TKO Group Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 27, 2024

There are 11 speakers on the call.

Operator

Good afternoon. Thank you for attending TKO's full year 2023 earnings call. My name is Cole, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to turn the conference over to our host, Seth Zaslow, Head of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, and welcome to TKO's full year 2023 earnings call. A short while ago, we issued a press release, which you can view on our Investor Relations website. A recording of this call will also be available via our website for at least 30 days. Joining me on today's call are Ari Emanuel, TKO's Executive Chair and Chief Executive Officer Mark Shapiro, our President and COO and Andrew Schleimer, our CFO. After prepared remarks from Ari and Andrew, we'll open the call for questions.

Speaker 1

The purpose of this call is to provide you with the information regarding our full year 2023 performance. I want to remind everyone that the information discussed will include forward looking statements and or projections that involve risks, uncertainties and assumptions. Please see our filings with the Securities and Exchange Commission for further detail. If these risks or uncertainties were to materialize or any assumptions prove incorrect, our results may differ materially from those expressed or implied on this call. Forward looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, except as legally required.

Speaker 1

Our commentary today will also include non GAAP financial measures, which we believe provide an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non GAAP metrics can be found in our press release issued today as well as the information posted on our IR website. With that, I'll now turn the call over to Ari.

Speaker 2

Thanks, Seth, and good afternoon, everyone. TKO's strong results reflect robust demand for our premium content and live events. Throughout 2023, we achieved multiple viewership and attendance records, including 10 highest grossing event records for UFC as well as viewership records at each WWE Premium Live event during the year. We inked significant partnership agreements across TKO, most notably with Anheuser Busch. We secured domestic and international media rights increases for UFC and WWE, including for SmackDown and NXT in the US.

Speaker 2

We launched new international events with significant site fees in the Middle East and Australia. And we made meaningful progress in our integration efforts, including merging UFC and WWE's global partnerships teams to form a unified best in class global partnerships organization. During this period, both businesses reached financial milestones. Based on the full year, both UFC and WWE achieved their best financial performance ever. For UFC, 2023 also marks the 5th consecutive year with record financial performance in terms of both revenue and profitability.

Speaker 2

The positive momentum has extended into 2024 as powerfully demonstrated by our agreement with Netflix to bring WWE's weekly flagship program, Raw, to the streaming giant's global Raw, to the streaming giant's global platform in a deal worth approximately $5,200,000,000 over 10 years. This agreement will provide substantial and predictable economics for years to come, it also demonstrates our ability to leverage the Endeavor flywheel to capitalize on the evolving media landscape and forge relationships with new and emerging partners. With regard to our TKO Global Partnerships Group, our growth potential across both UFC and WWE is significant and already evident, reflected by recent deals with Anheuser Busch and Slim Jim, and revenue upside in this category is showing strong promise. UFC has set new sponsorship revenue records each of the past 6 years, and we believe WWE has similar potential. These accomplishments underscore our conviction in the combination of UFC and WWE as well as TKO's capacity to drive revenue growth and margin expansion, generate meaningful free cash flow and deliver shareholder value over the long term.

Speaker 2

Now turning to some business highlights. At UFC, we sold out at all 5 of our live events in the Q4, including October's UFC 294 in Abu Dhabi. UFC and the Department of Culture and Tourism Abu Dhabi have a long standing relationship, which we look forward to continuing through 20 28 with the recent extension and expansion of our partnership. During UFC 295 in New York City, we set another record at Madison Square Garden, cementing UFC's position as the 1st, 2nd, and 3rd all time highest grossing events in the legendary arena's history. Meanwhile, our fight night in Austin, Texas became the highest grossing sporting event ever at Moody Center as well as the highest grossing US fight night in UFC history.

Speaker 2

In 2023, UFC's live events continued to attract strong fan attendance. During the year, we sold out 20 events with live audiences, with 7 of those events now ranking among the top 20 highest grossing UFC events of all time. These events were equally successful on broadcast. For the full year, we had our highest ever average viewership on ESPN's linear networks for UFC's pay per view prelims, meaning the bouts before the main card as well as the most watched year of pay per view prelims telecast on record. Average viewership for all pay per view prelims in 2023 on ESPN and ESPN2 grew 35% over 2022.

Speaker 2

This is before factoring in simulcast viewership on ESPN Plus for those events. Turning to international rights. During the quarter and to start the year, we completed multiple renewals, including with Sportsnet and TVA Sports in Canada, ESPN in Australia and New Zealand, and Sony in India, in addition to renewals covering emerging markets like Sub Saharan Africa and multiple European territories. And as I previously mentioned, our roster of leading sponsors continues to expand, delivering meaningful top line growth over 2022. In addition to signing new partners like Anheuser Busch as the official beer sponsor of the UFC in a record breaking deal, we renewed commitments from long standing partners, including Monster and Toyo Tires.

