Earnings Call Transcript - TKO Q2 2024

Operator, Operator

Hello everyone, and welcome to the Q2 2024 TKO Earnings Call. My name is Charlie and I'll be coordinating the call today. You will have the opportunity to ask a question at the end of the presentation. I will now hand over to our host, Seth Zaslow, Head of Investor Relations, to begin. Seth, please go ahead.

Seth Zaslow, Head of Investor Relations

Good morning and welcome to TKO’s second 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. After prepared remarks from Ari Emanuel, TKO’s Executive Chair and Chief Executive Officer, and Andrew Schleimer, TKO’s Chief Financial Officer, we will open the call for questions. Mark Shapiro, our President and Chief Operating Officer, and Andrew will be handling the Q&A. The purpose of this call is to provide you with the information regarding our second 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.

Ari Emanuel, Executive Chair and CEO

Thanks, Seth. Consumers, and in particular sports fans, are increasingly seeking customized, immersive, communal experiences, and TKO has demonstrated throughout the first half of the year how we are capitalizing on this demand and building entire worlds and weekends around our premium content. Coming off a strong first quarter marked by event milestones, record audiences, innovative brand partnerships and the landmark WWE deal with Netflix, TKO delivered record revenue and profitability in the second quarter. With this continued momentum, we are again raising our full year 2024 guidance for revenue and adjusted EBITDA. Before Andrew discusses our record financial performance, I'd like to share some key highlights from the quarter that include single event, all-time highs for ticket revenue and viewership, significant site fees we've witnessed on a global scale, as well as new brand partnerships that will meaningfully drive top line revenue margin and audience. First, UFC and WWE's live events continued to outperform, demonstrating that demand for premium sports and entertainment content has never been stronger. Starting with UFC, the marquee numbered events in Las Vegas, UFC 300 and UFC 303 brought in our third and fourth highest ticket revenue of all time, respectively. Additionally, UFC 302 in Newark, New Jersey, set the record for Prudential Center's highest grossing event in venue history while also becoming the most-watched UFC pay-per-view prelims ever on ESPN too, underscoring how much fans value our content, both live and on screen. At WWE, the quarter got off to an explosive start with WrestleMania 40, which became WWE's most successful event ever, setting records for highest grossing WWE event and most streamed entertainment event on Peacock. That momentum continued over the quarter with a powerful slate of international PLEs. Backlash France attracted more than 20,000 fans over two nights in Lyon, setting records for highest grossing smackdown and highest grossing Backlash of all time. Meanwhile, Clash at the Castle sold out two nights at OVO Hydro in Scotland, breaking WWE's record for a PLE held in an arena. Taken together, these benchmarks all underscore how we are capitalizing on the growing demand for premium content and benefiting from the experience economy around the globe. Next, we improved the economics around our live events. In May, we integrated UFC and WWE's live events groups to drive synergies across event development and scheduling, tourism incentive programs, ticketing and fan experiences. We had several wins throughout the quarter, in particular, a series of site fees and incentive packages from public and private partners that is clearly now an increasing trend. Most notably ahead of UFC's first ever fight night in Saudi Arabia, we expanded our relationship with the General Entertainment Authority to bring a second UFC event during Riyadh season in 2025. At the same time, WWE signed a first of its kind agreement with Indiana Sports Corp to bring its three largest stadium events, WrestleMania, SummerSlam and Royal Rumble, to Lucas Oil Stadium in Indianapolis over a three-year span starting in 2025. WWE also struck a partnership with Minnesota Sports and Events to make Minneapolis the host for SummerSlam over two consecutive nights in 2026. While early innings, we are encouraged by this progress and confident in our ability to continue delivering one of a kind live events for venues and tourism authorities in the US and abroad that will attract sold out crowds. Finally, we successfully signed new brand partners and expanded our relationships with existing ones. Top of this list is UFC's signing of Riyadh season to the largest single event sponsorship in its history. This milestone also marks the first time a UFC event will feature a title partner, rebranding UFC 306 at Sphere Las Vegas as Riyadh Season Noche UFC, which will no doubt be a much hyped and talked about spectacle for sports fans this September. We also signed partnership deals for Activision's Call of Duty franchise with both WWE and UFC. This marks the first time TKO's global partnerships team has secured simultaneous deals for both companies, highlighting the marketing power of our integrated partnerships team and the attractive demographics and dedicated audience UFC and WWE deliver. In closing, the strength and appeal of our iconic properties are undeniable, and the value proposition we laid out for TKO is widely evident. As we build toward the launch of WWE's partnership with Netflix and with the record-breaking NBA media rights deals signaling powerful secular tailwinds ahead of our rights renewals, our conviction in TKO's potential for long-term growth and value creation is as strong as ever. With that, I'll turn the call over to Andrew.

