All right, we're going to get started. My name is David Karnovsky. I cover media, entertainment, and advertising at JPMorgan. Very happy to have back at the conference this year in his capacity as President and COO of TKO Group Holdings, Mark Shapiro. Mark, thanks for being here.
Thanks for having me.
So you are a little over half a year in on TKO Group. High level, what's going to plan so far? What are you excited about going forward?
I'll tell you, we believe in the industrial logic of the transaction to complementary assets. We've run this playbook before with the UFC when Endeavor purchased the UFC, so we're well-versed in growing audiences and expanding monetization opportunities for sports leagues. We're performing well. 2023, we're coming off of record financials, both the top line and on Adjusted EBITDA, and then I would tell you that we're a company that you can expect to have significant free cash flow generation. On the operational side, all of our KPIs are working: attendance, pricing, site fees, our audience ratings, just all really strong, and on the media side, our deals are in place. We have, of course, the UFC renewal coming up in a couple of years with Disney, and the PLE is coming up with Peacock, but Raw is set, NXT is set, SmackDown is set.
We're feeling really good on that front. I would say additionally, we're ahead of plan on our net cost synergies, and we're right now driving and running on a road that is sort of paved very smoothly. The experience economy is still very, very strong, very hot, and we're sitting pretty in the sports ecosystem, which is driven by an insatiable demand for premium sports content, and that's where we play.
Great. All right, let's get into that a bit. So you bring a depth of perspective to the rights market, given your background. So hopefully to get your take to level set. So it seems we're on the verge of Amazon grabbing a major NBA package, and then last week we saw Netflix partner with the NFL for Christmas Day games. So what's going on that we're seeing an acceleration now of streaming companies into this space? Is this all you're doing?
Yeah, no, hardly. We're in the lineup, as they say. Look, I think you have a confluence of some cataclysmic events, really some forces at hand. I mean, first off, you have a situation where the streamers, and there's many of them now, are looking for further penetration, and they're using sports to get it. So YouTube, Amazon, Apple, Netflix, all big believers in sports, and now all very much big players in that ecosystem. At the same time, you've got the tried and true standards of media, namely in Disney and Comcast, who have pretty significant digital platforms of their own at this point, trying to grow that, further their own penetration, while still fuel their linear platforms. So they're playing on both fronts, and what that means is more bidders at the table.
What that means is, and we talked about this on the Ari's call, which I think is really the headline of our situation at the moment, which is demand is outstripping supply, so demand for premium sports content is outstripping supply. That puts us in a good position, and that's evidenced by so many deals you've seen lately: ESPN NCAA record deal, NASCAR myriad of partners record deal, WWE and the Netflix deal. Insane in terms of the term and the numbers and just the fact that nobody thought Netflix would be jumping into those waters, and of course, the NFL never stops coming up with content they can sell. They renewed their Peacock one wild card game, and now they sell two Christmas games in a bidding war between Netflix and Amazon.
That whole picture puts us in a good place, certainly for where we sit now, but our upcoming renewals. We'll be thoughtful and we'll be patient as we play out those windows.
Okay, so on the supply and demand concept, right, what read-through should investors draw from maybe the NBA process to your upcoming negotiations? The league selling three packages has four buyers. Does that mean there's kind of one disappointed party sitting on the outside looking for content?
Yeah, we're all waiting to see if Warner Bros. Discovery will be left at the altar. Clearly, deals happening with Comcast, deals happening with ESPN, Disney, deals happening with Amazon. It's interesting when Adam Silver said a couple of years ago that he would hope to get 3x total rights fee in his renewal, a lot of folks laughed, and by and large, that's where he's going to be when this is all said and done. Look, I think we, once again, TKO sits in a good position because we possess two properties that are year-round, that we are the owner, the league, the commissioner rolled in one. I mean, we make stuff happen fast, decisions fast, flexibility fast. And in this linear/digital world where we're straddling the two, you need flexibility with your content and your programming windows, and we supply that really in spades.
