Catapult has today given a trading update following the end of their first quarter (their financial year ends in March)

It looks like the company is (finally!) on the cusp of being free cash flow positive. And top line growth remains strong.

They don't usually do quarterly updates, and there's not a lot of detail, but you can read the full announcement here

A very solid result from Catapult. I wont repeat all the key figures (see here for the details), and @jcmleng and others have already provided a great overview. But some key highlights include:

ACV came in pretty much on my expectations at 20.2% YoY growth. H2 was the highest growth in ACV on record.

EBITDA was -US$11m, compared to my estimate of -US$15-20m.

Positive operating cash flow, and by a decent margin, showing a 40% improvement. They remain on track for +'ve FCF in FY24. Based on H2 cash outflows, the first half of FY23 would have been +'ve, as the business has reduced fixed costs by $US3.6m.

Churn at record low of 3.8%

Margins very much moving in the right direction -- variable costs now 56% of revenues compared with 68% in previous H2. Importantly, fixed costs were 47% of revenue (58% pcp) and CAT said "the absolute cost of G&A can now support the business at scale and is expected to rise modestly"

At an inflection point, with every incremental dollar of revenue expected to generate a 30% profit margin.

Video has just <3% penetration among the Pro segment. Lots of cross sell opportunity, and this product set has the highest gross margins (90%).

Existing Pro customers increased the spend by 6.8%

Of course, while companies love to focus on EBITDA, depreciation costs are very real (about $20m per year), and NPAT was -$US30m. Still this is a story of two halves -- NPAT for H2 was -US$8.9m thanks to a US$26m improvement in fixed costs and better gross margins.

Turnaround thesis is on track.

Held.

Very short 14 minute call as the detail of the preso is contained in a pre-recorded video that accompanied the results announcement.

Will reiterated the highlights of the FY23 performance

Then took 3 questions, as that was all that was forthcoming, responses to those questions:

• Wearables growth came from expansion in underperfoming regions - EMEA, US Collegiate, Latin America/APAC
• Confident of sustaining the 25% growth in wearables as (1) only ~2,400 professional teams are customers vs 20,000 professional teams (2) good greenfield growth in FY23, expect to maintain this pace of growth in the next 2-3 years (3) launching of 2 new products in FY23 which opens up new markets
• Vector T7 - opens up basketball which is under penetrated
• Vector Core - lighter version of Elite Wearables designed to help very large organisations support lower tier teams
• Video growth came from 2 areas:
• Legacy Video solution, 7% growth targeted at American Football and Ice Hockey, mostly from upsell and price increase
• SBG Video solution 27% growth, targeted at Soccer, Motosports etc - this is almost Wearable-like growth
• There is a transition plan for NFL from Legacy to SBG Video starting this season, fully transition in the next 1-2 seasons
• Strategy of “Land with Wearables, Upsell with Video” is working very well - there was a 9% growth for customers with 2 products - expecting this to rise to 30-50% (if I heard correctly) as they focus on upselling more video
• FY23 was the year that saw the operating leverage from the SAAS model kick in
• Focus in FY24 is to return to FCF positive - very confident of this occurring as EBITDA has been a good proxy for FCF

Will need to view the management pre-recording to further digest the results, but am liking what I am seeing thus far.

My view remains that the turnaround has already occurred since Will/Hayden rocked up. The FY23 results is the evidence of that turnaround working and in play - game on!

Have held CAT for quite some years now, averaging down along the way. Viewing the CAT CFO SM meeting was a good reason to re-review the position with CAT. I now better understand the moat and like very much, the "integrated wearables and video" strategy positioning, and the traction it seems to be getting. The Journey diagram made much more sense when verbalised and that helped crystallise further what CAT is all about.

My notes from the CFO meeting is at the bottom of this straw. In reviewing the 1HFY23 results and the recent announcements, the story of recent history/challenges, the changes and the traction since, all make sense to me.

Disc: Have initiated a SM position, held IRL, topped up IRL today.

