Catapult Sports Ltd (CAT) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to Catapult's Earnings Conference Call for Financial Year Ended 31 March 2021. I'm Andrew Keys, and I'm moderating the session today. Please note the call is being recorded. Joining me is Catapult's CEO, Will Lopes, who is in Boston; and CFO, Hayden Stockdale, who is in Melbourne. In a moment, Will is going to provide some opening comments, then Will and Hayden will answer questions. [Operator Instructions] Good morning, Will. Over to you.

Fantastic. Thank you, Andrew. First, good morning and -- to everybody in Australia, and good -- or good evening, rather, to everybody here in the U.S. listening to this call. I think before I give a little bit of remarks, I think it's worth reminding that we did put out video update out last night in Australia, so that walks through our results for the year, I highly recommend watching that if possible. And also before I talk a little bit about the highlights of the year, I think it's worth just thanking everybody for dialing in to this call. I also like to extend a thank you to the Board who were very supportive to this very difficult year for their mentorship and strategic support. I'd like to thank our employees who have delivered absolutely fantastic results in this year. And most importantly, I'd like to thank our customers who continue to trust our service and our products, in ensuring that's helping them perform at their very best. Also one last reminder is that all the numbers I will talk about today here are for FY '21, looking at 12 months that ended in the end March 31, and we're doing that to give everybody a clear comparison on a year-over-year basis. So from our presentation yesterday, I think we're -- the headline of the day here for us is that growth momentum has shifted, and we could not be more pleased. And we saw that shift happen across a variety of metrics, but I think the most important metric that we saw was our key leading indicator, which is annualized contract value, which is ACV. And for the second half of the year, that number grew at 35% on an annualized basis. As a matter of fact, when we actually uncover that number a little bit, what we find is that Performance & Health, which is our largest vertical, grew around 55% in the fourth quarter alone, with all 3 regions, APAC, EMEA and the Americas, growing greater than 40% on an annualized basis. On any given circumstances, that is a fantastic growth story. But to do that in a COVID-impacted year, I think, was phenomenal. And to see the quick return in terms of growth has made us all very excited. We also saw the growth momentum shift not only in the leading indicator of ACV, but on our ability to cross-sell and our capabilities of cross-selling into multi-solution customers where our second half was up 41% in the year. And we also saw that -- sorry, and that growth momentum surprisingly did not impact our high levels of retention where ACV in the second half -- or ACV churn rather, on the second half of the year was 5.5% versus 6.8% in the first half. So all of that led to really our subscription revenue growing in the fourth quarter at 12.5%, and comprise -- and made up 87% of our total revenue. So it's a huge shift for us that our leading indicator is now driving our lagging indicator in terms of growth. So we're very excited about the momentum that we saw in the second half. For our fiscal year highlights of the year, our ACV grew 16.5% for the year, which is still a fantastic number, considering how difficult the first half of the year was. But even more impressively is that ACV growth in EMEA and in APAC was 57% and 34%, respectively. ACV in Performance & Health, again, our largest category, grew 32% for the entire fiscal year, despite the challenge that I think we faced in the first half. And customers with more than 1 solution grew 17% for the entire year. So again, 17% against that 41% of the second half, that really starts to show the momentum that we're seeing. I'm also really pleased to announce that our contribution margin continued to improve. We -- for the fiscal year, we reached 48.2% versus 47.1% last year as efficiencies continue to come in. And now our subscription revenue, which is core to our strategy for the year, was 79% of total revenue, up from 71% in fiscal year '20, really reflecting our strategic focus in delivering high-value SaaS revenue that we know have better margins over time. And I think important to note that this is now our second consecutive year in delivering positive and growing free cash flow, where we generated $4.9 million in FY '21, up 69% from FY '20, from where it was at $2.9 million on it. I think, as I presented in our video yesterday, this has been clearly a very difficult year, a year like no other year where sports have been impacted at a rate where probably since World War II, we haven't seen this level of disruption. We know we had difficulties in the first half of the year. But I think that the true testament of the quality of our products and our services really has been highlighted in the second half of this year with immense momentum coming out of Q4 as we exited FY '21. We're very excited, and we're very pleased, and I think even more so is that our level of pipeline going into FY '22 is very reflective of the momentum that we saw exiting it. With that, I'm going to pass it on to Andrew to open up for some questions.

Thanks, Will. [Operator Instructions] We do have a couple of raised hands. Firstly, going to Anthony Porto from Morgans.

Can you hear me there, Will?

