Mat Hayward
Over the last year Endeavor Group Holdings, Inc. (NYSE:EDR) has engaged in a juggling game with its business, divesting of its Endeavor Content business in January 2022 while acquiring OpenBet, which will be combined with IMG Arena to form a new segment called “Sports Data and Technology,” which is expected to be profitable from its launch in January 2023.
Some of the numbers were down for EDR in the third quarter, but much of that was directly related to the divestiture of its Endeavor Content business.
The company, for the most part, has generated growth via acquisitions, but with its growing debt load in a high interest rate environment, along with the strength of the U.S. dollar, it appears to me it may have to moderate the pace of its acquisitions while further paying down its debt, which it seems the company is now doing.
For now, the company hasn’t seen spend from its customer base coming down, but I think if the economy worsens in early 2023, resulting in an increase in layoffs or firings, that will result in consumers prioritizing spending, which would probably result in a decline in revenue at some of the venues.
In this article we’ll look at some of the latest earnings numbers, performance by segment, and how 2023 will probably be a challenging one for EDR.
Some of the numbers
Revenue in the third quarter was $1.22 million, down $170 million or 12 percent year-over-year. The decline in revenue was heavily impacted by the divestiture of its Endeavor Content business, which represented $334 million in revenue. Not including that revenue loss, revenue would have been up 15 percent in the reporting period.
Revenue in the first nine months of 2022 was $4.01 billion, compared to revenue of $3.6 billion in the first nine months of 2021.
Net loss in the reporting period was $(12.5) million, or negative $(0.04) per share, compared to net income of $63.6 million or $0.16 per share in the third quarter of 2021. The primary catalyst for the loss came from $85 million in losses from its affiliates, with the majority of that coming from its minority investment in Learfield.
Adjusted EBITDA in the third quarter was $303.1 million, up $19.8 million or seven percent from the third quarter of 2021. Its Endeavor Content business added another $26.5 million in adjusted EBITDA last year. The reason that’s important on the revenue and adjusted EBITDA side of things is, while it makes the comps less attractive this quarter, going forward the comps will improve on a quarterly basis because of the sale of the business occurring in January 2022.
Free cash flow (“FCF”) remains strong for EDR, coming in at $153.2 million in the third quarter of 2022.
At the end of the third quarter of 2022, the company had cash and cash equivalents of $970.8 million, compared to $1.56 billion at the end of calendar 2021. It had long-term debt of $5.34 billion at the end of the third quarter of 2022, compared to $5.63 billion at the end of calendar 2021.
The company paid down $250 million in debt in the third quarter and had plans in place to pay down an additional $250 million in debt in the fourth quarter of 2022. After the debt reduction, the company expects annual interest costs to drop by about $30 million.
With the company having approximately 40 percent conversion of free cash flow for full-year 2022, and expecting it to improve to 50 percent conversion in 2023, it expects to continue to de-lever going forward.
Taking into account the lack of visibility in 2023 and the potential for the global economy to worsen, paying down debt may be one of the more important things the company does over the next 12 months or so.
On the FX side of things, management sees it having an impact of approximately $120 million for full-year 2022. While a big headwind now, once the strength of the dollar rescinds, it’s going to significantly improve the numbers for EDR. I don’t see that happening anytime soon, but it should be part of the long-term model of investors when considering the future performance of the company.
As for guidance, revenue is expected to be down for the fourth quarter based upon FX impact, divestiture of its Miss Universe Organization, and some of its non-scripted content deliveries being pushed forward to the first quarter of 2023.
Segment Operating Results
Representation segment
Revenue and adjusted EBITDA was hit the hardest in the Representation segment, with revenue plunging to $388.3 million, down $276.4 million, or 42 percent from the third quarter of 2021. The majority of that came from the aforementioned sale of its Endeavor Content business.
Not including revenue from Endeavor, revenue in the segment would have been up 17 percent, pointing to strong organic growth.
Adjusted EBITDA in the segment was $132.9 million in the third quarter, down $8.9 million, or 6 percent, year-over-year. In the third quarter of 2021 it included $26.5 million in adjusted EBITDA from Endeavor.
Taking into account revenue and adjusted EBITDA, this segment should show significant improvement in the quarters ahead based upon new baseline comps. That assumes organic growth in the segment continues momentum.