INVESTMENT THESIS

• The CAT “turnaround” seems to be well under way and the fruits are now starting to be reaped
• Clear mission to give Customers a data-led advantage to win - the technology is only the means to achieving the end goal of Suggestive/Prescriptive Insights to enable Recommended Actions to be taken
• The company has pivoted sharply to its strategy of integrating wearables AND video to enable customers move up the maturity curve to improve analytics insights - from the key metrics, this is resonating with customers
• The moat:
• 2 flywheels in play (1) the competitive edge that the CAT ecosystem of wearables and video gives to teams creates its own ongoing demand - teams will need to get onboard to firstly neutralise the CAT advantage, then to win with/from it (2) the constant innovation required to improve the technology is not only internal to CAT but is also driven by leagues/teams who are prepared to experiment and be leading edge - these technology improvements can be exported to other leagues/sport, which provides further league-level demand. Both these flywheels complement each other, putting further distance with CAT’s competitors.
• CAT is 5x the size of its competitors - it has huge first mover advantage
• The hardware and software technology, the algorithms - these are contractually protected with CAT having the right to veto any monetisation of the data to 3rd parties created by the CAT ecosystem
• CAT appears to be the first to market to aggressively focus on integrating wearables and video into a single platform, which becomes a success-critical tool and an integral part of how a sports team actually functions on a day-to-day basis
• Continued innovation of both software, hardware, algorithms etc - the release of the Vector T7 wearable device in Mar 2023 is a good example
• The positive Up-Sell/Cross statistics in the 1HFY23 results and in Hayden’s comments below provide good confidence that CAT’s strategy is resonating with their Customers - many paths to create ACV growth (video to wearables, wearables to video, expansion of sport codes within a customer, expansion of use of CAT to lower tiers of a team etc)
• There is laser focus on getting to free cash flow by FY24, the Company is clear on what drives cash flow burn, have identified and pulled the levers to reign in cash flow burn in the past 6M - hard decisions have been taken and the hard yards appear to behind the Company
• There is very clear written language that CAT does not intend to tap the market for equity capital - debt facilities are in place to cover any shortfalls
• All key metrics of Revenue, ACV, ACV Churn, Future Revenue Under Contract, Product Integration Cross Sell/Up sell have shown good upward trajectory
• Business is mostly recession proof - CAT’s products are a small part of an Elite team’s budget, sport and training must still continue even during complete lockdown periods during Covid

Risks

• Poor execution of the strategy resulting in inconsistent trends in the key revenue/customer/ACV statistics - LOW, given current trajectory, but this can change
• Appearance of a credible competitor, which has similar scale - LOW, unlikely in the intermediate term given the size of Cat, relative to its competitors and the flywheels in play
• Executive churn that causes a distraction, change in strategy etc - MEDIUM, Hayden Stockdale, the CFO has left, so this is a distinct possibility
• Cash flow burn that goes against the plan to free cash flow and there is no immediately apparent fix to address the cause - if this requires capital raising (again), this would be thesis breaking - LOW, given clear articulation of cash flow burn drivers, work already done to reduce excess costs, debt facility
• An acquisition that does not enhance or accelerate the clearly articulated go-to-market strategy - LOW, can’t see an acquisition being contemplated at this stage given the focus on getting to cash flow positive, the disruption this will cause to the execution of the strategy

Notes of Strawman Meeting with Catapult CFO Hayden Stockdale on 31 January 2023

12M COMPARISON

• CFO and CEOs Will Lopes entered the business ~3 years ago and have transformed CAT completely
• Vision is intact, execution against that vision was the focus
• Vision is to be the “Salesforce of Sport” - own the sport and software platform/technology to enable teams, coaches, athletes and leagues to maximise their performance
• Focus has been on growing the platform:
• Historically, this has been about the wearable devices - going very well, about 5x the size of the competitors
• Under penetrated eg. NBA Basketball - only 3 teams are customers but of these 3 teams, 2 are CAT customers
• Growth rates ~30%
• Video offering has low growth - 5-6% - how to bring this to be on par with the growth rate of wearable's
• SBG acquisition 1.5 years ago was intended to expedite the growth of video
• Signs are very positive, buoyant