Yes, I can, Anthony.

I guess if you look at ACV on total teams, so it implies ACV per team went up about 16% in the year, if you just do a simple average contracted value on a number of teams. So you added only 24 teams in the period but 36 multi-solution teams. I guess could we have a breakdown of kind of how much of that growth in ACV per team came from multi-solution teams versus signing up larger elite clubs in EMEA and APAC versus being smaller in NCAA versus, I guess, FX impact with the U.S. dollar reducing versus the euro, et cetera? And then I guess how much yield improvement at the actual comp level is all that in the mix?

That's a pretty deep math project you just asked me to complete for you.

Yes, I understood that.

No, that's quite all right. What I would say is our ACV growth has primarily been driven by new sales and upsells to existing customers. In new sales, it really was driven by expansion of that pipeline that I think -- what we saw was our sales pipeline for most of the year was very healthy, but it was delayed. In EMEA and in APAC, we started to see the closing of deals probably towards the Q3, early Q4 mark. In the U.S., we actually start to see that into Q4. And then the expansion of the pipeline has really accelerated since. So the bulk of the ACV was driven by new sales. The upsell really came from a lot of the technology changes we've made over the years, the insights, particularly in Performance & Health, and the improvement in technology in Performance & Health on it. In terms of the FX component to it, quite honestly, I think part of us making this change into U.S. dollar for a currency perspective is that 70% of our revenue is U.S. dollar-based. And so I actually stopped worrying about this constant currency FX impact into the metric. But I think -- I'm sure there was some tailwind on that. But the bulk of the ACV was really driven by new sales and the upsells on that, with I would say, probably, the indexing moving slightly stronger to the new sales versus upsell.

Okay. I guess...

Sorry, the 1 thing I'd add there is in terms of impact, it was definitely new sales than upsell. Cross-sell, whilst we had some fantastic successes there from an ACV perspective, was not really that significant, but we can talk a little bit more about the importance of the data points that we've picked up there more strategically. But from an ACV perspective, that wasn't that significant. And as Will pointed out, FX is something that gave us a little bit of a tailwind, obviously, with the U.S. dollar depreciating slightly. But given that 70%-plus of our revenues are in U.S. dollars, it's not really something we actively track.

And when you talk about upsell, is it just -- is it simply just moving on to the vector? Or are you able to -- are you starting to tier the product even within the vector range at the late level?

Yes. It's a mixture of improvement in hardware, and it's adding software components, particularly around the insights that I think we saw upsell on.

And just, I guess, 1 more for me. I came across a Playermaker the other day, the Arsene Wenger-backed GPS on the boots. I guess you guys have been -- that you're the vesting between the shoulder blade has been a constant feature since you started. Are there any plans to have more than 1 sensor on players to gain more data and insight? I guess, eventually, we -- I guess, originally 5, 6 years ago, we thought that potentially the trackers would be eventually meshed into the uniforms, et cetera. But I guess any development on that and the trackers and the sensors?

Yes. We're never fans of divulging our exact road map because we know that we don't have just investors, but sometimes we have competitors listening to these calls. What I would say, Anthony, is that we are very focused on making sure that we stay ahead of the curve in terms of insights around data that allows us to correlate performance data. And whether that includes expanding the data set of what we're measuring around the athlete from a body perspective, what we're measuring around the athlete in the training ground or outside of the training ground, all of the things are important to us. And why I keep constantly, I think, talking about the critical nature of our platform and the expansion of our data set is that we do believe that long-term future for us requires that we actually add more data set than we're just currently doing. And R&D in that is important, including going beyond the collection of the data where you -- in the torso.

All right. Next question is from Julian Mulcahy at Evans & Partners.

Will, I wonder if you can talk about your -- the step-up in investment that you could have alluded to in the outlook comments in terms of like how much of it's R&D, how much of it's acquisitions and if you can put any numbers around that would be really helpful.

Yes. I think we're definitely not at the position that we could give guidance in terms of our financials at this stage. I think what we are trying to make sure that our investor and our shareholder base understand is that as we start to see and gain confidence in our return of growth and the momentum that we're seeing right now, we want to make sure that we're optimizing the organization, both from an R&D perspective, sales perspective and beyond, that we're capturing that opportunity as quickly and as deeply as possible. And so we're going to use good judgment. And I think the reason we kind of flagged sort of the SaaS rule of 40 is that you typically want to make sure that your growth rate has a good balance around your EBITDA rate. And we're going to keep that in mind. But we definitely -- as we start to see more confidence -- sorry, we start to gain more confidence in terms of our growth rate, we definitely don't want to lose the opportunity of capturing the market faster than we're doing it.