Events, Experiences & Rights segment
Revenue in the Events, Experiences & Rights segment was $440.6 million, dropping $5.7 million, or 1 percent from the third quarter of 2021. The weaker performance was attributed to a decline in specific media rights deals for events that don’t occur on an annual basis, such as CONCACAF World Cup qualifying games, the Ryder Cup, and the UEFA Euro Championship.
It was also affected by some events that were planned for earlier in 2022 than in the year before.
Adjusted EBITDA in the segment was $49.7 million in the third quarter of 2022, down $35.3 million, or 42 percent from the third quarter of 2021. The hefty drop in adjusted EBITDA in this segment came from unfavorable comps from insurance recoveries recognized in third quarter of 2021, the timing of some events, increasing costs from its workforce, and its ongoing investment in the Olympics business at On Location.
This segment will be important to watch concerning insurance recoveries and timing of events, in that they should show improvement in the quarters ahead. If they don’t, it will be a significant headwind for the company in 2023.
Owned Sports Properties
Momentum from its fast-growing and highly profitable Owned Sports Properties continues to grow, as revenue jumped to $402.3 million in the third quarter of 2022, an increase of $113.8 million, or 39 percent from the third quarter of 2021. Revenue growth came primarily from live events and more events with live audiences, licensing revenues from UFC, and an increase in media rights fees. Adjusted EBITDA in the segment jumped to $195.7 million in the third quarter, up $61.1 million, or 45 percent from the third quarter of 2021.
Sports Data and Technology
We have no idea yet how its new Sports Data and Technology will do, as it has launched in January 2023, which will represent the combined performances of its newly acquired OpenBet business and IMG Arena.
What we do know is management said this should be profitable from the start, so if revenue and earnings are significant, it will be a potentially strong tailwind for the company in 2023.
I tend to think it’ll make more of an impact in the second half of the year based upon macro-economic headwinds the company will probably face.
Economic headwinds
The company said it hasn’t been seeing cutbacks in spend from media companies, even though they’ve asserted they’re looking at cutting costs because of the lack of visibility concerning the economy in 2023.
While I have no reason to doubt that assertion, I do think that could rapidly change as interest rates continue to climb, inflation remains stubbornly high, and companies continue to trim the size of their workforces as growth slows down.
This could have a dramatic impact on the performance of EDR if consumers start to cut back on spending for entertainment and live events and prioritize spending on necessities. If the number of workers laid off or fired continues, and many companies freeze hiring, it’s going to create an atmosphere of uncertainty and fear for people, and that almost always results in cutting back on spending until the economic picture gets clearer and companies start to hire again based upon an improved economic growth environment.
More than likely, this would hit its live events business more than the others.
Conclusion
Taking into consideration the loss of revenue and adjusted EBITDA from selling its Endeavor Content business in January 2022, Endeavor Group Holdings, Inc.’s comps are going to improve in the quarters ahead.
Its Owned Sports Properties segment should continue to do strong, led by the UFC. It’s my opinion that if things go south with the economy, it’ll probably continue to do well, but could also be a canary in the coal mine if things start to get tough. If the UFC shows signs of weakness, the rest of the segments would probably underperform as well. As for its new Sports Data and Technology, that’s the potential outlier we have no idea as to how much it’ll contribute to the top and bottom lines of the company. If it is profitable from the launch as management expects it to be, it should be a nice tailwind for the company in 2023.
Taking everything together, EDR’s performance in 2023 will be largely determined by the strength or weakness of the global economy. If the economy falls of the cliff and a large numbers of workers are terminated, there will definitely be a rethinking on the part of consumers as to where they want to allocate their spending. Under tough economic conditions, it will first go to taking care of necessities.
And with less disposable income under those economic conditions, there will be less money to spend on wants when measured against needs.
If, on the other hand, the economy has more of a soft landing, EDR is well-positioned to grow its business and improve its top and bottom lines in the quarters ahead.
Even though there isn’t enough visibility at this time concerning the economy, it appears there’s a higher percentage chance it’s going to get worse before it gets better. As far as what we know, the Federal Reserve is going to continue to raise interest rates at this time, and that means higher costs associated with debt.
I believe Endeavor Group Holdings, Inc. will probably have to focus more on cutting costs and lowering debt over the next year, which it shouldn’t have trouble doing with its strong cash flow profile.
It looks like demand across its various segments remains strong at this time, but with accelerating layoffs, stubbornly high inflation, and rising interest rates, this can very quickly change. Under that scenario, Endeavor Group Holdings, Inc. will come under pressure, and its share price will as well.
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