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Endeavor Group Holdings (NYSE: EDR) not too long ago posted Q3 2021 monetary outcomes, reporting a worthwhile quarter that outpaced Wall Road expectations. Morgan Stanley, Endeavor’s lead analyst, attributed the income beat to “belongings held on the market, the upper EBITDA efficiency mirrored each the reopening of Endeavor’s companies and better profitability ranges from the restructurings and portfolio modifications through the pandemic.” However the funding financial institution’s Nov. 16 analysis replace on EDR credited the UFC with anchoring firm progress. The MMA promotion delivered the very best nine-month, year-to-date interval in its historical past.
JWS’ Take: Whereas the destructive impacts of COVID-19 nonetheless linger throughout components of the broader Endeavor enterprise, developments throughout the owned-sports-properties phase—which is basically comprised of the UFC—have normalized.
Endeavor’s owned-sports-properties phase posted Q3 revenues ($288.5 million) and EBITDA ($134.7 million) that exceeded expectations. Whereas a big portion of UFC revenues are contractual in nature, variable income streams, like dwell occasions (suppose: tickets, hospitality), industrial and worldwide PPVs and shopper merchandise are all up. The group attributes the rise in dwell occasion and industrial PPV revenues to the pent-up demand that exists to attend marquee sporting occasions and to the reopening of the bars and eating places that present the occasions. The introduction of recent buying and selling playing cards, NFTs and the continued success of the UFC EA online game account for the expansion within the consumer-product phase.
Surprisingly, the $288.5 million in income was truly down $10.6 million YoY, however that’s largely defined by the scheduling results of the pandemic. Pressured to backload the occasion calendar in 2020, UFC held three extra fights in Q3 final 12 months than it did in 2021. A one-time $25 million contract termination price additionally inflated final 12 months’s quarterly complete.
Firm insiders imagine the promotion’s aggressive response to the COVID-19 outbreak was a catalyst for the record-breaking 12 months. The UFC was the primary U.S.-based sport to renew exercise following the widespread shutdown attributable to the pandemic. UFC CFO and Endeavor deputy CFO Andrew Schleimer stated getting again to work shortly “created, or at the least earned the respect of, an entire new fan base. We have been capable of develop the fan base meaningfully as measured by social media, viewership and [sold-out] arenas,” he stated. “We’ve offered out each considered one of our numbered occasions this 12 months. So, we actually benefited from our potential to proceed working in a significant manner all through the pandemic.”
The UFC has been capable of carry the momentum it picked up in 2020 by means of the primary three quarters of 2021. Lawrence Epstein (COO, UFC) stated it feels just like the group is firing on all cylinders. “There are such a lot of elements contributing to our sturdy 2021,” he stated. “We had six consecutive pay-per-view sellouts from April by means of September. In July, UFC 264: Poirier vs. McGregor 3 turned the third-highest-grossing occasion in UFC historical past. Our licensing enterprise is performing very nicely, with the launch of recent buying and selling card merchandise and NFTs. In phrases of sponsors, the demand to accomplice with UFC has by no means been stronger. Not solely are longtime companions like Monster and Modelo renewing with us, however we secured main offers with new companions like DraftKings and Crytpo.com. And our industrial pay-per-view enterprise is bouncing again as extra bars and eating places open up. Final however not least, the continued promotional assist from ESPN has had a huge effect, elevating our model and that of UFC athletes.” Morgan Stanley estimates 2021 income shall be $930 million.
The UFC appears well-positioned for progress. The corporate believes there’s upside potential in sponsorship, shopper merchandise and licensing, and worldwide media rights. During the last six months alone, the MMA group says it inked 14 new worldwide broadcast offers, together with agreements in China and France. Collectively these pacts will yield an 80%-plus enhance in common annual worth over the expiring agreements, reflecting each the recognition of the UFC model abroad and the class’s potential. Morgan Stanley expects revenues to climb 8% to $1.031 billion in 2022. Makes an attempt to succeed in Benjamin Swinburne, the fairness analyst who covers EDR for the funding financial institution, went unanswered.
Brandon Ross (accomplice and TMT analyst, LightShed Companions) cautions that future progress—at the least because it pertains to the extra variable income streams—stays tied to the product the corporate places forth within the Octagon. “Identical to each content material enterprise, it’s a matter of who’s preventing,” he stated.
Whereas Endeavor’s 10Q submitting displays a rising enterprise, it additionally exhibits the UFC holds $2.2 billion in debt—a load that requires the promotion to make giant mortgage funds yearly (see: $180.2 million fee in June). However based mostly on the amount of money circulate the enterprise generates, the corporate appears to have vital headroom to service the debt at present ranges. In Q3, Endeavor’s owned-sports-properties division posted an EBITDA margin of 47%.
The MMA outfit has additionally managed to meaningfully de-lever because the time of Endeavor’s preliminary funding in August 2016, and on a a number of foundation (internet debt to EBTIDA), it stays at a post-acquisition low. “I’m not anxious concerning the leverage of this enterprise,” Ross stated, “particularly since they’ve a lot contractual income.” A big portion of that UFC income pie beneath contracts (together with the profitable home media rights pact) are constructed on offers that comprise annual escalators or accrete over time.
It has been steered, nonetheless, that the debt load (together with a hard and fast income base) prevents the UFC from growing fighter compensation. However an organization insider, citing the companies’ margins, insists monetary obligations will not be driving operation choices.
The UFC’s success during the last 9 months has anchored the expansion mirrored on Endeavor’s P&L. However Ross stated the MMA promotion has additionally been “massively essential” to the EDR share worth. “It’s the piece of the enterprise that buyers greatest perceive and the one with probably the most tangible worth folks can put a finger on,” he stated. “So, they gravitate and anchor very a lot on the UFC.” The UFC story seems to be resonating: EDR shares are up 18.6% from the place they started buying and selling in late April.