Chit Chat Stocks - Callaway (ELY) | Deep Dive

Episode Date: March 21, 2021

Callaway Golf Company designs, manufactures, and sells almost all things golf. From golf balls to clubs, driving ranges, Callaway does it all. Golf equipment makes up 62% of the companies operations and the rest is made up of Callaway apparel and Topgolf. Listen in as Brett, Ryan, and Brad analyze the company and where it may go from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (3:12) Industry | (7:43) Management & Ownership | (10:26) Valuation | (12:41) Earnings | (14:32) Balance Sheet | (18:56) Our Analysis | (22:33) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode on Chit Chat Money. We are here with Brad Freeman. This is your third episode, so we're getting to the groove with you, but we got your college

basketball team as a number one seed in the March Madness Tournament. I cannot say I've been watching much college basketball but what are your thoughts the the wolverines they got a shot this year or what well they always have a shot but uh isaiah livers is one of our best players and he is he's unfortunately injured so if we can figure out a way to squeak out these these first two wins of the tournament get through the first weekend and i am like crossing my fingers uh he comes back and we can make a run um and when the competition kind of stiffens a little bit but he did he did poke not to not to nerd out too much on this but he's gonna change his profile picture to kobe bryant shooting through an injury so i took that to mean he was he was uh he was ready

to play i'm really hoping that happens that is a fantastic that's like investors going through linkedin yeah i have to be like it's a sign it's a sign they have a they have an ad for a cybersecurity ai analyst this thing's gonna pop off but we have uh we also have uh another number Everyone's seed alumni here at Gonzaga with producer Brady. Yeah. But this isn't a basketball podcast. We're talking Callaway golf today. I'm going to go over the whole company.

I don't know. Do the standard stuff. But before we do that first, yeah, we got to talk seven investing first. You can use our code at CCM at checkout or the link in the show notes to get $10 off your first month. So it's just seven bucks to try it.

And then after that it's a $17 a month or $170 a year. So if you want to do a yearly subscription, that's even better. And if you're thinking about it, you know, you've been on the fence. I mean, we're going to give you an opportunity to try it out for cheap. And then you'll see that the research is really strong. And I don't want to. You won't churn. I know you won't.

Yeah, you can't. Don't churn on us. We don't want that because, you know, the service is great. You really want to do that each month. But it's not necessarily them telling you what to do. It's more of just recommendations and research that is just strong. And I saw, you know, the ones last month, there was a few that I was checking out and, you know, it doesn't really, you know, we're not just buying something because they say it, but it kind of springboards an idea. Okay.

I'm going to research this further. So it's a great idea. Yeah. We're thinking of the same one. Yeah, probably. Yes. Won't say it by name. Yeah.

Won't, won't spoil it, but for $7, you can go see it. It's a, it's a great idea generator, but we don't want to harp on that too much. So Ryan, do you want to get into Callaway? Yeah. Yeah. So Callaway Golf, I have a direct quote from their IR page here. Callaway Golf Company is a premium golf equipment and active lifestyle company. So there's, now there's a bunch of different parts to the business, but the bulk of it is still golf equipment. So that makes up 62% of revenue. And that includes golf clubs, drivers, irons, putters are actually under the Odyssey

brand. And then they have golf balls, which are apparently really competitive and make up a sizable portion of revenue. But then there's the apparel side. That's also, they also use the term soft goods in there. So Callaway has its own apparel. I'm sure you've seen people wearing Callaway clothes if you've ever golfed. But Callaway also owns Travis Matthew, OGO. Am I saying that right? Or is it O-G-I-O? I don't know. But those backpacks, It's just kind of like, they're kind of like Yeti a bit. And then Jack Wolfskin. So Travis Matthew is basically just another golf brand, if you're not familiar with it.

And then OGO is more of storage gear. So backpacks, duffel bags, that kind of thing. I have an OGO backpack, anecdotal evidence. Yeah, it's lasted me five years. So, okay. So there's your buy signal. But anyway, they also have Jack Wolfskin and that's like outdoor apparel. I think you could probably guess that from the name.