JOURNEY OF IMPROVING SPORTS ANALYTICS INSIGHTS

• Stage 1, Descriptive Raw Data, provides the basic What, When, Where, Who - wearables gives these basic data of what has happened
• Market today is mostly in Stage 2 - Descriptive Data Analytics - draw actions from inferences
• Currently, use visual interpretation of video to make informed conclusions of what happened
• CAT was first in the market ~1 Year ago to bring together wearable and video data
• Ability to tell coaches why certain things happened in minute detail vs the benchmark of what a player can achieve - this takes the guesswork out of the analysis as objective data is used vs subjective inferences
• Enables getting to predictive mode as (1) have data-driven understanding of the athlete and (2) the data to predict the likely performance outcome for a single athlete in a single game
• This in then run through simulation to provide a recommendation on best team, best players etc - moving the capability to Suggestive, Predictive insights and recommended actions - can choose players likely to achieve the required outcomes
• Key to achieving this advanced level of insights is the tight integration between wearables and video offerings and have them work together in a single, seamless platform

WEARABLES

• 5x larger than competitors - difficult for competitors to beat as (1) CAT is strategically critical to the team (2) have more data from more athletes where data insights is critical
• 20,000 teams market - have 3,000 to 3,500 of these teams - expect to penetrate further
• Confident to win on a day-to-day basis
• Wearables is the holy grail and cash cow - will not compromise this dominant position

VIDEO

• Challenge whether CAT can grow here
• To attain the deep insights, need to marry up wearable data to video, then sell video

CASHFLOW AND CASH SPEND METRICS

• Still significant $ invested in wearables and investing heavily in video
• Can scale back investment in videos, teams and peripheral products
• Margins are high - Video ~90%, Wearables ~80% - can grow EBITDA at margins of 40%
• Key metrics - slice of market and growth - invest in markets which are big enough
• Cash flow positive target will be for the full financial year, given the seasonality of the business (see below)

SALES APPROACH, PRICING

• New customers, the key priority, especially customers who do not have wearables
• Then cross-sell video into wearable customers - integration of both these products is the driver
• Up sell can come in multiple ways (1) expand from elite team to entire teams (2) mid-tier product, sell top tier products (3) in Universities, start with 1 sport, then expand to different sports
• Key Sales Metrics: (1) addition of new customers (2) addition of new logo’s and (3) whether can convert wearable customer into a video customer
• Pricing Power - well aware that CAT has pricing power but have not pulled the trigger
• Philosophy - want to overwhelm the customer customers with products and the value that it adds before raising prices
• Competitors in video raised prices during Covid - clear visible pushback from Customers who looked to move away
• Will pull the pricing trigger for existing customers in the “right way” - working with the customer, manage expectations, arming the sales team with the right tools etc
• For new customers, contracts now include automatic renewal and annual price increases built in

TREATMENT OF REVENUE

• Hardware and Software are treated as a “single performance obligation” revenue as one does not work without the other
• As contracts are now fully subscription, revenue and costs are recorded monthly, over the life of the contract
• Cost of sales is taken up upfront - this is a conservative approach
• When a product is sold to the customer, the hardware component is amortised in the balance sheet from inventory through the life of the contract instead of a lump sum hit to COGS
• Hardware devices which break are replaced as part of the subscription contract - extent and rate of device breakage varies from sport-to-sport, depending on the extent of player-to-player contact, the higher the contact, the higher the incidence of device breakage

SUPPLY CHAIN ISSUES

• Impacted about a year ago - price of hardware went up as much as 20% but have since come back to normal - these price increases have been called out in the results when they occurred

BUSINESS CYCLE

• CAT is a very seasonal business
• Sports teams operate on a 12M basis - On Season and Off Season - buying only occurs in the Off Season
• Based on this, cannot look at business performance on a month-by-month basis but rather to assess performance on a rolling 12M basis
• World Elite sport is counter-cyclical and essentially recession-proof:
• recessionary pressures directly impact the bottom tier teams which face budgeting pressures
• during Covid, elite teams were hurting very badly - not playing, no revenue etc, but were (1) well funded (2) the CAT subscription was only a very small portion of the overall budget and (3) still needed athletes to train - very little impact
• Junior teams were badly impacted