Speaker 2

Pivoting now to WWE, demand for WWE's live events was similarly robust. 9 premium live events in 2023 sold out and broke multiple sales records in the process. In the Q4, these included Fastlane, which became the most watched and highest grossing Fastlane in company history, and Survivor Series, which became the highest grossing Survivor Series of all time. That momentum has continued into 2024. Last month's Royal Rumble attracted a venue record of more than 48,000 fans to Saint Petersburg, Florida's Tropicana Field and had the largest gate of any premium live event in WWE history outside of WrestleMania.

Speaker 2

Turning to media rights. As previously mentioned, we recently announced a significant long term deal with Netflix. This partnership will dramatically expand the reach of WWE and bring weekly live appointment viewing for the first time to the streamer. We're incredibly excited about this new relationship and what both brands can achieve together over the long run. Beginning in January 2025, Netflix will become the exclusive new home of Raw in the US and will also become the home for all WWE events and specials outside the US as they become available, inclusive of raw and WWE's other weekly shows, SmackDown and NXT, as well as premium live events, including WrestleMania, SummerSlam, and Royal Rumble.

Speaker 2

The Raw deal follows our new rights agreements that have been announced following the close of the TKO transaction for SmackDown with USA Network and for NXT with CW Network, which widens WWE's overall domestic distribution to include streaming, cable and broadcast. Together, these deals delivered an increase of more than 1 point 4x in AAV, exceeding expectations on guidance and demonstrating our ability to capitalize on the evolving media Looking ahead at 2024, we are optimistic about the opportunities on the horizon, which Andrew will now discuss in greater detail, along with our financial performance.

Speaker 3

I'll start with an update on integration and then shift to our financial results before discussing our capital structure and outlook for 2024. As Ari highlighted, in the 5 months since launching this business, we've begun to realize the revenue and cost synergies that underpin the strategic and financial rationale for this transaction. Now that we've completed our 1st budgeting cycle, we have even greater conviction in the industrial logic of combining these 2 iconic brands and leveraging the capabilities of Endeavor. These businesses are highly complementary, well positioned for success and are delivering record financial results. On the revenue side, let's start with Media Rights.

Speaker 3

In addition to the meaningful wins we discussed on our last earnings call related to renewals for SmackDown and NXT, last month we entered into a transformative partnership to align WWE's content with the global reach and scale of Netflix. This long term agreement will give us visibility and stability into a high margin revenue stream well into the future, in addition to a best in class marketing partner reaching 100 of millions of fans around the world. With this latest deal, we have now positioned WWE media rights with the leading global streamer, while continuing to take advantage of traditional distribution formats. Across both UFC and WWE, our distribution partners at Disney, Comcast as well as Netflix see the value of the strong viewership and engagement our premium live sports and entertainment products deliver. These relationships position us extremely well going forward as we execute our plan to maximize fan engagement and monetization in the next cycle of renewals for our content in an ever evolving media landscape.

Speaker 3

In sponsorship, shortly after the New Year, we announced a unified global partnerships team focused on delivering unique, authentic integrations across our portfolio for brand partners. Global partnerships is and will continue to be a significant high margin growth area for us. In live events, we benefit from continued strength of the experience economy, which has persistently driven record results across our business. To reiterate, site fees are a key growth area for us. As one example of immediate synergy, this past weekend Elimination Chamber was held in Perth, Australia, where we secured the 1st meaningful site fee for WWE in the region.

Speaker 3

The event will increase fan engagement and strengthen our presence in the market. Furthermore, we recently announced a 5 year partnership to bring multiple live events to the Honda Center in Anaheim, California with both UFC and WWE securing preferential economic terms. Over Presidents' Day weekend, we held both UFC 298 and Monday Night Raw there. And while it's early innings, this partnership establishes a template for how we will leverage the global popularity of our 2 iconic brands by packaging events for arenas and tourism authorities around the world. On the cost side, we continued to make significant progress.

Speaker 3

We completed our review to identify savings opportunities across each of our businesses. This focused on areas such as finance, marketing, human resources, legal and IT. In addition, it included overlapping personnel in revenue generating areas such as sponsorship, media rights and consumer products. We're now in the process of seeking business integration that can yield efficiencies in other areas, including live events, production and operations. As we discussed on our last call, we've identified and commenced action upon run rate savings that when fully realized will allow us to achieve the upper end of the previously communicated range of $50,000,000 to $100,000,000 in annualized net savings.