but uh they also that's like hiking gear jackets sleeping bags stuff like that and then if you're if you're thinking about jack wolfskin sorry if you're an outdoorsy person in the united states you might be like oh i've never heard of them they're based in europe and um china mostly so they're trying to push the united states but if you're like oh i've been to rei i haven't really seen much jack wolfskin um they're going to do that over the next year or so or maybe the next few years but yeah they're not in the united states that much okay and then lastly they also just finalized. Well, they have apparently it still has to close, but they just sort of cemented their deal in October for a merger with Topgolf. No, it closed. It closed in March. It's already

closed. It has officially closed. Okay. Cause on the conference call, it was like, they were deliberating over it. Yeah. It's on, it was about a week ago. So really recently. All right. And so that was the merger with Topgolf. And prior to the deal, they actually already owned 14% of top golf um and that was because of their investment i think they first invested in top golf all the way back in 2006 um and the deal values top golf at two billion dollars uh for reference top golf did 1.1 billion in revenue in 2019 um so that's like it's a it's a merger more than an acquisition like this is it's a huge part of the business now yeah they're doubling their share count i mean i'll get into that in evaluation but yeah okay and then i'll dive into

the history here so it was incorporated in california in 1982 with the sole purpose of selling high quality golf clubs uh it was founded by eli calloway jr who had previously had a successful career in textiles and wine uh those were the industries he was working in so sounds like a decent life wine and golf carlsbad yeah and he uh he was an so he was an avid golfer and the time history sticks usa was one of the big club manufacturers but they were beginning to run low on funds and so they started looking for investors and eli had just sold a vineyard for nine million dollars this according to wikipedia so take with a grain of salt but uh he took those some of those profits and bought half the company and then two years later

two years later he bought the other half as well um and callaway that was in 1982 and 1984 and then callaway went public on the new york stock exchange in 1992 with a market cap of 250 million it actually reached a market cap of over 3 billion by 1997 wow so if you invested at the top in 1997 it would not have been a great investment no it would have been flat since then pre-merger right because i mean they're doubling the share account whatever with the right it was basically flattered down yeah hmm it doesn't surprise me and i will get into this but it doesn't surprise me that this was overbought at one point it became a hot stock in the 90s yeah i mean to be honest yeah it makes sense you want to talk to i mean or sorry i was gonna say you want to get into

the industry or you got yeah i mean i was gonna say some anecdotes that this used to be a dream job to work there when i was gonna be an engineer on the beach you know researching golf clubs working with pros i mean that was the dream life but they are headquartered in carlsbad it's in between san diego los angeles but that doesn't really matter for investors i'll get into the competition and industry so the golf club market is about 3.6 billion dollars estimated in 2019 and the golf ball market is about 1.1 billion dollars the estimates are that it'll probably grow at about gdp or maybe slightly higher since golf's having a little bit of a growth phase but i wouldn't count on that you know they're not the growth is uh the market's

not going to be strong apparel market is obviously larger but harder to define more competitors there too. They're really competing with, you know, Nike and Lululemon, tons, I mean, dozens and dozens of competitors there. But the driving industry range, or sorry, driving range industry is much larger. It's north of $10 billion and growing quickly. And I mean, Topgolf's a little different. Like there's not much competition with them that is scaled and they're really building out their own concepts. So yeah, they're competing with the family, you know, driving range down the street but they're also not in a way it's more of an entertainment venue but we can talk about that i bet we'll talk about that a lot on the second half of the show

competitors for clubs would be you know taylor made tight list uh taylor made is owned by adidas and there's ping golf clubs are really top heavy so like if you look at the industry it's there's really like four to five top dogs which would be you know taylor made callaway tight list like i mentioned before, TaylorMade has probably the number one lead in drivers, but then Odyssey is the number one putter. So they're really kind of going back and forth each year. Golf balls are more of a commodity market. It's a lot lower part of their revenue, but outside of, I mean, I guess, you know, there's like those pro B1s that kind of have a brand cachet, but really there's not much, it feels a bit like a commodity to me. And then like Topgolf, like I said,

it's a unique asset yeah and then uh what about didn't you say costco is getting into the golf ball market as well oh yeah i mean even costco got into the mix they actually had a who was it tyla sued them because they copied uh the pro v1 patent but the kirkland signature ball yeah i mean they just made that it's not tough to make uh the golf ball you just need i don't know a million in r&d a few million r&d and just get them into the costco warehouses there they were selling uh quickly it seems strange listening to them like brag about their technological advantages what with a golf ball it seems like it couldn't make that big of a difference compared to its competitors am i wrong no i mean it's no no the in a way you're wrong but it's it's a bit of a

commodity because yeah i mean there's not much you can work with there's only a few variables you know but the golf clubs there's a lot more tech that goes into it but enough of that uh brad you want to talk management yeah so the company was founded by eli calloway jr as ryan kind of hit on um the current or he passed away um very very old legacy company the current ceo and president is oliver brewer um he was a former president and ceo of adams golf he was an mba at harvard um and yeah pretty impressive background uh brian lynch is the current cfo he worked up the ranks with the company as a vp and general counsel and he's been with the company for 22 years. And that just kind of goes with a pattern of the management team being made up of people