Andrew Schleimer, CFO

Good morning. 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 the year. Ari touched on a number of areas where we are making good progress with the integration of our businesses. That said, we recently kicked off our 2025 planning process. This will be the first full year with several of our groups, such as live events and sponsorship, combined as one team across both UFC and WWE. We expect to continue to realize benefits on both the revenue and cost side from running our business more efficiently, as we continue to further integrate our operations. With a year under our belts and integrated teams impacting our planning process, we anticipate further upside ahead of us. When we announced the combination of UFC and WWE in April of last year, we set a target of $50 million to 100 million in annualized net savings, including additional benefits that we have started to realize from live events, production and operation. I'm pleased to report that we now expect to exceed 100 million in annualized net savings. Before I turn to our financial results, I want to provide an update on the status of the UFC antitrust lawsuits, as well as a development regarding our external auditors, Deloitte. As we discussed on our last earnings call, we reached an agreement to settle all claims asserted in both UFC antitrust lawsuits. As we previously disclosed, on July 30, the court issued a ruling denying the motion for preliminary approval of the settlement agreement. We obviously disagree with this ruling and believe it disregards the expertise of both our counsel and plaintiff's counsel, as well as the input of an accomplished and well-respected expert mediator, all of whom have decades of experience in antitrust case law. It prevents the athletes from receiving what plaintiff's counsel argued was in the best interest of its clients. As we have said throughout this process, we believe strongly in the merits of our cases and are prepared to try both of these cases. We are evaluating all of our options and have initiated discussions with plaintiffs counsel who have expressed a willingness to engage in separate settlement discussions for the Lee and Johnson cases. As appropriate, we will provide further updates. Deloitte has served as our audit firm of record for WWE and UFC for many years prior to the formation of TKO and has been TKO's auditor since the transaction closed. We expected to continue our long-term relationship with Deloitte in the years to come. Unfortunately, solely due to the effects of technical auditor independence rules of the SEC that will be triggered when the Endeavor take private transaction closes, Deloitte will be unable to continue to serve as TKO's auditor. Note, this is solely due to a technical matter and has nothing to do with the work performed by Deloitte for the company or any issue with the company's financial statements. We plan to file an 8-K after the market closes today, announcing that we've engaged KPMG as TKO's independent registered public accounting firm. We are confident in a smooth transition to KPMG, who will complete our 2024 audit. Turning now to our financial results. Second quarter reported results included three months of activity for both UFC and WWE. WWE activity is not included in the reported results for the second quarter of 2023. To assist with comparability, we've presented supplemental financial information in our press release and IR website that includes WWE activity and the portion of WWE related to the corporate group for the second quarter of 2023, as well as each quarterly period from January 1, 2022 through September 11, 2023. For the second quarter of 2024, TKO generated a record revenue of 851 million. Net income was 151 million, adjusted EBITDA was 421 million, also a record, and our adjusted EBITDA margin was 49%. Including WWE activity for April 1 through June 30, 2023, combined revenue for the second quarter was 716 million. Combined adjusted EBITDA was 314 million and our combined adjusted EBITDA margin was 44%. Inclusive of these amounts, revenue increased 19%, adjusted EBITDA increased 34%, and adjusted EBITDA margin increased five percentage points. Now I'll walk you through our segments. Our UFC segment generated revenue of 394 million in the quarter, an increase of 29% or 89 million. Adjusted EBITDA was 232 million, an increase of 23% or 44 million. UFC's adjusted EBITDA margin was 59%, down from 62% in the prior year period. Revenue growth was led by live events, which had a record quarter and continued to benefit from the strength of the experienced economy. Live events revenue increased 114% to 69 million. Ticket sales increased primarily due to one additional numbered event, four in the second quarter of this year as compared to three in the prior year, and strong demand for high profile events such as UFC 300 and UFC 303. Site fees were also a meaningful contributor to the increase. Results in the quarter included a $20 million site fee related to our event in Saudi Arabia, as well as a meaningful site fee for UFC 302. Media rights and content revenue increased 18% to 251 million. The increase was primarily driven by one additional numbered event. UFC had a total of eleven in both the second quarter of this year as well as the prior year. However, as we've discussed in the past, numbered events carry a higher allocation of fixed media revenue compared to fight nights. The contractual escalation of media rights also contributed to the increase. Sponsorship revenue increased 33% to 62 million. The increase was driven by new partnerships and renewals as well as the mix of events in the quarter, including two of our biggest events, UFC 300 and UFC 303, which featured our annual international fight week. 