Speaker 3

We recognized a portion of these savings in 2023 and we anticipate realizing the balance in 2024. We will continue to optimize the cost structure as opportunities present themselves. Turning now to our financial results. Full year 'twenty three reported results include 12 months of activity for UFC and 3.5 months of activity for WWE. WWE activity is not included in the reported results for 2022 or from January 1 through September 11, 23.

Speaker 3

To assist with comparability, we presented supplemental financial information in our press release and IR website that includes WWE activity and a portion of WWE related to the corporate group for the Q4 and full year 2022 and for the period from January 1 through September 11, 2023. For full year 2020 3, TKO generated reported revenue of 1,675,000,000 dollars Net income was $176,000,000 Adjusted EBITDA was $809,000,000 Including WWE activity for 2022 and from January 1 through September 11, 23, combined revenue was $2,619,000,000 compared to $2,432,000,000 in the prior year, an increase of 8%. Combined adjusted EBITDA was $1,092,000,000 for 2023, dollars compared to $1,013,000,000 in 20 22, also an increase of 8%. Our combined adjusted EBITDA margin was 42% for both periods. Now I'll walk you through our segments.

Speaker 3

For the full year, our UFC segment generated record results reflecting continued strong performance across each category of the business. Revenue increased 13% to 1,292,000,000 dollars Adjusted EBITDA was $756,000,000 an increase of 11%. UFC's adjusted EBITDA margin was 58%, down from 60% in the prior period. Media rights and content increased 10% to 871,000,000 The increase was primarily driven by higher domestic and international rights fees resulting from increases in contractual revenues, higher fees associated with international renewals and one additional pay per view event in 2023 as compared to the prior year. Live events revenue increased 34% $168,000,000 The increase was driven by 5 additional events with a live audience, 26 in 2023 as compared to 21 in 2022, as well as higher site fees.

Speaker 3

Sponsorship revenue increased 18% to 196,000,000 dollars The increase was driven by new partners and increases in fees from renewals. Adjusted EBITDA reflected the increase in revenue, partially offset by an increase in expenses. The increase in expenses reflected higher direct operating costs, primarily due to an increase in athlete costs from different matchups as well as higher production expense associated with 1 additional pay per view event and 5 additional international events as compared to the prior year. Marketing and venue costs also increased due to 5 additional events with live audiences in 2023. SG and A increased primarily driven by higher personnel from greater headcount as well as increased travel and other associated with the additional pay per view event and international events.

Speaker 3

Turning to WWE. The following commentary on the full year segment includes WWE activity for 2022 and for the period from January 1 through September 11, 2023. For the full year, we generated record results reflecting continued strong performance across the business, in particular, live events. The segment's combined revenue increased 3% to $1,326,000,000 and combined adjusted EBITDA was $533,000,000 an increase of 4%. The segment's combined adjusted EBITDA margin was 40% in both periods.

Speaker 3

Media rights and content revenue increased 1% to $883,000,000 The increase was principally related to the contractual escalation of media rights fees for our flagship weekly programming, Raw and SmackDown and Premium Live Events, which more than offset a decline in 3rd party original programming due to the timing of deliveries. Live Events revenue increased 17% to $262,000,000 The increase was related to an increase in domestic and international ticket sales. Sponsorship revenue increased 11% to $69,000,000 driven by new partners and contractual step ups in existing agreements. Consumer products licensing revenue declined $22,000,000 to 100 and $12,000,000 primarily due to the previously disclosed transition of our digital retail platform and vendor merchandise business to Fanatics as well as a decrease in collectibles revenue. Adjusted EBITDA increased as higher revenue was partially offset by an increase in expenses.

Speaker 3

The rise in expenses reflected an increase in content creation costs, partially offset by lower expenses related to the timing of third party original programming and the transition of our digital retail platform and venue merchandise business to Fanatics in addition to the realization of cost synergies post the close of the merger in September. Turning to corporate. Corporate reflects the general and administrative operations supporting both of our segments, including finance, legal, HR and our executive team. Corporate also includes the fees paid by TKO to Endeavor under its services agreement. On a combined basis, corporate expenses were $196,000,000 for the full year.

Speaker 3

This includes expenses related to new employment agreements for a number of our executives. Now moving on to our capital structure. We define free cash flow as net cash provided by operating activities less capital expenditures. As I'll expand upon in a moment, free cash flow excludes the majority of the mandatory tax distributions to our owners, but does include the portion of cash tax paid by TKO PubCo. For the full year, we generated $420,000,000 in free cash flow.