COMMENTARY ON CAPITAL

• SBG deal in July 2021 was a critical deal - quality of software, new customers and the ability to accelerate video - very confident this will be a company-making deal
• XOS deal in 2016 was a”stroke of genius” - enabled wearable into video, the challenge was that execution and implementation of the acquisition was executed poorly
• Smaller acquisitions were more of a distraction than value adding
• Market is “dislocated” - feeling that the company is much, much more than the current share price
• Have $6m debt facility, recently increased to $20m at better rates - likely to use this facility foe a few months to cover the cash flow effects of the seasonal nature of the revenue
• Have good support from their existing bankers for additional facilities - no need for this other than for “signalling” purposes

DATA OWNERSHIP

• Data is owned by the team’s
• CAT has the right to use the data to improve its algorithms on an anonymous basis
• Teams do not have the right to monetise the data without CAT consent - this is to ensure that monetisation is not used in a way which competes with CAT
• Data is not interesting to a 3rd party unless it is for the whole league - teams are more interested in winning, it is the leagues that are more interested in the data as they care about eyeballs, fan engagement etc

NATURE OF BUSINESS AT SCALE

• Assuming EBITDA of ~40%
• CAT expects to continue to invest in the mid-teens % in R&D, so EBIT will be around ~25%, post tax NPAT will be 17-18%

COMMENTS ON XFL LEAGUE ANNOUNCEMENT

• ACV of $0.7-$0.8m, a sizeable deal
• XFL is a disruptor in wanting to be a data-driven league through technology
• One of the key reasons why sports technology seem to come out of Australia is the willingness in Australia to experiment with different things - this is a good environment for CAT to grow in - try the new technology locally, then take to the rest of the world eg. Telstra Tracker, which is a world leading capability - XFL is heading towards that with data on scoreboards, fan applications etc.

WHAT MARKET MISUNDERSTANDS ABOUT CAT

• Lots of loyalty from existing shareholders who understand the technology and the business
• Struggling to broaden the shareholder audience beyond the current shareholders and finding a way to get new shareholders to look at CAT again
• CAT has made some hard decisions - move entirely to subscription revenue, timing of capital raises
• Cost of Sales is still recorded upfront even though revenue is spread across contract lifespan - have not seen this flow through to the results yet
• Once 20%+ ACV growth numbers translate into revenue growth, expect to get broader support from shareholders

Hi totally hear you @PeregrineCapital

Part of the problem here has been a lot of moving of the goal posts. First it was talk of EBITDA positive, then operating cash flow positive, and now Free cash flow positive.

I mean, great, all are worthy aspirations. And I do think FCF is a better metric to focus on, especially as operating cash flow can be made to look a lot better by marking some expenditure as investing cash flows. It's certainly much better than EBITDA.

But it's understandable that investors could look at this latest announcement with some cynicism.

To be fair, covid threw a bit of a spanner in the works. And I'll also allow for the fact that it would take some time to unwind previous management's largesse (although covid would have been the perfect cover). And it's not always a bad thing to spend heavily when there's a sound strategic rational.

But to my mind if there was any fat to trim -- especially that which wouldn't impact growth, which is what they are claiming -- then why wasn't this made a priority before!? Cost management is something that should always be in focus.

Moreover, they added costs in the recent year as part of an accelerated investment in sales, product and operations. Are we to surmise that these are the same costs that are now being unwound? Or was there just loads of additional expense elsewhere?

The announcement was also a little vague in exactly what expenses and in what areas would be cut, but I assume its prosumer mainly.

Also, reading between the lines, what is it they are seeing on the business' front lines that has prompted this focus on costs? Macro conditions were mentioned, but again that's pretty vague.

Anyway, the market has welcomed the news, and I'm not going to argue against the intent. If they can sustain 20% ACV growth and pivot to FCF +'ve I dare say we'll see a re-rate. But let's see how it goes.

I maintain my position because, despite some hairs, I just think shares are cheap. (they are on something like 2x ACV)

ASX announcement here

CAT will be cashflow positive........in FY24.

The most frightening implication of this announcement is that there was some possibility that they wouldn't be FCF positive in FY24. Are management tone deaf?

The cashflows are too far out for my liking and I have very little faith in my ability to forecast what those cashflows might be. Really hard to tell what "capex" is actually capex IMO.

Does someone still have a differing view on CAT?

Shares now down 25% in the 4 trading sessions since FY22 results were released. As I said at the time, there was a few factors that weren't great, but c'mon -- that's pretty harsh! Talk about an unforgiving market.

