Catapult Sports Ltd (CAT) Earnings Call Transcript & Summary

Hello, and welcome to Catapult's earnings conference call for the first half of fiscal 2022. I'm Andrew Keys, and I am facilitating today's call. Catapult's CEO, Will Lopes; and CFO, Hayden Stockdale, are on today's call. Will and Hayden have prerecorded a video, which goes through the results presentation on a slide-by-slide basis. We encourage you to watch the video for a complete context on the results. There is a link to the video at the bottom of the result's press release lodged with the ASX, and it's also accessible through the Investor News section on the Catapult website. I'll now hand over to Will, who is in Boston, before we take your questions. Good afternoon, Will.

Good afternoon, Andrew, and thank you. And thank you for all who are joining us today, as well as good morning for those of you in Australia and as well as good afternoon for all of those of you here in North America. So, I'll do just maybe perhaps a quick recap of this half year results, and then I'll hand it back to Hayden -- sorry, Andrew for some Q&A on it. But I think the -- first, I think the theme for us here at Catapult, I think, is really that Catapult has emerged stronger from the pandemic, and global growth is accelerating and reaching record levels. Our ACV is up 43% with all regions performing really, really strongly. Our Performance & Health vertical had a full organic growth of 40% year-on-year. Tactics & Coaching grew 57%, and that was supported by the acquisition of SBG. Our subscription revenue accelerated dramatically to 29%, up from 3.3% in fiscal year '21, following really 12 months of strong ACV growth. And that, to us, was really pleasing because subscription revenue is the lagging metric to our leading indicator of ACV. And then our underlying EBITDA remained positive at $1 million, despite the increase of R&D and our transition to a full SaaS model. Another theme for us here is that we have transitioned to a global SaaS business. Subscription revenue now stands at 86% of total revenue, up from 79% in fiscal year '21. Our gross margin of 73.5% is strong and has room to improve over the coming years. Annual ACV churn fell down to 4.1% at a record -- near record lows. And our high ACV growth will drive future years of subscription revenue, which we're very excited by the ACV growth that we're seeing. Another theme, I think, from this half year results is that we are the leading vertical SaaS solution for elite athletes globally. We're seeing strong global growth across all regions, specifically great results in North America this past half. Strong growth with our performance in health vertical, which is driving really our land strategy. The SBG's integration and growth is well ahead of plan and improving our expand strategy and supporting ACV expansion going forward. And we've had strong growth in multi-vertical customers, up 50% year-on-year, as we've successfully driven new sales, particularly in that Performance & Health vertical customer base. And I would say the last sort of theme here is that we're fully funded with $42 million cash at the bank to continue to accelerate our growth initiatives. And if you had a chance to watch our Investor Day, that bodes really well because what we're trying to do is grow into that very large and sizable TAM of over $2 billion in professional and $40 billion [ of ] consumer. And so we see the potential, given these half year results, to really be the foundation of not only near-term growth but also long-term growth. So we're -- I couldn't be more pleased with how this half had ended. I think I shared, I think, in the last half year results that I came to Catapult to really drive significant growth, turn and transform this business to a full SaaS model. And I think at least in this half, we're very excited that we're doing both of those in an incredible manner. So with that, I'm going to hand it back to Andrew, so he could kick off sort of our Q&A session.

Thank you, Will. For attendees, if you'd like to ask a question, the choice is yours. Pop it into the Q&A function, and I'll facilitate that. Or alternatively, please raise your hand in Zoom, and we'll bring you into the call. We've Michael Aspinall from Jefferies.

That should be -- it should have worked. Is that coming to you, guys?

You're on. Yes.

Yes, cool. Just a few from me, mostly focused on kind of sales. Firstly, can you just walk through what you're seeing at the various stages of the sales hopper and pipeline?

Yes. What do you mean by that? What are we seeing just in terms of strength or...

Just in terms of, say, the number of teams you've got at the top of the funnel for the kind of the sales pipeline and how you see them progressing kind of down their final through to coming to customers.

Yes. So our pipeline actually continues to remain strong. And I think what -- part of maybe that outlook same, it was -- when we look at the pipeline as it stands today, we feel pretty confident that our ACV growth will continue at this sort of strong trajectory going forward.

Okay. And maybe another one then, historically, Northern Hemisphere summer has been the key selling season. Does that change at all with SBG? And how should we think about kind of the seasonality of new customer additions in the second half, for ACV growth in the second half?