Speaker 3

This includes approximately $50,000,000 in favorable working capital related to the timing of customer payments that were contractually due in January 24, but received early in December 23. During the year, we also incurred $49,000,000 of capital expenditures, approximately $25,000,000 of which related to WWE's new headquarters. We ended the quarter with $2,761,000,000 in debt and $236,000,000 in cash and cash equivalents. As a reminder, our year end cash balance reflects the use of $100,000,000 in the quarter to we're targeting revenue of $2,575,000,000 to $2,650,000,000 and adjusted EBITDA of 1.15 $1,170,000,000 There are 3 notable drivers I would like to address in our guide. Number 1, as you know, our current deal with USA Parral ends on September 30, 2024.

Speaker 3

And given the lead time Netflix required to ensure technological readiness, our new long term deal commences on January 1, 2025. As a result, our guidance excludes any revenue or adjusted EBITDA in Q4 from the domestic rights fees for raw. This item is purely timing related, and we are in the process of securing distribution for Raw during the interim period in Q4. We will provide further details once we have an update. For the avoidance of doubt, in 2025, with the commencement of the Netflix deal, our financials will include a full year of media rights for Raw, inclusive of the step up built into the new deal.

Speaker 3

Number 2, UFC performance will be impacted by the revenue recognition of its live events. In 2023, we benefited from the delivery of one live event we were not able to stage in 2022 due to COVID. This will impact comparability between our 2023 2024 results. Our guidance range is reflective of 2024 having one less pay per view from a U. S.

Speaker 3

Media rights revenue recognition perspective. We estimate the impact to revenue and adjusted EBITDA to be approximately $20,000,000 Number 3, the timing and magnitude of the net cost synergies, which we anticipate realizing this year at the upper end of our previously stated range of $50,000,000 to 100,000,000 dollars The other notable drivers of growth related to our 2024 performance include meaningful growth in partnership sales, the renewal of licensing agreements for UFC content in certain international markets, the monetization of new third party original programming and enhancements to ticket yield across our live event portfolio in addition to site fees in key markets. As we discussed on our last call, given the quarterly fluctuations related to the timing of events and content deliveries, among other items, we do not intend to provide quarterly guidance and believe our results are best evaluated on a full year basis. However, as we look to the Q1 of 2024, we wanted to highlight a few notable items. At UFC, the current calendar includes 3 numbered events compared to 4 in the prior period.

Speaker 3

In addition, we expect 5 events with live audiences compared to 6 in the Q1 of 2023. At WWE, results will be impacted by the absence of consumer products licensing revenue that was recorded in Q1 2023 related to the early termination of an agreement for license collectibles. Year over year, consumer products licensing will also reflect the previously disclosed transition of our Venue merchandise business with Fanatics. In terms of free cash flow, we're targeting full year 2024 free cash flow conversion in excess of 50% of our adjusted EBITDA target range. Our expected conversion rate in 2024 reflects approximately $50,000,000 of CapEx related to non recurring projects, such as the completion of WWE's headquarters and UFC's New Performance Institute in Mexico City, which opened this past weekend.

Speaker 3

We expect this non recurring CapEx will be weighted towards the Q1 of the year. Our free cash flow conversion target also reflects an unfavorable working capital impact of approximately $50,000,000 related to the early collection of customer payments I mentioned earlier in my remarks. As we previously discussed, we're structured as an UPCE. As is common with UPCEs, TKO OpCo will be making periodic distributions of cash to its owners, Endeavor and TKO PubCo, to cover tax obligations on a quarterly basis. For full year 2024, we expect to make distributions to our owners on a pro rata basis at the highest individual tax rates at the time applied to taxable income.

Speaker 3

As it relates to the income at TKO Pubco, we anticipate paying taxes at the lower corporate rate of approximately 25%, resulting in excess cash at TKO PubCo. It's not lost on us that we expect to have significant cash on hand in 2025. As such, we'll consider a wide spectrum of alternatives to increase shareholder value, including organic investment at positive ROI, reducing our net debt position, returning capital to shareholders in the form of share repurchases and or dividends and non organic investments should a unique and compelling opportunity present itself. Absent financial and environmental factors, we believe we can support a net leverage level of up to 3x based on our financial and growth profile given our contracted revenues, high margin flow through and the cash generative nature of our business. This net leverage target should provide insight into our framework for liquidity.

Speaker 3

Considering recent inflation data as well as the current interest rate environment and uncertainty around rate cuts, our focus today is on generating cash flow, and we expect net leverage to continue to decline in the near term. We look forward to providing further updates on our plans with respect to capital allocation in the coming quarters. In conclusion, we generated robust financial results in 2023 reflecting strength at both of our businesses. We are extremely excited about the road ahead and our prospects for 2024 and beyond. With that, I'll turn it back to Seth.

Speaker 1

Thanks, Andrew. Operator, we're ready to open the call for questions.

