ASX:CAT — Company Profile
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Sport is an increasingly big business with the price for broadcasting rights soaring across almost all sports around the world, player salaries have risen alongside this increase.
Take New York Yankees outfielder Giancarlo Stanton (I don't know if the Yankees use Catapult but I know they are an MLB approved vendor).
Stanton is due to be paid $285 million over the next 10 years with a further option for the Yankees to either pay him another $25 million or buy out his contract for $10 million. It's also important to note that in Major League Baseball, payments are guaranteed, meaning that Stanton will be paid this money regardless of performance or injury.
With such enormous sums being paid to professional sports people -- Stanton is an extreme case but these contracts do exist elsewhere, the minimum an MLB player can make is around half a million dollars per year --it is in the teams best interests to ensure they get the most value out of these players by keeping them at their healthiest to maintain peak performance which Catapult can help with and is arguably cheaper than the teams developing their own tech.
As more teams, leagues and stadiums are equipped to utilise Catapult, it should gain enough of a reputation to attract more in a quasi-network effect as well as allow it the ability to raise prices which should not only help it become profitable but increasingly so.
Is there room for it to grow? I believe it does. Catapult sizes the elite market at around 10,000 teams and between $450 and $550 million. Although I am not sure about the high point, I believe that the statistics-savvy American market (through major leagues, minor leagues and college/high school sporting teams) provides enormous potential for Catapult by itself before adding in teams and leagues in other developed countries.
Further, whilst Moneyball changed how baseball teams effectively scout and sign players and manage their team, other sports are still in early days of understanding how it can use data to build stronger, cheaper and more effective and successful teams.
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
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
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.
A small company trying to do too much, and thus fails.
Small company that's unable to attract the right level of talent, aka can't compete with the giants of the world. By talent I mean eveything from C-level all the way down to data scientists and engineers. No, Mark Zukerberg isn't leading Catapult! And no, the best data scientists have plenty of other great companies to work for.
Overestimated market opportunity.
Prosumer market starts taking off and then one of the wearable leaders comes and usurp the market. E.g., as in what happened to FitBit with Apple becoming the market leader in Smart Watches.
In other words, a lot needs to go right for Catapult to win big. But the various pieces are there to make this is possibility.
Another local startup in this space is Sports Performance Tracking. They're a venture backed business with a pretty similar model from the looks of things.
A quick google throws up a large number of competitors in the Sports Analytics industry although many of these names probably do something completely different to Catapult.
Current addressable market is approx 10,000 teams -- currently have 1500 teams They reckon their addressable market is around $450 - $550m, and growing See slides 31 & 33 of 2017 AGM presentation (see link)
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).
I think there is a real risk of this happening. This business won't scale as well as a software company for a few reasons (in my view). 1. Hardware devices are required and this is an area that is developing extremely rapidly. Medical sensors overlap this market (blood pressure, insulin levels, etc). Ongoing development will be required to be able to measure the 'next' thing. 2. Elite teams will require close, time consuming relationships. They will constantly be interested in additions and changes to get performance advantage. 3. In contrast software companies have virtually zero cost per sale and much less customer contact to determine product upgrades.
I am still in the early days of research on Catapult, a company I am interested in due to my thoughts in #BullCase.
One thought I have so far is that, whilst I believe a moat exists, I do not believe it to be strong. There are many other companies, including the leagues themselves, who work in this space all targetting their own little niche but with the potential to eat Catapults lunch as there are inevitably crossovers in technology as well as new and better ways of measuring performance are found, gain traction and adopted. I believe this will always start from America where teams are typically ahead of the curve due to the enormous amount of money involved.
For Catapult to protect its moat, it will need to entrench themselves into the teams and leagues they already have contracts with to make it difficult to move elsewhere. To grow its moat, it will need to continue to invest in innovation to stay at the cutting edge of performance technology in sports at a faster rate than competitors. This could be expensive but it is necessary.
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
Lost a remuneration vote.
Employee remuneration growth exceeds revenue growth.
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.
Following capital raise announced on 26th March, 2018, CAT will have 191.4m shares on issue.
Including ALL unlisted uptions (most are way out of the money) and 3.1m treasury shares, there are 203.2m shares on issue
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