If you want a little more "colour" on the released results preso, CEO Will Lopes and CFO Hayden Stockdale talk through them here:

https://www.youtube.com/watch?v=pSePDHiyyVE

Worth watching just to see how management are pitching the story.

While it's easy (OK, very easy) to be a little jaded, there is still a pretty good story here...i think.

It is worth remembering that Will has only been on board for 2 years -- he inherited a bloated company with a poorly coordinated product set, flailing strategy and was just about to bear the full brunt of a pandemic which shut down sporting events around the globe.

They just delivered 32% ACV growth and are expecting 20-25% growth in the current year. And with most revenue now subscription based (a key goal of Wills when he took over), that ACV growth should largely translate to revenue growth. They still have <10% market penetration and are the current industry leader with deals across the biggest teams and leagues in the world (and a big x-sell potential there too, especially with a fully fledged T&C offering that has demonstrated strong growth already in ANZ). The goal of US$400m in ACV was again reiterated, which is 6-7x greater than present.

OK, costs did blow out, and you don't want to ignore that, especially given the company's history of poor cost control, but there are some genuine one-offs and non-cash items there due to the SBG acquisition, the balance sheet is very strong (US$26m), they expect to be operating CF/EBITDA positive going forward, and all growth investment is conforming to the rule of 40.

The hint of weaker margins due to higher wages, COGS and supply chain issues is probably a factor for the market too, although this isn't an issue specific to Catapult. It was good to see gross profit and contribution profit grow faster than revenue. So at least on that front some scale advantages are emerging.

So, it's not like this has no hairs on it. Still, in AUD terms, the business is sitting at around $90m of confirmed revenue for the current year. Again, that's on track to grow 20-25% in FY23, and grow to over AUD$550m worth in the coming years. Importantly, and again you need to take management at their word here, the business is self funded to achieve these goals.

On a fully diluted basis, the market says this company is worth less than $210m.

For my sins, I think the market is wrong. I'm continuing to hold.

Have been busy for most of the day, but when I skimmed Catapult's results this morning my first instinct was "the market should like this".

But, with shares ending down 10%, it seems I was way off base!

So let's dig in and see why that might be.

Of course, the company was keen to put its best foot forward. And it did have some genuine positives to report.

• The transition to a subscription model is largely complete, with subscriptions now 92% of total revenues (and 98% for the Professional Performance & Health segment)
• ACV grew 32% (double FY20) and was 51% higher in the all important Americas market.
• Average Annualised Contract Value (ACV) per customer was up 4.2%
• Customers that contribute to ACV were up 16.3%
• P&H churn remained low at 3.5%
• MatchTracker and Vector integration ahead of schedule, with Tactics and Coaching growth of 29.7% in APC during the key selling season.
• Customers with more than one solution grew 27%, showing good success with cross selling, and they expect this to accelerate with the integration of MatchTracker and Vector
• Positive operating cash flow (just, and with some caveats)
• US$26m in cash on balance sheet and growth spend fully funded.
• Strong prosumer ACV growth (but off a very small base)

Aside: The transition to SaaS always has a bit of a drag on revenue, as revenue that was previous booked upfront is now recognised over a much longer period. The advantage is that it provides for smoother and more consistent cash flow and revenue, and (ideally) makes for an easier purchase decision by the customer as it's a smaller ongoing cost, rather than a large one off cost. It transitions expenditure from Capex to Opex. Now that this transition is behind them, growth in revenue should more closely match growth in ACV.

The best part of Catapult has (to my mind) always been the Pro P&H segment, and here we saw 32% ACV growth and they have still only captured <10% of the available market opportunity. I've said it before, but i wish they had remained focused purely on this instead of trying to expand into too many other areas, too quickly.

At any rate, they did what they did, and while that has seen higher costs and investment spend, they do have (finally, i hope) a market ready product in Tactics & Coaching (T&C) and a solid P&H customer base from which to cross-sell from.

Indeed, the T&C segment has a large addressable market for which they have only captured less than 2.5%. The customer spend here is higher than for P&H and enjoys 90% gross margins and even lower churn (1.5%). The APAC region was the only market in which the newly integrated product was able to be sold (due to the different sales cycles in different geographies), and here T&C ACV was almost 30% higher, compared to just 7.2% and 3% in the Americas and EMEA, respectively. It bodes well for future growth when they start to present this to the northern hemisphere markets.

