Endeavor Group Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 3 Jun 2021

[Company Representatives:]

Ari Emanuel - Chief Executive Officer Mark Shapiro - President Jason Lublin - Chief Financial Officer Samanta Stewart - Senior Vice President & Head-Investor Relations

[Operator:]

Welcome to Endeavor’s First Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speaker's presentation they'll be a question-and-answer session. . Please be advised that today’s conference is being recorded. . With that, I will now turn the call over to Samanta Stewart.

[Samanta Stewart:]

Good afternoon, and welcome to Endeavor's first quarter 2021 earnings call. A short while ago we issued a press release, which you can view on our investor relations site, [e-mail]. A recording of this call will also be available via this site.

[Ari Emanuel:]

Thanks Sam. The past year has been by far one of the most challenging, but also one of the most rewarding for our company. We were tested at every possible way and our teams rose to meet every challenge, demonstrating resilience and ingenuity at every turn. Despite the setback COVID-19 provided, we weathered the storm and laid a strong foundation for the remainder of 2021 and beyond. Shortly, Mark Shapiro will walk you through some more specific examples of this, and Jason will share more details around our financial results and guidance for the year. First, I want to spend a few minutes on the encouraging recovery signs emerging across our portfolio and how the convergence of technology, sports, entertainment, media and gaming played to our strength, as an integrated company that both owns and represents IP and content. As more states and countries loosen travel and gathering restrictions, and vaccination rates increase, we are beginning to experience accelerated demand across our 800-plus global events portfolio.

[Mark Shapiro:]

Thanks Ari. Across our own sports portfolio, we are indeed benefiting from some of the tailwinds that Ari mentioned. Those wins existed before the pandemic, but at the same time the pent up demand of the experienced economy is really lighting a fuse across the entire range of our businesses. As you noted, UFC and PBR were two of the first sports organizations to resume live events in the spring of 2020. For PBR since coming back online and as attendance continues to increase we are actually seeing a double digit uptick in spending from advertisers, who are eager to reach live audiences and ratings on CBS are up 29% this quarter compared to Q1, 2020. Euroleague meanwhile resumed live events in the fall of 2020 and held their final four event in Germany just last week, which we streamed across Facebook, Twitch and TikTok for the first time. Even though we didn't have crowds in Cologne due to pandemic related restrictions, we anticipate being back to full capacity when the next season commences in the fall of 2021. Similar to the pacing we are seeing at PBR and UFC which we’ll discuss in a moment, I'm happy to say we're seeing strong demand on the advertising and sponsorship side of the business in Europe.

[Jason Lublin:]

Thank you, Mark, and good afternoon everyone. As already Mark discussed, we are encouraged by the early recovery times and trends we are seeing emerge across our businesses, and believe we are very well positioned to drive continued long term growth. Let me start by walking you through our first quarter results and then I'll briefly discuss guidance for the year. For the quarter we generated approximately $1.1 billion in revenue, a 10% decline from the same period last year as COVID-19 continues to have a negative impact across our business and geographies. However, the cash and EBIDA for the quarter was up 13% over the same period last year increasing to $199.5 million, which I will discuss in more detail shortly. As a reminder, we operate our business in three segments

[Ariel Emanuel:]

Thanks Jason. Before we open up for questions, I want to briefly frame how we're thinking about our future. When it comes down to it, there isn't a trend positively impacting the sports and entertainment landscapes that we are currently benefiting from. To that end, we'll continue leveraging the entire endeavor portfolio to capitalize on each of the trend and extract maximum value out of every deal for our clients, partners and owned properties. We also remain committed to strengthening our balance sheet and deleveraging and will continue to look across our changing global landscape to unlock opportunities, etc., drive long term growth and value for our shareholders. With that, I'll hand it over to the operator.

[Operator:]

Thank you. Your first question comes from the line of Ben Swinburne from Morgan Stanley. Your line is open.

[Ben Swinburne:]

Hi! Good afternoon. Two questions; I’m wondering if you could talk a little bit about the growth drivers that you see and are most excited about at the UFC specifically? Everyone is very focused on that business. Obviously the ESPN deal is up several years out, but between now and then what do you think are the areas we should be focused on that can drive that business from the top line point of view. And then I just had a clarification question probably for Jason on the guidance. You know we’re seeing reopening happening as you said quicker, but it certainly varies geographically and by events. Anything you can tell us in terms of what the assumptions are around returning to live events and their full form that's baked in the guidance, so we have a sense for sort of what the underlying assumption is there. Thanks everybody.

