TKO Group Holdings, Inc. (NYSE:TKO) Q1 2024 Earnings Call Transcript

TKO Group Holdings, Inc. (NYSE:TKO) Q1 2024 Earnings Call Transcript May 11, 2024

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Operator: Good afternoon. Thank you for attending today’s First Quarter TKO 2024 Earnings Call. My name is Tamia, and I will be your 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 would now like to pass the conference over to your host, Seth Zaslow, Head of Investor Relations. You may proceed.

Seth Zaslow: Good afternoon and welcome to TKO’s first quarter 2024 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 our 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 first quarter 2024 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.

Ariel Emanuel: Thanks Seth. TKO is off to a solid start in 2024 with strong performance across both UFC and WWE. Coming off a record 2023 for both businesses in terms of revenue and profitability, we’ve continued to deliver through the first quarter. We had record attendance and gates across our live events portfolio in the quarter. We secured a landmark global deal for WWE with Netflix and renewed UFC rights in multiple international markets. We landed groundbreaking brand partnerships, including a first ever in ring sponsor for WWE. We settled all claims in the UFC antitrust lawsuits, bringing that matter to a close without introducing any further changes to our existing business operations. In April, WrestleMania 40 drew its largest ever viewership and set a WWE gate record with a 145,000 fans over two days at Philadelphia’s Lincoln Financial Field.

In the following weekend, UFC 300 became one of the highest grossing events in UFC history. Based on Q1 performance and business momentum, today we are raising our full year guidance for revenue and adjusted EBITDA. Andrew will share more detail on our financial shortly, but first I will touch on recent highlights that underscore our conviction. First, as our record setting events demonstrate, the experience economy is alive and well, especially for premium content and experiences like ours. For UFC, during Q1, we sold out all five events with live audiences, setting numerous arena gate records. These included UFC 297 in Toronto, UFC’s highest grossing arena event in Canada, UFC 298 in Anaheim, the highest grossing MMA event ever in California, and UFC 299 in Miami, setting the arena record and ranking among the highest grossing UFC events of all time.

UFC also returned to Mexico City with a fight night that became our highest grossing event in the country and coincided with the launch of our performance institute there. The Mexico City facility, our third performance institute worldwide, will accelerate our efforts to develop and support MMA athletes across Latin America, an important growth market and source of some of UFC’s top talent. We’re equally excited about several big upcoming fights, including Conor McGregor highly anticipated return to the octagon at UFC 303 on June 29th and UFC’s planned debut at the Las Vegas Sphere this September. Turning to WWE, premium live events in the quarter, Royal Rumble and Elimination Chamber delivered record gross revenue and viewership. Royal Rumble broke the all-time attendance record for Tropicana Field in Saint Petersburg, Florida.

An elimination chamber in Perth, Australia brought out more than 52,000 fans to mark WWE’s first Australia event since 2018 as part of an agreement with Tourism Western Australia. Throughout the quarter, WWE’s events also benefited from momentum leading up to WrestleMania with 17 consecutive sellouts for televised events. This sellout streak is the longest for televised events in WWE history. In total, WWE events in Q1 set 54 individual market records for both gross and paid tickets across all event types. These attendance records speak to the broader economic benefits we bring to host cities and we are focused on partnering with local governments and maximizing revenue opportunities from site fees. As one recent example, during the quarter, Tourism Western Australia entered a multi-year partnership for UFC to return to Perth with at least two events including the UFC 305 pay per view in August and one additional Fight Night in subsequent years.

Huge crowds in a sports stadium with their smartphones streaming a live game.

These initiatives all follow WWE’s own successful partnership with the Western Australian government. Next, we are well positioned to continue growing our brand partnerships. At the beginning of the year, we merged the global partnership teams of UFC and WWE to go-to-market in a unified way and enable more brands to engage with our fans. Right out of the gates, our team has delivered significant wins, expanding both businesses’ brand relationships across new categories, territories, and assets. UFC’s record setting partnership with Anheuser-Busch is off to a successful start, and we’ve added multiple first-time partners across the beverage, health and beauty, vocational training, health care, and medical equipment categories. For WWE, we announced a first ever brand partner to appear center mat premium live events as well as multiple premium brands, including Wheatley Vodka, Amazon Studios, and Coca Cola.

All told, we’re encouraged by this fast start and remain confident in our ability to grow global partnerships revenue, particularly on the WWE side as our team has done for UFC. Finally, our premium sports and entertainment content remains in demand. This is clearly demonstrated by the global $5 billion plus Netflix deal WWE announced early in the quarter. We’re incredibly excited about the potential we see with Netflix and for our fans around the world. Well ahead of the 2025 launch, the partnership is already getting off to a promising start. WrestleMania 40 streamed live on Netflix in New Zealand last month through a onetime arrangement. Despite no marketing push, WWE fans tuned in in full force, propelling the event to the number one spot in Netflix’s local programming lineup over a four-day span.