Right. Okay. And in terms of like the growth in ACV in that final quarter, how much of that was on just people going from capital sales to prepaying subscriptions?

Yes. It's a really hypothetical question. It's hard to answer that because it's hard for us to understand, had we walked in with a deal that was all upfront versus a deal that is subscription, where would it landed. So we haven't really been tracking that so much. I think the way we've been looking at it is ACV is truly the leading indicator for us in terms of subscription growth and the fact that, that number has been going up even before we actually made a switch from capital to subscription, is a positive sign. So it's very hard to kind of give an answer around that hypothetical.

Right. Okay. And just on the reopening in sport, I mean the June quarter is typically your peak season and the U.S. sports are back, colleges are back. So can you kind of rank where your opportunities lie? Is it really NCAA that you see the best sort of bounce back in growth?

If you -- I think in North America, it's not just NCAA, I think it's NCAA and professional sports. I think in EMEA and APAC, it continues to be professional sports. Overall, I think what we saw in Q4 in terms of growth, particularly around Performance & Health, was that growth came from both professionals, collegiate and even academies. So I think we're feeling that the opportunity from a greenfield perspective hasn't ended and pretty bullish on all sectors there. I think the difference -- what I would say is the difference in North America, in particular, is that it's really been lagging in terms of opening that I think what we saw in APAC and what we saw in EMEA. And the very positive signs that I think we're seeing going into now this sales season is that most of the professional leagues have played or are playing a full season. They're now starting to play that season with fans in stadium. As a matter of fact, here in Massachusetts, within 3 days, we'll be able to have full baseball games with people in the stadium, which is fantastic. The NBA Playoffs are now bringing fans into the stadium. And then collegiate sports, which typically is very tied to students returning to schools because you can't differentiate a student athlete versus a nonstudent athlete, for the most part, have said students will be back in the fall, given the vaccination rate that's happening here. So I think the signs for us are very positive that we anticipate that I don't know if we'll be 100% pre-pandemic, but I think we're starting to get very close to it, at least from where we stand.

Okay. And just following from me. With the video business, you've got your sort of core funded product, which is feeling sort of steady, sort of slower growth. And all the growth seems to be on vision and you've had your really strong growth in that period. Can you just talk about how -- what sort of teams or regions that you've picked up with these increasing customers? I mean you called out the TAM in soccer alone of 150 and sort of how quickly you reckon you can penetrate those markets?

Yes. So I think there are a couple of things to point out from what we're seeing in Vision because I think it was a really great sign. I think the most positive sign there is that our ability to cross-sell into Performance & Health customers seems to be very, very strong. And particularly as we walked out of sort of the impact of COVID, that growth rate was, from a cross-sell perspective, well north of 50%. And that's on top of a base of Performance & Health customers who are growing in Q4 at a 55%, right? So I think that connection to us made us very excited. And so there's some cross-selling there that we definitely believe in. Vision, in particular, is a technology, and this is an area we really need to focus on, is not yet at the level that warrants high ACV because the technology is not yet top tier. And I think that's the area where we really need to focus on is how do we make that technology and accelerate our R&D to make it top tier. And I think I've talked about this quite a bit in the previous earnings, where contextualizing our performance data in video is important, making sure that the speed and the value proposition of speed to our customers and video is also important. And so that underlying platform is key to both of that. So I think, to us, it's from a growth strategy is if we could improve the technology within the video landscape around what we're trying to do with Vision and accelerate that, we know we can land customers, that will just give us the ability now to expand ACV. So the other part of your question is where are these cross-sells coming from? The reality is they're coming from all over the globe, but mainly outside of American football customers. So American football customers, we're very well penetrated with that Thunder solution. And so we've been basically working through different regions at different sales cycles to introduce Vision. And we've been able to do that within basketball clients, soccer clients, rugby clients across all 3 regions.

Next question is from Owen Humphries at Canaccord.

Maybe just start on the R&D. Now that you guys have passed free cash flow breakeven, your contribution margins are at 50-odd percent. The ACV is now growing quite nicely. Just talk me through the plans on your investment here. We're talking about higher sales and marketing, R&D. Is there new products you guys are looking to build and launch over the next 12 months? Just talk me through that reinvestment cycle.

