More good momentum-related news from CAT this morning.

PWHL League Win for Video Solutions

• CAT announced a new partnership with the Professional Women’s Ice Hockey League (PWHL)
• Empowers all 6 PWHL teams with CAT’s cutting edge video solutions to enhance game strategies and performance analysis
• Catapult’s video solution will equip the league with a transformative toolset to elevate the speed, efficiency, and impact of video analysis.
• League-wide + Women Sport + Video - a good win on all these fronts

2024 - Year for advancement of technology in Women’s sports 

• Catapult recently surveyed over 700 industry experts and one of the pivotal trends set to reshape the sports technology landscape is the growth of technology in women’s sports. 
• According to Catapult’s recently published report “2024 Sports Trends & Predictions”1, 2024 is poised to be a landmark year for the advancement of technology in women’s sports with an overwhelming 80% of industry professionals anticipating a larger role of sports analytics in this domain. 

This makes sense given the prominence in women sports in 2023 - Matilda’s, AWFL, Women’s Cricket successes, particularly. CAT is very well positioned to capitalise on this.

Discl: Held IRL and in SM

Big tick for Will Lopes. Good for ongoing continuity, certainty and skin in the game.

Catapult Group International Ltd (ASX:CAT, ‘Catapult’ or the ‘Company’), the global leader in sports technology solutions for professional teams,is pleased to announce the appointment of Catapult Chief Executive Officer, Mr Will Lopes, as a member of the Board in addition to his role as CEO, effective today. 

"Since 2019, he has worked tirelessly to enhance Catapult's innovation pipeline, has executed the valuable SBG acquisition, and has accelerated the Company's transition to free cashflow without sacrificing growth. All shareholders should be very pleased with this appointment, and the signal it sends to the market about Will's ongoing commitment and belief in Catapult. We look forward to the continued success of the business under the strong leadership of Will and his executive team."

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