Catena Media plc (CTM) Earnings Call Transcript & Summary

Welcome to the Catena Media Q4 Report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present Göran Blomberg, Acting CEO; Peter Messner, CFO; and Michael Daly, VP. Please begin your meeting.

Hi, everybody, and welcome to this Q4 presentation from Catena Media, and I'm Göran Blomberg. After a soft start to the Q4 in October and November, we ended the quarter very strong in December. In total, Q4 revenue were flat, but the EBITDA was up around 9% in the quarter. Adjusted EBITDA margin ended at 46% versus 42% last year. We had a very strong operating cash flow all over the year, so also in Q4. So we ended the year with a net debt of EUR 57 million compared to EUR 150 million last year, and that means a leverage of 1.09 and going down from 3.46 last year. When we look at our business -- next slide, please. And one more slide, please. Next slide, please. Can you please change slide? Thank you. So when you look at our business, there are a couple of things that we would like to highlight. We have a very strong business in the U.S. 2019 represented 18% of our business, and now it's up to 30%. In Q4, the growth was 42%. And year-on-year, we had a 72% growth. We have a strong development in Japan over the year with an increase of 38%, and so also for AskGamblers with 23% growth year-on-year. Sports was negatively affected by the COVID during 2020, but was back to normal in December, and that continued in January. We faced headwind in Germany for both Sports and Casino, and Germany was down 50% in the Q4. All in all, we have around 15% of our business that has declined. And therefore, we have put the transformation program in place to enable growth and increased efficiency. We have significantly strengthened our financial position during the year, first, through a rights issue, and then through the strong cash flow. So we are now operating within our target of 0 to 1.75 in leverage. And that means that we have possibilities for strategic M&A now during 2021 and going forward as well as share buybacks and dividend, and we will evaluate all those options going forward. We had a very strong start in January. As I said before, we have the momentum that continued into 2021. And together with opening of 2 new states in the U.S. at the end of January, we ended with a 58% growth and 61% in like-for-like organic since we divested one product within the Financial segment last year. So 61% like-for-like growth, and that's -- we're very happy with that. So we estimate the full year 2021 to be well above our target of double-digit growth because of this strong start-up we have seen. I'm now very happy that Michael Daly will step in as the new CEO for Catena Media. And Michael has very successfully built up our U.S. business to a strong growth and profitable business. And he also brings an excellent skill set to his new role as the CEO. So I'm really looking forward to go into the next phase of increased growth and profitability together with Michael. So I leave over to Peter for the numbers.

