out the way that you'd expect as a fan, constantly a surprise at every corner. So I believe we're in good shape there. And I really do. I think it's early innings as it relates to WWE. Frankly, to my surprise, I didn't grow up a WWE fan. Of course, I knew it. And of course, who didn't know Hulk Hogan. I probably knew him better as Thunderlips from Rocky 3. But I have become a pretty strong fan, not just because you're involved and you're going to the events and you're sitting in a room and brainstorming with Nick and Paul, but because it's just good television, great characters, these superstars, the storylines, their backgrounds, where they're going, how hard -- by the way, how hard they work and the kind of athletes that they are. I mean our superstars are getting hurt every day. This is -- there's -- you can say all you want about scripted, but the athletic competition isn't so scripted when a punch lands in the way it wasn't supposed to. And I think our fans really appreciate it. I think they appreciate how genuine it is, how raw it is and how we really cater to a family-friendly audience. So we're really excited about where we can go with WWE. And let's not underestimate what ESPN is going to mean already from a credibility perspective. But [indiscernible] is going to get that D2C platform moving fast, whether it's fans that are authenticating through their cable operator already or whatever the platform might be or fans that want to pay $29.99. I mean we saw great success with our first event, Wrestlepalooza. We anticipate Wrestlepalooza becoming an annual event, strong numbers across the board and ESPN, the marketing they brought to the table on the WWE. And I should credit the Walt Disney Company. That first event, Wrestlepalooza, they sent us a 10-page plan on how they were going to promote the launch of WWE on ESPN across the Walt Disney Networks, similar to what PSKY is doing with UFC, and we couldn't have been happier, frankly, no notes.

Great. Any updates on some of the ancillary content that wasn't included in the PLE deal this time around, the library, the premium events on the NXT side.

Right. You're referring to when we did the ESPN deal that we obviously still have the NXT PLEs to sell, and we have the WWE library. What I would tell you is we haven't gone to market yet on the NXT PLEs. We've got a lot in our plate right now, and we want to be smart and strategic about that, and we're in no rush. We need to be deliberate and thoughtful. But as it relates to the library, we're working on a nonexclusive deal at the moment and I think we'll have something to announce in Q1.

Okay. Great. Mark, a few quarters back, the sponsorship revenue line was renamed to partnerships and marketing. I think...

Thank you for that, Ryan.

You take a more holistic view, I think, of what you're doing with these clients. So -- and you've announced a couple of big deals recently, DoorDash, Polymarket, but how does the pipeline look as we get into the New Year?

Pipeline is strong. And we get questions on this all the time if we're being conservative. I mean we're not playing games. We're not sandbagging. We have a good feel of our business. But to your point, we do have strong momentum. I think on the last earnings call, I mentioned we'd announce 2 deals by the end of the year. We did sort of a new frontier new age deal with Polymarket, and then we followed up with DoorDash, which nobody saw coming as well. I think we will actually be able to announce a third deal by the end of the year. We're getting very close in a category I have personally always wanted to see us close. I'll leave the Ts there. But hopefully, we can get that in the door by December 31, and it will be a strong deal, again, multiyear escalators, highly visible. So we're in a good place. I mean we have strong momentum across the board. I think we've told the Street that between WWE and UFC, we're roughly at $450 million for the year, which is way above our internal goal of $375 million. And when you start to contemplate a picture that is strong momentum, new categories like DoorDash that we didn't envision or Polymarket, which we didn't envision. And then on top of that, media inventory because let's remember, in our ESPN deal, we have inventory -- advertising inventory inside of our events that we can sell. And in our PSKY deal, we have ad inventory we can sell along with a lot of broadcast integration. And when you factor in that inventory we believe now we'll have more detail specifically and try to give you a number for next year specifically in February, that our goal of getting to $1 billion by 2030 for the TKO assets in partnerships and marketing will actually be $1.2 billion.

Mark, can we go through some of the building blocks to get to that $1.2 billion? I mean, in terms of -- I don't know if there's a way to frame it in terms of pricing, renewals versus bringing on new partners versus some of these other opportunities like the advertising inventory?

Yes. Look, from a numbers perspective, as I said, we'll lay that out in February as best we can. But clearly, this is a strong revenue stream for us. We have a best-in-class team led by Grant Norris-Jones, who came from the UFC and is now overseeing all of this, including opportunities across IMG and PBR and Zuffa Boxing. So he and his team have their plate full. They are now staffing up to sell ad inventory because if you think about it historically, that's not something we did. I mean, he has experience there and his senior leaders have experience there, but they've been all about activation, experiential, grocery store aisle opportunities. And now we'll be selling ad inventory. So it will take us a little while to build that team, probably a good part of the first half of the year. So you won't see any numbers trickle in probably until the second half. but we feel good about that. And really, the way we've gone about it, Ryan, to your question specifically is that we're renewing categories that are coming up for expiration. Many of those deals, like our international media rights are significantly underpriced because they were cut years ago. They didn't have the kind of ring inventory as example -- as an example, or integration inventory that they have now. We're also finding new categories, as we mentioned. And frankly, there's a lot of demand. When I was at ESPN, I would fondly press our ad sales team like you're on the golf course too much, you're not making calls. And frankly, the reason why they weren't if they were guilty of that, and I thought they were is because there was a lot of order taking. Oh, you want to buy Sports Center. No -- I mean, Sports Center sells itself. That doesn't mean they didn't have a hard job in other categories, but those calls were coming in for Sports Center and then you work them into everything else. And I would tell you, we're now getting a lot of calls more than we did in the past. That doesn't mean Grant's team isn't out there hunting like nobody's business and trying to unearth new opportunities and new brands and really introduce them to our properties, many of them for the first time, these advertisers and marketers. But it's good to see that specifically on the mainstream side, the phone is ringing.

