TKO Group Holdings, Inc. (NYSE:TKO) Q4 2023 Earnings Call Transcript

TKO Group Holdings, Inc. (NYSE:TKO) Q4 2023 Earnings Call Transcript February 27, 2024

TKO Group Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $0.5. TKO Group Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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. [Operator Instructions] I'd now like to turn the conference over to our host, Seth Zaslow, Head of Investor Relations. Please go ahead.

Seth Zaslow: 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. 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. 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.

A crowd of sports fans watching a live match, dressed in the colors of the owned sports properties.

Ariel Emanuel: 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 U.S. 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 fifth consecutive year with record financial performance in terms of both revenue and profitability. 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 platform in a deal worth approximately $5.2 billion over ten years. This agreement will provide substantial and predictable economics for years to come. And 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 six 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. Now, turning to some business highlights. At UFC, we sold out at all five of our live events in the fourth quarter, 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 2028 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 first, second, and third 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 U.S. fight night in UFC history. In 2023, UFC's live events continued to attract strong fan attendance. During the year, we sold out 20 events with live audiences, with seven 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 telecasts on record. Average viewership for all pay-per-view prelims in 2023 on ESPN and ESPN2 grew 35% over 2022. 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 longstanding partners, including Monster and Toyo Tires. Pivoting now to WWE, demand for WWE's live events was similarly robust. Nine premium live events in 2023 sold out and broke multiple sales records in the process. In the fourth quarter, 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 St. Petersburg, Florida's Tropicana Field, and had the largest gate of any premium live event in WWE history outside of WrestleMania. 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 U.S. And will also become the home for all WWE events and specials outside the U.S. 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.

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 1.4x in AAV, exceeding expectations on guidance and demonstrating our ability to capitalize on the evolving media landscape as well as the quality and value of our premium content across TKO. Just five months in, we continue to make great progress across TKO. 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.

Andrew Schleimer: I'll start with an update on integration and then shift to our financial results before discussing our capital structure and outlook for '24. As Ari highlighted, in the five 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 first budgeting cycle, we have even greater conviction in the industrial logic of combining these two iconic brands and leveraging the capabilities of Endeavor. These businesses are highly complimentary, well positioned for success, and are delivering record financial results. On the revenue side, let's start with media rights. 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 hundreds 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.

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 experienced 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 first meaningful site fee for WWE in the region. The event will increase fan engagement and strengthen our presence in the market. Furthermore, we recently announced a five-year partnership to bring multiple live events to the Honda Center in Anaheim, California, with both UFC and WWE securing preferential economic terms.

Over President's 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 two iconic brands by packaging events for arenas and tourism authorities around the world. On the cost side, we continue to make significant progress. 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 million to $100 million in annualized net savings. We recognize a portion of these savings in 2023, and we anticipate realizing the balance in 2024. We will continue to optimize the cost structure of opportunities present themselves. Turning now to our financial results. For year '23 reported results include 12 months of activity for UFC and three and a half months of activity for WWE. WWE activity is not included in the reported results for '22 or from January 1st through September 11th, '23. To assist with comparability, we've 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 fourth quarter and full year 2022 and for the period from January 1st through September 11th, 2023.

For full year '23, TKO generated reported revenue of $1.675 billion. Net income was $176 million. Adjusted EBITDA was $809 million. Including WWE activity for 2022 and from January 1st through September 11th, '23, combined revenue was $2.619 billion compared to $2.432 billion in the prior year, an increase of 8%. Combined adjusted EBITDA was $1.092 billion for 2023 compared to $1.013 billion in '22, also an increase of 8%. Our combined adjusted EBITDA margin was 42% for both periods. Now I'll walk you through our segments. For the full year, our UFC segment generated record results reflecting continuing strong performance across each category of the business. Revenue increased 13% to $1.292 billion. Adjusted EBITDA was $756 million, 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 million. 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% to $168 million. The increase was driven by five additional events with a live audience, 26 in 2023, as compared to 21 in 2022, as well as higher site fees. Sponsorship revenue increased 18% to $196 million. 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 one additional pay-per-view event and five additional international events as compared to the prior year. Marketing and venue costs also increased due to five additional events with live audiences in 2023. SG&A increase 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. Turning to WWE. The following commentary on the full year segment includes WWE activity for 2022 and for the period from January 1st through September 11th, 2023. For the full year, we generated record results reflecting continued strong performance across the business, in particular, live events.

The segments combined revenue increased 3% to $1.326 billion and combined adjusted EBITDA was $533 million, an increase of 4%. The segments combined adjusted EBITDA margin was 40% in both periods. Media rights and content revenue increased 1% to $883 million. 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 third-party original programming due to the timing of delivery. Live events revenue increased 17% to $262 million. The increase was related to an increase in domestic and international ticket sales. Sponsorship revenue increased 11% to $69 million, driven by new partners and contractual step-ups in existing agreements.

Consumer product licensing revenue declined $22 million to $112 million, primarily due to the previously disclosed transition of our digital retail platform and vending merchandise business, the Fanatics, as well as a decrease in collectibles revenue. Adjusted EBITDA increased as higher revenue was partially offset by an increase in expenses. 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 vending merchandise business, the 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 million for the full year. 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 million in free cash flow. This includes approximately $50 million 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 million of capital expenditures, approximately $25 million of which related to WWE's new headquarters. We ended the quarter with $2.761 billion in debt and $236 million in cash and cash equivalents. As a reminder, our year-end cash balance reflects the use of $100 million in the quarter to opportunistically repurchase 1.3 million shares. Now turning to our outlook. For full year 2024, we're targeting revenue of $2.575 billion to $2.650 billion and adjusted EBITDA of $1.15 billion to $1.17 billion. There are three notable drivers I would like to address in our guide. Number one, as you know, our current deal with USA for Raw ends on September 30th, 2024. And given the lead time Netflix requires to ensure technological readiness, our new long-term deal commences on January 1st, 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 time-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. Number two, 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 '23 and '24 results. Our guidance range is reflective of 2024, having one less pay-per-view from a U.S. media rights revenue recognition perspective.

We estimate the impact to revenue and adjusted EBITDA to be approximately $20 million. Number three, 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 million to $100 million. 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 first quarter of 24, we wanted to highlight a few notable items. At UFC, the current calendar includes three numbered events compared to four in the prior period. In addition, we expect five events with live audiences compared to six in the first quarter 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, 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 million 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. We expect this non-recurring CapEx will be weighted towards the first quarter of the year. Our free cash flow conversion target also reflects an unfavorable working capital impact of approximately $50 million related to the early collection of customer payments I mentioned earlier in my remarks. As we previously discussed, we're structured as an UPSI [ph]. As is common with UPSI, 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. 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 investment 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 three times 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. 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.

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

Operator: Perfect. [Operator Instructions] Our first question is from Ben Swinburne with Morgan Stanley. Please go ahead.

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