Endeavor Group Holdings, Inc. (NYSE:EDR) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, and thank you for joining the Endeavor First Quarter 2023 Results. My name is Kate, and I will be the moderator for today’s call [Operator Instructions]. I would now like to pass the call over to our host, Head of Investor Relations, James Marsh. You may proceed.

James Marsh: Good afternoon and welcome to Endeavor’s First Quarter 2023 Earnings Call. A short while ago, we issued a press release which you can view on our Investor Relations site, investor.endeavorco.com. A recording of this call will also be available via that site for at least 30 days. Today, you will hear from Endeavor’s CEO, Ari Emanuel; and CFO, Jason Lublin, before we open for questions. The purpose of this call is to provide you with information regarding the first quarter 2023 performance in addition to our financial outlook for the balance of the year. I do want to remind everyone that the information discussed will include forward-looking statements and/or projections that involve risks, uncertainties and assumptions, as well as described in the Risk Factors section of our filings with the Securities and Exchange Commission, including our 10-Qs and 10-K.

If these risk or uncertainties ever materialize or any assumptions prove incorrect, our results may differ materially from those expressed or implied by such forward-looking statements and projections. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly 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. This measure should not be considered in isolation from, or a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our press release issued today as well as in the non-GAAP financial information posted on our IR website.

With that, I’ll turn it over to Ari.

Ari Emanuel: Thanks, James. In Q1, we continued to deliver solid performance. Despite the complex macroeconomic environment, we remain focused on executing our strategy across content and experiences, strategically allocating capital to fuel the growth of our business and leveraging the Endeavor flywheel to unlock incremental value for our clients and partners. Today, I will highlight how we continue to deliver on this strategy. Then I’ll turn the call over to Jason to walk through our results for the first quarter and our capital allocation strategy. I’ll start with our approach to building and optimizing our portfolio. In early April, we announced our intent to bring 2 iconic sports and entertainment brands, UFC and WWE together under 1 roof to form a new publicly listed company under the ticker TKO.

This is a rare opportunity to create a global live sports and entertainment pure play built for where the industry is headed. Following the value creation playbook we successfully executed with UFC, we expect to activate the full Endeavor flywheel for WWE across areas, including domestic and international media rights, ticket sales and optimization, event operations, sponsorship, licensing and premium hospitality. More recently, we announced an agreement to sell IMG Academy at an enterprise value of $1.25 billion. This is the second time in the past 18 months that we’ve sold assets valued at approximately $1 billion or more. These deals like our proposed combination of UFC with WWE are strong reminders of the quality of assets within our portfolio.

The Endeavor flywheel is core to this effort and Super Bowl 57 and Barrett-Jackson’s annual Scottsdale event were 2 great examples from the quarter of the Endeavor network in action. At this year’s Super Bowl in Glendale, Arizona, On Location curated premium experiences for more than 50,000 fans across the weekend. OpenBet customers processed more than 13.6 million bets during the game, 160over90 delivered activations for the likes of AB InBev, Courtyard by Marriott and Visa. FILM 45 again produced the NFL Honors and Super Bowl’s greatest commercial, and WME talent was out in full force, as we represent several Eagles and Chief players, halftime performer Rihanna, 12 other artists performing at the weekend events, 29 broadcasters and 33 celebrity clients featured in commercials.

For Barrett-Jackson, the premier collector car auction and events company, we’ve leveraged our global network and expertise to grow the brand through digital enhancements, cross-promotional marketing opportunities and by offering On Location’s premium hospitality and experiences. Barret-Jackson’s January collector car auction in Scottsdale, its first event as part of Endeavor was the company’s most successful in its 50-year history, achieving more than 140 world record auction sales. The History Channel carried prime time coverage of the event, and we pulled in over 300,000 in attendance. Now I’ll share additional highlights from the quarter. Growth in our Own Sports Properties segment continued to highlight the strong demand for premium sports content and live experiences.

5 out of 6 UFC events in Q1 sold out and 3 set highest grossing event records. PBR had its best start to the year in the sports 3-decade history. In Q1, PBR Tours featured 24 sold-out performances, 26 event paid attendance records and 31 event revenue records. PBR also signed multiple sponsorship extensions. Our Events, Experiences & Rights segment further benefited continued strength across owned events and demand for sports rights. The Miami Open achieved record attendance and On Location curated premium hospitality experiences for 13 college football bowl games. In addition, IMG was named official production partner for Major League Soccer, and will produce all coverage for Apple’s MLS season pass, featuring more than 500 games throughout the season and extensive studio coverage.

This is one of our largest production deals to date in terms of prestige and scale, cementing IMG’s reputation as a Center of Excellence for production. Also in Q1, IMG renewed and expanded its more than 50-year partnership with the RNA to build and further develop their commercial program. Q1 also marks the first time we are breaking out our new Sports Data & Technology segment. In the quarter, IMG ARENA distributional sports data and streaming rights for the Miami Open, the Indian Wells Open and the start of the MLS season. Open executed 8 new partner launches in Q1, including extending its betting and platform technology to Massachusetts with FanDuel as well as launching in Ohio with both FanDuel and Betfred. OpenBet also launched a new long-term digital partnership with OPAP, a lean gaming company in Greece, helping strengthen OpenBet’s position in one of the most promising European regions.