Yes, it's a good question. I don't know if it changes the seasonality of sales in terms of teams, right? Reality is that we typically go out and are dealing with customers doing their off-season and all the way to typically pre-season. What we are starting to do in the Southern Hemisphere is actually start to introduce a lot of the SBG product suite and not only bring that along with our Performance, but we're feeling -- Performance technology. We're feeling really good at that integration and how well it's going at this early stage. So I think we'll learn from the Southern Hemisphere sales cycle right now. And I think what we're doing at this stage, and maybe this goes back to maybe -- I think maybe what you're trying to ask, Michael, is that we are using this period to ensure that our pipeline in terms of SBG product suites as well as the performance vertical is getting filled appropriately, particularly in the Northern Hemisphere. So we are having conversations, for example, with American football teams when we get their time because they're all in season right now. We're having conversations here with baseball teams, hockey teams, same thing with European soccer. We've got a conference actually just last week, where we actually started to show how we're going to integrate performance data into the product suite of SBG, which was very well received by our customers there. So we are building that pipeline. And what we see today feels -- it feels pretty good.

And the one thing to add to that is motorsport, which -- where the global selling season is our second half.

Okay. So it sounds like plenty of opportunities there to grow ACV in the second half as well?

Yes, we're finally pretty good about that.

Yes.

Okay. And then just in terms of the process of integrating, you kind of touched on it then. You're integrating SBG into kind of the existing CAT sales discussions or the sales force. What kind of work have you done there to enable those guys who are talking to customers to sell that product?

Yes. It's still early days for us. I think what we've done is basically utilize what was this pretty small sales force out of SBG to become sort of the trainers inside the organization. They've been actually having quite a good amount of discussions with our existing sales team that was here at Catapult to basically get them ready to have conversations of the product suite and then specifically, how do you use that product suite and supports that -- in some cases, we don't even support yet, right? So for example, we've utilized that team to train around basketball, as you saw from the deal we did in APAC. In some cases, they've been part of those discussions early days, so that you can kind of see how the interaction goes. We've done the same here with American football. We've done the same with some NCAA university clients. And then we've integrated a lot of those conversations with the European soccer teams because they're in the same time zone. So we're feeling -- and obviously, the other component to it is, as a product marketing section, we've now actually started to pull in all of the SBG product suite and sort of the value proposition that we bring with it and included in our product marketing components, whether it's a brochure, whether it's the website, to basically get fully integrated into it.

Okay. Great. Last one for me. Just -- can you just give us a bit of context around what you've achieved on the R&D side of moving towards that data fluency kind of goal you have?

Yes. Yes. So I think there's been a couple of things. One, I think it's really been the first, and I think probably the most important thing for us, was to integrate the data that we have for performance analytics into video analysis. And so we're actually going into beta fairly soon with the integration of that. That was what we previewed in the conference that we did in the U.K. last week. We anticipate that product will come live before the end of the year. So we're feeling pretty good about that. The second area of data fluency is really making sure that we're pulling data into the cloud and really starting to work hard on that. We've invested actually quite a bit in terms of hiring the right engineering team. We've added a new CTO in the last six months. And just most recently, we've added another chief architect here in Boston to kind of help drive a lot of that. And we anticipate that, that integration of having data in the cloud at a significant scale is something that we have a clear line of sight for basically the sales season of next -- here in the Northern Hemisphere.

Okay. Next question comes from Julian Mulcahy or Evans & Partners.

Just a few for me. Firstly, just on the reported EBITDA, you cited that it was the less-than-expected negative impact from the sort of investment brand. Can you kind of explain why it was less than expected? Is it just a timing thing? Or you actually did better than you were hoping for?

Sorry, Julian. Listen, I didn't catch the full question. Less than expected because of the...

Because of the increased investment.

Okay. Yes, it was, I think, twofold. One, the trajectory of the investment that we made in -- we effectively only had three months of the year to really do that from the date of raising the funds. And it probably took a little bit longer to put the foot down on the accelerator there than we had expected. But just also secondly, more generally, I think the operations of the business performed more strongly. We're just a little more efficient than what we had expected to be.

Right. So with that leaves the sort of $25 million sort of ramp-up you've called out, what's the sort of timing? Is it do we see -- is it the big increase this half? Or does it extend evenly over the next sort of 18 months?

No, I think you'll find it doesn't get all added on evenly and straight away. There is a ramp-up to it. Absolutely. And yes, it probably took slightly longer in those first few months to sort of get to where we wanted to in that trajectory. But look, the overall program we anticipated was going to be circa two years, and it's still circa two years.

Right. Okay. And with the change in capital sales from wearables from capital to subscription, do you find that you kept all the teams that would have been potentially capital sales customers, they were able to take -- happy to take subscriptions?

Absolutely.