[Ari Emanuel:]

Thanks Ben. So in the next 24 months – I’ll get to all the point that you’re asking. So first one is internationally. For the next 24 months we have several international deals coming up. About 20% to 30% of our deals come up every year on the international side. I can go into more detail of this, but Brazil, Australia, Canada, UK, Philippines, South Korea, Germany and Russia. China as you just heard from Mark, we made last year, but I'll come back to China. Also new territories that just got sanctioned are France and where there's possibilities in Africa. Sponsorship is another big area. And remember, in our sponsorship number, we've added more products to put sponsorship on. Pay-Per-View, Fight Night, Contendor Series, Ultimate Fighter which we just sold to ESPN, Fight Path, and also in China there's a local contender series also, I’ll come back to China. I just also want to remind you, our fan base is 90% international and 10% domestic. International Pay-Per-Views are outside our ESPN deal. They go to the USD Endeavor directly. We've extended EA deal which was again in the middle of the year. We have a better split. Also micro transactions – also the China portion of that deal, whether it be on PC or mobile is outside that deal. Again, I’ll come back to China as a whole entity. Gambling, IND Hearing is handling a big aspect of our growth. NSG, Mark talked about our Gap and the last deal. We will be the second sport up and if our deal was in our playing cards, our Panini deal, we've outperformed that situation in a significant way, which is a good indicator that our NFT business will be significant. Mark talked about a little bit On Location and our Pay-Per-View event. That will be a very big driver and has been a big driver. In China I just want to say the following

[Mark Shapiro:]

Yeah, so Ben just the – and for everybody else on the call, at the risk of being repetitive, I do want to underscore some of those buckets that Ari talked about, obviously because OSP is such an important, not only growth driver, but just overall segment to the business. I think first it's important to just take a step back if you will and look at what we've done with the UFC since we purchased it in 2016. To your point, we did the seven year deal with ESPN. We've grown Fight Pass, which is our over-the-top platform subscription. Obviously a lot of live events that extend beyond the UFC MMA and that’s a big growth driver going forward as Ari mentioned. We've grown sponsorship significantly, and this has been a panner year for us shockingly with COVID. Our monster deal got renewed as we talk about Draftkings, which we mentioned Modello , but we also did a multiyear deal with Bet365 and we did a terrific deal with guaranteed rate mortgage and we're actually in negotiations on a renewal for that. We’ve been introduced in new markets as Ari mentioned and we're just chomping into bits to get introduced in France, which is soon. We've increased our international rights, really leveraging the endeavor platform. All of the IMG media work that Adam Kelly and Sam Zussman, their teams do, gives us huge leverage and it’s allowed us to get some good offices Ari mentioned on the international rights to decide. We’ve begun to introduce site fee and it's something we’ve been asked about a lot given the competitors or other leagues like F1 gets site fee. This is really great into our model going forward. We don't see it as significant or material, but frankly we saw some site fees in Abu Dhabi during COVID and we expect to see more in bunches as time goes on. We’ve gotten big time into licensing products. Ari mentioned betting, that’s the way of the world. I mean half the states right now in the U.S. are licensed and that’s only going to grow. And on the ancillary side, we opened a performance institute in China. That's important, because we're going to be getting by and as Ari mentioned, China is a huge priority. We need more Chinese fighters coming out of that. We closed our first kit deal. We did a sizeable EA deal that Ari mentioned, a renewal there, and NFP is something that you know we’re going to follow the NBA top shot. Although we did our deal before the NBA with Dapper Labs, we’re going to follow their lead and really score in that area. And then all of this gets replicated, China, China, China, and that's kind of where we're going. But if you look at it at the end and we’re not going to talk about specific numbers, we’ve doubled the EBITDA since we took over the UFC. And when you put all this into context, all this in perspective, we are simply in the early stages. We have a young demo, we have a strong female fan base, we are global. Our location is going to be a big driver here. In fact, we’re 75% sold out for experiences for the Glendale Arizona matchup that’s coming up this month and then the Conor McGregor huge fight, which is going to be July 10 back in Vegas to a sold out show at T-mobile. WME is driving all kinds of content opportunities, digital opportunities, influencer opportunities, podcast opportunities, all the same equation of making more stars out of our great fighters once they win in the octagon, because you do have to win in the octagon first. And then you’ve got the Walt Disney company behind all of this. I mean we are the big driver on ESPN Plus. They recognize that and they are turning on all of their assets to get behind the UFC and the partnership you know couldn't be better. And I would just say in closing on the UFC, a lot of this is done notwithstanding COVID, which by the way we're still in the middle of. So that just shows you that Dana White and that truck, that locomotive, it just keeps powering through and it's really been accelerated. Its accelerated to sport into the mainstream. My son is 20 years old. He comes home from college. All he did during COVID on Saturday nights was line up with seven friends outside watching the fights, fight-after-fight, card-after-card and I would add betting small, small amounts of course, because you’re not allowed to big amount bets, but betting nonetheless on fight after fight, which of course goes to ING arena. So you know that’s a lot on the USD fight side, but we’re – I think you can tell we're pretty bullish. On your second question, and Jason you could do the financial. You know we would just remind you that we're still in a COVID state of mind here, right. I mean we are a global company, and the U.S., although we're seeing a lot of doors opening and we're seeing a lot of bright lights as I mentioned, you know it's not indicative of the rest of the planet, and music is probably the best example, right. We're going to get a few things in the third quarter; festivals, things popping off some bookings and fourth quarter that will heat up a lot more in the U.S. But you're not talking till 2022 so it normalizes for Europe, for Pac Rim, for South America. I mean way behind here and of course the variant is now trixing through the U.K. right now, the Indian variant, that also is going to you know slow itself. So I would just say our guidance today is based on the visibility of the business and it contemplates a fourth quarter where we assume a high degree of delivery, both in Endeavor Content and some of those projects could get close to Q1 and international events. Jason?