Great. We can shift over to the live event side of the business. As you look across the portfolio, what are you seeing today in terms of consumer demand? Any signs of weakness along the demand curve?

We're not at the moment. We're -- as I mentioned earlier, we're taking advantage of the experience economy, right? We're post-COVID. Humans are social animals. That's just a fact. They want to be out. They want to have shared experiences. They want to share their experiences. There's a difference there. They love short-form content, snackable content. We have a host of influencers, really that Dana White has just done an extraordinary job curating influencers, social media influencers that watch the UFC, that watch WWE, that watch Slap, which is a business that he invented and created. It's not inside of TKO, but nonetheless, it's one of his businesses. And he's curated this incredible team, and they're putting so much creator economy content out there, maximizing opportunities across YouTube and TikTok. And that's benefiting us in the sense that it's increasing engagement, it's increasing awareness. And when you do that, it's increasing our sampling pool, the TAM, our fan TAM, if you will, and they want to come out and experience it for themselves. And we're seeing it in ticket sales. We're seeing it in margins. We're seeing it in premium hospitality where they want that one-of-a-kind experience, not just a seat in the arena. We're seeing it in consumer products and licensing. And frankly, other cities and municipalities and local governments are seeing it because we're getting more calls coming in of interested parties that very much want to bring the UFC or the WWE to their city and are willing to work with us on subsidies and incentives to do just that.

Okay. There's also some big cyclical events next year at for on location, the Winter Olympics and World Cup. And if we go back to the last summer games in Paris, there were some idiosyncratic factors that impacted that. Can we expect these big events to be profitable for TKO this year or next year, excuse me?

We're cautiously optimistic, I would say. Milan is you've seen, I'm sure, reports of this, and they got a whole hockey ice issue right now, an arena issue. Let's just hope that, that gets done in time and that the NHL continues to participate. That would be a disaster for the Olympics. But we're doing well on ticket sales there. We're largely in line. It's slower than I'd like it to be, and there's been reports of that. But we're still a few months out. And as I said, cautiously optimistic. And it's small for us. The Winter Olympics are not what the Summer Olympics are and certainly not what FIFA World Cup is. FIFA World Cup is absolutely on fire from a ticket sales perspective. We're -- I think we're way ahead of where -- certainly our pro forma, but where FIFA had us. And remember, we don't sell -- if you go down a location, you can't just buy a ticket to go to the World Cup. It's a package. It might be travel, might be an experience, might be a meet and greet, might have some swag tied to it or F&B, food and beverage, behind the gates, behind the ropes kind of experience, very high touch. That's what we're selling, and we're on an unbelievable -- we have unbelievable momentum right now. And the draw that they just had was extraordinary for us over the weekend. We had incredible ticket sales that really materialized where folks are seeing the draw, seeing who's in it, seeing the matchups and I better get my package now. So we're really excited about that. And having so many matches just really across North America and in big cities, not to mention Mexico and Canada is something that will play well into our favor. And it will ultimately be scarcity value. You'll ultimately have some scarcity value, I should say.

We've touched on a lot of the new revenue streams coming in next year. How should investors think about the opportunity for margin expansion versus reinvestment in the business? And then along those lines, you also have a target this year for 60% free cash flow conversion on a normalized basis, what are the puts and takes for free cash flow conversion in 2026?

Yes. Look, I would just say run rate on a normalized basis, we're going to stick with our 60% free cash flow conversion normalized basis, I would underscore that. The details all around that. And then from a margin perspective, you're going to see margin accretion, right? We're 33%, 33.5%. And obviously, with the momentum we're having, you start to factor in these media deals, we believe that we'll be in excess of 35%. Again, more detail to come February when we give our guide.

Maybe just to wrap it up, the capital allocation priorities for the company here, you had an accelerated share repurchase program, doubled the dividend. But what are the priorities from here? And what's the appetite around M&A, both from perhaps smaller scale acquisitions or even larger opportunities should they present themselves.

Look, we're going to always be prudent here when it comes to acquisitions. We will certainly look. We will explore, we will talk and listen, but we are not hunting for new properties at the moment. We are focused on execution. We have only a couple of weeks left in this year. We need to hit the ground running in January. We need Netflix Raw to continue pumping the way it did in its first year. We need successful launches with Zuffa Boxing and of course, with the UFC and PSKY. So that's where we are. Capital return in the meantime, you've seen what we've done, right? We talk about doing what you say and saying what you mean. We doubled our dividend. We're obviously well into our buyback. I think you can see more of that to come. Returning capital to shareholders in a company that puts out the kind of free cash flow we do is our priority, and we are dedicated to it.

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

Thank you, Ryan.