So I think that it bodes well for us. I mean, I'm anxious to see how it plays out with the NBA, but we're not necessarily eager to move off of our current partners. But nonetheless, just given that we are a fast-growing sport in the UFC, with the premier MMA organization, and WWE has so many windows per week that are premium, it's very attractive to a lot of potential buyers.
Got it. So with your Netflix agreement you announced earlier this year, I wanted to focus on the international side. So WWE long had fragmented distribution, multitude of deals around the world. Aside from the kind of benefits of moving to the streaming leader, what does it mean to have a single partner when you think about things like sponsorship, live events, commerce?
You know, look, I think it works both ways, truthfully. You've got the NFL that now is, I can't even count how many partners they have. And this is a league that was worse than with the broadcast networks, and we're not moving off of that. It's CBS, NBC, and ABC, then all of a sudden it was Fox. And obviously, ESPN and Turner dipped their toes in. And now they've got YouTube as a massive partner, and Netflix is a great partner. And Amazon's been better than anyone would have thought. And the Peacock wild card game has been terrific. And of course, they're synergizing and simulcasting on the likes of Paramount+, etc., etc. I mean, they're all over the place. And it works. Last time I checked, their viewership's higher than ever in a fragmented marketplace, more fragmented than ever before.
And frankly, the young viewers aren't really watching broadcast network as a first choice destination. And then you've got our side, which is UFC, where we're playing with one partner, albeit multiple platforms. I mean, Disney isn't just ESPN. We're on ESPN2, we're on ESPN+, we're on ABC. There's a lot of different homes for us. But I think it works all kinds of ways, and we'll see what works best for us come that time. And given so much is changing, I mean, not the least of which is Paramount, who knows how many bidders will be there come the time. But Netflix has been a transformative deal for the WWE, $5.2 billion, 10 years, more potentially on top of that, highly visible revenue, stable revenue, high margin revenue. And they're the best marketing machine, platform, powerhouse, frankly, in content right now, them and Disney, frankly.
We like our chances with that, and we're anxious to see what happens. I'll tell you, we did a test in April in New Zealand for WrestleMania, where we aired WrestleMania on Netflix in New Zealand, but no promotion, no marketing whatsoever, and no press release. Nobody knew it was happening because we were all nervous it wouldn't necessarily work so well, kind of the guinea pig trial. It went off without a hitch. That's the good news. Secondly, the gravy on top of that was we were the highest-rated program that night on all of streaming and linear. A great story for us.
Any early response from sponsor partners around the world to the Netflix distribution?
Oh, sponsors are excited about it. I don't think anybody saw it coming, David. And granted, this doesn't mean they're into sports yet. As you know, WWE is sports entertainment. It is scripted. News flash at 11 for you. It is scripted.
Sorry to disappoint people.
Yeah. And Netflix does a lot of scripted programming. So they saw it as that. They're fans of storytelling clearly in all its shapes and sizes. So it was a way for them to dip their toe into sports, live events, but not get all the way pregnant.
Does it mean anything for you kind of domestically in terms of reaching new audiences? Your content or your core content's always been exclusive cable and broadcast, but you have this huge digital reach, right? Are there other younger fans out there that followed you on social that now have the opportunity to watch this?
Yeah, I think on two fronts there. First of all, I would say that one of the reasons why Netflix chased us down, and I think this will be an important factor in our negotiations and renewals in the future, is that TKO is an antidote to churn. WWE and UFC are both antidotes to churn, strong in terms of subscriber signups and strong in terms of retention. And Netflix is looking for that all day because the viewer is fickle, especially young. So you want to do a pay - you want to see a pay-per-view event on UFC, or you want to see a premium live event on WWE, you pay. You don't want to miss it. It's must-see programming. It's live, dynamic, urgent, shareable, snackable in terms of highlights, if you will.
I mean, we're really tailor-made for this social media generation, knockouts, submissions, big punches, big takedowns, big stunts on WWE. However, Triple H can write them these days. It's pretty exciting, and folks want it. They want to be there as it happens, so they buy to tune in, and then they stay. Then it's up to Netflix to do the rest of the bidding or ESPN+. So it really sets itself well for success, and I would say when it comes to Netflix, just look at the range of programming. They obviously do a lot of sports documentaries and follow docs like Drive to Survive. We all know what that's done for F1. They win every week. They seem to have a new hit every week on the scripted front. I mean, Baby Reindeer is their big hit right now. Their docs, their traditional docs, absolute home runs.