Yes. At this stage, we're not giving any financial guidance for FY '22. I think the way we're looking at it is we feel really good about the growth trajectory. We want to make sure that growth trajectory continues in for the next couple of months or -- and I think we're getting really good signs on that front. And then I think as the confidence continues to grow, we definitely want to capture more of the growth, and that will definitely require some reevaluating of our R&D budget and making sure that we're investing in the right spot. But I think Catapult is in this fantastic position. We have negative working capital, our ability to really support strong R&D and strong increase in sales is unlike probably where we were 2 years ago, which I think is a privileged place to be in.

Okay. Good one. And just maybe I just noticed in one of the -- one of your releases around the revised strategy with Prosumer. Can you just provide maybe a bit more color on what you're thinking about that opportunity?

Yes. I think we'll definitely come to the market and present what we're thinking about it. I think what we've seen so far is that we're having really great unit economics while maintaining the same level of revenue that we had pretty much a lot in the previous year. And doing so in a year that the pandemic also impacted Prosumer sales. And so revenue stayed pretty steady. Our ability to lower cost to acquire is now down 90% from the previous period. And our EBITDA improved significantly in our design. So I think what we're seeing is the unit economics are working, which they were not working 2 years ago. And now it's really the question, how do we position this for a growth stage. And how do we do it smart, right? And I think if there's one thing I think I've been fond of saying is, this is the one area of the business that when I walked in here, I really had a lot of experience coming in. And I think typically, you want unit economics that work as an exit, but you also want unit economics that work on the entry from the marketing funnel, and I think we're seeing at both ends. But we're actually looking quite a bit forward to expressing that to our shareholders and the market of what we see now and I think how we're going to drive that forward in a few months from now.

Well, I might just ask 1 last question, if I may, just around the tactics and coaching business. I just noticed in the -- you have noted there that you expect accelerated investment to accelerate the growth in that business. Obviously, ACV was broadly flat throughout the period. Can you just maybe touch on what aspects needs investment? And how do you reaccelerate growth in that division?

Yes. So if we break that vertical into sort of the 2 core products we have, which is Thunder, deeply penetrated in American football, core to the daily workflows of customers every day, I think that product itself is probably going to -- has a good but not a high growth trajectory of probably 5% to 10% going forward. But I think the real opportunity is expanding outside of American Football and through other regions in sports. And that's where we've been trying to do with Vision. I think what we saw, as I recently mentioned, is that our ability to cross-sell that product into Performance & Health clients was really, really high, and it bounced back. It was impacted by COVID for sure. But then the moment that we started to see this momentum shift, the growth rate of customer base there was very high. So we're fairly confident that -- our ability to cross-sell. I think to your question, where do we see investment going is really improving the technology on that product, so that we could accelerate the ACV expansion. So our strategy was really land and then expand. And we're seeing that we can land, and now it's really the time to accelerate the opportunities to expand it. There's lots of things from an R&D perspective that I think we see in our road map, not only just making sure the quality of the technology accelerates and gets to levels that I think we'd consider top tier from a video product, and we know what top tier looks like. But it's also utilizing the advantage we have with performance data around wearables and bringing those 2 things together, which I think creates a completely different perspective to the coaching staff and how they're looking at video. So I think that's the area that we look at and see the more we could invest in and accelerate that opportunity forward, the faster we'll see ACV in that vertical grow.

No. And just very, very lastly here, just around are you seeing any supply disruption around sourcing chips for your hardware?

No, there's nothing that's impacting our current sales pipeline at this stage. I think it's something that -- what I would say is supply chain management, I think became forefront to us at the beginning of the pandemic. And so maybe because of that, we've been very -- a bit more methodical and making sure that we're managing it and provisioning chips in particular ahead of time at this point, but it's not impacting us in particular.

Yes. We have a very active line of sight on the entire supply chain for everything that we do. And there are a couple of components where the supply chain, we've seen some additional risk and some additional lengthening of that. And so we've just acted accordingly in terms of building out a little bit more inventory in those areas. But we operate a very conservative position when it comes to that supply. And I think we're in the fortunate position, as Will said, with a negative working capital structure that we can invest a little bit more in inventory than perhaps would otherwise be the case just to derisk that.

Okay. I've got -- we've got some questions that have come through Q&A. Chris Savage from Bell Potter has 2. The June quarter is typically your key sales quarter, but that didn't happen last year for obvious reasons. Are you seeing a more typical sales period happening this quarter? Or is it still too early?