[Jason Lublin:]

Yeah, the only thing I would add to what Mark said is from a guidance perspective for the UFC. We have a – we have forecasted for the Pay-Per-View events having live audiences throughout Q3 into Q4, not for the fight night events, and on the client side you know having music really into Q3 going into Q4.

[Ben Swinburne:]

Thanks everybody.

[A - Ari Emanuel:]

Thank you.

[Operator:]

Your next question comes from the line of Meghan Durkin from Credit Suisse. Your line is open.

[Meghan Durkin:]

Hi guys, thanks for taking the question. I think this is for Ari, but maybe Mark has comments too. You touched on it in your prepared remarks, but I wanted to see if you could give us a little more detail on the media consolidation that's happening and how it might impact Endeavor. Maybe some examples on how past deals like Disney buying Fox impacted the business and the ways in which Warner and Discovery might be different from that or similar. And how aggressive do you expect Amazon to become with MGM in the portfolio? And then a follow up, seems so dramatically in the past year. Can you talk about the protections you're getting in place for your clients if the studio changes distribution strategies on their films you know last minute in some cases.

[Ari Emanuel:]

Well, I think – this is Ari, thanks for the question. I think the Warner, Discovery and the Amazon, MGM is just further proof point that content is high demand in short supply, both on the scripted, non-scripted side, movie side and also on the sports side, because I think Warner’s Discovery is also going to be in the sports side as Plus has been on a bunch of sports rights too. And opposition in the ecosystem saves long term growth and investments will continue. The tech leaders and the incumbent in my opinion, with powered X-BOD and A-BOD services still on the – will also have to protector their linear channels. So demand is increasing. It's one of the early premises that we started the company out with. There's a finite number of creators and intellectual properties and IP to meet that demand, therefore increasing the value of talent we represent and the content we own. So all-in-all prices are going up in every situation and that's the way I think – as it relates to the release schedule, and the windowing and the issues surrounding there, I think that was your second question if I'm correct. Listen, we saw this happen with Warner Brothers; we've seen that happen with Disney. We are going to find the floor as they figure out and if we just look at this past weekend, Disney had a duel window, All Time Disney Plus and theatrically Paramount had just a theatrical release. They are going to have some let go on the Paramount side just directly to streaming. We have navigated that whole situation. There's no clear answer right now with how this is going to happen, but we are the big, one of the big players in that ecosystem, and we are negotiating on behalf of our clients and our own properties to make sure that we get the proper economic as we go forward, and that’s the way we are going to operator until we find the proper flow, which is going to take a little bit of time as COVID kind of moves on.

[Mark Shapiro:]

You know Meghan, just working backwards from there, I mean I think your second question, you know to Ari’s point, we're more flexible at the studios, right. I mean we're having these conversations up front and they are paying for that flexibility. So that moves right to the benefit of all of our clients, that's all I’ll say on the second question. On the first question I would just add, I mean Ari talked about just further proof points that believe it or not content is in short supply if you think about it; it’s just growing. But that content has a different definition these days. It’s all forms, it's audio, its betting, its video gaming, right, its live sports, its TV, its films, its book to films, its audio, not just podcast. So this isn’t just about representation, and you can bet that Amazon didn't buy MGM just to leverage the library. There's going to be a lot of buying, there’s going to be a lot of original programming and there's going to be a lot of spending. And I think what underscores the entire comp consolidation question and equation it that truthfully, it powers all our secular tailwinds, if you think about it. Reopening, content, OSP segment, Owned Sport Properties, I mean that also as we said and everybody knows that Eurosport is a major fan of sports and he’s going to be a big there. The reliance on influence these days to move product, to sell tickets, to sell movie tickets, to sell books, sports rights overall and betting. So all the wins, all the trends that power the Endeavor Enterprise if you will, are really going to be fueled by this consolidation.

