Topgolf Callaway's (NYSE:MODG) Q4 Sales Beat Estimates

Golf entertainment and gear company Topgolf Callaway (NYSE:MODG) reported Q4 FY2023 results exceeding Wall Street analysts' expectations, with revenue up 5.4% year on year to $897.1 million. On the other hand, next quarter's revenue guidance of $650 million was less impressive, coming in 46.7% below analysts' estimates. It made a non-GAAP loss of $0.30 per share, down from its loss of $0.27 per share in the same quarter last year.

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Topgolf Callaway (MODG) Q4 FY2023 Highlights:

• Revenue: $897.1 million vs analyst estimates of $864.8 million (3.7% beat)
• EPS (non-GAAP): -$0.30 vs analyst estimates of -$0.33 (9.8% beat)
• Revenue Guidance for Q1 2024 is $650 million at the midpoint, below analyst estimates of $1.22 billion
• Management's revenue guidance for the upcoming financial year 2024 is $4.54 billion at the midpoint, in line with analyst expectations and implying 5.8% growth (vs 7.2% in FY2023)
• Free Cash Flow of $43.7 million, down 64.6% from the previous quarter
• Gross Margin (GAAP): 64.1%, up from 29.9% in the same quarter last year
• Market Capitalization: $2.64 billion

"I am very pleased with our fourth quarter results, which included revenue growth in each of our operating segments, culminating in consolidated revenue growth of over 5% and almost doubling our Adjusted EBITDA1," commented Chip Brewer, President and Chief Executive Officer of Topgolf Callaway Brands.

Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE:MODG) sells golf equipment and operates technology-driven golf entertainment venues.

Leisure FacilitiesLeisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one sustains growth for years. Topgolf Callaway's annualized revenue growth rate of 28.1% over the last five years was incredible for a consumer discretionary business. Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Topgolf Callaway's recent history shows its momentum has slowed, as its annualized revenue growth of 16.9% over the last two years is below its five-year trend.

This quarter, Topgolf Callaway reported solid year-on-year revenue growth of 5.4%, and its $897.1 million of revenue outperformed Wall Street's estimates by 3.7%. The company is guiding for a 44.3% year-on-year revenue decline next quarter to $650 million, a reversal from the 12.2% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 6.4% over the next 12 months, an acceleration from this quarter.

Cash Is KingIf you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

While Topgolf Callaway posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, Topgolf Callaway's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer discretionary sector, averaging negative 8.5%.

Topgolf Callaway's free cash flow came in at $43.7 million in Q4, equivalent to a 4.9% margin. This result was great for the business as it flipped from cash flow negative in the same quarter last year to cash flow positive this quarter. Over the next year, analysts predict Topgolf Callaway will reach cash profitability. Their consensus estimates imply its LTM free cash flow margin of negative 2.7% will increase to positive 3.8%.

Key Takeaways from Topgolf Callaway's Q4 Results

It was good to see Topgolf Callaway beat analysts' revenue expectations this quarter, driven by better-than-expected performance at Topgolf. That stood out as a positive in these results. On the other hand, its revenue guidance for the next quarter missed and its operating margin fell short of Wall Street's estimates.

In terms of 2023 highlights, the company achieved positive free cash flow both on a consolidated basis and at Topgolf, and its Callaway brand finished the year with the #1 U.S. market share for clubs, woods, drivers, fairway woods, hybrids, and irons.

Despite the milestones Topgolf Callaway reached this year, this quarter's results could have been better. The company is down 1.2% on the results and currently trades at $13.39 per share.