The company is targeting long-term ACV of >US$400m, compared to US$63.9 at present.

If we just take expanded penetration of P&H, T&C and increased customer spend, that takes us to just shy of US$300m. The rest is inorganic (acquisitions) and prosumer -- and i'm not really keen to put much weight on that. Still, it's a decent uplift if it can be achieved.

Ok, so all of that seems pretty good. Catapult is now a more pure play subscription business with a fully fledged market ready product set and very strong ACV growth with a very large market opportunity still ahead -- and they remain the largest player in this space.

And you get exposure to all of this for 2.6x ACV or 2.2x revenue. That just doesn't seem demanding at all -- especially with the company guiding for FY23 ACV growth of 20-25%. AND, management said they were fully funded to achieve growth ambitions (ie. no more capital raises)

So, what's the market worried about?

Well, mainly, the company is still not profitable. When they hell are we going to see some scale advantages start to emerge? Surely not for a while if they keep increasing the expenses -- in fact, we saw cost increases across sales, product and operations. I'm all for spending money with a good ROI, but c'mon guys! I think we've been patient, but when are we going to see the results? Show me the money!!

The NPAT was negative US$32m

EBITDA negative US$5.8m, even on an underlying basis

Positive operating cash seems largely a result of shifting a lot of expense to the investing section (capitalised development COGS costs). Free Cash Flow was negative US$17.9m

I do think the new CEO is far more targeted in the investment spend, but I was hoping to see even more restraint. Especially in this new market environment which is far less tolerant of cash burning operations.

So i do get the market's reaction now that I've had a chance to dig into the details. But, call me an optimists, the potential here remains very attractive:

Catapult is a market leader in a large and resilient industry undergoing structural change (digitisation). There is genuine sales traction, and that's growing at very strong rates. The revenue is very sticky and with attractive gross margins. It is also, apparently, well funded and on track to achieve its ambitions without the further help of shareholders.

Sadly, until they achieve sustainable free cash flow, while still maintaining growth, the market is likely to remain sceptical. And fair enough.

If it wasn't for the very solid ACV growth, and expectations for that to continue, I'd be out of here. But, for better or worse, i'm prepared to stay put for now. I think it's called the endowment effect...

Heard a report on ABC AM this morning about the data collected from athletes, and the concerns over privacy of player data (eg how it could be used by betting agencies).

https://www.abc.net.au/radio/programs/am/first-time-voters-weigh-election-choice/13830338 (start at 16:07)

What caught my ear, however, was the claim that this data doesn't actually deliver on its claims to "reduce injury and improve performance"

I managed to track down the discussion paper referenced in the story, which can be found here. It's a long read, and the focus is really on the privacy angle. It doesn't elaborate too much on the effectiveness of this data -- and where it does it seems to be on specific metrics.

I don't see this as a thesis buster, and my thinking is that at the elite level clubs will go for anything even if there's a small chance of providing an edge. But I wanted to share in case others have a different perspective.

Catapult today announced it had signed the German Football Association (DFB-Akadamie) as a new customer, with a multi-year, multi-solution contract.

It covers all 15 teams across womens and mens national teams for the video solution, and for 10 teams with the wearable product.

No financials given, and the announcement wasn't marked as price sensitive, so likely not material in and of itself. But hopefully acts as a useful reference customer given the German FA is one of the more significant sports federations globally.

ASX announcement here

Todays announcement is further evidence that shareholders just want to see the proof in the pudding.

The frequent roll out of announcements that mention very little by the way of numbers are wearing very thin.

The only thing that will satisfy the market is some solid numbers.

Catapult has signed a multi-year deal with Roush Fenway Racing to use its recently acquired Racewatch solution.

No financials given, and in and of itself the deal is likely not likely material in the overall scheme of things -- but it's an encourage first step into a large and (hopefully lucrative) new vertical.

Roush Fenway Racing is a major player in NASCAR and should serve as a potent reference client for future sales.

Doesn't change the thesis for me, but good to see some movements on this front after their acquisition of SBG Sports a few months back.

Shake 'n Bake ;)