[Meghan Durkin:]

Okay, thanks guys.

[Operator:]

Your next question comes from the line of Benjamin Black from Evercore. Your line is open.

[Benjamin Black:]

Great, great, thanks for taking my question. I have two. The first question is on live events. I know it's been over a year since the acquisitions, but it be great to hear how you thought about integrating On Location and how that could potentially kick start the live events business when the economy is fully reopen. And also relatedly, like how should we be thinking about the contribution of the Olympics longer term? The second question is on capital allocation and M&A, and I’ve if the pandemic has potentially locked any new M&A opportunities or previously thought of not available, and looking ahead towards the next 12 to 18 months, how will you weigh paying down debt versus potential acquisition? Thank you.

[Mark Shapiro:]

Alright Ben, I love four questions in one. Ben, by my count here we got On Location integration, we've got Olympics and kind of financial impact, and we will have some expenses we are going to incur in the first few years, so Jason will get into that. M&A which Ari will cover and debt which obviously Jason and Ari can both cover, because you know Ari’s commitment to that debt reduction. First of all on On Location, look, I would just say, its already fully integrated. We’ve got a tremendous leadership team and Paul Caine and John will be there and the Olympics deal right out of the gate winning these first three Olympics, huge ones too. I mean you can’t get a better line-up Paris, Milan, Los Angeles, very, very excited about it, but it's not just the Olympics and that opportunity. I mean we're a provider for a lot of major sports owned events. The ones we own line UFC, like The New York Fashion Week, like the Sydney Fashion Week which is plain today sold out in Sydney, Australia despite some shutdowns by the way, Miami Open, Professional Bull Riding. But beyond that we do work with Masters, we do work for the PGA Championship which was huge for us two weeks ago with Phil Mickelson and that offset win and then of course concerts, and as they come back fourth quarter, first quarter, you know it's going to play right into the fastball of On Locations. So it's full year integrated, a lot more opportunity to take our events and blow it out to build more experiences around the event with our clients and partners. That's the differentiator for Endeavor and that architecture is working. Super Bowl advance sales, you heard in my comments at the top, really tremendous. The fact that we were beating Miami, which is you know the best place to have a Super Bowl is a home run, and you know we feel good. I'll let Jason kind of talk about the financial where it is, its revenue recognition will be later. What you should know in the first couple years here, we'll be ramping up, adding on, we’re integrated, but we now need more firepower to do the Olympics and will increase some of those expenses the next couple of years. Jason.

[Jason Lublin:]

Yeah, as Mark said, you know we are really excited about the revenue potential over the likes of the deal, which in Paris ‘24, Milan ‘26 and LA 2028. You know Mark mentioned you know from a revenue perspective we’ll be starting to recognize our revenue, and the majority of it in 2024. Then we will certainly have some operating expenses leading up to the 2024 games and that is inclusive of the guidance that we put out today.

[Ari Emanuel:]

And Ben, as it relates to M&A, listen we continue to look for strategic M&A and organic growth. There’s been a lot of organic growth, let it be, Sport24 in the company, Gaming with IMG Arena and Endeavor Content and we are opportunistic. M&A, it has two buckers for us. One is that its built on to our existing portfolio, which kind of increases our note around our businesses. It was called reigning champ, it's really called NCSA which is for IMG who are carrying business like the LinkedIn of that business which fits perfectly into our IMG Academy business. And then Mark mentioned also in his comments, Flight Scope which is a data capturing technology that fits into our IMG Arena business. In addition to that, we are constantly looking for our next acquisition that is not a bolt on to our existing portfolio, that we think we can utilize the platform to take out costs, drive international, use the whole platform to increase the value. We think there's a lot of opportunity out there, but we're also very diligent and have to go through a rigorous process as we look at them. So that's how we look at. We are partially inclined. As you know we built a company on a lot of M&A and we look at the market place and we're feeling very good about it.

[Jason Lublin:]

But in terms of de-leveraging, we’re committed to deleveraging you know, that should come in the form of cash flow play down, using cash flow to pay down debt as well as we’ll leverage M&A. Now we are public, we are a public company also with a public currency to you know execute on M&A. But in my remarks we also highlighted that you know we expect a $600 million reduction of our outstanding debt in Q3. So we are very committed to our deleveraging profile as well and we are balancing that with M&A.