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 production, marketing and athlete costs, as well as an increase in direct cost of revenue due to one additional numbered event. SG&A was essentially flat year-over-year. Turning now to WWE, WWE delivered record quarterly revenue and adjusted EBITDA. The financial results continue to reflect strong creative momentum in the business as well as the benefits to both the top and bottom line from the initiatives we've implemented since the formation of TKO. Our WWE segment generated revenue of 457 million in the quarter. Adjusted EBITDA was 251 million and adjusted EBITDA margin was 55%. The following commentary on the second quarter includes comparisons to activity for the period from April 1 through June 30, 2023. In the second quarter of 2023, revenue was 410 million, adjusted EBITDA was 173 million and adjusted EBITDA margin was 42%. Revenue increased 11% or 47 million, adjusted EBITDA increased 45% or 78 million and adjusted EBITDA margin increased 13 percentage points. Revenue growth was led by continued strong performance for live events. Live events revenue increased 32% to 144 million, a quarterly record. The increase was primarily related to an increase in ticket sales. Since the formation of TKO, we've been focused on increasing ticket yield and this strategy favorably impacted our results in the quarter, not only in connection with WrestleMania, but for the balance of WWE's live events in the aggregate. Media rights and content revenue increased 4% to 261 million. The increase was primarily related to holding one additional premium live event compared to the prior year, as well as the contractual escalation of media rights fees for our flagship weekly programming and premium live events. These increases were partially offset by a decrease in third-party original programming due to the timing of delivery. Sponsorship revenue increased 6% to 25 million, primarily due to timing and the mix of events. In the quarter, we signed new sponsors in the insurance, beverage, CPG, spirits and entertainment categories. Consumer products revenue was essentially flat at 27 million. Results reflected an increase in video game licensing revenue offset by the previously disclosed accounting related to the transition of our venue merchandise business to Fanatics in May 2023. 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, as well as a decrease in production costs. Turning now 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 62 million for the second quarter of 2024. On a combined basis, corporate expenses were 47 million for the second quarter of 2023. As a reminder, the WWE services fee to Endeavor didn't take effect until the six-month anniversary of the closing of the transaction. As a result, the second quarter of 2024 was the first time that TKO's quarterly results reflected a full three months of activity in addition to the fee UFC continued to pay. The increase was also 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. 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 tax paid by TKO PubCo. For the quarter, we generated $219 million of free cash flow. This includes $12 million of capital expenditures, approximately $7 million of which related to WWE's new headquarters. We expect approximately $10 million in spending in the second half of the year on WWE's HQ, but nothing meaningful beyond that point. The quarter was also impacted by the timing of working capital, with certain revenues recognized in Q2 that will not be collected until the third quarter, most notably the site fee associated with our WWE Saudi Event, King and Queen of the Ring. We ended the quarter with $2.744 billion in debt and $278 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 at 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 to increase value, but intend to do so in a selective and disciplined manner. In the quarter, we repurchased approximately 1.9 million shares for $165 million. Since the formation of TKO in September of 2023, we've repurchased a total of approximately 3.2 million shares for $265 million. Now, turning to our outlook, as we've discussed in the past, we manage the business with a focus on full year performance. Therefore, we believe our results are best evaluated on a full year basis, given the quarterly fluctuations that are inherent in our operations related to the timing of our events and content deliveries, among other items. As noted in our press release, we are raising our full-year 2024 guidance for revenue and adjusted EBITDA for the second quarter in a row. We are now targeting revenue of $2.67 to $2.745 billion and adjusted EBITDA of $1.22 to $1.24 billion. The increase is related primarily to strong operating performance on a year-to-date basis in the following areas: continued strength in live events at both of our businesses and increased expectations for sponsorship revenues at UFC. Conversely, these increases are partially offset by incremental production costs, most notably related to UFC 306 at the Sphere. On our last call, we noted that we expected the second quarter to be the highest revenue and adjusted EBITDA quarter of the year in terms of absolute dollars, mainly due to the strength in our live events business and the favorable timing of events at both UFC and WWE, and it was. As we look to the third quarter of 2024, we wanted to highlight a few notable items. At UFC, the current calendar includes 10 events compared to 13 events in the prior year period. In addition, we expect three numbered events compared to four in the prior period, as well as six events with live audiences compared to nine in the third quarter of 2023. The timing of the calendar is expected to meaningfully impact our largest revenue stream, media rights and content revenue. To a lesser degree, we expect the timing of the calendar to impact live events revenue, as such should be substantially mitigated by strong underlying trends in pricing and attendance. We're incredibly excited about holding UFC 306 at the Sphere in September and the opportunity to create a once in a lifetime experience. As we've discussed, we expect to incur production costs in the quarter that are meaningfully higher than our historical norm for a numbered event, and as mentioned, higher than previously anticipated. At WWE, we expect healthy revenue growth and strong adjusted EBITDA, driven by continued progress on our initiatives to take costs out of the business. Regarding free cash flow conversion, we are reaffirming our outlook at an excess of 40% of adjusted EBITDA for the full year. In conclusion, we generated strong second 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, Head of Investor Relations

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

Operator, Operator

Of course. Thank you. Our first question comes from Brandon Ross of LightShed Partners. Brandon, your line is open, please go ahead.