In addition to Netflix, we remain focused on our upcoming media renewals. During the quarter, we secured a short-term agreement with USA Network to extend RAW through the fourth quarter of 2024. We also continue to secure rights agreements and renewals for UFC and international territories at healthy average annual increases. In closing, across each of our lines of business, we believe TKO is well positioned to capitalize on its strengths to drive continued growth and profitability. We remain focused on generating cost and revenue synergies, executing our strategy and delivering sustainable long-term value for shareholders. With that, I’ll turn the call over to Andrew.

Andrew Schleimer: Good afternoon. I’ll start with an update on integration and then shift to our financial results before discussing our capital structure and outlook for the remainder of 2024. As Ari highlighted, we continue to make significant progress with the integration of our businesses. Both are delivering strong results and are well positioned for continued success. We remain focused on realizing the revenue and cost synergies that underpin the strategic and financial rationale for the transaction. In addition to the major wins that Ari discussed, this past weekend we announced that Las Vegas will host WrestleMania 41 at Allegiant Stadium in April 25 in partnership with the Las Vegas Convention and Visitors Authority.

As we’ve stressed, site fees are a key area of focus for us and this event includes a meaningful payment as well as other cash and non-cash incentives. Further to our plans to integrate our operations, last month we announced that NXT Battleground, one of our NXT PLEs, will be staged at UFC Apex on June 9th. This marks the first ever WWE event to be hosted at UFC state of the art event and production facility. In partnership with On Location, we’ll offer fans premium experience packages for this event. On the cost side, we continue to make progress as we look to further optimize our cost structure. We’re firmly on track to achieve the upper end of the previously communicated range of $50 million to $100 million in annualized net savings this year.

As we discussed on our last earnings call, we’re now primarily focused on seeking deeper business integration that will yield efficiencies across our business. Before I turn to our financial results, I want to take a moment to discuss the agreement that we reached in March to settle all claims asserted in both UFC antitrust lawsuits. We’re pleased to have this matter resolved without introducing any further changes to UFC’s existing business operations. The long form settlement agreement is expected to be filed shortly with the court for approval. As previously disclosed, the aggregate settlement is $335 million. We recorded a charge for this full amount in the first quarter, which will be paid in three installments, $100 million this quarter, $100 million in Q4 and the final $135 million in the Q2 of 2025.

The settlement is anticipated to be deductible for tax purposes as and when paid. As a result, we expect our tax distributions to members as required under our Up Fee structure to be meaningfully reduced such that we won’t realize an adverse dollar for dollar impact to cash on hand. Turning now to our financial results. First quarter 2024 reported results include three months of activity for both UFC and WWE. WWE activity is not included in the reported results for the first quarter of 2023. To assist with comparability, we presented supplemental financial information in our press release and IR website that includes WWE activity and the portion of the WWE related to the corporate group for the first quarter of ‘23, as well as each quarterly period from January 1, ‘22 through September 11, ‘23.

For the first quarter of ‘24, TKO generated revenue of $630 million. Net loss was $250 million driven by the $335 million charge related to our legal settlement. Adjusted EBITDA was $282 million and our adjusted EBITDA margin was 45%. Including WWE activity for January 1st through March 31, ‘23, combined revenue for the first quarter of 2023 was $604 million, combined adjusted EBITDA was $257 million and our combined adjusted EBITDA margin was 42%. Inclusive of these amounts, revenue increased 4%, adjusted EBITDA increased 10% and adjusted EBITDA margin increased 3 percentage points. Now I’ll walk you through our segments. Our UFC segment generated revenue of $313 million in the quarter, an increase of 2% or $6 million. Adjusted EBITDA was $195 million an increase of 5% or $9 million.

UFC’s adjusted EBITDA margin was 62%, up from 61% in the prior year period. Revenue growth was led by partnerships as sponsorship revenue increased 28% to $49 million. The increase was driven by new partners including Anheuser-Busch, which launched in January, as well as increases in fees from renewals. Live Events revenue increased 12% to $35 million, despite one less numbered event, three in Q1 as compared to four in the prior year, ticket sales increased as a result of the mix of event territories and venues. UFC had 11 total events, including five events with live audiences in the first quarter of this year as compared to 10 total events, including six with live audiences in the prior year. Media rights and content revenue decreased 4% to $215 million.

The decrease was primarily driven by one less numbered event, which carries a higher allocation of fixed media revenue. This impact more than offset the benefit of two additional fight nights in the quarter. Adjusted EBITDA reflected the increase in revenue and a decrease in expenses. The decrease in expenses reflected lower direct operating costs, primarily due to a decrease in production, marketing and athlete costs, as well as a decline in direct cost of revenue due to one fewer numbered event. SG&A decreased, primarily driven by lower travel expenses from one less numbered event and one less international event versus the prior year. Turning to WWE. Our WWE segment generated revenue of $317 million in the quarter. Adjusted EBITDA was $140 million and adjusted EBITDA margin was 44%.

The following commentary on the first quarter includes comparisons to activity for the period from January 1st through March 31, 2023. In the first quarter of ‘23, revenue was $298 million, adjusted EBITDA was $117 million and adjusted EBITDA margin was 39%. Revenue increased 6% or $19 million, adjusted EBITDA increased 20% or $23 million and adjusted EBITDA margin increased 5 percentage points. Revenue growth was led by continued strong performance for Live Events. Live Events revenue increased 58% to $50 million. The increase was primarily related to an increase in ticket sales and site fees, including a meaningful payment for Elimination Chamber in Perth, Australia, our largest for an international territory outside of the Middle East.