who have been with the company for a very long time and who have slowly worked up the ladder to where they are today. So just another highlight from the executive team, Mark Lepowski is the executive VP of operations. He was the chief supply officer at Fisher Scientific and he was a COO at TaylorMade. So a lot of good and relevant experience there. And then the chairman of the board is John Lundgren, who's a former or who is a current board member at Visa and the former chairman and CEO of Stanley Black & Decker. In terms of ownership, so all the, I had to double check this because it's pretty unique. So both, they're all NASDAQ and YCharts and Fintel all have institutional ownership at 96% with a well-defined pattern of accumulation. Fintel

actually had it at 120%, which was a little strange to me. That might be, just might be a bit off there yeah so let's go with 96 um for for the sake of uh the podcast and then so largest holders as you expect are blackrock vanguard uh dimensional fund advisors fisher asset management and then in terms of insider ownership they just own two percent of the float and it's pretty stagnant at this point right yeah because the founders and stuff they've kind of they've aged out or died or passed away yeah or go ahead right i was gonna say if you're uh the ceo also goes by the name chip brewer his real name is oliver brewer but he goes by that so if you chips all right see if you i know there's so many golf puns we could be making but um yeah if you see that

name that's also he is the ceo of cali yeah i just put that together that's awesome chip brewer yeah yeah yeah that's a good good pun by him or maybe it was actually his name but i'll get to the valuation. So a caveat here, I believe Kloyfin, which was, I was getting the data here has integrated the merger into that. So it's a bit confusing. The market cap is about $5.4 billion. Enterprise value would be a lot higher, closer to $6 billion because of the debt they have on the balance sheet. The ticker is E-L-Y, which E, what is it? Is it Eli? Was it? Eli is, yeah. That's the name of the, that's the name of the founder, right? That was his first first name yeah i took a pronunciation leap but i think it's eli okay yeah it seems weird like

or ellie but ellie could be ellie it's definitely eli okay yeah so the market cap is about 5.4 billion dollars post merger uh they issued 90 million shares for the merger of top golf which is doubling basically their share count well less than doubling and there was the ownership stake they already had so you got to take that into consideration but with that the price to sales be about two when you consider adding top golf and we haven't seen the data updated with the top golf but i think in the fall at some point they did something on the revenue numbers it was about 1.1 billion and top golf revenue price to operating cash flow is about 23.5 but as ryan will get into there were some one-time bumps in 2020 so that was inflated a bit um it wasn't

really tracking the earnings as much as you would like so it's the valuations likely on a normalized basis a little bit higher um and yeah so don't i mean you're gonna look at this it's gonna look weird the market cap went from like 2.7 billion dollars to like five points something just randomly and that is because you know the top cough merger went through so when you're looking at that don't look at it differently but pretty simple to value the company uh you know nothing crazy or we're not looking at any i don't know it's it's very simple it is very this year was so weird for both them because of covid but then also the merger we don't know what top golf's most recent numbers were we don't know how they were affected by covid but if we assume that they kept

that 1.1 billion dollars in sales from 2019 through to 2020 like if we think they did better or at least flat then they'd be roughly around 3 billion in sales um between the two companies So they had Callaway in 2020 did $1.6 billion in sales. That was actually down 6.5% year over year. The soft goods market was kind of beaten up there in the heart of COVID. And they had 41% gross margins. Typically, that's around 45%, but they had some facilities that they had to pay for that weren't operating.

And so there was a lot of costs associated with COVID for them. and then negative 105 million in operating income because of a goodwill and impairment write-off of its Jack Wolfskin brand. So they acquired Jack Wolfskin, I believe in 2018, I'm blanking on the number that they paid for it. But they wrote down, I think almost 170 million on that acquisition. Now, sometimes we were laughing because we always see companies say, we're just going to take the write-off, but sometimes the companies do sort of over-exaggerate that write-off for tax purposes, because they're going to pay less in taxes on their gap income, or if their gap income is reported as lower. But the important thing to do is just pay attention to cashflow at that point,

because that's got to tell the true story. Yeah. It's nice on taxes, but you got to think it's probably, you know, the business isn't as strong as it once was, but. Yeah, there is. I mean, they're writing down or they're impairing the value of that business based on its estimate of cash flows. So there is some, uh, reality that, uh, Jack Wolfskin has probably had a rougher year. Um, but at the same time, they could have over-exaggerated it for the tax purposes. Um, and then, uh, there was obviously there was some working capital adjustments with inventory. And so that's going to affect cashflow because they reported 230 million in operating cashflow, which was up almost 200% year over year. Um, and so a lot of that, uh, came from