Thank you very much, Göran. Good morning, and welcome to our Q4 results call. Let's switch to Slide #6, revenue and NDCs. So our total revenues recovered after a somewhat weaker third quarter, grew by 7% quarter-over-quarter and ended up on a level that is comparable to last year's fourth quarter. However, the organic search revenue increased by 2% year-on-year. As you see, paid revenue has been the only KPI trending a bit below last year, and that has been the result also of a decision that was previously taken to focus more on organic growth. However, we have changed our performance marketing setup during the fourth quarter and have seen already very positive results during that quarter with an increase of 28% in paid revenues if you compare to just the previous quarter. In its entirety, revenue is flat year-on-year, as I said, despite the strong growth in the U.S. that Göran also mentioned with above 40% in the fourth quarter. And that, of course, is the result of a weaker performance in exactly this 15% of legacy business parts that we put a transformation program on, which relates to Casino assets in the German market. Sports still showed a slight decline due to a weak start in the fourth quarter that we have seen, but recovered in the final months of that fourth quarter. NDCs increased by 10% year-on-year, which is mainly due to the Sports segment, also with the U.S. having contributed largely with all major sports leagues being up and running as well as the performance marketing efforts that I've just mentioned. Let's switch to the next slide, please, and a closer look at our segments then. So with the recovery of Sports, the share of Sports is now back to 35%, and that is where it has been before the outbreak of COVID-19 pandemic in the first quarter of last year. Sports saw a slight decline of 2% year-on-year. And as just explained on the previous slides, that was the result of a softer start, but then with a full recovery towards the end of the fourth quarter. Casino represented 60% and, likewise, has been in line again with pre-COVID-19 levels, so that share in relation to each other of Sports and Casino has normalized in that respect after the COVID-19 situation. Financial Services segment has been stable at 5% of total revenue. But note that we divested the U.S.-facing Hammerstone business, which is a real-time stock market news subscription service, towards the end of December. So going forward, the Financial Services segment will have a slightly lower run rate in revenues and, hence, share of the total revenues. By source, the revenue split between revenue share and our cost per acquisition, CPA, and fixed fees has been fairly stable in its entirety as compared to the previous quarter. So there's nothing strange about that. Let's turn to the next slide and take a closer look at segments and total quarter results in terms of the adjusted EBITDA then. So as you can see in the graph, after a somewhat disappointing 2019, 2020 now turned the business back to a bottom line growth, resulting in a full year adjusted EBITDA of EUR 52 million. That's a 20% increase year-on-year. The fourth quarter in itself, adjusted EBITDA grew by 9% year-on-year. Casino results increased by 8%, while Sports decreased by 8%. And that Sports decrease was entirely the result of the new performance marketing approaches and, hence, the direct costs in relation to that in the fourth quarter. To take a closer look in our segment reporting in the report, personnel and other operating expenses in the Sports segment have been flat on a year-on-year comparison. The Financial Services segment increased with, I would say, an insane above 3,000% year-on-year and also above 200% versus the previous quarter. So why is that? So what we announced during last quarter's call, we decided to not further invest into this segment. That doesn't mean that we're not further developing the portfolio, but it meant a shift towards more maintenance and optimization and, in particularly, profitability contribution at the end. And that result we have seen accordingly in the fourth quarter already. So all in all, taking that together, the fourth quarter margin increased from 42% last year to 46% this year's fourth quarter. Let's go to the next page then and look at the cost development that is responsible for that margin increase. So the total cost of the fourth quarter, excluding items that affects the comparability, has been EUR 14.3 million. That's 54% of total revenues. And that is EUR 1 million below the fourth quarter 2019, but something like EUR 1.4 million above the third quarter. So let's break this down and explain. So the direct cost increased again during the quarter versus the previous quarter, Q3, as just previously explained, but it's still 9% below the fourth quarter of the previous year. The personnel expenses have been flat if you compare that to the first half of 2020. So during the third quarter call in November, I explained that we had certain effects during the third quarter as a result of changes in management and accounting effects between the second and the third quarter in relation to certain payroll cycles in the U.S. and generally, vacation period. So that affected and, therefore, explains the lower Q3 numbers. At the same time, we continuously invested into the U.S., and that meant, of course, strengthening and particularly increasing our workforce and, as a result, an increase in personnel expenses. Other operating expenses were around EUR 1 million below the level of last year and increased by roughly EUR 0.5 million versus Q3, but are almost on the pre-COVID-19 level of the first quarter. And that was a result of increased in particularly product spending and professional fees in relation to certain SEO efforts and content-building and other product-related expenses and particularly in Sports segment with naturally as a consequence of more sports having returned after the summer. And then again, as a result of that, the margin increased from 42% to 46%. Let's then turn to the next slide, and let's take a closer look at the profit for the quarter. So EBITDA increased quite significantly by 46% year-on-year. And items that affect the comparability, they account for the difference between adjusted EBITDA and EBITDA. And now in the fourth quarter, such items amounted to a net income of EUR 100,000. And those were related into a gain on divestment in subsidiary of EUR 0.5 million, that was the Hammerstone divestment; an increase in loss allowances; and then also a reversal of reassessed share-based incentive plans in the end, [ EUR 1.2 million ], relating to previous periods, however, so this relates to old incentive plans of 2018 and 2019 years. Depreciation and amortization charges have been further decreasing. We have seen that trend, and I commented on that during the last call, since Q4 2019, have been steadily decreasing, and that is a result of previously acquired assets that have been fully amortized by now. As a result, the operating profit increased to EUR 10 million. Note that last year's Q4 operating profit was highly negatively impacted by the impairment on the intangible assets. And if you would adjust for that, then, nevertheless, the operating profit increased by more than 100%. Interest payable on the borrowings, that relates to our existing bonds out there in the market and in the fourth quarter also still to the revolving bank credit facility. I will comment on that on the further slides on later. Note that interest payments on our newly issued hybrid capital securities, there was an interest payment of EUR 1.3 million during the fourth quarter. They do not show up here in the profit and loss for the period as those are directly taken against equity. So you see that in our statement of changes in equity accordingly. Our losses on financial liability, they again relate to changes in the fair market value of the existing bonds, and they do not have any cash flow effect, of course. So as a result of all of that, the profit for the period has been EUR 7.7 million, and the earnings per share, EUR 0.11 before and EUR 0.07 after dilution. Let's turn to the next slide and our cash position and cash development. So the net cash generated from operating activities increased by 32% and amounted to almost EUR 12 million, EUR 11.9 million, with a cash conversion of 96% and, as you see in the chart, following the quarterly trends as previously. During the third quarter, just as a recap, we made a mandatory prepayment of almost EUR 50 million in relation to our existing bonds and also repaid EUR 5 million of the revolving bank credit facility. And now in the fourth quarter, we made a voluntary prepayment of EUR 6 million in nominal value in relation to our existing bonds and repaid the remaining EUR 7.5 million of the revolving bank credit facility. So that has been now repaid in full. In addition, we repurchased a total nominal value of EUR 9.8 million of our own bonds that we now own. And as a result out of that, cash and cash equivalents amounted to almost EUR 30 million at the end of the fourth quarter. Let's then turn to the final slide of the financial section and look at the company's debt. So as just mentioned on the previous slide, debt has been heavily reduced through the prepayment of existing bonds as well as the repayment of the remaining part of the revolving bank credit facility and also our repurchases. And as Göran mentioned in the very beginning, our net debt -- net interest-bearing liabilities, they amounted to EUR 57 million at the end of the quarter, which is a significant improvement as compared to last year when it was slightly above EUR 150 million, which, of course, is the result of our successful refinancing during the summer and also the continuously strong cash generation in the business, of course. The leverage ratio, which is the ratio of net interest-bearing liabilities over the last 12 months of adjusted EBITDA, amounted to 1.09, and that was simply continuing the improving trend since the second quarter when we had 1.68 and the third quarter when we had 1.32. So then taking a look into this first quarter of 2021, we announced a further voluntary prepayment of EUR 6 million in total nominal value of the existing bonds, and that will occur next week, on the 2nd of March. And then we also press released a total further repurchase of our own bonds of EUR 3.3 million since the start of the year. And with that, I finish the financial services section and hand over and welcome Michael to our quarterly calls, who will continue with the outlook and, in particularly, development in the U.S.