Beckham's one of the finest I've seen, not just this year, but ever. And then I would say, finally, look at their specials. I mean, the Tom Brady roast has been the talk of the town in content for like a month. And so the idea of our programming coming into that pipe, that's very exciting. They are a marketing machine, a marketing powerhouse, and they will know how to turn the young folks and their 270 million worldwide subscribers onto our sports, which will be great sampling, great awareness for us, and ultimately great viewership and great acquisition or retention for them.
So you mentioned Drive to Survive. So is that potentially an opportunity, right, for you to program with them? Roast of Triple H, something like that, potentially.
We can get The Rock out there to do that with us. Who knows, but they will do more of those roasts that were too much of a hit, but yes, it is contemplated in our deal. We will do a lot of ancillary and shoulder programming, and I think the very first genre you'll see out of WWE in terms of ancillary programming will be a Drive to Survive show. That's contemplated for the first season, and we'll also do some documentaries, probably, on a few of our superstars.
Just given the lead time of production, that would be more of a late 2025 or 2026 type play?
We'll launch, as you know, our current deal is up at the end of the year for WWE, but I would expect to see a Drive to Survive type show next year to go along with the first year of our live telecasts.
Great. Maybe just sticking on WWE, so the PLE agreement with Peacock, that is a little less than two years to go. Maybe you can discuss the uniqueness of the content that's available there. What role do those 16 events, I think it is, plus the archive play on that platform? Why is that so valuable in the streaming landscape?
We're thrilled about the potential for PLEs. I would tell you, I'm as excited to take this to market as anything else. Now, having said that, we love Peacock. We love our partners over there. Rob, who runs NBC Sports, and Mark Lazarus, who runs NBC overall. I mean, they're creative. I think with a marketing lens, they're all about building value. They're super flexible. And Peacock is growing fast. And Brian Roberts and Mike Cavanagh have a clear strategy for it. Their penetration is increasing. Their programming is bringing in more and more eyeballs. And that's a place we want to be. I want to be clear about that. And the last WrestleMania was the most viewed event of all time on Peacock. So we'll take it and then some. Having said that, the PLEs will be in hot demand because there's effectively one a month.
I think there's 16 overall if you include the four at NXT. But there's essentially one a month for WWE. The way that Triple H, and I didn't understand this, frankly, well enough until we were out pitching Raw to various buyers, Apple, Amazon, all the likes, ultimately, of course, to deal with Netflix. As we were going into these meetings, and I would listen to Triple H give the pitch, and it sort of is like a soap opera, right? I mean, that's the WWE story. You're following a year-long story, and then once a month, you have these big events. Storylines either start or wrap up leading in and out of those big events. He really looks at it that far out. He's got such a phenomenal writing team. They really weave this web with these big tentpole events being the aha moments.
It brings in big viewers. It's a culmination or an origin for a lot of the stories. That in itself lends it to being kind of a must-see event every month for the streamers. What was interesting is Ari and I would walk out of these meetings, and the takeaway would be the very first question is, "When are the PLEs up?" "No, no, no, we're not pitching the PLEs. We're pitching Raw." "Yeah, but when are the PLEs up?" It tells me that there's great demand as long as Triple H keeps doing what he's doing.
Is that great a product?
It is a great product.
All right. I want to shift to UFC. So you guys don't usually put out press releases on domestic viewership, but when we track the data, especially for the pay-per-view prelims, the numbers continue to show really strong gains. So what do you think is resonating for this content right now?
I think you have to look at, you have to break down the UFC audience. As I mentioned before, it's the premier MMA organization in the world. It's a fast-growing sport. It's tailor-made for social. But break down just the makeup, the demos of the fan base at the UFC. You're talking about overall 700 million fans around the world. You're talking about a sport that is essentially in almost 175 countries. That equates to 975 million households that we're pumping the UFC into. We have 250 million social followers. And we have by far the best stable of fighters, men and women, around the world, almost 600. And we have a pipeline of more fighters that are being funneled in every day, driven by the fact that we've built these performance institutes.