the working capital adjustment. And then in the fourth quarter revenue actually grew 20% year over year. Interesting note, 49% growth in the golf clubs, uh, revenue, which I guess everyone's golfing now. I didn't expect that, but, um, and then the weighted average shares outstanding actually came down year over year. Obviously that's going to change, but I think it was down like two or three percent obviously now they're going to double that share account essentially so like the buybacks were probably not that useful but then uh i guess they were but they spend a lot of sorry what i said yeah just a bit you know yeah a little bit and then they spend a lot of money on marketing and selling costs as well so they like they partner essentially with pro

athletes i guess they sponsor them so they have to pay for that and then they also have golf network ads which i i think that i want a little pointless no no no no there's there's they're good the like because i mean you already know what the audience is they're going to be watching the golf tournaments i'll say the ads are weird don't you think they already know you're gonna know what yeah i mean well yeah i mean you could argue that for anything but the uh they gotta know what new clubs are coming out i'll say their commercials are a bit cringy because they talk about we have ai-enabled drivers and every company is doing that but it's just weird uh but no i mean it makes sense to market your clubs on the golf channel for sure i mean that's the only it's

the only place you probably should be marketing i think that's like i think they're selling costs around 26 of revenue i might be getting that number wrong but uh and then rnd was actually lower than i would have expected they do spend a lot of decent amount of money on rnd just basically finding the next uh set of drivers they're trying to advance i don't know how much further they can go it feels like drivers have already made it pretty far or no there's a ton of there's a ton of i mean there's a ton of tech that goes into a driver so there's a lot of there's a lot of variables okay all right uh brad you want to hit balance sheet and liquidity yeah uh also on the advertising front maybe cnbc bloomberg other guys to be some advertising and probably a good

audience for them. So the balance sheet, it's not, it's not pristine, but it's not as bad as I was expecting considering a pretty large merger, but that is because they paid for it in stock and not in cash. So they didn't raise a ton of debt for it. As of right now, as of their last report, they had 366 million in cash versus a little over a hundred million year over year. Inventory control was pretty impressive. Got to tip the hat to them. Inventory down 23% year over year in the midst of some pretty daunting and uncertain times. So good job there. $650 million in long-term debt with another $255 million in lease liabilities. So based on their EB, it's not terrible, but not pristine, probably closer to pristine than terrible, but somewhere in

the middle. And then again, highlighting that cash impairment charge or non-cash impairment charge it took with Jack Wolfskin. Goodwill doesn't necessarily mean future M&A events or like Topgolf are going to come with write downs, but it is something to consider. Yeah. That long-term debt isn't something to ignore with them. It's pretty meaningful. Like if you're looking at this and you kind of, I don't know, you kind of get, I don't know if I'm missing the word. You look at larger companies and you see, $600 million in debt, that's not meaningful. But with a company of Callaway size, $650 million in debt is really meaningful, especially when, I don't know how much, they say adjusted EBITDA too.

What'd you have in the cash flow there, Ryan? $230 million? I mean, normalized is even lower. So it really is banging off top golf, becoming a cash machine in a few years. yeah it's not a it's i'm sorry it's not an at&t or viacom but it is not it is not a pretty balance sheet on that that's for sure yeah yeah the six do we know what uh interest they have on that debt we should have looked at that beforehand but yeah knowing the gosh knowing yeah when it's due and the interest on that would be interesting and the i i would say the only reason i'd be somewhat fearful that long-term debt number is because the predictability going forward it's kind of hard to tell what demand's going to be like they it's been really really solid in q3

and q4 but there's always that there's the risk that lockdowns or something like that prohibits as much uh golf play yeah so q2 is their number one quarter uh because when what would that be april april may and june because leading into the summer season when everyone's typically playing uh around the world or at least in uh the northern hemisphere and if that that if that's bad again that could be terrible and really q2 last year that timing uh with covid was the reason that the year was so bad so you know i mean it could it could be on the other hand you could have a huge positive with the reopening and people wanting to get outside and stuff like that but i don't know there's a lot of variables to play because people could already play

you know outside last year it's just not yeah there's just a little bit of a lack of predictability and that's the only reason i'd have some concerns with that debt number but i mean if they are able to generate generate a normalized operating cash flow number of like 150 million uh i think they're going to be just fine yeah and that's just from the legacy business that's not including top golf uh on top of it um so anything else or we're gonna hit the break all right we're gonna hit the break and then we'll get back and talk about the future of cowboy golf cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware

or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic Wi-Fi app. Restrictions apply. Welcome back. Next up is competitive advantages. We'll kick things off with Brad. What do you have? As a brand competing with a lot of other deep-pocketed brands that are capable of taking market share, it's hard to give them a specific competitive advantage, but I will say their size and their clout allows them to sign popular athletes like Jon Rahm and Phil Mickelson, a very long-term relationship with him.