Operator

Perfect. Our first question is from Ben Swinburne with Morgan Stanley. Please go ahead.

Speaker 4

Hey, good afternoon guys. Ari, maybe to start with you, kind of a bigger picture question. This Netflix deal is sort of a seminal event for your company, but also the industry. Beyond the dollars, what excites you about bringing Raw and all the WWE content to Netflix globally? And what do you think it means for the business over the a longer period of time?

Speaker 4

And then I just had a quick follow-up for Andrew on the guidance.

Speaker 2

Listen, we're extremely excited about the relationship with Netflix. We do a ton of stuff with them on the movie and television and non scripted side. We're very pleased with the financial terms. We're an entertainment sport. We think the strategic relationship and the benefits from the deal are significant.

Speaker 2

And as you have indicated based on your question, it's a transformative deal, which we're excited about, Like the deal we made first time with the UFC and ESPN Plus, I think this is on the same level with them. They're the largest streamer on a global basis. So that global reach, I think, for our product is extremely important. We think we can benefit them and their strategy going forward with SVOD and AVOD. And so it's a good combination.

Speaker 2

And now as you can see we have I think, a great assortment of deals, Comcast for SmackDown, CW for NXT and now Netflix and we have one deal left with the PLE. So all in all, pretty incredible.

Speaker 4

Thank you. And then Andrew, just to be put a finer point on the Q4, it sounds like you expect to have raw distributed and there will be revenue and cash flow. It's just at this point can't quantify that and so there's nothing in the guide. I just want to make sure I got that right.

Speaker 3

Yes, you got that right. We currently exclude any income from off for Q4, which on a run rate basis based upon the existing deal terms is equivalent to 75,000,000 dollars approximately.

Speaker 2

And I would just say the following. Again, we don't have anything for them. We believe raw will in the Q4 be aired. We have no further information than that. We feel pretty positive about it.

Speaker 2

But as Andrew said, he went through the numbers with you.

Speaker 5

Yes. Don't assume any numbers, Ben. So like we're going to get on the best platform we can that's best for the brand and the content, the programming, the viewership and our following. But don't assume any dollars. That's why we pulled it out of there.

Speaker 2

Got you. Thanks so much.

Operator

Our next question is from Brandon Ross with LightShed Partners. Your line is now open.

Speaker 6

Hey, everyone. Thanks for taking the question. First, I wanted to follow-up with Andrew's commentary on capital allocation. Just wanted to double check that you said you're going to hold off on that generally until 2025. And you did mention in there that you would potentially look for special situations.

Speaker 6

If a very large shareholder were to sell a lot of stock at once, would you be open to buying that stock directly? And then my second question is I'm trying to learn to be political. Okay.

Speaker 5

What was your second question?

Speaker 6

Yes. Okay. And then second question is, you did this global deal with Netflix. I think you didn't give real clarity at the time on what international markets are not covered in the deal or contemplated over the long term. So any clarity that you could give on that would be helpful.

Speaker 3

Yes. Look, let me take the first one Brandon in terms of capital allocation. What we did say is that we expect to have meaningful cash flow or cash on hand in 2025. We gave some guidance on adjusted EBITDA conversion to free cash flow. You look at our adjusted EBITDA range, sans, any income for raw for Q4, that's rather healthy.

Speaker 3

We anticipate building up cash over the balance of this year. And I think the commentary was we'd be in a meaningful cash position by the end of 2025. That doesn't by any means limit our exploration of potential things over the next 6 to 12 months. But the point was the fine point was around just the cash balance. The second question.

Speaker 3

On the second question, look, I think we would generally be opportunistic or look to be opportunistic and we view any opportunity through the lens of creating shareholder value. There was a shareholder that sold stock. As you know, we participated, as I mentioned in our prepared remarks of the $200,000,000 roughly 1,300,000 shares.

Speaker 2

I would just add, listen, as I said based on the first answer with Ben and this, Netflix is an incredible partner. It's over $5,000,000,000 I think in my opening remarks I said $5,200,000,000 It's a long term deal. We take we've mitigated a lot of the risk in the business. We were very happy with it. I think certain people that we're talking to right now were questioning whether we would ever get a deal with Raw after we made the SmackDown deal.

Speaker 2

And as you can see, it's an incredible deal, throwing off a ton of cash.

Speaker 5

And Brandon, just let's call it out. I mean, obviously, we're talking about Vince McMahon specifically in terms of cashing stock. He still holds, I believe, 20,000,000 shares. That's right. Exactly.

Speaker 5

It's all registered. And he'll do whatever he's going to do and we're on the sideline. We'll have a look. We'll see. We have no idea on timing.