Andrew Schleimer, CFO

Brandon, are you there? Why don't we go to the second –

Mark Shapiro, President and COO

He's there. He's there.

Andrew Schleimer, CFO

Brandon, are you there?

Brandon Ross, Analyst

Yeah, you guys can't hear me at all?

Mark Shapiro, President and COO

Yeah, we got you now. Hey, Brandon, it's Mark and Andrew. How are you?

Brandon Ross, Analyst

Okay. Sorry about that.

Mark Shapiro, President and COO

Brandon, when you’re the first to speak, you need to be ready. We can’t keep calling you multiple times. You might have to wait until the end next time.

Brandon Ross, Analyst

I was there. First, I'll take the blame on the technical difficulties. How about that?

Mark Shapiro, President and COO

Thank you. Good morning to you.

Brandon Ross, Analyst

A couple of things. One is in the prepared remarks, Ari highlighted how much larger of a profit center live events has become, especially at WWE. You've approached this in various ways, including venue size and pricing. I wanted to understand your status in that optimization journey right now. How do you optimize ticket prices? What potential is there for the PLEs? Will we see a shift to stadiums and multi-night events? Any insights you could provide to help us model future expectations would be appreciated.

Mark Shapiro, President and COO

You're covering a range of topics, so let me clarify a few things. From the perspective of revenue synergies, things are looking quite positive at the moment. We're not seeing any negative impact from consumers or sports fans regarding live events and our ticket pricing. We regularly announce whenever we secure site fee agreements, and we've been quite successful in that area, which is a significant growth opportunity for us. Additionally, our sponsorship efforts are performing well, and we've already met our budgeted goals for the UFC this year, with plenty of potential for growth with WWE. On the media rights front, IMG has been instrumental in helping us negotiate the right fees internationally, capitalizing on their network to ensure that we receive appropriate compensation as both UFC and WWE expand. These are key areas for our growth. I also want to emphasize the potential of the Netflix deal for WWE, which is crucial for audience discovery. The Netflix partnership will introduce new viewers to WWE, promoting it prominently on their platform, which can lead to increased engagement. Existing fans will certainly continue to follow, but Netflix will be a valuable tool for reaching new audiences, particularly when it comes to site fees and sponsorship opportunities.

Brandon Ross, Analyst

Got it. And then the NBA deal finally wrapping up, if it actually is wrapping up, I guess UFC is really moving into focus and was just trying to think about the intrinsic value of the pay-per-view asset that you have in the past. You've been extremely helpful with viewership growth for the PLEs on WWE. I was wondering if you could just talk to us about how UFC viewership of the pay-per-views and pricing has evolved since the last deal and especially what you're seeing in recent trends.

Andrew Schleimer, CFO

Look, ESPN and Disney were very aggressive, if you will, on pricing the pay-per-view. I mean, and they have full control over that. I mean, we have inputs, but they have control, given what they're paying us for those rights. So over the period of our partnership, as you asked, they probably went a little quicker and a little higher than we would have liked, and we voiced that to them, especially in this kind of era of piracy, where we're seeing our piracy numbers really jacked up, and we think that's driven by them pricing it too high. So they were very receptive to that feedback. We had a meeting in Las Vegas a few months ago with Jimmy Pitaro and Dana, and they took their price down, if you will, in terms of offering a new marketing promotion where if you buy by a certain date well in advance of the numbered fights, you are going to get a discount and then the price, of course, increases once you pass that date, and they're seeing good success with that. So, like, audiences in the live event where we're selling out and breaking records, you see it all in the press release. And, like, the yield that we're commanding, which is, in many cases, specifically with WWE, been higher than we even planned for. We're also sustaining our buys when it comes to pay-per-view. So we feel really good about that.

Brandon Ross, Analyst

Excellent. Thank you.

Andrew Schleimer, CFO

Thank you.

Ben Swinburne, Analyst

Good morning. Can you hear me?

Andrew Schleimer, CFO

Yes, we can.

Mark Shapiro, President and COO

We can.

Ben Swinburne, Analyst

Hello. Good morning, everyone.