Yes. I think we're not finding -- I would say, there is nothing here so far that we're seeing where subscription sales has resulted in a loss opportunity for us.

Right. Okay. And if you had to like improve your sort of -- or sharpen your pricing on bundling to keep those customers?

No, [ definitely ] not, yes.

I think the impetus behind changing the financial year-end was to avoid certain discounting behavior. And we were very disciplined in what we did around 30 June and also around 30 September.

Right. Okay. And so the capital sales, so there's essentially XOS hardware is do we just see that as that's the ongoing level, where it is now? And your increase in subscriptions is what drives that growth which is 95% of revenue?

Yes. Yes. So I think the hardware sales that we still have left over is typically hardware for XOS for the Thunder analysis. There's small stuff that comes in related to device replacement, in some cases, new vests and so on, but it tends to be fairly small. But I think our focus has been on growing that ACV number, which is now driving subscription revenue and particularly the sort of the high growth that we saw. And we anticipate that as that continues to grow, the percentage of hardware revenue that will remain within our P&L will diminish.

Right. Okay. And with that, it's really good to see the cross-sell continue to improve, and you're up to sort of 9% now. What -- when do you think it goes vertical? Is it -- was -- I mean SBG has clearly been a game change of products. So is it -- do we -- it's not going to be going up 2% every half. When do you think it goes vertical?

Yes. It's -- so I would say that our focus at this stage is to ensure that what we acquired with SBG is fully integrated. And ensuring that, that integration happens as quickly as possible is where our heads are gone. I'm the CEO. So my patience is always not -- nothing is fast enough. And so I wish it was tomorrow that everything goes vertical. But I think the reality is that we do need to let the software integrate. The sales cycle also dictates some of that. And so even though we may have a great integration ready to go, you're not going to be able to talk to every football client -- American football client, for example, tomorrow. So you got to follow that sales season. And so I think it's -- I think we'll have a significant improvement in what we could sell from a multi-vertical perspective this coming year from a calendar year. And I think that will only accelerate the following calendar even more so.

And just to add to that, Julian, I think there's a combination of two things really. One is that the product suite that we have, we'd expect that to get a whole lot more exciting fairly soon. And two, we're doing a lot of work internally on ensuring that we're getting the go-to-market strategy, right, not just at the elite level, but also at certain levels below that. And I think the combination of that, you will find at some point, will accelerate that multi-vertical number in a very, very exciting way.

So are you talking about new products you've developed internally or acquisitions?

Well, no. I'm just talking about feature sets and the integration of various things and just the customer appeal that we'll create.

Okay. And just finally, with the Prosumer, you moved to subscription model now. And you said you're having a good interest from the individuals and teams. Can you put some numbers around actual units?

Not at this stage. I think what you can see there is just kind of where the ACV is landing and I think where the revenue used to be and where it's growing. It's still really early for us. I think what we were trying to show there is that, so far, it's been really positive. Again, early stages, right? It was done in the late end of the half. But I think our ability to see the level of activations that we're seeing, see the retention levels that we're seeing, usage patterns have all been actually a little bit above expectation. But again, still early. And I think we'll continue to deconstruct that, particularly as we bring the applicability of our solutions from the professional side down into the consumer side.

Okay. I'm going to go to the Q&A chat. Some questions here from Owen Humphries from Canaccord. The first one, thinking about the outlook. Can you help us quantify a range for what ACV growth will be strong in the "short to medium term?" in inverted commas. Does this imply a growth rate similar to that delivered in the first half?

So I think what we're trying to ensure that outlook statement says is, look, we're driving growth at a very high level. I think we -- you can see where that looks like on a pro forma basis, where we feel, given what we presented from a TAM and market size potential, there's nothing that prevents us from growing at the levels that we are. And we're feeling pretty confident that our growth rate is going to continue at the strong -- or at least at a strong pace for the near and the long term.

Okay. And the second question from Owen is relating to OpEx, which increased, excluding SBG, he said USD 11 million versus first half of the prior year. Have you seen any benefit of this investment? Or is that going to be realized in calendar year '22? And how much was catch-up investment?

Yes. I mean, I always say 30% on a pro forma basis growth of ACV subscription revenue kicking in at 29% churn at 4.1%; multi-vertical customers growing at 50%; more positive EBITDA than we anticipated, which came to some efficiencies and improvement in our sales and marketing as well as some R&D are all benefits of the investment we're making.

Thank you, Will. Question from...

Maybe just to add a little bit of color there. I mean there were some one-off costs there. When you actually read into the detail of the report, you would have seen there was $0.5 million worth of costs relating to the SBG acquisition. We did spend a little bit more on travel, for instance, as we came out of the pandemic. So there was a return of some of those things. There was also certain costs that we incurred this year that we didn't last year with the corporate savings we had. We haven't explicitly broken all of those out. But we're sort of getting back to closer to where sort of a run rate would be, albeit you have to strip out some of those one-offs.