We've seen absolute deliverables and results from having a Performance Institute in Shanghai and now Mexico City and obviously Las Vegas and in discussions for potentially one in the Middle East. That bodes well for us, not having to necessarily go out and find them or pluck them from other competitors, but to actually build them from the ground up so that they stay inside the UFC family. That's been a great success story for us. But by and large, the biggest reason for our success is Dana White himself. I mean, we have a great team behind him and management, Lawrence Epstein, who runs UFC day to day, and Craig Borsari, who does the production, and Peter Dropick, who oversees the live events. But Dana White is all that and then some. He's a marketer. He's a star all by himself. He's an unbelievable leader.
He's an incredible matchmaker. His social is growing arguably faster than the UFC itself. But the best thing he is, David, is he's a star builder. And in my years of being in sports, I've been with ESPN. I started with ESPN in 1993, so I've seen it all. Don't want to date myself here. But the only other person I can equate him to in terms of star building is David Stern. And Stern was as good as it gets when it comes to star building. Bird and Magic and Michael Jordan and Shaq and Kobe Bryant. And he would see a star before anybody else. He would seize upon it. He would bring his marketing prowess to the table. He would get behind that star, and there'd be a new following. So he would love having Anthony Edwards today. I'll tell you that. And Dana White is that.
He sees men and women. He sees these potential stars. He gets behind them. They have to win on their own, but he puts them in a position to, if they win, really explode. And that, again, works to our benefit.
Got it. So you noted recently you'll have a three-month exclusive window with ESPN starting in mid-January 2025 to negotiate a new agreement. You've been very positive on your relationship with Disney, what it's meant to the sport. How should investors think about you balancing that against what could be incremental interest from your partners?
All right. I've been very consistent with this. We love Disney. And I say that objectively, full disclosure. Obviously, I started my career there and worked there for 12 years. I love the way it operates. The man that was in charge at the time is still the man in charge, and Bob Iger. I think Jimmy Pitaro and Burke Magnus and Rosalyn Durant are doing a fantastic job in a very fast-changing, evolving climate and landscape. They've got Linear going. They've got ESPN+ going and soon to have direct-to-consumer Flagship. So the waters are a little choppy, there's no question, but they are the destination for sports, appointment viewing for all fans. What they say matters. When news breaks in sports, it generally breaks on their network, as evidenced by this weekend's kerfuffle with Scheffler and his little road incident at Valhalla in the PGA Championship.
They were there. They were covering the story at 5:00 A.M. They were breaking the news. They were explaining how it all happens. That's where we want to be. We love the neighbors on ESPN, those that lead into us and those that lead out of us. Having said that, we have grown into a position where we are now under monetized. That's just a fact. Not when we did the deal. It was a record deal, very exciting, and it was triple what we were getting at Fox, but we are now under monetized, given the viewership, given the ratings, given the demos, and we look forward to having those conversations.
So maybe we'll stay on that. So the pay-per-view aspect of the UFC deal is highly unique. It provides Disney with a third revenue stream for their assets. So when you cut that deal, how did you think about balancing any participation in the pay-per-view buys against what ended up being a more predictable fixed payment? And is it a priority to build in the next deal for some pay-per-view buy participation, even if that's at a really high threshold, right? That seems like something Dana would see as a worthy challenge, I would think.
I think, Dana, and speaking for Dana and Ari, I would tell you we're going to be very flexible in the next negotiation, just like we were in this one, remember. I mean, we sold our pay-per-view rights after all those years with the UFC doing month-to-month pay-per-views through DirecTV and cable. We ultimately sold those pay-per-view rights to ESPN. And before that, we're in conversations to do the same with Amazon. We ultimately went with ESPN, but we got pretty far down the road with Amazon. Now it's an evolved landscape. As we've discussed, ESPN is on the verge of launching their own direct-to-consumer Flagship. Peacock is trying to increase their penetration. Paramount+ is using sports to increase their penetration. We've talked about Apple, Amazon, YouTube, a lot of healthy places for us to be.