In our Representation segment, IMG Licensing delivered brand deals and collaborations for clients, including GAP, Dolly Parton, Millie Bobby Brown, Jeep, Goodyear, Fortnite and the NFL. The division was also ranked the #1 licensing agency in the world by License Global for the fifth year in a row. WME recorded strong bookings globally across its music touring business heading into festival season, and comedy is experiencing a [Indiscernible]. Standup greats like WME clients Adam Sandler and Ricky Gervais announced returns to the comedy circuit, and the spectacular deal of Amy Poehler and Tina Fey announced their first ever tour, which is selling out at every stop across the country. Despite spending tightening among buyers and brands, prolific and premium creators like WME clients, Tyler Perry and Dick Wolf, continued to draw competitive bids, and there’s no question theatrical has come back.

2023 global box office revenue projections have risen to an estimated $32 billion. As one of many proof points, we saw franchise opening records in March for Sequels John Wick: Chapter 4 and Scream VI, both of which featured WME clients in key roles, all positive momentum as we head into Memorial Day in the summer box office season. As we look ahead at 2023, we remain confident in our strategy and our ability to execute over the long run. While the Writers Strike is likely to have an act on our Representation segment if it carries on for any great length, the depth of that impact will be determined by several factors that we will quantify over the term of the work stoppage. Given diversification of Endeavor, we remain well positioned to continue capitalizing on the most resilient secular trends, benefiting premium content and live events.

With that, I’ll turn it over to Jason.

Jason Lublin: Thanks, Ari, and good afternoon, everyone. I’ll start by walking you through our financials for the first quarter. I’ll then provide some color around what we’re seeing in each of our operating segments. All comparisons will be to the first quarter of 2022. For the quarter ended March 31, 2023, we generated $1.597 billion of consolidated revenue, up $123.1 million or 8.4% over the prior year. Adjusted EBITDA for the quarter was $306.4 million, down $8.1 million or 2.6% from the prior year, which was consistent with our expectations. Free cash flow was [$42] million in the quarter, up $122 million over the prior year. Of note, first quarter free cash flow was seasonally the lightest primarily due to the timing of the majority of bonus payments and a reduction in deferred revenue for some of our large events and hospitality offerings.

Now I’ll walk you through each of our segments, including our new Sports Data & Technology segment. Our Owned Sports Properties segment generated revenue of $353.3 million in the first quarter, up $56.6 million or 19%. The segment’s adjusted EBITDA for the quarter was $185.7 million, up $36.9 million or 25%. As a reminder, the prior year quarter included $8 million of operating costs at Diamond Baseball Holdings, which was sold in September of 2022. Revenue growth in this segment was driven primarily by increases in media rights fees, sponsorships, commercial Pay-Per-View and event-related revenue at UFC, most notably due to an additional Pay-Per-View event in the quarter as well as additional events with live audiences. PBR also contributed to segment revenue growth driven by higher ticket sales from increased attendance as well as revenue growth from the team series.

At UFC, we continue to deliver more record-breaking events across the globe. UFC 284 in Perth was Australia’s highest grossing event of any kind, and UFC 285 in Las Vegas was UFC’s highest grossing commercial Pay-Per-View event within the past 12 months. Additionally, UFC 286 in London was the highest grossing event in O2 Arena history. Also in the quarter, we signed several new long-term broadcast partnerships. These include RMC Sport covering France, Monaco and French overseas territories, Saran Media for Turkey, Iceland and Baltic countries and U-NEXT in Japan. The increase in our aggregate AAV remains approximately 100% over prior deals since we began tracking in Q2 of 2021. As Ari mentioned, at PBR, we had 31 event revenue records including 24 sold-out performances.

Over the course of the quarter, PBR events also drew more than 0.5 million fans to venues across the U.S. We signed several partnership extensions including with Lucas oil, MGM, Kubota and Sonic. For PBR’s Team Series, we also ink partnerships with eBay Motors and overall industry’s Peak Automotive products. Turning now to Events, Experiences & Rights. The segment reported revenue of $800.8 million in the quarter, up $19.9 million or 2.5%. An adjusted EBITDA of $108, down $18 million or 14.3%, which was in line with our expectations and consistent with the cadence in our plan for full year 2023. Revenue growth was driven by heightened demand for events, most notably the Miami Open, Frieze L.A. and the inclusion of Barrett-Jackson. Growth was also driven by increases in media right fees at IMG Media as well as increased enrollment at IMG Academy.

Revenue growth was partially off by the discontinuation of On Location’s Music Festival business in Mexico, which accounted for $75 million in the prior year quarter. Segment adjusted EBITDA for the quarter was affected by a challenging Super Bowl comparison largely due to difference in matchup and location versus last year’s record-setting events. On Location’s ongoing and increasing IoT investment, which began in the second half of last year, which includes cost of personnel, marketing and technology-related costs and the discontinuation of On Location’s Music Festival business in Mexico as mentioned earlier. We remain excited about the potential returns on our IoT investment, which we continue to believe to be a multiple 9-figure profit opportunity across the three Olympic games.