Andrew Schleimer, CFO

Good morning.

Ben Swinburne, Analyst

Two questions on WWE. Another huge year-over-year growth in live events revenues, and yet expenses were down. I think. Andrew, you said production costs were down. Maybe you could unpack what's happening there with this mid-fifties margin at WWE, because obviously that's really impressive. And then I guess I would have thought the free cash flow conversion guidance might have come up just on the guidance raise. But also, I thought I'd figured you'd take the settlement out of the free cash flow, but maybe it's just too uncertain at this point. So I wonder, maybe you could just comment on free cash flow as well. Thanks so much.

Andrew Schleimer, CFO

Yes. Starting with the second question, we recorded a charge in the first quarter related to the settlement. At the same time, we adjusted our free cash flow conversion to include the $200 million in payments that were supposed to be made this year if we had received preliminary and final approvals as anticipated by year-end. We have not changed our expense reporting in our financial statements or the cash outflow regarding free cash flow conversion. However, if payments are delayed due to a settlement, as I've mentioned, we are in discussions with the plaintiffs' counsel and have separated two cases for these discussions. In that scenario, free cash flow conversion would increase, and we would need to reassess the charge reflected in our financial statements. But currently, we don't have any updated information that would lead us to change our expectations for the remainder of the year, though we will keep you informed of any developments and significant information that arises. Regarding WWE, this quarter was significant for WWE live events, particularly with WrestleMania in early April alongside other PLEs. We had one more PLE this quarter compared to the same quarter last year, and these events typically yield higher revenue and margin contributions. On the production side, we've successfully reduced costs by closely analyzing each P&L and eliminating unnecessary expenses. This effort is a big part of why we are confident in raising our synergy estimates to over $100 million, primarily thanks to improvements in live event production. While there’s no simple solution, we’ve achieved efficiencies through diligent work. In some cases, we've trimmed production elements while still increasing our saleable inventory by making the shows smaller without altering the final product for television or our live audience. There are efficiencies to be found there as well.

Mark Shapiro, President and COO

I would also say, Ben, that while the cost synergies are going extremely well and really the team – it's a credit to the teams. I mean, they're working hand in glove. Lawrence Epstein and Nick Khan, of course, are heading all this up, but Peter Dropick on the ticketing side in the arena, site fee side, I mean, just driving huge opportunities. And the opportunity for us to still go into cities to get a combo weekend, if you will, is in our near future for several cities where we could do a smackdown, if you will, and then of course also have either one of our Friday fights on UFC or of course a numbered fight, so that's out there. And on the production side, Lee Fitting and Craig Borsari are working hand in glove to get our costs down everywhere from trucks to cloud storage and usage, so thrilled about that. But on the revenue synergy side, the WWE is really the one that's going to benefit in the near term future. As I said earlier, UFC is already at their budgeted sponsorship number for the year, but we see attractive long-term growth opportunity, specifically for the WWE brand because it's been under monetized to date, and we're focused on closing that gap between the two properties in the next couple of years here.

Ben Swinburne, Analyst

Makes sense. Thanks, guys.

Mark Shapiro, President and COO

Thank you.

David Karnovsky, Analyst

Thank you. Mark, on the site fees, I'm interested how you view the best way to optimize this over the long term. Is this kind of a pure volume game where you look to get paid on as many events as possible, or is this more about kind of increasing the value of events and then highlighting that to host cities and vendors as a way to drive competitive pricing?

Mark Shapiro, President and COO

Yeah, look, hit it on the head there, David. It's a balance, right? I mean, it's both. We are Ari is really focused on festivalizing our events further than we're doing it right now with concerts and obviously we have the weigh in and adding culinary kind of taste opportunity, which you see at events like the US Open in New York, and just making our events certainly really attractive for the hardcore sports fan, but also making it more of a cultural event. And I think the more we can do that, we can really expand the stay, if you will. The event becomes a one day, a two day, a three day. I mean, it really moves from one to three days, which is something cities and municipalities have communicated to us they would like to see more of, and they could spend more from their tourism bureaus or whatever it might be, if we could expand the number of days that we come to town. So we're driving it hard in the sense of improving the quality of our overall event, both timeline duration and the content itself, but at the same time, driving a hard bargain and really pitting these cities up against each other. Look, we're going to Vegas for Wrestlemania, but truthfully, we easily could have gone to Minneapolis. And in fact, for a while they look like the favorites until Vegas came in at the end and trumped them. So it's just being really transparent with these cities and these local government officials, letting them know what they have to do, using the power of our leverage, the power of our relationships, and the power of the demand for our content to get us the price and the numbers and really the ticket we're looking for.