Okay. Questions from Raymond Jang in regards to customer sort of support levels. Are you seeing the level of customer support provided to teams slowly drop over time as they -- as the customers become more familiar with using the solutions? Or do you need to constantly provide training and help them with insights?

Yes. So I would say if you're -- it's almost like two separate questions really, right? So if -- as I would say, established customers are actually not requiring the same level of support that I think nonestablished customers do. There's always some high level of high touch, particularly at the very top of the elite sports pyramid, where you're spending a bit of time on the preseason and a postseason component to ensure that things are ready, things are set up. And that, I think, has improved over time, but I don't think enough given sort of our view on it. I would say from new customers, I think we've done a couple of things that have helped onboard customers a little bit better, but I think that's still an area of good opportunity for us from becoming more efficient, becoming more customer-friendly. And ideally, I always say that great customer service is you have no need for customer service. And I don't think we're there yet.

Okay. And maybe a question for you, Hayden, from Raymond Jang also. The 50% increase in the number of multi-vertical customers, how many of these were from teams on SBG's customer list?

We had -- when we acquired SBG, there was just short of 100 customers. I think it was closer to 80, 80, 90. And 25 of those, I believe, were existing customers of ours. So there was a 25 -- number of 25 there.

Okay. Thank you. A question from Stephen Avik relating to revenue from the media engagement vertical. Can you provide a bit of color on where that revenue is coming from the type of content that you're providing, the level of investment you're making in that area? And what is the focus in that area going forward?

Yes. So a lot of that revenue is driven by three -- essentially three areas, right? It's we have deals with NCAA conferences, where we have rights to basically monetize their video content that isn't used for live games and so sort of post game components. We'll use -- we'll basically monetize that in helping other media use content that they're trying to -- whether it's a commercial, for example, that somebody wants to use footage of a football game. So March Madness is typically a good example of, I want to use footage of the Kentucky basketball team or I want to use footage of the football team down in Florida, and I want to use that in a commercial setting. Another is that there will be utilization of that content for just engagement in video and content website. I want to -- the Bleacher Report, I want to actually show highlights of last week's game. And I want to actually use the content that Catapult has access to for it. And then in some cases, they're very specialized. So for example, we have an agreement with the NFL, where we build packages of video content during the draft season that we create with basically content that was coming from the football area. A great, I think, aspect of this business in many ways is that a lot of the tools and technology they are using are really tools and technology that have been built for the purpose of Tactics & Coaching. And so the level of investment in terms of an R&D perspective is very low. And so it does create a very profitable part of the business on it. And I think there is the opportunity to utilize a lot of what we have there from a license video content perspective to actually integrated more into other parts of our business, and we're actually doing a deep dive on that as we speak. So we see future potential here. It's not a core part of our business today. It's something that I think I would like to see a more integrated into the core part of the business. But so far, it continues to deliver some really good results. And I don't know, Hayden, if you want to talk about the total numbers specifically because I think this time, you actually touched on in the P&L discussion.

Yes. Look, the numbers still are small on an annual basis. It's less than $10 million worth of revenue. And as you'll see in the materials as well, the gross margins tend to be sort of -- sorry, the gross margins tend to be circa around the 50% mark. The one thing I'd point out there, though, is some of those initiatives that Will has been speaking about, about how we sort of grow that business potentially, they are more SaaS in their nature. And so we are hopeful that any of those initiatives would be at a higher gross margin. But look, the existing business we have there, we've got some fantastic relationships not only on the college side, really the owners of the content, but also the consumers of the content, whether the YouTubes, the Hollywood Studios and the like. And that element of the business, it can go up and down sort of from year-to-year depending on circumstances. And I think what we saw this year was really some strong growth on that. These are the sort of where we were two years ago and one year ago. And that's been pleasing.

Okay. Thanks, Hayden. And Will, a reminder for attendees. If you'd like to ask a question, please drop it into Q&A or raise your hand, and we'll bring you into the call. Another one from Raymond Jang about SBG and the video capability. Will, what differentiates it from other offerings in the market? A reminder about its benefits.