Speaker 5

We're not having any discussion with him. He's given us no point of view on his motive or if he plans to sell or not sell or if he does, how much. So we're going to wait around and find out just like you.

Speaker 3

Perfect. And I think just on Netflix Brandon, in terms of what's in and out of that deal, just to be clear and put a point a fine point on that one, Netflix has the right to all international territories as and when they become available.

Speaker 5

But we're kicking off with LatAm.

Speaker 3

Yes. Obviously, LatAm and Canada, some of the key markets that we put in our initial press release that were of core importance that are available as of January 1. Those that are not available as of that time would roll in if and when they become available subsequent to January 1, 2025.

Speaker 5

Yes. And just I mean those and those are really premier markets for them, Brandon. UK was a definite priority for them. LatAm was a definite priority for them. So we're glad that kind of those deals are up and available.

Speaker 5

And as the rest come out over time, they'll be jumping. And they've shown they want to expose the WWE to their 260,000,000 global subscribers. And obviously beyond the points Andrew and Ari have articulated laid out, we're also excited about the fact that we exceeded our guidance, right? We told The Street, we saw a 1.4 across the board for these three properties. We just exceeded that guidance and we got it with Netflix.

Speaker 5

I mean that's the big headline. When you're doing almost a $5,200,000,000 deal with the best platform in the world with the most biggest audience in the world, arguably one of the best media content brands in the world and by the way happen to be one of the best marketers in the world just see the front page. The idea of seeing WWE Raw on the front page when you go to Netflix is something we're really excited about.

Speaker 6

Okay, great. Thank you.

Operator

Our next question is from Eric Handler with Roth MKM. Your line is now

Speaker 2

open. Good afternoon. Thank you for the question. Two questions actually. First, with regards to the Netflix deal, how does this impact what you may or may not do with international brand extension sort of like WWE Europe or what you have now with WWE UK?

Speaker 2

And then I'll come back with a second question afterwards. I really don't understand that first question.

Speaker 4

Well, how do you think

Speaker 2

it's in one bucket of discount?

Speaker 5

Go ahead.

Speaker 2

I was just does partnering with up with Netflix have any impact on what you may do with future brand extensions of WWE sort of like what you have now with NXT UK? Does that help you at all with having one global partner, does it help you as NXT UK maybe morphs into NXT Europe or NXT Latin America or something along those lines?

Speaker 5

And Nick Khan is also on the call from WWE and he can comment on it. Nick?

Speaker 7

Yes. So for us, a global localized product has always been a priority. We think Netflix helps us with that. So even if you look at the premium live event schedule for this calendar year Perth, Australia this past weekend, Berlin, Lyon, France, Riyadh, Canada, all over the world look for down the road more local stars from those markets as we expand our tryouts to international markets. So we feel confident over time that that will all be covered and will be part of the Netflix deal.

Speaker 8

Great.

Speaker 5

And then And also just remember,

Speaker 6

it doesn't

Speaker 5

our Netflix deal is important to know for everybody. Our Netflix deal doesn't preclude us from creating new content and events and programming on a global basis. We just have some first look rights that they would have a window to essentially evaluate. So it doesn't and NXT just across the border, we have an opportunity to create all kinds of new material, sell it for an incremental rights fee, but they're going to be 1st in line

Speaker 3

to pay that rights fee.

Speaker 2

Like we have with the UFC, we have the Contender series, which we created after we had the Ultimate Fighter. So you can see we're creative as it relates. And in bull riding, we had the individual and then we created the team event. So we have the ability to do that within this deal.

Speaker 5

And ESPN is very similar to Netflix on Ari's point because they have a first look as well on any new program. And they say no, we're out there collecting incremental rights.

Speaker 2

Got it. Okay. That's helpful. Secondly, you've talked in the past about having weekend back to back events with UFC and WWE, you just did that in Anaheim. I'm curious how you think about revenue and or cost synergies when you do back to back events like that in the same city?

Speaker 2

So as you know, we just did, as you pointed out, a Saturday night, Monday night. So it was UFC Saturday night in Anaheim, Raw only on Monday night. SmackDown was in Utah at the time. Those 2 alone, there was significant savings on the box office, etcetera. And we now are looking at the calendar.

Speaker 2

This will be for 2025 with regard to all three. The revenue, you could imagine sponsorship, kind of a ticket package, site fees, which is growing significantly. There's significant revenue opportunity, licensing in the arena. And as you saw in Mexico City, there was a WWE star there. As you saw at the WWE event, there was Chandler was there promoting stuff.

Speaker 2

So there's a lot of crossover there and there's some cost synergies that we recognize, but there will be more because that was just 2 of our events and there's more to come.