But we will be flexible so that we are giving any prospective partner or current partner the best programming for the most ideal windows so that they can grow their base and retain their subs. Very important. So if I was, for example, launching Flagship direct-to-consumer ESPN, I might think about just buying out the pay-per-view and putting it right on that Flagship channel. You can only get it, just like ESPN+, if you have Flagship. If you're trying to launch ESPN Flagship, and whatever they might call it, that's the working title, and you're trying to charge $29, $39, $99, whatever it might be, what better than to have a monthly "pay-per-view" that sits exclusive to that platform? Now, we haven't had those conversations with ESPN, but that's just an example of the kind of flexibility we're going to bring to the conversations.
We know we have A-list programming. We know we have premium content. We know we have a volume of premium content. And we have enough that will fit many pipes without becoming tonnage. So when I look at some other sports, and I'll leave some brands out, some of them have really strong postseason, but the regular season, there's just too much there. And it just becomes white noise. We don't suffer from that. We're premium content in the regular season, if you will, and then we're double premium, if you will, when you get to those pay-per-views or those premium live events. That's a good place to be. And at the same time, we want to be accommodating because it has to work both ways. We need these platforms to grow our audience, to grow our brand, to grow our followers globally.
They need us for acquisition and retention and price hikes, so it should be a very healthy marriage.
Got it. One other interesting synergy coming off the merger is the ability to package UFC and WWE events to arenas or even countries. I think we probably overly focused initially on potential for events on the same weekend. But what's the opportunity to go to market with both assets in terms of driving site fees or even negotiating rent concessions with venues?
Big opportunity and a big part of our strategy. I spoke upfront that our major KPIs we're working, which is attendance and pricing and site fees. Look, if we're going to bring the show to town, we are looking for an incentive package. It doesn't always have to be straight cash, but it has to be a significant incentive package because, once again, demand is outstripping supply. So you've seen us monetize site fees with the likes of Saudi Arabia for WWE. You can look for us to expand our current deal in the next six to 12 months. Very happy with MBS and the partnership we have there. We have two events a year, but we're already in discussions. Nick Khan is leading that for us in expanding that to more events.
We also have a phenomenal deal in Abu Dhabi with the UFC, where we're getting significant site fees and incentive packages there. And we've now expanded our partnership with them for other affiliate events, if you will, in the Middle East that they would participate in as we sell them to different countries. We've now expanded our Saudi Arabia relationship by not just having a UFC fight this June, but announcing for almost double the rights fee another event next year. And I would tell you, David, we would be doing a longer-term deal with Saudi Arabia if we already had one event under our belt. So that's another way of saying, as long as everything goes well in June, which we anticipate, I think Dana White would be very amenable to doing a much longer-term deal in Saudi Arabia.
On top of that, we're getting site fees for our pay-per-views in the UFC, significant, by the way, here in the U.S. and internationally, but specifically here in the U.S., and we're going to start asking for those same incentive packages to bring Raw to town, to bring SmackDown to town, to bring our Fight Nights to town, so we just had a UFC Fight Night a week ago in St. Louis. We did the highest gross for a Fight Night in the history of the UFC in St. Louis. Highest ever. We're just talking just a regular card. I was actually there. Budweiser is our partner. That's their home. Tremendous event, and that's what happens when you haven't had the UFC there since pre-pandemic. The demand and thirst is so insatiable that the audience is willing to come out and spend record sums on tickets.
And we want to see incentive packages in order for us to bring those Fight Nights to town. So I think there's tremendous upside. We've got a team working on this around the clock, and we have high hopes and, frankly, strong demands from management to see that we execute on the strategy.
All right. I'm going to make sure to cover capital allocation. So TKO has a strong free cash flow profile. You've talked about a target of 60% conversion on a normalized long-term basis. Company is yet to be specific on cash use, though you've highlighted a long-term target leverage range. Mark, you said it yourself in the last earnings call. Investors are eager to hear more here. So maybe you can update on the priorities.