Media rights and content revenue increased 5% to $221 million. The increase was principally related the contractual escalation of media rights fees for our flagship weekly programming, RAW and SmackDown, as well as Premium Live Events. Sponsorship revenue decreased $3 million to $14 million primarily due to timing and the mix of events. As expected, consumer products revenue declined $8 million to $32 million. The decrease was primarily due to the absence of revenue recorded in the first quarter of ‘23 related to the early termination of an agreement for licensed collectibles, as well as the previously disclosed accounting related to the transition of our Venue merchandise business to Fanatics in May of ‘23. Adjusted EBITDA reflected the increase in revenue and a decrease in expenses.

The decrease in expenses reflected lower personnel costs and other direct costs related to our planned cost reduction initiatives implemented following the formation of TKO, partially offset by an increase in production costs as well as travel and entertainment. Turning to corporate. Corporate reflects the general and administrative operations supporting both of our segments, including finance, legal, HR and the executive team. Corporate also includes the fees paid by TKO to Endeavor under its services agreement. Corporate expenses were $53 million for the first quarter of 2024. On a combined basis, corporate expenses were $47 million for the first quarter of ‘23. The increase was primarily due to higher personnel costs, including executive compensation and other G&A expenses, including public company costs following the formation of TKO in September of last year.

As a reminder, in mid-March, WWE began paying a services fee to Endeavor in addition to the fee being paid by UFC. Now moving on to our capital structure. We define free cash flow as net cash provided by operating activities less capital expenditures. Free cash flow excludes the majority of the mandatory tax distributions to our owners but does include the portion of cash taxes paid by TKO PubCo. For the quarter, we generated $28 million of free cash flow. This includes $32 million of capital expenditures, approximately $20 million of which related to WWE’s new headquarters. We expect a similar level of spending in the second quarter on the new HQ, but nothing meaningful beyond that as the project has reached completion. First quarter free cash flow was also impacted by various normal course working capital items, specifically the timing of annual bonus payments, as well as customer collections and payments related to events such as WrestleMania and UFC 300 that occurred in early April.

We ended the quarter with $2.752 billion in debt and $246 million in cash and cash equivalents. As we previously discussed, we expect to have significant financial capacity over time as we grow adjusted EBITDA and generate cash. As such, we’ll continue to consider a wide spectrum of opportunities to increase shareholder value, including organic investment of positive ROI, reducing our net debt position, returning capital to shareholders in the form of share repurchases and or dividends and M&A should a unique and compelling opportunity present itself. In April, we repurchased approximately 1.9 million shares for 165 million. Since the formation of TKO in September of ‘23, we’ve repurchased a total of approximately 3.2 million shares for $265 million.

As publicly reported, we also looked at MotoGP. This was an asset that we saw would complement our existing portfolio and create long term value for shareholders under our operational control. Going forward, we expect to explore opportunities to increase value and enhance our growth profile through M&A, but intend to do so in a selective and disciplined manner. Now turning to our outlook. As noted in our press release, we raised our full year 2024 guidance for revenue and adjusted EBITDA. We are now targeting revenue of $2.61 billion to $2.685 billion and adjusted EBITDA of $1.185 billion to $1.205 billion. The $35 million increase at the midpoint of both revenue and adjusted EBITDA is related primarily to, number one, strong operating performance on a year-to-date basis, primarily driven by continued strength in live events at both of our businesses and number two, our agreement with USA Network for the domestic rights to RAW for the fourth quarter of this year.

As a result, our guidance now includes $25 million of revenue and adjusted EBITDA in the fourth quarter. 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. That said, as we look to the second quarter of 2024, we wanted to highlight a few notable items. Given the timing of our event calendar, we expect the second quarter to be our highest revenue and adjusted EBITDA quarter of the year in terms of absolute dollars. At UFC, the current calendar includes four numbered events compared to three in the prior year period. In addition, we expect seven events with live audiences compared to five in the second quarter of ‘23.

One of the incremental fight nights is scheduled to take place in Saudi Arabia and will include a meaningful site fee. At WWE, results will reflect the impact of WrestleMania 40, as well as King and Queen of the Ring on May 25th in Jeddah. At Corporate, as I mentioned a moment ago, our results will include WWE services fee to Endeavor for a full three months as well as UFC, which will continue to be paid. In terms of free cash flow conversion from adjusted EBITDA, we updated our target for the year to reflect the impact of $200 million of settlement payments, which were included in operating cash flow, partially offset by the outperformance of the business in Q1 and the benefit of the RAW agreement in Q4. As a result, we now expect full year 2024 free cash flow conversion in excess of 40% of our adjusted EBITDA target range.

In conclusion, we generated strong first quarter results that reflected continued 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. Operator, Mark and Andrew are ready to field questions. As an fyi for those on the call, Ari is not joining Q&A today.

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