Andrew Schleimer, CFO

The only thing worth adding is historically, WWE was largely a domestic product, and as we continue to bring WWE events overseas, there is demand for this model from tourism boards, et cetera. So those fit quite nicely in our effort to grow this line item.

David Karnovsky, Analyst

And then on the WWE sponsorship, we saw you added Wingstop as a sponsor for the PLE events, which is in addition to prime. Just wanted to see if you could dig into your strategy in terms of limiting those in-ring sponsors for now to the biggest events you have and how you see that building out over time.

Mark Shapiro, President and COO

We don't. We don't see any limitations, frankly. It's all about price. If you want to be in the ring, if you want center canvas you want to be in the corners, you want to be the clock when it comes to the UFC. I mean, we are out there. Grant Norris and are, of course, running the combined global partnerships group. We are out there talking to new categories, we are out there talking to traditional categories, and we're open for business. I would say these two and their teams get about as creative as any league I've ever seen and we're open to anything, frankly. I mean, we're not looking to over-commercialize it, and certainly, we're definitely never going to cheapen the brand. But at the end of the day, we're the league, we're the commissioner, we have total control, and we're only limited by our own creativity. And when you look at Wingstop, or frankly, even our new Budweiser deal, and I would say Monster, I would say crypto.com, we're constantly shucking and jiving with these guys, pivoting on what's working for you and what's not. What else do you want? What else can we create for you? Of course, usually when we're moving or changing something in the contract that comes with an increase. So it's all about monetizing and maximizing the dollar opportunities. And frankly, the ad market is strong, not just for media, but certainly for experiential activation and, of course, sporting events.

David Karnovsky, Analyst

Thanks.

Mark Shapiro, President and COO

You don't see us fill it up fast enough, David. It's only because we're not yet getting the pricing we want. We will not give away inventory.

Seth Zaslow, Head of Investor Relations

Operator, let's take the next question, please.

Ryan Gravett, Analyst

Great, thanks. Maybe just circling back on the UFC rights, but on the international side, can you give us an update on how international rights renewals are performing and if you're willing to share what kind of step ups you're seeing? And this is more broadly how you would characterize the demand environment for sports rights relative to what we're seeing in the US?

Mark Shapiro, President and COO

Yeah. What I would tell you there is, first of all, remember when we moved to Netflix in January, for the most part, Netflix will have our international rights. There will be several regions and countries they don't yet have because of current contracts. But when those contracts roll up, they'll pick them up. So this is primarily a UFC conversation and what I would tell you is IMG is really a secret weapon for us because the intelligence is second to none. The fact that they have 35 offices around the world gives us kind of person to person contact name basis, a lot of business they're doing, we can see around corners and it gives us the opportunity to get the kind of step ups we expect to get. We're not going to get any specific numbers on international and what we're seeing and what we're getting. What I would tell you is international is not as hot as it is domestically in the US, but nonetheless, we're seeing the increases when deals roll off.

Ryan Gravett, Analyst

Got it. Thanks, Mark.

Mark Shapiro, President and COO

You got it.

Stephen Laszczyk, Analyst

Hey, guys, thanks for the questions. First, maybe for Mark on live events, you guys see a pretty large swath of the income distribution across your two properties. I'd just be curious if you could impact some of the consumer trends you're maybe seeing at the moment. And then any thoughts on where there still might be opportunity across the properties to take some more price over the next year on the live event side? And then, Andrew, you caught up the Sphere in September. Just curious if you could add any context around some of the revenue or costs we should expect to see come in the quarter. Thank you.

Mark Shapiro, President and COO

Thanks, Stephen. I touched on this a bit earlier. It was interesting listening to the Disney earnings call where Bob Iger mentioned that lower-income consumers are holding back, which has slowed down attendance at Disney parks, possibly returning to pre-COVID norms. He also mentioned that higher-income consumers are not flocking to theme parks but are traveling internationally more. From our perspective, we are not experiencing any slowdown in advanced sales. I credit this to Dana White’s consistent matchups and Paul Levesque’s creativity with WWE. It's no small task, managing a Friday night show, a Monday night show, and NXT. We're also exploring short-form content partnerships with other providers, which Nick Khan is currently working on and will announce soon. Our fan engagement remains strong, especially among key demographics and we've seen significant interest in Hispanic markets, which we're focusing on with our new performance institute in Mexico City. Our upcoming event at the Sphere is also aimed at the Hispanic and Latin audience. We recognize the current favorable conditions and are monitoring our pricing strategy—we could be more aggressive on the WWE side but are exercising caution. We're collaborating with dynamic ticketing partners to achieve the outcomes we anticipated from our merger. Both UFC and WWE events are consistently selling out, and we've also seen impressive per capita sales in food, beverage, and merchandise. The lengthy nature of our events offers consumers a lot of value, making it a great outing for families with WWE and an exciting experience for sports fans with UFC, and we aim to leverage that when evaluating ticket pricing.

