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Endeavor Group Holdings (NYSE: EDR) recently posted Q3 2021 financial results, reporting a profitable quarter that outpaced Wall Street expectations. Morgan Stanley, Endeavor’s lead analyst, attributed the revenue beat to “assets held for sale, the higher EBITDA performance reflected both the reopening of Endeavor’s businesses and greater profitability levels from the restructurings and portfolio changes during the pandemic.” But the investment bank’s Nov. 16 research update on EDR credited the UFC with anchoring company growth. The MMA promotion delivered the best nine-month, year-to-date period in its history.
JWS’ Take: While the negative impacts of COVID-19 still linger across parts of the broader Endeavor business, trends within the owned-sports-properties segment—which is largely comprised of the UFC—have normalized.
Endeavor’s owned-sports-properties segment posted Q3 revenues ($288.5 million) and EBITDA ($134.7 million) that exceeded expectations. While a large portion of UFC revenues are contractual in nature, variable revenue streams, like live events (think: tickets, hospitality), commercial and international PPVs and consumer products are all up. The organization attributes the rise in live event and commercial PPV revenues to the pent-up demand that exists to attend marquee sporting events and to the reopening of the bars and restaurants that show the events. The introduction of new trading cards, NFTs and the continued success of the UFC EA video game account for the growth in the consumer-product segment.
Surprisingly, the $288.5 million in revenue was actually down $10.6 million YoY, but that’s largely explained by the scheduling effects of the pandemic. Forced to backload the event calendar in 2020, UFC held three more fights in Q3 last year than it did in 2021. A one-time $25 million contract termination fee also inflated last year’s quarterly total.
Company insiders believe the promotion’s aggressive response to the COVID-19 outbreak was a catalyst for the record-breaking year. The UFC was the first U.S.-based sport to resume activity following the widespread shutdown caused by the pandemic. UFC CFO and Endeavor deputy CFO Andrew Schleimer said getting back to work quickly “created, or at least earned the respect of, a whole new fan base. We were able to grow the fan base meaningfully as measured by social media, viewership and [sold-out] arenas,” he said. “We’ve sold out every one of our numbered events this year. So, we really benefited from our ability to continue operating in a meaningful way throughout the pandemic.”
The UFC has been able to carry the momentum it picked up in 2020 through the first three quarters of 2021. Lawrence Epstein (COO, UFC) said it feels like the organization is firing on all cylinders. “There are so many factors contributing to our strong 2021,” he said. “We had six consecutive pay-per-view sellouts from April through September. In July, UFC 264: Poirier vs. McGregor 3 became the third-highest-grossing event in UFC history. Our licensing business is performing very well, with the launch of new trading card products and NFTs. In terms of sponsors, the demand to partner with UFC has never been stronger. Not only are longtime partners like Monster and Modelo renewing with us, but we secured major deals with new partners like DraftKings and Crytpo.com. And our commercial pay-per-view business is bouncing back as more bars and restaurants open up. Last but not least, the continued promotional support from ESPN has had a huge impact, elevating our brand and that of UFC athletes.” Morgan Stanley estimates 2021 revenue will be $930 million.
The UFC seems well-positioned for growth. The company believes there is upside potential in sponsorship, consumer products and licensing, and international media rights. Over the last six months alone, the MMA organization says it inked 14 new international broadcast deals, including agreements in China and France. Collectively those pacts will yield an 80%-plus increase in average annual value over the expiring agreements, reflecting both the popularity of the UFC brand overseas and the category’s potential. Morgan Stanley expects revenues to climb 8% to $1.031 billion in 2022. Attempts to reach Benjamin Swinburne, the equity analyst who covers EDR for the investment bank, went unanswered.
Brandon Ross (partner and TMT analyst, LightShed Partners) cautions that future growth—at least as it relates to the more variable revenue streams—remains tied to the product the company puts forth in the Octagon. “Just like every content business, it’s a matter of who’s fighting,” he said.
While Endeavor’s 10Q filing reflects a growing business, it also shows the UFC holds $2.2 billion in debt—a load that requires the promotion to make large loan payments annually (see: $180.2 million payment in June). But based on the amount of cash flow the business generates, the company seems to have significant headroom to service the debt at current levels. In Q3, Endeavor’s owned-sports-properties division posted an EBITDA margin of 47%.
The MMA outfit has also managed to meaningfully de-lever since the time of Endeavor’s initial investment in August 2016, and on a multiple basis (net debt to EBTIDA), it remains at a post-acquisition low. “I’m not worried about the leverage of this business,” Ross said, “especially since they have so much contractual revenue.” A large portion of that UFC revenue pie under contracts (including the lucrative domestic media rights pact) are built on deals that contain annual escalators or accrete over time.
It has been suggested, however, that the debt load (along with a fixed revenue base) prevents the UFC from increasing fighter compensation. But a company insider, citing the businesses’ margins, insists financial obligations are not driving operation decisions.
The UFC’s success over the last nine months has anchored the growth reflected on Endeavor’s P&L. But Ross said the MMA promotion has also been “massively important” to the EDR share price. “It is the piece of the business that investors best understand and the one with the most tangible value people can put a finger on,” he said. “So, they gravitate and anchor very much on the UFC.” The UFC story appears to be resonating: EDR shares are up 18.6% from where they began trading in late April.