Description

1.       Situation Overview:

a.       Genius Sports is being acquired by $276M SPAC dMY Technology Group II, led by Niccolo de Masi, aided by a $300M PIPE process. Founders will roll their stake while sponsor owner Apax is monetizing position. The deal will leave Genius Sports in a net cash position.

2.       Business Overview:

a.       Genius Sports is the clear #2 data collection and analytics business in a duopolistic market, covering over +240K sporting events of which +110K are exclusive right deals. The business has high-quality characteristics at ~60% recurring revenue, minimal concentration with top 10 customers accounting for 30%, high incremental margins (+70%), +4-year weighted average contract length, and multiple means of monetization (ad-tech, data feeds wrapped in software and more). We expect the Company to do $145M of revenues in 2020 at $14M of EBITDA with a Revenue and EBITDA CAGR through 2022E of 28%/133% respectively.

3.       Valuation:

a.       We are paying 8.0x/6.4x CY21/22 sales and 34.0x/21.3x EBITDA. The broader info services group trades 13x/11.5x CY21/CY22 sales and ~30x/26x CY21/CY22 EBITDA yet only grows top-line ~5% with EBITDA growing ~8-9% at ~44% EBITDA margins. We think ZoomInfo (“ZI”) is a good example of how the market may capitalize high-growth data analytic businesses. Consensus sees ZI growing Rev/EBITDA at 25%/26% with EBITDA margins of ~50%. ZoomInfo trades 32x/26x CY21/CY22 sales and 64x/52x CY21/CY22 EBITDA, implying Genius is coming to market at a 75% discount to ZI on sales and ~55% on EBITDA multiples.

4.       Key Thesis Points:

a.       (1) High barriers to entry with large and growing moat (2) Attractive economic profile (3) Pole position amidst industry evolution

5.       Return Profile:

a.       We believe the investment can generate a 2.7x-3.1x MoM or 27%-31% IRR assuming a ~4 year hold with near-term optionality to trade +$15 (+50%)

Brief Business Overview:

Genius Sports is a data collection and analytics business, covering over 240K sporting events of which 110K maintain exclusive rights. Not only does the Company have a moat via its vast data collection network via +7K data journalists but also because it wraps this data feed into subscription software that provides sport book makers with technology that helps with risk management, trading solutions, and integrated media/streaming solutions.

The business is split among three segments with Data & Streaming being the core: (1) Data & Streaming, 74% of Revenues (2) Media, 15% of Revenues and (3) Sports 11% of revenues. Outside of the core business, the Sports segment contains customers such as FIFA, NCAA, NBA, NASCAR, PGA Tour, MLB and others, whereby they provide tools around fan engagement and combat betting-related corruption. The Media segment can be thought of as their ad-tech solution, connecting publishers and advertisers, allowing companies to access sports data via API and measuring engagement on the back-end.

Genius Sports has impressive profitable growth at scale. It is expected to do $145M of revenues in 2020 with $130M done in the last twelve months and EBITDA of ~$14M. The business has high-quality characteristics at ~60% recurring revenue and de Minimis concentration with top 10 customers accounting for 30%, and no one customer being more than ~4%. Incremental margins are incredibly high (+70%), as +90% of the cost base is right-sized, which leads to an EBITDA ramp $71M by 2022E.

The supply of the data that is ultimately monetized is derived through a mix of “official” rights and “unofficial” rights. Of their 240K event portfolio, 170K events are fed with official rights which is a more valuable and sustainable offering. Genius maintains long-term (+4-year weighted average) contracts with sport leagues to ensure they have the fastest and highest fidelity data, allowing them to charge a premium to sport book operators.

Industry Overview:

In 2019, the global gaming industry across all platforms, online and offline (i.e. casinos), was estimated to generate ~$460B in gross gambling revenue (“GGR”). While the broader gaming market has grown 2% per annum for the last five years, the online gaming market has seen significant share gains with 11% growth p.a. This growth trend for online gaming is expected to continue over the next five years, with online gaming revenue projected to double by 2025, reaching $59B up from $31B in 2020. This growth in online gaming has resulted in part from:

·         Jurisdictions globally, including the US, embracing regulated sports betting in an effort to create a safer gaming environment for consumers and to generate additional tax revenue (which is otherwise lost to illegal bookmakers and operators).