so so that i think is how they they differentiate themselves by signing these popular athletes and having them wearing their um their their gear and using their clubs yeah they they just signed john rom which is nice i mean it's tough it's like hard to see how that helped from an investing perspective but yeah he's one of the top young players and then they got phil nicholson i guess who's the number two kind of the tiger woods but taylor made i was looking at the players they have they really have an advantage over Callaway. Now Callaway has an advantage maybe over a lot of smaller players, but Taylor May has like Tiger Woods, Dustin Johnson, and Roy McIlroy,

like three of the top five. So I don't know. We got Bryson. I don't know. I don't know. He, I don't know who he is. They win. Yeah. Bryson wins. Yeah. But to that point, the, it is pretty, there's not any clear cut. Maybe I'm wrong,

but there doesn't seem to be any clear cut technological advantage that they have over competitors because it's always flipping who's the number one issue. So there isn't anything profound in that regard, but they are the largest golf equipment manufacturer in the U S according to what I saw. Some of these companies are not public. I think he said Taylor made was a Taylor made was owned by Adidas. Yeah. Titleist is on its own. I believe those are the big three. There's some other small ones. Nike's out of it. I mean,

competes a lot in the soft goods uh yes but the the golf equipment yeah they didn't they used to be pings in it a bit too things in a bit um so i wouldn't say there's anything i guess any big advantage that way but the size and scale i do think is an advantage because they can kind of become more of a conglomerate unlike maybe a ping or a title list um and when i say conglomerate i mean outside of just typical golf like they they've obviously made that their goal they've been acquiring a lot of apparel goods outdoor lifestyle kind of things um whether it's jack wolfskin ogo it feels like they're kind of going with the pepsi model where they have their namesake their brand their their primary soda which is golf equipment in this regard but then

they can make those acquisitions that are sort of adjacent to it um like the lifestyle stuff that they've made yeah the bolt case isn't the golf equipment's not not going to make this a 10 beggar it's got to be some sort of you know and pepsi wasn't going to make pepsi a 10 beggar or whatever but they all the other things they acquired honestly were more important so i guess yeah that is a good good comparison yeah i know you're about to touch on this but top golf is obviously i think that will be a huge advantage yeah it's going to be where the whole future growth things that's also the growth opportunity yeah top golf on its own um i guess this wasn't it's not here now but top golf could be a good funnel for apparel gear clubs and balls

now a lot of people aren't really shopping there if you're maybe the i don't know like a real die hard or something like that but it is a good funnel i mean they got millions of people going these places there's more and more every year i think you know trying on the clubs testing them out if you're giving people callaway over the other brands at first that's a that's an advantage and then also selling the apparel because when you look at top golf it's not necessarily that driving range where someone just gets that cheap bucket and it's just hitting for an hour it's more of an entertainment venue and pre-coveted it was a place where they'd take a lot of corporate events and like 20 person outings so if they're selling apparel there i think that could work as well

because some people just really like if you're going to if you're going to one of these events some people don't even like to golf so like it seems like you know the boss forcing people to go to one of these things but if they have a place to shop for other things if you're interested in you know apparel and doors and stuff or whatever but they could also raise rates like presentation rates for other companies in those pro stores like if ping wants or taylor made wants to go uh present their stuff on the front of the racks they can start to raise prices that way yeah there's a few ways they could go about it they can make it exclusive callaway stuff um too as well there's a few ways um but they definitely can use that as you know top golf itself seems like a good

asset but they could also use it to hopefully supercharge their other brands it sounds great you know, synergies, blah, blah, blah. But, you know, it sounds great in theory. I'm not sure how much the execution will work there, but we'll, I mean, let's get into the, right into the future growth opportunity. Brad, you want to talk about yours? Yeah. Sticking with top golf. Um, I do think that the golfing is uniquely kind of resistant to the e-commerce and the, the, the online sales thing, um, golf clubs mainly. Um, just because, I mean, when I have purchased sets in the past, I've tried tons of them, tried several different brands and several different models and was pretty obsessive about it. And I'm sure I'm not the only one there. So I do think

that while Topgolf is more of an entertainment destination today, that the future growth opportunity there beyond just continuing on with the growth trajectory it's currently enjoying would be turning it into more of a of a driving range with with pros and in a fitting center so that they can really cross sell their their brand um in this brick and mortar model that they can now enjoy using yeah the cross sell is important i think the fitting center thing is another way they can grow as well they could potentially disrupt you know in all the metropolitan areas there's those golf super stores i think there's not really one that's big nationwide. And in Seattle, we have something called putts or pro golf discount. Those could be