Thank you, Peter. If we would proceed to Slide 14, please, so 2 more slides, to the European Sports and Casino. So with the exception of the Italian market, most of our European Casino brands faced continued challenge to maintain their website ranking and traffic. Another exception to that is AskGamblers, which is more of a global product for us, which had a strong finish in the fourth quarter with improvements in ranking and increase in organic traffic and conversion rates due to continuous improvements done on the product by that team. As aforementioned, about 15% of our business showed no growth, leading to a decision to start a transformation program to consolidate our Casino segment. And within this, we expect our organizational efficiencies and to -- and optimization to grow -- our growth in optimization. So both Sports and Casino faced headwinds in Germany in Q4 due to the tolerance period to the new regulations. In total, Sports revenues from Germany dropped by half during the fourth quarter. We do expect the German market to continue to be negatively impacted in the first half of 2021. In 2020, with many sports events canceled, our business pivoted to promote other products, notably casino and poker, with some success. Although this could not compensate for the loss of sports betting that Peter mentioned, our business has normalized back from pre-COVID in Q4. In the fourth quarter, the business normalized, so yes, driving sports within a good recovery. If you switch to the next slide, please, on the U.S. update. The U.S. is now live as of January in 12 states, 5 for casino and/or poker, in the case of Nevada, and 12 for sports, also including Nevada where we're doing some land-based affiliation work. The market openings in Michigan and Virginia and remote registration starting in Iowa in January were a great start for 2021 for us. Overall, in 2020, we had a great year in North America. Catena's share in North America is now -- 30% of our business, in total revenues, is coming from North America, and that unit saw 72% year-over-year growth. Outlook for North America for Q1. Super Bowl ended the NFL season, which happened to coincide with the launch of Virginia and Michigan, so strong start to Q1. And then we have events like large March Madness, which is college basketball in the U.S., which is good for sports affiliation. Yes. The rest of 2021, it's a limited likelihood to see any new states launch. We have a number of states out there with measures and bills, but the likelihood of any of them passing in 2021 seems low. But with Virginia and Michigan launching in January, we have new states for the entire NFL season starting in September time frame. So we expect a very strong NFL season as well as strong and steady casino growth in the various states that are allowing that, which also now includes Michigan. So we switch to the next slide, please. On the U.S. potential, so this has changed slightly since the last time we updated because, obviously, we had some states post-quarter go live. So we now have 12 states where we have the ability to do affiliation or that we're doing affiliation. So in Q4, that was 46 million worth of population. Now into Q1, that's become about 65 million. It does decrease our upcoming states, upcoming states being those that are on the near-term horizon. We have Illinois, which actually we're already partially affiliating for because of governor COVID mandates allowing online to open earlier versus December of this year. And then we have Maryland, Louisiana and South Dakota, all of which have measures, valid measures passed, but now have to do regulations and the like. So we could see them launch this year, potentially the start of next year. But there is still a very large road map ahead for North America, almost 100 million in population in just the 4 large states. And there has been fair activity on New York, nothing concrete that we're willing to say it's within the upcoming states at this point. But lots of great movement in Florida, Texas and New York, in particular. And then you have many other states, which take almost the same-sized population that are still on the horizon somewhere. And as we've seen in North America at least, and with COVID adding to it, nothing is really that predictable on timing except that things seem to continue to move faster than anyone would have expected a year ago. I'll now turn it over to Göran for the key takeaways for Q4.