Speaker 3

Yes. Just to put a pin in that one, Ari, hit the top line. On the cost side, we benefit from venue rent economics by virtue of bringing both shows to the same building and doesn't necessarily have to be, Eric, the same weekend. We can bring both properties and negotiate a multi visit deal, if you will, with that venue and realize the same beneficial or preferential rent economics as we did this past weekend. Ari talked about the top line, more beneficial ticket rebates by virtue of packaging these 2 programs together in the same venue.

Speaker 3

So look, it starts to get really interesting and that's before any logistical savings on T and E, other production, event operation efficiencies and otherwise. So look, that's something that's well in the works here. Okay.

Speaker 5

Eric, think just this is a good analogy here, kind of years back. This is very analogous to ESPN and ABC having Sunday night and Monday night football, right. So any time there was back to back shows that were even in the same region, there were substantial cost savings, truck, personnel, satellite time, you name it. So we think there's a real halo effect for us on the production side of the cost synergies.

Operator

Our next question is from David Karnovsky with JPMorgan. Your line is now open.

Speaker 9

Hey, thanks for the question. Ari, I wanted to get your latest thoughts on just the sports rights landscape, given obviously the distribution agreement with Netflix, but also the sports joint venture for some legacy media firms and then the continued pressure at linear, kind of how are you seeing upcoming renewals with UFC and WWE Network as positioned?

Speaker 2

Well, I mean, on the latter point, as you know, we have the PLEs and we have the UFC deal coming up. We feel very strongly about that and our partnerships that we currently have. But there's many players in the marketplace just based on the subs we have at Comcast with the PLEs and what we've done for ESPN ESPN Plus with the UFC. Mark, just completed a pretty good negotiation as it relates to the football playoffs. So and what we just did with regard to Netflix, I think they're now a player in this and I think everybody is kind of paying attention to them and what they're going to do.

Speaker 2

And now with the new entry with the Fox, Warner Brothers and ESPN. That being said, I think they're all moving to a linear either AVOD or SVOD service. And I think our assets are going to be really important in that conversation. We're going to see what happens with the NBA. I think that's going positively.

Speaker 2

And so we feel very good about where sports rights in general are going. Mark can talk more specifically on college football, but it's all on an upward trend.

Speaker 8

Yes. I

Speaker 5

think, David, first of all, on the joint venture, it's Mark. Ari and I have no comment on that. We're not going to get into the WBD Disney, whole combination. Just back on the sports rights front, I think, jeez for the better part since we bought the UFC, it's just been commentary about sports rights, the bubble, when's it going to burst, when's the cap coming And we certainly face a lot of those headwinds on the WWE renewals. But I'll just remind you like they're just the platforms are going to pay for premium content and we're blessed by having 2 great premium content properties in the WWE and UFC.

Speaker 5

And when you have premium content and you have several bidders, which clearly they were out there and you have a move from linear to digital, but you still have to keep linear alive, you've got a pretty robust marketplace. When Ari talks about the college football, he's talking about the NCAA deal and the renewal that ESPN did, it was 3 times, 3x. Then also the CFP as you know they went from 5 games to 12 games. That was a healthy increase that ESPN bid off. And then Amazon takes the wildcard NFL playoff game, which was a big hit on Peacock for $110,000,000 and they have first right of first refusal.

Speaker 5

They jump on it for next year and up at the $120,000,000 And then NWSL which also IMG and WME Sports did the negotiating on that end with a multitude of players women's soccer that went for a big number. So not to mention the NASCAR deal was a very healthy deal. Sports, live sports especially when you have what we have which is volume and year round we're sitting in a really good place.

Speaker 2

This conversation has been the same conversation with motion picture and television, when is the bubble going to burst with regard to content. I would just say to you, I appreciate everybody, it's eventually got to burst, it's never going to say when exactly what Mark said, when you have premium content, which we sit on, whether it be at EDR or here, premium content sells for premiums.

Speaker 9

Okay. And then just on a separate topic, I want to ask on a class auction lawsuit against UFC. My understanding is that this could be heading to the trial in coming months. I guess in that context, any update you could provide on your thinking here? And how do we look about the read through from this to what could happen with a second lawsuit representing a later period?

Speaker 9

Thanks.

Speaker 3

Yes. Look, as we've always said, and this is our consistent message since we started talking about this case publicly, we believe strongly that the facts and the law are on our side. And we look forward in terms of timing to making our arguments to a jury trial. But as is typical in a case like this, we've been engaged in private mediation simultaneously with our trial preparations and that's what we're prepared to comment on at this time.

Speaker 9

Thank you.

Speaker 2

Operator, we'll take the next question please.

Operator

Our next question is from Peter Zaffino with Wolfe Research. Your line is now open.