nationwide, but yeah, Topgolf could turn to that as well, where the testing is important. You got the top tracer stuff that Brian's going to talk about, but using that brick and mortar as an asset and the e-commerce is not necessarily a threat. I know I bought a $50 driver on Amazon once and I was really upset with my purchase. So I don't think many people are buying these online. And you really got to test them out yourself. I would also say, so I think I was kind of the ideal Topgolf customer. I started as a non-golf person and their mix is about 50% non-golf people, 50% golf people. So I was kind of non-golf, but it funnels people into real golf.

They said 75% of the people that went to Topgolf said they would like to play on an actual course in 2021. one so if you're taking that 50 of non-golfers and converting them to real golfers and cali owns that pro club uh there is definitely cross opportunity but i'll get into the top tracer stuff so um if you're not familiar it is the leading ball tracing technology and it has basically changed the way golf is watched so uh if you ever watched golf in like 2015 i think sometimes they'd lose the ball no they had it before it's been uh the first time they had it was 2006 but But before that, yeah, before that, it was, I mean, it was before that it's impossible to watch the little white ball on the screen and think about it was before HD.

So you basically just look into a pixelated screen and then it would land on the green and be like, oh, it was a good shot. Yeah. And so, but now if you see the blue line that kind of tracks the ball, that is top tracer technology, I think for the most part. And then they've also deployed this technology to 7,500 driving ranges across the globe. and that's apparently only 1% of the addressable market. Only 1% of TAM.

Yeah. But I mean, you think about it, I think a lot of the driving ranges, I don't know how competitive the tracer technology stuff is, but I think a lot of the driving ranges will adopt this over time. And so I didn't know there was that many driving ranges around the world, but I guess it's a pretty large market. Yeah. Cause it's really easy to do. I mean, there's, there's tons of these tiny ones out there. Yeah. And revenue from the top tracer segment has grown 233% over the last three years. If you're wondering how it actually works, I have a quote here. There are cameras and sensors that create a 3D space where objects entering that space attract the light waves created by the golf ball, allows the software to track the ball flight and show up on the screen. This is why the range needs a certain level of lighting.

so maybe it doesn't fit for all ranges but uh yeah it seems like probably i would say maybe the most valuable asset in that uh top golf acquisition yeah that i do like that part of it a lot i've been to a range that uses it um it seems nice i didn't try it out because it is a bit expensive and you kind of have to go in with the you know idea you're going to use it but it's helped i mean it's definitely an asset where one you can charge more to people so it helps the ranges as well um it's kind of a win-win scenario they're not trying to compete with the ranges they're they're really helping them and especially the ones that aren't going to be in areas that could use a top golf venue because a regular top golf venue they're giant most areas don't need

them it's got to be in a big metropolitan area or maybe a metropolitan area with at least 100,000 people or more maybe 250 000 if i'm really thinking about it but the top treasure technology i mean it's got to be high margin one you have deals with broadcast teams you have deals with the pga it seems a bit to me now this is kind of a weird comparison it's almost a bit like ea sports with fifa or madden or something like that where they're going to be the exclusive operator it's tough to disrupt that it's even if it's the technology is copyable unless they lose the deal back, you know, something like that, where it's like, all right, you can rely on this being, you know, licensed every year. I don't know how much of the business

it is, but yeah. Yeah. I mean, the revenue growth numbers are really impressive over the last three years. Uh, but they did not give a nominal number. No, they did not. That's a little bit of a red flag. I guess that it's not that big, but I mean, again, the margins on this gotta be really, really strong like and i don't even know if they do uh what's interesting is maybe it's a pay-per-use like all right you're in a driving range you have a fixed cost to get it in there but they just take cut off of yeah but i know they pass that fixed car or i bet that they probably pass the implementation cost to the range yeah um so that that's not a lot of capital up front maybe a 10 percent take rate i don't know or it could just be like sort of subscription like or pay for it

each month either both there's pricing yeah on it i guess yeah both his models are good i mean after i guess the next 10k or 10q once top golf is uh officially merged with them now that they have been they're gonna have to talk about it right hopefully hopefully yeah i wish it merged i wish it happened beforehand uh before the end of this year but so we can get on the 10k that's why they did it they don't want to have to put an extra 20 pages on the 10k yeah that's that's true that's true and they also we didn't hit this but they own the most popular mobile golf game called world golf too i think it has 40 million downloads worldwide top golf does yeah top golf owns that so i i don't know how valuable of an asset that is either but um i don't know yeah