Andrew Schleimer, CFO

And on the Sphere, just some color. Look, we're bullish, obviously. We've talked about this being a cultural event and Dana has publicly stated how much we're investing in this event. And obviously, this is going to be a massive spectacle for those in the arena and for those at home. On the top side, this will be one of the largest gates, if not meaningfully the largest gate that we've ever done. And then the cost side, it's going to be the single largest investment that we're making in an event, and it's even more expensive than we originally anticipated. And that's reflected in our new guide. So we talked about some headwinds going into the balance, excuse me, tailwinds going into the balance of the year, but if there's one meaningful headwind that has a direct dollar for dollar impact on EBITDA, it's the incremental expense we're seeing at the Sphere.

Mark Shapiro, President and COO

And Stephen, a little anecdote here. Ari and I held a dinner in Paris for the Olympics. That's, in fact, where Andrew and I are coming to you from right now, for our premier ad partners. And one of them made a comment about us being in a position and always sort of having a history, and I credit Dana with this more than anybody else, of not making every decision based on the dollar, that we are committed to growing the brand, we are committed to growing the audience, and sometimes we will make investments that short term won't necessarily pencil out, but long term, there will be a big win for us and play out tenfold, and that's what the Sphere is when Andrew talks about a spectacle. This event is going to be very positive for the UFC brand in business long term. And if we have to spend more than we've ever spent on an event, and believe me, we're doing that, it will pay off long term. We expect to use this event to grow our fan base, to increase fan engagement, and most importantly, to capitalize on the growth area that is the LATAM market for us.

Stephen Laszczyk, Analyst

That's great. Thank you both.

Andrew Schleimer, CFO

Thank you.

Peter Supino, Analyst

Thank you. I wondered if you could help us think as bigly as we can about your longer term growth opportunity outside of the United States, especially in terms of event count and productivity program to exploit that over time. And I'd also love to hear from you about the international distribution you'll get from Netflix and how that compares to your prior international distribution, since that's such an important driver of demand. Thank you.

Mark Shapiro, President and COO

Thanks, Peter. You know, I would say that on the first question, I guess we could talk the international one first. Look, what we love about the Netflix partnership it's not like you're going to see popping up in a lot of countries we're not already in, right? I mean, we're in 170 countries right now but further international expansion is a priority. But more importantly, fan avidity and fan engagement, that is our priority with Netflix, reaching new fans, bringing in new customers, new audiences, really expanding that is the goal. And by the way, it's the goal for them. So we've got a checkerboarded across the world, if you will, what's a priority for them to grow their audiences, areas like Brazil, and what's a priority for us to bring in expanded audiences, and we'll work hand in hand. In fact, we'll launch a co-marketing plan together where we'll buy media and also do an outdoor campaign to see if we can get the attention of new audiences and new fans. And that's really the way we're looking at it. So again, it's not like we're not in a lot of places, but we need to increase the passionate fan base. We need to increase engagement. We want to bring more women to the table. It's impressive that our sport is 40% female on the UFC side, and of course, WWE already plays to families, but UFC specifically has room to grow there, love this. Love to get this to a place where a 50:50 at one time, that might have sounded like impossible, but we're trending in that direction, especially on the rating side, in terms of some of the feedback we're getting from ESPN and how many women are watching UFC fights. And we're not just talking women fighters, we're talking the entire card. So, look, we're very attractive worldwide. We're going to dig deep into that. And we've got the power of Netflix's programming, the power of Netflix as a marketing partner, the power of Netflix's pockets when it comes to dollars as a marketing partner, and so we're bullish on how we're going to do from a ticket yield standpoint and of course, international rights on the IMG side.

Andrew Schleimer, CFO

I believe we are thinking big. As I mentioned earlier, while WWE has historically hosted some major shows internationally, the vast majority of their live events have taken place domestically. We see bringing those shows to new markets overseas as a significant opportunity to build new fan bases and strengthen fan loyalty, particularly in collaboration with Netflix. In the short time we've been involved, whether in Perth, Australia, or the recent backlash event in France, and a PLE in Germany in the second quarter, our content has shown considerable international appeal. This also opens up more opportunities for site fees in these markets. The more international events we hold, the more potential revenue we can generate, especially at the top line. While we won't provide specific figures, we feel optimistic about the prospects.