Speaker 8

Hi, thank you. 2 if I could. First regarding UFC, are you worried at all about competing for Disney ESPN's programming budget in a 2 year period of time in which they're going to be funding NVA inflation and several other contract renewals in context of their broader corporate commitment to reduce programming costs? And second question is on competition. I wondered if you've seen any behavior changes at the PFL since they took in outside capital.

Speaker 8

Thank you.

Speaker 2

I'll take the second part first. I mean, just do yourself a favor, look at the ratings that just happened. And we're happy with competition, not only are the PFL and Bellator competition, but football's competition, basketball's competition, video games are competition. There's a lot of competition and there's a lot of competition in an MMA space. That being said, we performed significantly better than them as it relates to the ratings, that took place recently.

Speaker 2

As it relates to the NBA and whether they're going to be at ESPN, Comcast, Warner Brothers, Amazon, etcetera and their budgets, We know how much the UFC drives ESPN ESPN Plus. We're happy with our relationship. I think they're happy with us and we feel very positive about that relationship and what's going to come. So that's all I'll say right now. Operator, let's take one last question.

Speaker 2

Okay.

Speaker 3

Sorry.

Speaker 2

Next question?

Operator

Our last question will be from Ryan Graevet with UBS.

Speaker 10

Just going back to the Netflix deal, are there cost savings that you can realize by having just largely one partner for the majority of your programming internationally, like sunsetting the WWE Network and any way to quantify that? And then just curious on the initial reception from your sponsors on the cross selling opportunity here in any way to frame when that could drive higher WWE sponsorship revenues? Thanks.

Speaker 3

Yes. Ryan, this is Andrew. I'll take the first part. Mark will take the second one. I think you hit the nail on the head on one of the opportunities visavis our deal with Netflix.

Speaker 3

As you know, the lion's share day 1 of our content internationally inclusive of the WWE Network will be licensed to Netflix. And to the extent that there is longer tail WWE Network operating in the market that will then shift to Netflix at the time of which those deals are up. So sunsetting that network is certainly part of our plan and will yield cost savings when we transfer over to the license model as I said in my prepared remarks.

Speaker 5

And then just on the partnership side of the business, which is obviously and maybe even arguably are among the top 3 revenue synergies we see for TKO going forward. Let's remember when we meaning Endeavor bought UFC, they were doing roughly $35,000,000 in partnership revenue. Not a lot of inventory identified, not a clear strategy, not a robust global staff selling it and not any local folks, which by the way WWE is very good at. They sell locally really well. It's national, they need work.

Speaker 5

And now here we are in end of February in 2024 and we've got a clear line of sight to well over $200,000,000 in partnership revenue for the year. So it's been a great growth story for us. And just as a reminder, similar to Netflix, not only are the dollars good and the margins good and the recurring revenue good, but these are great marketing partners. You're not going to find better marketing partners for our brand than Monster Energy and Anheuser Busch, etcetera. So we're really confident that we can really materialize the same kind of results on the WWE side, especially since we have merged a best in class global partnerships team that is now on the street selling both properties.

Speaker 2

Great. Well, thank you everyone for joining us on today's call and for your interest in TKO. Operator, you

Speaker 1

can conclude the call now.

Operator

That concludes today's call. Thank you all for your participation. You may now disconnect your line.

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Key Takeaways

  • Record financial performance: TKO delivered best-ever results in 2023 with UFC achieving its fifth straight year of record revenue and profit and WWE also posting all-time highs, driving full-year combined adjusted EBITDA of $1.092 billion on revenues of $2.619 billion.
  • Transformative media rights deals: TKO secured a 10-year, $5.2 billion Netflix agreement for WWE Raw and global programming, alongside renewed domestic deals for SmackDown on USA Network, NXT on CW, and increased UFC rights fees across key international markets.
  • Expanded sponsorship and partnerships: The newly merged UFC and WWE global partnerships team set new sponsorship records—sixth straight year for UFC—and signed major partners like Anheuser Busch and Slim Jim, highlighting significant upside in high-margin sponsorship revenue.
  • Live event momentum and site fee growth: All five Q4 UFC events and nine WWE premium live events sold out in 2023, setting multiple gate records at venues like Madison Square Garden and Moody Center, while pioneering new international events in the Middle East and Australia with substantial site fees.
  • Integration synergies and 2024 outlook: TKO has identified $50–100 million in annualized cost savings to be fully realized by year-end 2024, and is guiding 2024 revenues of $2.575–2.65 billion with adjusted EBITDA of $1.15–1.17 billion and free cash flow conversion above 50%, aiming to reduce net leverage toward 3x.
AI Generated. May Contain Errors.
Earnings Conference Call
TKO Group Q4 2023
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