what's your uh growth opportunity uh so yeah i mean top golf is the one that is really the driver here but so you guys have those but i they estimate there's about 24 million golfers right now worldwide. That's grown. I got a boost from COVID and it's been growing the last few years. There's been, I don't know, the market's just been strong overall. It's hard to say. I'm not sure if that's going to continue at a high rate, but it's something to consider. Will there be 30 million golfers worldwide by 2025? Is it just going to grow slowly? But either way, if there that growth it'll lift the entire industry up because you know we talk about them being sort of in a tough spot competing with tight lists taylor made paying for clubs if they keep their market

share that will you know if they keep their market share on the entire industry raises like it's not i don't know they're going to do well yeah i don't think i don't think callaway's become i don't think the apparel and the golf equipment part has become that central to thesis anymore i think top golf is sort of the main driver at this point yeah and if anything top golf is going to be the start where you know if they're going to grow the game as they call it you know get more people to use it top golf might be the way that drives that you know yeah and that i mean that kind of let's get into highlights and low lights because i'll be talking about that but but Brad, you want to go first? I love to see how many people from that management team have just

been with the company for decades. That gives me encouragement that it's a good place to work. They're improving their talent and fostering success. And I always like to see that. So that would be my highlight, the management team, how long they've been with the company. And then two lowlights, I guess. One would be the demographic of golf. So you do get the deeper pocketed consumers by catering to more of an older demographic, but it just, it raises the stakes for you continuing to have to attract new people into the sport to continue that top line growth. And then also, what was my second one? Now let's just stick with the one low light. I can't, I can't think of the second one. Yeah, that is a good point though, that the marketing

spend is going to stay consistent. It doesn't mean that they can't be profitable and they have profitable in the past but the marketing spend will probably be i don't know 10 to 20 of revenue and you should expect that over the long term yeah i would also say this acquisition didn't seem like they were already invested so they were tracking the progress of this investment and then finally they said i we we want to merge with it they know how well this business has been doing yeah um so it's done extremely well and it's not like they just randomly went out and bought it as like a last-ditch effort to reinvent the business like it's because they probably saw huge cross-sell opportunities with it um and so yeah that really is central to probably any thesis at this point

um is top golf as a part of the business i also think it's like the perfect introductory system for new golfers um i i it's gonna ease the process of getting into real golf uh yeah for sure and i also think uh people like to buy the gear before they get good at golf yeah instead of getting good and then buying the gear only the i mean the people that really really want to get good probably will buy gear uh after the fact but i think a lot of people go out to the course for the first time like i need all the clothes i need the shoes and gloves so maybe that's a buy signal for uh maybe that's bullish for callaway my low light though is and i'm probably reaching here but the overlap between the investing community and golfers is pretty high uh or at least historically

has been uh which makes me feel like a lot of investors are going to try to justify ownership because their affinity for the brand which is probably what happened in 1997 i imagine maybe maybe i don't know i might be reaching there but it feels like you're it just i instantly think that my bias is getting in the way that i like the brand i like golfing so why not on it yeah but the insider the insider ownership kind of i think just weights that a bit just because if anchor and black market majority ownership you know i i don't know if there's people i don't know if investors like us who are like oh i like golf i don't know if we're moving the market but i think the point the point's logical for sure yeah but yeah i don't top golf kind of introduces a new

element though because it's not the it's like owning all the bowling alleys in the u.s then actually the coolest ones or whatever i don't know that's the coolest but the the biggest and and most technologically advanced. I've never been to one, but they sound... Topgolf? No. I don't think they have one in Seattle. It's criminal.

You got to go. Yeah, I'm going to make a whole trip out of it. I'm going to go on a flight. I think one note about Topgolf is that you might look and see, oh, there's not that many venues worldwide, but I think they said on the call in the fall that each venue does, once they're ramped up, about $17 million in revenue each.

annual annual revenue so they open about eight to ten a year and that's really going to drive the growth i mean they don't need that many venues to uh to do well but their their food is also probably high margin i don't know if you've ever been there but it's incredibly small portions at an expensive price so that's more maybe that's a low light but it's not high margin food no yeah it's like movie theaters right but yeah i'll have mine i mean integration with top golf seems good apparel business, throw that on top of that and work well together. If they execute management team, like Brad said, Lycum seems strong. They seem to run a financially sound operation, you know, outside of, you know, shipping hiccups in 2020. And now they have some debt on the