·         Consumers showing a strong preference for online products as opposed to retail products when the option of online versus retail is available to them

The $31B of Online gaming GGR is generated by online sportsbooks such as DraftKings, Bet.Works, Gaming Innovation Group (GiG), GVC Holdings, International Gaming Technology (IGT), Kambi, Playtech and Scientific Games. While the online sportsbooks are the platforms where bets are placed and lines are set, the sports data that is used by these sportsbooks are purchased from third party data providers. The two leading companies that provide this data are SportsRadar and Genius Sports. While there are other companies that do offer similar data solutions, such as IMG Arena and Stats Perform, SportsRadar and Genius Sports have the largest datasets available in the market by a large margin. We estimate that the market for third party data is likely in the $8-10B range.

As mentioned above, SportsRadar and Genius Sports are the most scaled players in the space with datasets that cover 390k+ and 240k+ sporting events, respectively. These events include Tier 1 sporting events, such as the English premier league, the NFL and March Madness, as well as Tier 2 to 4 events from college volleyball to Lithuanian table tennis. While Tier 1 events are the most top of mind, the long tail of events represent a significant portion of bets placed on sportsbooks, and therefore need to be covered by the data companies and offered as a product to the sportsbooks.

Both SportsRadar and Genius Sports are able to collect data from events via two methods – official data collection and unofficial data collection. Official data collection, which requires purchasing the rights to the data from leagues themselves, is prevalent mostly for Tier 1 sports and is a competitive bidding process among the data providers. Unofficial data collection is having large teams of individuals watching / streaming games globally and manually inputting data into the data platform and is used on both Tier 1 events, as well as the lower tiers.

While both official and unofficial data for Tier 1 events are used by sportsbooks today, and thereby sold by the data providers, we expect two main shifts to occur that will drive the importance of official data in the future.

·         Increase of in-game betting: In-game betting, the ability to make calls on specific events within a game (i.e. do the Patriots get this 4^th down) is becoming increasingly popular and a larger % of all bets made. In the EU this is 60-70% of total bets now vs. the US at ~30% which is expected to go to EU levels if not past. Because these bets are made in real time, the ability to get data at the lowest latency is incredibly important. Due to broadcast delays and other factors, official data collection is faster than unofficial data collection; as a result, sportsbooks who rely heavily on in-game betting in the future will look to purchase their data from the third party providers who have the official data rights

·         Regulation / Leagues Forcing Official Data: Many leagues are beginning to understand the value of their data in the sports betting world and are looking to monetize it to the best of their ability. As such, some leagues are looking to regulators to require that sportsbooks to use only official data, meaning this data will have to be purchased from the third party data providers with the rights to that official data.  In fact this has already been a concern for DKNG per speaking with their product head. It is DKNG’s view that this transition may be happening in the next 2 years.

While we expect official data collection to become a more important piece of the equation as stated above, the ability for third party data providers to continue offering unofficial data remains equally important. This is due to the fact that sportsbooks want to offer their customers the broadest coverage of events including Tier 1 events, as well as the long tail. The ability to collect this unofficial data for the tier 2 to 4 events at scale is currently only possible through the significant networks that SportsRadar and Genius Sports have built.

Furthermore, SportsRadar and Sports Genius will be able to use the profits from their lower tier datasets to fund the acquisitions of tier 1 rights / official data. Those data providers that do not have the capabilities to capture unofficial data at scale across the lower tiers of events will most likely be unable to afford the official data rights for tier 1 events, effectively making them noncompetitive in the long run.

Key Thesis Points:

·         High Barriers to Entry with large and growing moat

o   Genius Sports has 1,500 employees across 6 continents, 450 employees in technology and trading, over 7K data journalists, +650 long-term partnerships with sports and sportsbooks, and over $110M invested in proprietary technology, a meaningful more amount than the revenue generated by lower players. The +240K coverage level is behind only Sportradar, with the next largest player being in the sub offering materially less as they tend to focus on a specific sport (e.g. IMG Arena and Golf)

o   The Company has a multi-prong moat today that has been built such that it only grows over time. Similar to other data and info services businesses, the “data lake” created by centralizing highly valuable and difficult to scale data feeds is not easy replicable.

o   Incremental to this however is Genius’ choice to wrap it in value-add software that not only demands a higher multiple for the business, but makes it that much stickier as it makes switching that much more burdensome for a book maker that prioritizes speed, data fidelity, and consistency,.

