ASX:CAT — Company Profile
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Shares in Catapult have been on a steady decline since they hit their all-time peak of $4.29 back in 2016. That price was always crazy. And you still have to have very strong growth expectations to justify a price above $2. But I think the market has now swung too far the other way.
A quick recap.
At its peak, wearable unit volumes were growing very quickly and the business was fast approaching an inflection point, where surging sales would multiple to even stronger profit growth as the company passed breakeven.
But the business then made some big acquisitions in XOS (video analytics) and PlayerTek ("prosumer" wearables), raising a bunch of cash at $2.70. (It then raised more at $2 in 2017, and then at $1.10 at the start of this year.)
These acquisitions, particularly XOS, gave a step change to company revenues, but XOS has not grown since and -- importantly -- Catapult has significantly increased costs as it ramped up new product development and sales resources. This has deferred breakeven longer than what the market was hoping for, and with no evidence that these investments will bear a decent return, the market seems to be losing patience.
And I really get that. I would have preferred the business remain focused on the core wearables offering. There’s a real risk it’s trying to do too much at once, and these new investments could indeed fail.
But to my mind it's still too early to describe the investments in Video, AMS and Prosumer as failed. Although things may not be developing as quickly as hoped, these new offerings still offer serious potential and the strategic rationale for pursuing them are sound. We'll only start to get a sense of how successful these initiatives are over the current year, but to me the potential remains as good as it ever did.
Importantly, the core wearables division continues to surge ahead and there remains plenty of growth potential.
This emerging industry is growing extremely fast. Although Catapult may not end up owning this space, it's a hell of a long-term tailwind to have at your back.
In the short term, shares could easily fall lower. If Catapult doesn't post a positive underlying operating profit for FY18 when it reports next month, if second half growth is slower than expected, if Prosumer sales are underwhelming, or if cash burn increases, the market will likely be unforgiving.
But so long as the longer term growth potential remains on track, I'm a buyer at current levels.
Catapult is the global leader in wearable tracking technology for the elite sporting segment, with many of the world's premier sporting teams as clients.
A high percentage of revenue is recurring, customer retention is very high, and growth in it's core wearables offering has been extrenely strong to date. A large market opportunity remains (and is fast growing).
In recent times, the business has raised a bunch of capital and acquired a range of related companies, as well as bulking up its development and sales teams. That's acted to dilute shareholders and significantly increase costs; something that has materially deferred the company being cash-flow positive.
But longer term, it means that Catapult owns a more significant part of the sporting technology 'stack' -- giving it the potential to extract more value from existing customers. The move materially enhances the value proposition, allowing elite teams to better optimise for fitness, injury and results.
The company has the balance sheet to achieve profitability, and is structured in a way that will allow it to enjoy a good deal of operating levereage; as such, profits should grow strongly as it achieves scale.
The market has lost pateince in recent times, but the business is in a great position and has extremely attractive long-term prospects
Looks like the following nations are clients according to the catapult website:
You would assume that if one of these nations (each of which is in the round of 16) wins the workd cup that catapult will have a massive pr win. Other nations (and clubs) would likely take up the technilogy for fear of being left behind. Particularly if one of the lesser ranked teams (ie not brazil) go on to win.
Can potentially own the full stack of elite athelete management with:
- data from wearables
- athelete management system (AMS) acting as the database
- video analytics used in conjunction with AMS historical data + during game sensor captured data
- offer a suite of services: training, strategy, injury management
- offer data + analytics for media distribution/partnership with live broadcasts
- provide critical datasets for e-sports/games
I will continue to follow Catapult recognising the potential threats that it faces, notably
1) failure to secure sport-wide deals, Catapult needs to win one or more significant league-wide subscription deals
2) failure to engage with new teams and falling short of expectations
3) operating cost exceeding expectations. There is a need for better than average cost control
4) loss of a major client to a close rival.
Competitor StatSports steals contract for Brazil Football confederation, ahead of world cup.
Suggests that Catapult offering not as sticky as first thought, and not as superior to competition.
The company risks scaling poorly -- so far costs have risen as fast as revenues, so although the company's sales have been growing at a huge pace, there's been little to show for it (so far at least) from a shareholder perspective. There is a risk that that trend could continue as they focus on building out their producet offering (eg AMS, tactical analytics, Prosumer offerings).
1. Network effect. The more players on the system, the more valuable it is. That's because data history is important and players are frequently traded. Similarly, due to data commercialization deals, and league-wide contracts, newer client teams may have little choice with which system to go with. 2. Intangible assets in terms of the tracking algorithms, which have been developed over many years and are proprietary. Also in terms of Brand -- when you can claim to be servicing the biggest global teams, it gives great credibility to your brand 3. Some mild switching costs -- teams/coaches lose data (which is owned by Catapult) and would need to learn to work with a new system
Latest Quarterly & business update - July 2018
Full announcement here
Group revenue for FY18 expected at $76.8m -- 19% growth, but at the lower end of $76-81m guidance.
Group underlying EBITDA of $0.6m, and net operating cash flows of $1.5m -- the first full year of positive operating cash flow, and in-line with guidance.
Core wearables division continues to grow strongly, with both revenue and ARR up 29%
Video saw revenue up 9% and ARR up 5%
Prosumer, which only launched new PLAYR offering in June, saw revenue of $3.4m up from $1m pcp.
The market didnt embrace the news, with shares down slightly after release. We'll get more detail when audited FY results are out in August.
Catapult's FY18 3rd quarter Cash flows (full release here)
Note that the 3rd quarter is typically the slowest for Catapult, and the company has positive operating cash flows year to date of $4.9m.
Still, Catapult does capitalise product development activities. If you were to class these cash flows as operating (not that you necessarily should), the company would have negative operating cash flows year to date.
Playertek was acquired in August 2016 for $4.9m AUD. A further $3m invested since (source 2017 AGM preso)
Catapult sold 2524 units in Q4 of 2017, after it was re-launched following acquisition -- more than 1.8 times the sales of Q1 to Q3 combined.
Full re-launch of Catapult Branded product expected in Q4 2018
Will initially focus on Soccer market. Estimated market size of 3m players