Yeah. No news to break here. What I would say is, give us a minute to actually generate the free cash flow. But I think when you look at our profile, and I understand the investor impatience, if you will, in wanting to see us return capital to shareholders or at least make a statement on what we're going to do. Look, our profile is strong. We're growing revenue. We're in a good position on net debt. As you mentioned, our Adjusted EBITDA margins are very, very healthy. We're a low CapEx business. And what that translates and equates into is significant free cash flow generation in the long term, which gives us significant financial capacity. Having said that, we're going to be thoughtful and deliberate and patient about how we deploy that capital. But we will deploy it in three ways. First is high ROI projects, organic ROI projects.
Second is select M&A, very select. We have to be very thoughtful, very prudent about this. It's got to be inside of the sports ecosystem in a meaningful way, control. And third is, of course, returning capital to shareholders through dividends and buybacks. And I will tell you unequivocally, we're committed to all three. And we will roll out a specific timeframe and plan as this evolves as we generate that free cash flow. We're proud of our margins. We're proud of where the business is. We're stoked by all that's ahead. We have two big renewals coming up. We've gotten past our antitrust litigation and lawsuits in a very favorable way. And we have open roads. And right now, it's about executing, and it's about continuing to monetize those synergies we've talked about when it comes to bringing the two leagues together. And that's where we stand.
On M&A, I think in earnings, you had said the opportunities would be confined to premium sports and live events, a fairly limited set of premium sports that are privately owned. I think live events, kind of the considerably broader vertical. Can you speak to any type of assets that would interest you there?
Look, we took a look at MotoGP. I think that's the best example you have. Seth Zaslow, my inside IR guy, probably wouldn't even want me to bring it up, but I'm doing it just for him, just to tweak him a little bit. But look, we hung around the rim there. I think there was a foregone conclusion that if they sold, which is a big question because Bridgepoint has been challenged for many years and confronted for many years on selling MotoGP and didn't want to do it. And finally, if they were going to come around, it was probably going to be F1, F1 of cars, F1 of motorcycles. It made a lot of sense. But we wanted to get in there and explore and evaluate and show our interest.
And I'll tell you, I think we could have done wonders for that sport in a way that I don't think Liberty will do as well as we would have, just because we've done it with UFC. We're doing it with WWE, and this one kind of played right into it. All the monetization opportunities around the flywheel of sponsorship and site fees and incentive packages, consumer products, licensing, monetizing social, and then, of course, the domestic and international media deals, and oh yeah, leveraging UFC and WWE. I think it really played well for a strategic advantage. They didn't want to go there. We never really got serious, and that was that. And now they'll try and get their approval and get past regulatory hurdles. If they don't, though, we'll stand kind of waiting and listening. But having said that, those are few and far between.
I mean, those are unicorns. So if there are others that are out there that we can really see synergistic opportunities, both from the cost structure perspective, operating leverage, and from a revenue synergy perspective, we will be opportunistic and we will jump.
Got it. All right. We got time for probably one more. Margin target this year, margin guide this year is 45%, strong increase from last year. Cost synergy is planned to that, I think. But how should investors think about the long-term profitability at WWE and UFC?
Yeah. I think that you hit it earlier. I mean, we expect to have free cash flow conversion north of 60% starting next year and for a long-term basis. But we're at 45% this year for a lot of different factors and one-timers. But we're sitting in a strong position, and we're growing revenue in mid-single digits, but we've got two huge renewals in front of us. So if you're looking for a growth story, you really, certainly in the content space, aren't going to find too many better opportunities than TKO because of what we're doing, both with the cost structure and the synergies there, but monetizing all those revenue levers. We'll do it with the two domestic renewals, the UFC deal, which could be global. You never know. And then, obviously, sponsorship across the board on all the other factors that we've discussed.
But it's really all at our fingertips. I'm not going to say it's not hard. We're out there pounding the pavement every day. And things could change from a macroeconomic environment to impact us. But where the sports ecosystem sits today and the demand for premium content and the experience economy where consumers and audience are looking for premium experiential opportunities, not just a ticket to go to the game, but everything that comes with it, you'll find no better than WWE and UFC.
Great. Great way to end it. All right. Mark, thanks so much for being here.
Great to be here.