o   There are two ways sport data companies can collect their data. You can either sign exclusive agreements with the league directly, or you can have a team or rudimentary algorithm that scrapes live streams and broadcasting of games. The former is known as “official” data while the latter is known as “unofficial data”.

o   We prefer to invest in a business that is focused on the “official” piece as our work suggests the industry is moving in the direction of prioritizing this type of data. Leagues, such as the NFL, put restrictions on unofficial data and how it can be scraped. This raises the cost of collecting the data, and reduces the speed at which competitors can feed book makers pricing systems.

o   Not only is there the added benefit of being more skewed towards official data, but the space in which Genius Sports plays demands an incredibly high amount of physical labor. The data collection process is highly manual, and in order to provide book makers with broad coverage, you need bodies 24/7 collecting stats (I.e. “data journalists”).

·         Attractive economic profile

o   Genius Sports has historically CAGR’d it’s top-line from 2016-2019 at a rate of 39% while slowly ramping profitability. The team has done a deep-dive on the info services and data analytics space in the past, and we have been particularly keen on the industry due to its highly attractive operating leverage.

o   From a top-line perspective, the lack of customer concentration, longevity of contract life being +4 years, and the creativity to wrap its data feeds amongst a broader value-add software suite generating recurring revenues is something us and the market will be willing to capitalize at a high multiple

o   The build out of this business model has seen the vast majority of its cost structure already in the ground without need for an operating expense base that needs to grow more than low-single-digits on a personnel/staffing cost basis and rights costs that are skewed towards low-renewal cycles in the Tier 2-4 leagues.

o   Putting it all together, you have a company algorithm that should generate +25-30% revenue growth at +50-70% incremental margins yielding EBITDA to grow at an impressive +130% CAGR through the medium-term projection period

·         Pole position amidst industry evolution

o   In the EU, live betting is currently 60-70% of the total online gambling market vs. only ~30% for today in the US. Our work from DKNG and recent calls on this indicate that the US market is in catch-up mode as live betting is the clear future

o   In this world, official data deserves a material premium – even more so than it does today. As an odds maker, you cannot afford to keep your live bet windows open without real-time, and 100% accurate data. An example of this would be in soccer where the data journalists know to hit a “Dangerous Attack” button which automatically shuts down live betting when a player gets to the opponent’s third of the pitch as the odds of a penalty kick, corner kick, or goal are exponentially higher. However, when the data goes exclusive (i.e. you need the official data), unofficial data providers are not allowed to have someone in the stadium sending that signal out, creating a huge lag and ultimately means they can’t offer the same level of service competitors do.

o   It is becoming very clear to us that the leagues are going to try to control the distribution of their data. As they are not able to directly offer gambling, they will look to monetize their data through exclusivity or at minimum 2-3 licensing partners. Odds makers have practically no choice but to pay-up for the official feeds. We think this lends itself to a nice runway of pricing power for the forseeable future (e.g. we have heard Sportradar recently pushed price of 2x increase to clients which were accepted). 

Valuation & Math:

·         Capitalization:

o   At the $10.29 price, the business is being valued at a $1.7B market cap and $1.5B enterprise value, yielding a net cash per share of ~$1 or 10% of our purchase price

·         Entry Valuation:

o   We are paying 8.0x/6.4x CY21/22 sales and 34.0x/21.3x EBITDA over the same period respectively

·         Comps:

o   We analyzed the broader info services group as well as interactive gaming / gambling focused names. The public markets currently lack a great comparable that offers this business model and grows in the high-20% range while CAGR’ing EBITDA +130% over the next few years

o   The broader info services group trades 13x/11.5x CY21/CY22 sales and ~30x/26x CY21/CY22 EBITDA yet only grows top-line ~5% with EBITDA growing ~8-9% at ~44% EBITDA margins

o   ZoomInfo, the higher growth comp within this bucket is set to CAGR its Revenue/EBITDA through 2022 at a rate of 25%/26%, slightly lower than Genius’ 28% top-line and materially lower than its 133% EBITDA ramp. ZI has EBITDA  margins of ~50%. With that being said, ZoomInfo trades 32x/26x CY21/CY22 sales and 64x/52x CY21/CY22 EBITDA. This implies that Genius is coming to market at a 75% discount to ZI on sales and ~55% on EBITDA

·         Longer-Term Valuation

o   We believe the investment can generate a 2.7x-3.1x MoM or 27%-31% IRR assuming a ~4 year hold.

Catalyst

Institutional coverage post de-SPAC

Investor education

Valuation re-rate