Yes. I think the major feature that I think has come with that product's -- software product suite is their ability to actually integrate multiple data sources and actually bring that to live over video, right? And it allows us to actually give really two sort of great benefits to the end user. One is that it improves the workflow speed. So if I have data, I could actually dissect the video that I want to review with my athlete, my coach, my training staff very, very quickly. And I could actually package that up for different workflow streams. So it saves a ton of time. It's really sort of the one component. The second is really that now, because of all these data sources coming in, it allows for the suite actually in itself to find new algorithms and really drive new insights in terms of how somebody could pay, review what's happening on the screen. And a good example of this to us is, I think, what they started to do initially with Formula 1. So they were bringing in data from the car, then they started to bring in event data that was happening on track. They also brought external data such as temperature of the racetrack, weather patterns, et cetera. And as they put all of those things together, they were able to create algorithms that predicted the outcome of the race. And they do that about -- in a single race, about 2 million of those predictions. And they're giving the -- basically the people on the side of the track the ability to actually make better decisions based on what they're seeing from those outcomes and those predictions. And now they've turned that into basically the same sort of predictive algorithm for other sports, right? So they started with soccer in particular. And what we're very excited by is the fact that we now integrate our wearables data into that, not only bring that from a game-day perspective but also training day and really start to bring some of the insights that we see from a performance of the athlete. And then you start adding that to the Tactics. And it really starts to create really something that's unique in the market overall. So not only can we save time from that workflow perspective, but the insights that we could bring to market over video becomes unique and really differentiated.

Thank you. Last call for questions. Reminder for attendees, please drop questions in the Q&A or raise your hand in Zoom. Otherwise, we're getting very close to the end of this call. No hands raised?

I think there's one from Julian.

It's not then now. I did -- he has come back yet. No? Yes.

He raised the third time. I think he wants the question.

Back to you, Julian.

Can I just -- well, we've had the predictive aspects that SBG provides to the rest of the business. Can you just sort of -- when wearables were first getting rolled out, you had your old-style coach, don't give me data. Give me 100 push-ups and run laps sort of stuff. So they've gradually got with the program. So how quickly do you think they'll transition to looking at predictive algos in sportswear than before?

I think it will be a much faster transition than, for example, when -- how they were waiting to accept performance data just from a training perspective. Because what you'll be able to show, particularly with overlaying this in video, is actually the impact that it has on the tactics, right? So the coach cares deeply about the tactics. They want to see, if we're going to create a pressuring situation, for example, on soccer, where I want to attack, the offense always heading as hard as they can on defense, even when the defensive team has the ball. And if you could start to show over video when an athlete isn't perhaps capable of actually being in that situation, because of fatigue or because of potentially muscle or some other form of injury, that allows them to actually think and have a better decision process in their tactics. And it's not -- and then it becomes less about, am I training athlete aim better. It's I actually can't win with the tactics given what I see in performance on video. We actually presented that. What I just described as an example, we actually -- that's one of the things we presented at this conference. And what we saw was just not a reaction from the video side of the sports team or the performance side of the sports thing. It was actually the coaching staff that also said, "Wow, this is actually unique."

Thanks, Julian. Now that brings us to the end of Q&A. Reminder for all attendees, Will and Hayden have produced a video to accompany the results presentation, and they walked through each part of the presentation slide by slide. And you can access that from a link at the bottom of the ASX press release and also on our Investor Center under the Investor News section. Will, I'm going to hand back to you for closing remarks. Thanks, Hayden. Thanks, Will.

Yes. So thanks, everyone, for joining. I think also a worth pointing out that this half year results came on the heels of us presenting and doing an Investor Day just about a week ago. And actually, we presented really some great set of information about TAM, our strategy, the market size and its potential that I think really puts these results, I think, in a context that shows that not only are we growing globally and accelerating that growth, but really, at the other side of this is a market potential that I think is significantly larger than many have probably had anticipated that Catapult could reach. So it's really made us solve here at Catapult excited to share that information, and I highly recommend watching and reading at least the slides that came out of that. I think just from a closing remarks, I think I'll just reiterate, I think, that we couldn't be more pleased with what we're seeing. I think we're -- we've now really transitioned the company to a full SaaS model. And we've done so in many ways, managing sort of our EBITDA and our contribution margin in line where we were prior to this transition. We're growing across the globe. I think the ACV of 43%, even on a pro forma basis at 30%, is just fantastic. And I think I would say that we really have emerged quite strong out of this pandemic. And with teams and leagues playing back in front of fans across the globe, I think that the opportunity ahead of us continues to be strong. And as a matter of fact, I think it's actually much stronger today than it was a year ago, and it's definitely much stronger than it was two years ago. With that, I'd like to all of you -- thank all of you for joining. Thank you, Hayden, for stepping in there as well. And thank you, Andrew, from managing the Q&A session. Enjoy the rest of the morning, and have a great afternoon.

Thanks, Will.

Thanks, guys.