Yes. And I think I would say is that the pipeline -- the sales pipeline we're seeing at this stage is very reflective of the growth momentum we saw in Q4. And I can tell you that's not the case for us going into this sales season last year. And so I think it's definitely momentum has shifted. It's definitely improved. We're very excited to see where it is. I think it's a little early to say, is it back to the pre-pandemic levels? I think there's some impact of that I think will continue to kind of linger on it, but it's not what it was the first half of last year.

Okay. And then the other question from Chris, which was talk through, Catapult remains in a strong cash position, is Catapult more inclined to use the cash for sales and marketing or for M&A?

Yes. I think I'll reiterate what I said a little while ago, I think as our confidence continues to increase with the growth rate that I think we saw in Q4, we will definitely make sure that where there are opportunities for us to accelerate acquisition of customers, improvement in ACV and beyond, I think, will be foolish for us to not optimize around those and go aggressive where needed. But I think at this stage, it's too early for us to give a good indication of financial year results for FY '22.

Yes. And maybe I'll just add to that. I mean, look, the 3 possible areas there, M&A, there's R&D and also what Chris asked about in terms of sales and marketing. What I'd point out in relation to sales and marketing is with the very high contribution margin that we have and also with the negative working capital balance that we operate with, that as we grow, depending on the trajectory of that growth, the sales and marketing effectively finances itself. Now obviously, that's not the case if you get super high growth. But I think the point there is that, that will not and should not consume much in terms of investment dollars out of the cash balance.

Thanks, Hayden. Rob Pizzichetta from Morgans has provided a question about ACV growth and the 10x mark up. He's asked, can you expand on why you're so confident? How can you feel so good about ACV being 10x what it is current levels?

Yes. Yes, I think we've done a pretty deep exercise around our TAM and our TAM opportunities on it. I think we're -- unfortunately, due the logistics of having a short fiscal year, doing 2 close up audits in a very successive periods, we have yet to line up the right time frame for an Investor Day. So I think we could talk about this a bit. But I think there are really 2 components that I think makes us very confident of where we're looking at. The first is we know for what we're seeing from a video perspective, I think what we just talked about tactics and coaching is that we know how big that market is. We have seen the indicator of how well we could do from a cross-selling perspective, and we know that we have a very strong road map on technology and from an R&D perspective, there is no reason why we couldn't do extremely well in that market, particularly given our position in Performance & Health. And so that is one of the major growth legs for us. The second is really that our ability to go from this very descriptive data set performance as we stand today and really becoming more sophisticated, not with just the current data that we pull in, but expanding the data sets that we have and really moving into a more predictive and prescriptive, we know the value of that insight expands well beyond the ACV that I think we are retaining from our customers today because the value of the insight is very, very valuable and very high. And so those 2 components alone, I think, makes us feel very confident about taking the current ACV that we stand with now and looking at multiples significantly higher than it is. And that's even before we get into the adjacent verticals around media, adjacent verticals around management and even going down market into the Prosumer environment.

Thank you, Will. There are no questions in Q&A and no raised hands at the moment. [Operator Instructions] And to reiterate something Will said earlier, if you haven't had a look at the results presentation video involving Will and Hayden, please do. They go through all the slides that have been lodged on the ASX. Right. No more questions, Will. So I'm going to throw to you for some closing remarks.

Thanks, Andrew. And thank you, everyone, for dialing in again and asking the questions. I think the parting words for me is that I -- it's -- when I joined Catapult, I think I always knew that the company had the foundation, particularly from its product sets, to really be a very high-growth company. I think what made me excited about the opportunity was that not only was the industry still at infancy and changing very rapidly, but that the opportunity for us to actually sophisticate the company from a scaling perspective, starting with the hiring of a great CFO that's here today as well as a significant level of management team, improving the governance and the Board and the rest of the organization, really expanding on how we think about SaaS metrics and really starting to focus on the right things and really getting this company back into a high-growth mode. I knew that if we could really start to put the pieces together, we would see really a fantastic result at the end of that. And I still feel like it's very early days for me here, but the fact that we're seeing ACV growth rate at the levels that we have in the past quarter, I think, really starts to show that the pieces are starting to come together. And the opportunity for us going forward only continues to grow from here. So it was an exciting second half for us, a very challenging year for us nonetheless, to say the least. But I think we couldn't be more excited and pleased that this is where we ended in a year where -- who could have predicted what would have happened with sports. So with that, again, thank you, everyone, and I wish everybody a great rest of morning and a great rest of night, depending on the part of the world you're listening in.

Thanks, Will.

Thank you.