Mark Shapiro, President and COO

Yeah. Look, you got to point back to New Zealand, too. I mean, we did a test in New Zealand of our UFC programming live events on Netflix, and we won the night in ratings. I mean, that's insane. You did no marketing prior to. There was no warning or messaging that this was coming because, of course, Netflix was not worried, but they were being conservative in terms of testing the tech, which, by the way, there was not one hitch, so we were excited to see that. But that was just gravy when the audience numbers came back. So when you're thinking long-term growth for us, obviously, our media deal is strong. Obviously, site fees are really capitalizing on that sponsorship, but international rights fees will definitely be part of the equation. Thank you.

Eric Handler, Analyst

Yes, good morning. Thank you for the question. At this point, a lot has already been asked, but with the WWE PLE deal expiring one quarter after the UFC deal, how are you approaching the timing? Are you planning to align that with the UFC deal, or do you prefer to finalize the UFC deal first before considering the PLE deal? Any insights you can provide would be appreciated.

Mark Shapiro, President and COO

Thanks, Eric. I have a few thoughts on the media rights situation, especially regarding the PLEs and the UFC. Overall, Ari, Andrew, and I have a positive outlook on this, with Nick and Lawrence also playing important roles in the negotiations. The market for premium content like ours is exceptionally strong. For instance, the recent NBA renewal exceeded expectations, and there was significant competition between Netflix and Amazon for the Christmas Day games. Additionally, the rights fee for the French Open increased dramatically, which was handled by IMG for the French Tennis Federation. Looking ahead, the USTA has two years remaining on their deal with ESPN for the US Open, and IMG is also assisting them with that negotiation. I'm optimistic about the outcome for the USTA and the value ESPN will receive. In terms of the UFC and the PLEs, this content is available year-round, and we're doing well in attracting viewers and subscribers in the direct-to-consumer landscape. Both the UFC and PLEs are effective in reducing churn, and they perform well on linear and network television as well. Networks like ABC and NBC remain significant in the rights deals moving forward. The NBA deal is a perfect example of this, with NBC broadcasting games alongside ABC and ESPN. I have been involved in rights deals for 25 years, on both sides of the table, including my time at ESPN with properties like Monday Night Football and NASCAR. Right now, the market is as strong as I've seen it, but timing is crucial. While sports rights are robust and enduring, they can fluctuate between being hot and warm. What we see today may not be the same next year; it could get even hotter. Sports have a unique ability to attract audiences and create a sense of community, making them vital for all platforms. We're seeing encouraging numbers, but timing remains key as we approach our negotiation periods. Regarding the PLEs, we expect discussions to commence in 2025, but no schedule has been established yet.

Jason Bazinet, Analyst

Thanks. You guys have obviously done a good job on the revenue and cost side with these two properties together. Do you mind just rolling the clock back and reminding us when you created TKO why you didn't take all of the sports assets inside Endeavor, including PBR and make it part of TKO. And is PBR something that could become part of the TKO family going forward? Thanks.

Mark Shapiro, President and COO

What I would say on that, Jason, is that, first of all, just with regard to PBR specifically, that was just never in the cards. I mean, we were negotiating with Vince McMahon at the time, and from day one, he was only open to doing this merger, if you will, if it was these two properties, period, end of story. So there was no discussion on PBR. So that's the reason why that happened. And as far as anything else beyond that, I mean, look, we're always going to view M&A through the lens of value creation, end of story. And we'll be opportunistic where we see value there, and we see properties that are going to power our assets long term, that are going to accelerate our growth, that have clear revenue and cost synergies, right now, TKO is one of the cleanest stories in media. And we don't want to pollute our story, we don't want to complicate our model, we're not creating Endeavor 2.0, we're going to be disciplined, we're going to be always value accretive, we're going to keep an eye on, obviously, leverage ratio, and anything we ever look at, I think, has to be also viewed with the lens of pairing a capital return program, whether that is a dividend or that is a share buyback, that's a priority for us.

Jason Bazinet, Analyst

But there's nothing about the PBR asset that doesn't feel like it's not orthogonal to whatever you're building on the sports side. There's nothing that's uniquely different about that sport versus other sports.

Mark Shapiro, President and COO

No, I mean, look, these are two separate companies, right, keep that in mind. I mean TKO is a public company, own shareholders, its own board and don't get me wrong that's obviously a great league, and on the Endeavor side, we're very hands-on with it, but I'm not going to comment or speculate on Silver Lake's plans for their assets as they begin to take it private.

Seth Zaslow, Head of Investor Relations

Thank you everyone for joining us on today’s call and for your interest in TKO. Operator, you can conclude the call now.

Operator, Operator

Thank you. This concludes today's call. Thank you so much for joining. You may now disconnect your lines.