Thank you for that. So if we summarize the situation in Catena, we have a Sports business that is back to normal. We have a good development for our businesses in Japan and within AG. We faced headwind in Germany for both Sports and Casino and part of the legacy business as well. Those areas with headwind summarize up to 15% of the business. And for that, we have put the transformation program in place. We have strong growth in January, showing a 61% plus in like-for-like revenue. So because of all this, we estimate that 2021 will be well above our target of double-digit growth. So I will, by that, open up for questions.

[Operator Instructions] And our first question comes from the line of Erik Moberg of ABG Sundal Collier.

To start off, on the legacy side of the business on the Casino side, you mentioned the transformation program there. Could you perhaps elaborate a bit on this part's current EBITDA margins as well as how much of the current cost base you think that you will be able to trim down?

Michael, please?

Thanks for the question. So the transformation period is about optimizing the businesses for growth. So at this point, I don't think we're ready to comment yet on the exact effects of cost because it is a process underway. So it is in order to align our businesses with the consumers and the operators in the markets we work in and, yes, again, to optimize for growth so that we can increase the growth in the areas that we are not. And as we said, it's around 15% of the business. So it is also to allow the teams to focus on the other 85% of the business that are growing well.

Got it. And could you perhaps elaborate a bit on how this part of the business ended the quarter? Was it -- was the end of the quarter stronger than the beginning of the quarter?

We haven't really broken out, Erik, that particular segment of the business in that way for this report. So I don't know that I'm fair to comment on that. We've seen growth in the end of the quarter in numerous areas. But again, it's not what we desire in the operating tempo, let's say.

Fair enough. And just from a regulatory standpoint, if look at this part of the business, aside from Germany, are there any other regions that you foresee year-over-year headwinds going into 2021?

Quite honestly, I don't believe so. Germany has the regulatory. I think Germany, it should be noted that while the regulatory headwinds are short-term impacting, we expect Germany will be a strong market for Catena in the years ahead. Regulations are ultimately not a bad thing for affiliates that are able to operate and thrive in regulated markets, which is something we are able to do. So Germany, we will continue to grow that business over time, just the short period headwinds are impactful to the current business as the markets modify. In the other markets, we see opportunities for growth across the board. Again, regulations shifting things so that our operating models have to adjust, but lots of potential for growth. So this is not -- Catena is not just a U.S. and Japan story. There's potential in all sorts of European markets, new ones opening as well as the current ones we've been operating in. So yes, so we're not abandoning any markets or anything like that with the way we talk about transformation. Again, it's optimizing for how each of those markets require a slightly different operating focus.

Got you. That's some good flavor. And just looking into towards the later part of 2021 versus -- and the beginning of 2022, could you perhaps give us some flavor on Netherlands and the potential contribution from that market?