And as Ari already said, we recently announced an agreement to sell IMG Academy in an all-cash deal, reflecting an enterprise value of $1.25 billion. We expect the transaction to close at the end of Q2 or the beginning of Q3 this year. I will address our planned use of proceeds from this transaction later in my remarks. Moving on to our Representation segment. Revenue was $350.2 million, a decrease of $7.1 million or 2%. Adjusted EBITDA was $84.2 million, down $17.5 million or 17%. The decrease in segment revenue was primarily attributable to $14 million of revenue recorded in the prior year quarter from the Restricted Endeavor Content business, which was sold in January of 2022. Segment revenue was also impacted by a decrease at our marketing and experiential business due to the disposition of certain contracts in the quarter, partially offset by an increase in revenue at WME driven by television, music and fashion.

Segment adjusted EBITDA was affected by higher cost of personnel at WME. We view this as an important investment to drive continued long-term growth across a range of talent categories. Turning to our new Sports Data & Technology segment. Revenue was $100.9 million, an increase of $55.8 million or 124%. Adjusted EBITDA was $4.5 million, down $2 million or 31%. Growth in this segment revenue was attributed to the addition of OpenBet, which we acquired in September 2022 as well as growth at our IMG ARENA business. Segment adjusted EBITDA, which benefited from the inclusion of OpenBet was more than offset by a $22 million increase in data costs at IMG ARENA, including approximately $10 million of costs that were incurred in advance of the sales cycle.

These new data costs created a temporary pressure on segment margins, which we anticipated, and we expect to monetize these data rights in the future. As mentioned on last quarter’s earnings call, this is consistent with the segment being back-half loaded and building largely sequentially as the year progresses. Moving on to our capital structure. We ended the quarter with $5.2 billion of debt and $718.7 million of cash, resulting in $4.5 billion in net debt. Our net leverage was 3.88x at quarter end. As previously articulated, we expect net leverage to meaningfully decrease by year-end, following the IMG Academy sale and the expected close of the UFC WWE transaction. Now let’s discuss our capital allocation strategy. Since going public in April 2021, we prioritize deleveraging.

Having successfully reduced net leverage, we are now shifting our focus to have greater financial flexibility. We plan to deploy capital across three areas in short order: paying down additional debt, buying back stocks and initiating a quarterly dividend. Following the closing of the IMG Academy sale, we intend to voluntarily pay down $50 million of debt and commenced repurchases of up to 300 million of our Class A common stock under an event-driven share repurchase announced earlier today. We’re also announcing our plan to start issuing quarterly dividend to holders of our Class A common stock and our other equity holders and Endeavor operating company in an amount up to $25 million per quarter. Moving on to our outlook for the remainder of 2023.

We updated guidance to primarily reflect the expected sale of the IMG Academy. Our revenue guidance range is now between $5.665 billion and $5.815 billion, which is $5.74 billion at the midpoint. And our adjusted EBITDA guidance range is now between $1.22 billion and $1.275 billion, which is $1.248 billion at the midpoint. Our updated guidance does not include any potential impact from the writers strike as the scope and duration of the strike are currently unknown. We are working to size the potential impact as the situation develops, which we will look to incorporate into our guide when we report Q2. We will not be providing free cash flow guidance for the remainder of 2023 in light of depending UFC, WWE and IMG Academy in transactions. These transactions provide challenges in forecasting our free cash flow metric this year, given the uncertainty with respect to the specific timing and closing of both as well as the treatment of certain costs related to them under GAAP.

Included in operating cash flow our transaction fees and expenses for both deals as well as cash taxes related to the sale of IMG Academy, which are currently estimated to be approximately $200 million. For the avoidance of doubt, proceeds received are not included. Given these factors, we do not believe the metric in 2023 is representative of a normalized level of free cash flow for this collection of assets. That said, we plan to address the metric in 2024 following the closure of both. Looking ahead of the year, we remain focused on executing our strategy and are encouraged by our increased opportunity to create shareholder value. With that, I’ll turn it back to you, James.

James Marsh: Thanks, Jason. Kate, will you open it up for questions, please?

Q&A Session

Operator: [Operator Instructions] Our first question will be from the line of Ben Swinburne with Morgan Stanley.

Operator: Our next question will be from the line of Stephen Laszczyk with Goldman Sachs.

Operator: Our next question will be from the line of Doug Mitchelson with Credit Suisse.

Operator: Our next question will be from the line of Bryan Kraft with Deutsche Bank.

Operator: The next question will be from the line of Jessica Reif Ehrlich with Bank of America.

Operator: The next question will be from the line of Tom Champion with Piper Sandler.

Operator: Our next question is from the line of David Karnovsky with JPMorgan.

Operator: The next question will be from the line of David Joyce with Seaport Research Partners.

Operator: There are currently no additional questions registered at this time. So I will pass the call back over to the management team for closing remarks.

James Marsh: Thanks, everyone, for joining us today.

Operator: That concludes the conference call. Thank you for your participation. You may now disconnect your lines.