[Operator:]

Your next question comes from a line of Alexia Quadrani form J.P. Morgan. Your line is open.

[Alexia Quadrani:]

Thank you. My question really is on the content side and the comment you made earlier about the robust demand for content which we read about obviously all the time. I’m curious if you can give us some color about how much is sort of catch up given COVID, and how much is just really the sustainable growth and demand given the proliferation of the streaming outlets and distribution outlets in general. And I guess second, just sort of staying on that topic. If you can elaborate how you think your share is trending versus others or your peers, or is that irrelevant right now, because there is just so much growth and demand for content right now for everybody.

[Ari Emanuel:]

So I’m assuming you’re really mainly talking about, even though Mark mentioned there's a lot of different content, when you think about it there's podcast, there is audio, there's gaming, there's a lot of different forms of content. There's gamers that are going into the surface, but I think you are thinking about mainly movie, television on this.

[Alexia Quadrani:]

Yeah, yeah, exactly on the entertainment fund, yes.

[Ari Emanuel:]

When we started this process, you know last time everybody said it's got to stop at one point in time; its only increased. You now have seven big players that have committed financially, it’s a huge economics. We now have Netflix. I think it was in their last earnings call $17 billion. They are going to do 16 movies, because a lot of their libraries are going to the other services and they got to build that library. Disney is committed. You now have Paramount Plus coming into the market place committed too for their services. As you just saw a little bit of a consolidation on Amazon Prime. This is not, and the linear players that also had excellent services have got to actually still service their linier channel, they have huge investment there. I would tell you, there is players that you don't even know. All these companies are making large overall deals for writer, director, actors throughout the system and this is not slowing down. I said it before, I do not believe this is slowing down for five years, because they've all committed strategically to this, plus they have the – the linear players have to defend their service also in this mix. So I don't believe it's slowing down in any capacity.

[Alexia Quadrani:]

Thank you.

[Operator:]

Your next question comes from the line of David Joyce from Barclays. Your line is open.

[David Joyce:]

Thank you very much. Could you help us think about the cadence of margins? I know that you gave us some guidance for the year, but based on the expenses being a little later than we thought in the first quarter, what are the normalized margins for these businesses, and again how we think that'll play out throughout the course of the year? And then secondly, kind of related to the margins, what are the normalized business activities versus meeting, how should we think about the organic versus inorganic contributions here, and how will Endeavor Content be changing once the WGA settlement is factored in? Thanks.

[Mark Shapiro:]

Yeah, so I’ll take that first question of the margin profile. So look I think if you look at the mid-point of our range, we are you know projecting I think about roughly 15.4% margin for the year. Obviously Q1 was higher than that, and obviously this is COVID impacted your, so this is transitioned here. That is not indicative of the margin we see for this business long term. So that's just what we are projecting for the business to be this year.

[Ari Emanuel:]

And then David, just as it relates to Endeavor Content, which is in full swing right now, as I mentioned that big deliverables in the fourth quarter. Our 2021 guidance assumes Endeavor Content is status quo, for the balance of the year, that's our plan. We will have this in its entirety, in its current form through the end of the year.

[David Joyce:]

And then just anything on the inorganic contributions in the quarter or for the year?

[Ari Emanuel:]

I don't know. Specifically David, I’m sorry.

[David Joyce:]

Just what your acquisition activity is doing, contributing into the revenue and EBITDA for the year. If we could get a sense of what that strategy is doing for your growth.

[Jason Lublin:]

Yeah, all I would say is that we – we closed down a couple of transactions, which you know which had slight scope and FCA, but we are not going to break out the split between organic and inorganic growth.

[Ari Emanuel:]

Same goes for Endeavor Content.

[David Joyce:]

Alright, thank you very much.

[Ari Emanuel:]

On an ending note, here's what I would say to you. As Mark said, in his statement and as I’ve stated. When you think about content, when you think about gaming, when you think about sports, we're in every sector - music, whether it be WME or On Location, we are in every growth sector. When you look at Ticketmaster, we're a huge supply of them. We are also On Location. Gaming we’re one of the big players. Sports ownership, sports representation, we're in that space. You have to come through our doors and it relates to how you want to do content throughout the ecosystem. Whether that be podcast or whether that be movies and television, we are in every growth sector in the media space. So when you think about your media analysis, you have to factor us in.

[Emanuel:]

Thanks everybody.

[Jason Lublin:]

Thanks for joining us.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.