So Netherlands is very exciting for us. We are working down the path there as a operator -- or expecting to be an affiliate there, working with the operators that will be coming online. Being very cautious, it is a highly regulated market. Again, we thrive in such things, so we expect a strong performance there. I don't believe we are, at this point, ready to break out our expectations on the Netherlands, in particular, because there are still a number of factors, including, does it stay on track from the country perspective of the expected launch date, et cetera.

Fair enough. And in regards to the trading update, to me, it appears like revenue in January at least amounted to, say, EUR 14 million. I assume this partly can be explained by strong development in the U.S. But could you perhaps elaborate about on the geographic split in the January? And how do you think this will evolve throughout the quarter?

Well, we don't give any geographic split in sort of month-by-month basis. But as you said, we had a strong development in the U.S., and we have a good momentum in the other businesses as well. So -- and therefore, we say that based on the stock, we see that we, for the entire year, we would be well above our double-digit growth target.

Okay. So would it be fair to assume that the legacy business at least is relatively flat from the exit of December and then sort of U.S. is the main driver of the sequential improvement there?

Well, as we said, the legacy business and the German business is still in decline. And those 15%, where we have a transformation program, are still in decline.

Got it. And then just one more question for me. Just in regards of -- you indicated that you might be looking at the M&A in the U.S. going forward. Could you perhaps elaborate on your thoughts of M&A versus focusing on organic growth in the U.S.?

I'm happy to. So I think there is a balance in all companies that need to be considered in organic and M&A. So again, not just North America. North America is the most obvious target for us such in terms of being it is one of the faster-growing markets globally. But there's lots of opportunity for M&A, and it is a balance that we have to analyze what would that kind of investment do towards our own sites in organic growth. So it's -- M&A is about finding maybe there are other affiliates that makes sense to bolt-ons. Maybe there are other companies that are, let's say, in the periphery of this space, sites that could become affiliation by work with us. So they might not have organic affiliate revenues today, but we could add that revenue stream in there. So that's essentially interesting. And probably the most interesting to me is, in long-term perspective, is where technologies can be used to leverage our businesses, not just in North America, but potentially globally. So those are the types of M&A I think we consider. And yes, it is always a balance against organic growth, which organic growth is going to be the strongest driver for us, I expect, in the near term anyways because if you look at North America, at least the number of large affiliates that would have a significant impact to our bottom line immediately are a very small number. And a number of them are our competitors, larger competitors in Europe, too. So there are some out there. But again, are they worth what they would be versus us investing in organic growth? That's part of our analysis, what we have to do.

Fair enough. And then just in regard to value creation, from a value-creation standpoint, given the current valuation, do you think that M&A really could add more value than focusing solely on sort of buybacks and organic growth? Just from that perspective, do you think that the current valuation allows you to do M&A?

I believe it does. I believe it gives us potential. And I'll turn it to, yes, Göran or Peter to talk more specifically on that. But I think, yes, M&A is not -- M&A is on the table for Catena Media. The other options are there as well. From my perspective, growth in M&A is a great engine for an organization in the right place. So I think it is something definitely on the table. Then I'll turn it to Göran who's going to be able to comment.

Well, I agree what you say. At the moment, the cheapest assets to buy is probably our own share. But at the moment, we don't have -- we have to go to the AGM first to ask for permission to do a share buyback. But of course, that will be part of our tool and our toolbox in how we create value going forward.

Our next question comes from the line of Mikael Laséen of Carnegie.

Yes, I've got a few questions. First of all, can you say something about the difference between the net new depositing customer growth in Q4, grew 32% quarter-on-quarter, and revenue grew by 7% quarter-on-quarter, so suggesting a lower revenue per NDC? What is the reason behind this?

Peter?

Yes, there are primarily 2 reasons I would highlight. The one is Sports. So Sports has been a little bit weaker, of course, in the third quarter in comparison to the fourth quarter. And as I said, Sports had a little bit of a weak start in the fourth quarter, but then developed and recovered fully towards the end of the fourth quarter, in particular, in the U.S. with all the major sports leagues having been up. The second item has been our performance marketing efforts that I referred to earlier as well where, of course, NDCs have been increasing in accordance with our increased spending, which you have seen in the paid revenue as a result of that as well.