balance sheet, but it looks like in the past they weren't, I don't know, like when I look at what the financial team or the, not the, whatever, the CFO office, how they're managing the balance sheet and stuff like that it looks like they have shareholders at heart where a lot of tech companies and stuff like that i'm like come on like you know you kind of are like all right well we're just going to give away all these shares blah blah blah the balance sheet and they're not really treating their shareholders as in the best light i think you know they're not the best here but it seems fine low lights the equipment and apparel is or sorry industry excuse me can't talk today they seem like semi commodities you know the industry doesn't seem that appealing

uh the golf club industry to me while it's kind of cool while they may have a tiny bit of a moat it's not great can the moat be built with top golf at the center maybe you know top golf seems like a great business but i don't know the equipment industry is not something i really get excited about uh i don't know it seems like the business you want to be in in the golf industry is the player where they're basically everyone's paying you to do stuff like callaway has to pay whoever phil nicholson probably millions a year and that's like you know you need them and you there's a lot of expenses here on a cowboy side but you're not invested in phil nicholson i know that's that's that's that's the point new uh new exchange no that's that's the uh well that comes

back to those those new exchanges out there for those influencers or whatever the worst thing in natural but i think that's it more or less interested wrap things up brad you want to go first? Sure. There's no real red flags to point out and say, this company is not investable. It's bad, but there's also nothing that really jumps off the page and makes me really excited to invest. Maybe over the next several quarters, if they do start to kind of execute and show what Topgolf really can be, I would start to be a little more interested in potentially starting an investment in the company. But as of right now, I think I'm just going to stay on the sidelines. okay ryan um more interested uh 50 of the business i absolutely love 50 i could care

less about owning so there's that sort of uh and it's not necessarily it's not like it's bad right it's just kind of like yes i want to yeah i want to own it i mean maybe if it was cheap enough i don't know but uh it's not a business i'm super excited to invest in that equipment side i think all on the same page in that yeah um but top golf is i would like to see what their earnings were in 2020 i would like to see some financials before i made any decisions obviously but uh i bet they're losing money because it takes a lot of capital investments to build out these things but it doesn't mean the union economics seemed really strong i think they had an ebitda number which doesn't mean much i guess yeah um i think they had a positive ebitda number which take it with

a grain of salt but and they i think they said again adjusted even though so like you know whatever but they have about five million per venue um once they're up and running again i'd love to see the audited numbers because as we know uh i just i just think about the peloton ceo say we're surprisingly profitable in that one year when they were losing millions and millions of dollars but yeah i don't know they see what about you more or less i'm more interested but But right now, not crazy interested. Like I want to see, I have to wait until the next 10Q. Yeah.

If you look at like the cashflow numbers right now, it looks like relatively like a market multiple, but normalized, it seems pretty expensive. I mean, Topgolf's great, but it almost feels like to me when the business, this will be a better investment because of the predictability. if we can see a year or two of, I don't know, the integration working, right? Because if they get it working, this could be a decade long runway of, I don't know, highly predictable growth. If you worry about, you know, getting the valuation getting too high after that, but I don't know, I'm not comfortable right now. If the problem, they have to be transparent about

top golf's financials and the top tracer stuff. If they're not transparent about it, they're losing a lot of potential investors because that I would not own Callaway for its equipment business. Yeah. That I think, I think we're all in agreement there. Yeah. I mean, there's so many fascinating things about this business, but it's, it's tough. It's just something where I, there's too many unknowns. Yeah. You know what I mean? All right, Brad, anything before we wrap things up? Oh no, you're choosing, you're choosing next week. So what are we doing?

What are we doing? Yeah. I actually remember my second low light. you guys reminded me of it when um you were talking about waiting on the investment so so i think this is theoretical and i don't have evidence to support it but but it seems like golf was a pretty um pretty in in the sweet spot of covet 19 activities of um you're outside and you're social distancing and and and stayed open while other things didn't so i i makes me want to wait even more um seeing how they do when the world kind of goes back to normal um how much of that demand was transitory and how much is going to stick around. But enough about that. The next

week episode is going to be a brand new FinTwit darling, Upstart, the AI, so artificial intelligence and machine learning. We get to talk about that. Super exciting. Yeah. But it's a lending platform that uses artificial intelligence and machine learning to be a better lending platform. I know very little about the company, so I'm excited to dig in. I'm excited to dig in, learn about it, and then be like, Dan, I still don't understand this, but we'll do our best. That's going to do it for this episode. Thank you all for listening. Remember, as always, Brian and I are general partners at Arch Capital. Arch Capital investors may own securities discussed in this podcast. We are not financial advisors. Anything we say

on the show is not formal advice or recommendation. Thank you all for listening. We'll see you next week. don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm still figuring it out somehow things usually get worse before they get better. Apparently that's how I roll. So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem.