Catena Media plc (CTM) Earnings Call Transcript & Summary

Welcome to Catena Media's interim report January through June 2022. I'm Michael Daly, CEO. I'm joined by Peter Messner, our group CFO. I'm pleased with our forging ahead in our largest markets in North America, and today, we're going to talk about our Q2 highlights, our Q2 financials, our outlook and our Q&A. We have been forging ahead in North America during its slow season. But at the same time, it has been a tough quarter and one that's led us to affecting a paradigm shift in our business operations in Europe. Revenues fell 5% globally to EUR 28.9 million. Some revenue decline was expected based on the sports calendar in Europe this year over last year, not having Euros in June, and with the normal slowing casino periods in the summer of the European holidays, although it's been anything but normal in the last few years due to COVID-inflated online businesses. Some decline versus forecast was not expected. We saw some revenue challenges compared to our forecast in the Canadian province of Ontario, which started very differently from the initial parts seen in the U.S. states. Ontario still contributed favorably, just below our expectations given the noncompetitive marketing rules put in place. North America overall grew 21% year-on-year, with sports well up even during the slow part of the sports calendar. Our 2021 acquisitions acquired based on the plan to use those to expand in these newer markets for both sports and casino contributed significantly. Japan was another unpleasant surprise. That market is growing steadily for us the last few years, bolstered by COVID restrictions and the strength of our teams. Those dynamics changed this quarter. We had some expected reverse COVID effect as the countrywide travel opened, but also press around an individual event that blossomed to an election level topic, stemmed the flow of new customers and impacted current customer spend rate due to payment providers backing away at least temporarily. This should correct, but will take a bit of time for the news to abate and SEO to return to expected trends. The other unplanned item, at least not planned when we started the year with an investment for future thesis, was the macroeconomic conditions, particularly starting to show themselves in the European markets. We are seeing the first parts of impact from consumer spend levels, decreasing rev share in some markets. And this will be felt going forward into the winter months as our expectations. I'll talk a bit later on the paradigm shift that this requires of us. The aforementioned revenue impacts also significantly impacted our adjusted EBITDA year-over-year down to EUR 9.1 million. Frankly, some of this was expected. We continue to invest heavily in North America with the opportunities there. That investment is to both grow and defend our territory in the sports business, which has a seasonality. From April to August, this is the low season. However, annualized investments to capture the opportunities in Q1 and later Q3 through Q4 are still annual investments, people, technology, et cetera. These slower times are even often when we have to accelerate the product investments to be ready for the start of the NFL season in September and maximize the sports calendar as it happens. Given this, we were expecting a margin in the 30s this quarter as compared to the exceptionally high margin last Q2 when we had the Euros as well as the COVID-inflated online markets, which we did very well optimizing for. But Q2 was lower than our targeted plans for the aforementioned revenue reasons. As we saw macro conditions start to deteriorate, we started even before the recently announced strategic review to tighten the belt for our non-North American operations compared to original plans. Revenue deterioration impacted faster than cost control measures could. Again, more to cover on the cost controls and the strategic review in a bit. All this said, while Q2 below our targets, we're still in a solid financial position with options for capital usage with operating cash flows up 25%. I'll now turn it over to Peter to talk more specifically about the numbers.

Thank you, Michael, and welcome to our second quarter earnings call also from my side. Let's start with group revenue and our new depositing customers as a key performance measure. So we had a slight revenue dip in our slowest quarter of the year as Michael mentioned. Revenue came in at EUR 28.9 million, which is 5% below last year's second quarter, while North America, however, grew by 21% and accounted for 52% of the total group revenue. Due to the sports seasonality, this is really the lowest revenue quarter of that year. In line with that revenue dip, the new depositing customers are below last year's comparable number with 3%, and that is primarily driven by a weaker casino performance outside of North America. The customers generated in our Sports segment, however, increased by 20%. And that was a very strong contribution from the recently added states of New York and Louisiana, as well as the launch in the province of Ontario in Canada in the beginning of the second quarter. If we take a look at the revenue segmentation, casino very clearly returned to a dominance in the second quarter. Historically, casino has always been the biggest segment in our portfolio, but whenever new states in North America launch, particularly what we have seen in the first quarter with New York and Louisiana, that might temporarily shift. So following the strong sports Q1 with these launches in New York and Louisiana, casino returned to that dominance with 59% of total group revenue as a share. As mentioned on previous slides, the sport NDCs increased quite significantly with 20%, and that translated into an overall 31% increase in sports revenue during that second quarter as well. We saw particularly a strong performance of the acquisitions of last year, Lineups.com and all our i15 Media assets. The share of CPA, that is, cost per acquisition was in line with the last 2 quarters of last year and -- at 53%. Again, the second quarter was a little bit different due to the launches in New York and Louisiana in North America. We haven't seen any negative impacts on our CPA rates, and it is fair to state that the CPA model partly even insulated us from margin pressures elsewhere where we are fully reliant -- not fully reliant, but to the largest extent, reliant on revenue share. And that, of course, is historically impacted on any consumer spend, if there should be any. Switching to the next slide on our cost development. We have been investing in innovation and long-term growth for several quarters now. And as you see, we have reached a cost base that was only marginally higher than in the first quarter of this year, that is a 1% difference to the first quarter. In comparison to last year, however, there was a significant increase based on these investments. The direct costs increased by 20% and that reflects growing revenue contributions from content partnerships in North America, also including influencers. The personnel expenses increased by 29% year-on-year, and that's the same growth rate as in Q1 as compared to Q1 last year. So that is in line with the increased investment in North America and readiness for future market launches. And there are a lot of those piled up, and Michael will talk about that a little bit later. Compared to last year, the number of employees in North America increased by 82% in the second quarter, and that includes the effects of the 2 acquisitions as well, and of course, the continued investment to fully seize opportunities that came with these strategic investments. Other operating expenses increased by 39% versus the second quarter last year, and that's likewise a result of the investment in technology and search engine optimization. But it's also resumed travel activity, which essentially was nonexistent last year. The cost ratio, which is all the cost as a percentage of revenue is expected to fluctuate quarterly as a function of the revenue seasonality. And again, Q2 was a very low quarter from a sports calendar perspective. And that is, of course, the reverse of the adjusted EBITDA, where the margin now ended at 31%. Going into a view of our segments. Casino is the biggest segment with 59% of total group revenue. Casino in North America increased on the back of also growth in social and sweepstakes casinos, and also the addition of Ontario as a new market, Ontario launched in April with both sports betting and casino. The adjusted EBITDA was overall impacted by the growth investment continuously in North America and also in Japan. And as I said, Ontario has a new casino launched, but then also, of course, the decline in player spending in Europe. As Michael mentioned, Japan. Japan had previously shown continued double-digit growth, but that market had a decline during this quarter as a result of this political campaign around online gaming and the player behavior that was now temporarily impacted. And furthermore, the yen continued its weakness against the dollar, and that is affecting deposit levels and then as a result, revenue share, which is the majority of our Japanese business. Switching to the Sports segment. This is again the low sports season in North America. Still, group sports revenue increased by 31%, driven by the launches in North America and also Ontario that launched in Q2. Adjusted EBITDA reflected the aggressive investment in preparing for further North American markets, and most of those are expected to primarily be sports betting in the beginning and maybe then later on online customer as well. We are particularly pleased, as I mentioned before, with Lineups and i15 Media assets that we acquired last year. And as announced after the quarter end, we signed the first media deal in the U.S. with NJ.com, and Michael will talk about this and we have partnerships in the outlook session a little bit later. Finally, Financial Trading, our smallest segment, contributed 3% of total group revenue, and in particular, it continued to face challenging market conditions as expected in the macroeconomic environment that we have. So while the stock markets really had their sharpest first 6 months for fall for decades, markets will eventually from a historic perspective, rebound at 1 point and then the segment is well prepared for any expected increase in search volume again and investment activity that is resumed. The flagship brand of the segment is AskTraders, but also other brands in the segment focused quite a lot on content and a wider range of trading assets, and that helped to increase traffic in particular in Germany, which accounts for approximately half of the segment's revenue. Taking a look at cash flow and our cash conversion, that was in same cash conversion percentage with 280%. As a starting point, Catena Media's business model comes with a very strong cash generation. For the full last year, cash conversion was 104%. The operating cash flow this quarter was EUR 20.5 million, and it increased by 25% as compared to last year, and that translated into that 280% cash conversion. Why was that? Well, if you take a look at our first quarter results, we had a low cash -- a lower cash conversion and a low operating cash flow because that was a result of partly delayed receivables collection from Q1 sales. So that happened now in the second quarter as expected. Cash flow used in investing activities included EUR 15.4 million, and those related to the deferred purchase price payments of the previous year's acquisitions in Lineups and i15 Media. Cash flow used in financing activities included EUR 2.8 million that related to the share buyback program that we did prior to the Annual General Meeting. And then EUR 2.1 million in the quarterly bank term loan repayment as per the agreement that we have with the bank and EUR 2.2 million in total interest payments, which relate to the term loan, the recurring credit facility and our hybrid capital securities as well. At the end of the quarter, the cash balance of cash and cash equivalents was EUR 23.5 million. The balance sheet is continuously strong. We had total assets of EUR 357.2 million and total equity of EUR 238.9 million, including the hybrid capital securities. There are still amounts that are committed on acquisition of EUR 13.8 million, and they also still relate to Lineups and i15 Media assets, and they're all due within 12 months. In December this year, $10 million will be paid in relation to i15 Media and the remaining $5 million for Lineups in May next year. That together are the EUR 13.8 million from a foreign exchange perspective. The borrowings of a little bit above EUR 80 million comprise the bonds, the bank term loan and the RCF. And there is a current liability to be paid of EUR 8.3 million within the next 12 months, that is the bank term loan. Other liabilities of EUR 24.2 million are mainly our trade and other payables. And then there are certain amounts in relation to the deferred tax liabilities and lease liabilities as well. The net interest-bearing liabilities totaled EUR 58.2 million. That's essentially the borrowings minus the cash, and that results in a leverage ratio, which is this net interest-bearing liabilities in relation to the last 12 months adjusted EBITDA of 0.91, which is well in line with our financial targets. And at the end of June, the company had 33.8 million outstanding warrants in relation to the issue of our hybrid capital securities in the summer 2 years ago, and these warrants can be exercised during always one of the exercise windows following a quarterly or year-end report until and including the second quarter report in 2024, so exactly around this time in 2 years. And with that, I hand back to Michael to talk about the outlook.

Thanks, Peter. Let's talk about July. July, we remain in our slow period of the North American sports affiliation calendar. But compared to last July, the team's efforts plus the added sports products, end markets plus the growing Ontario sports and casino market, led to a 33% year-on-year growth in July for North America, and a 10% total company when excluding the still stagnating German market. In Germany, I am very excited that we've started working with operators who have received or are imminently receiving their casino licenses, which means growth during the second half when compared to where we ended H1. Speed of growth will still remain unclear as operators enter, test the waters, determine sustainable levels of marketing in the new environment. But the takeaway is a new German business is now starting for Catena and the investment done there this last year will start to pay off. Japan, with the news flow disruption still declined in July, the July elections are now over and the pro-gambling party winning, we've healthy expectations as things return to normal over this next quarter or so. Overall, July which is a weak month in many markets and not having the Euros, which is going on in July 2021, performed quite respectfully. Let's talk about the H2 story. The H2 story is exciting, particularly in North America, if you go to the next slide. Year-over-year increases in July look favorable when compared to H1 and Q2 year-over-year. Granted it's very early in H2, but the year-over-year comparison start is pleasing, particularly with the road map ahead. What is the road map? Numerous states on the cusp of launch. While it is less likely many of these will make H2, some will make this next NFL season, which ends in February, and a few may surprise us by pushing in. One set of surprise looks like Kansas, that although a very small state, it's moved forward much faster than others and now has a launch expected in the earlier part of this NFL season. This is what makes North America so exciting is the dynamic that varies separately from state to state. This also will make it so difficult to forecast as we originally had Ohio, a state of significance in H2, and that's now stated to be in Q1 of 2023. Maryland was expected to be ahead of Kansas and with a higher contribution. Those, along with a slower Ontario start, all impact the win we crossed the rolling 12 months of $100 million threshold. It does not impact the if we will pass that as we will. And the newly approved Massachusetts state even further solidifies that not being an if but a win. So it's most likely to be a win in H1 on the next year with the rolling 12 versus the end of this year based just on what we now know about state launch expectations, which, as you know, continue to change. Also on that road map, partnerships. We've long avoided these as the commercials were not reasonable in our view, alongside the potential cannibalization in certain markets where we had strong sites. These were probably better for those we thought who -- served those better who had a strong -- didn't have strong sight to their own to grow. However, the market is maturing, operators are talking about managing marketing spend in whole, and that's being reviewed. This opened up the opportunity for better discussions with partners. And I'm very pleased to announce our first such publishing relationship starting just after the end of the quarter, with NJ.com, which has been a strong site in the very strong market in New Jersey for years. And we expect the 2 companies to conserve and grow their audiences who may have casino and sports betting interests. We cannot ask for a better first partner in the space and look forward to expanding to more relationships like this in other future markets. The third interesting element of North America is development of revenue share discussions. Long have we been and still remain CPA dominant. CPA has great strength in these early market phases, helping in bringing capital for required growth across the continent, also bringing some buffer from what are likely to be revenue share impacts in other places due to the macroeconomics that impact players' wallets. There has also been the condition in North America that even those who are willing to broach the subject of revenue share from the operator side were trying to follow the old models of daily fantasy where those revshares would be short-lived at 2 or 3 years best case. I'm happy to say we are now in what appears to be serious negotiations for our first revenue share deal that is much more extended period. With the right terms for both ourselves and our operating partner, we hope to move forward on this. Well, I've said before that I thought marketing conditions might bring operators to the table on this topic. It's happening a bit sooner than expected. And honestly, maybe less about the changes in marketing spend versus certain operators recognizing the potential synergies that such a revenue share relation encourages. CPA will remain dominant in the market for some time to be clear, so a transition like this, I think, is potentially the optimal way for us to have it. Very exciting times in North America, which does seem to be a recurring theme. Next slide. Turning to Europe, I and Peter have spoken about the challenge in European revenues that continue. And while we tightened the belt in Q2, we recognize that our investment thesis that we started the year with was no longer in line with the macroeconomic indicators. Regulatory conditions in Germany and the Netherlands have not and will not improve at any dramatic pace. U.K. continues to oscillate in their own regulatory view of gambler. On top of this, inflation and fuel impacts will be increasing, not decreasing in our view, in the coming months, more impacting Europe than North America, quite frankly. This led to a paradigm shift on how to think about our European businesses going forward. We started our strategic review concerning our financial trading and our larger AskGamblers products. These products were seeing some interest in the markets, and we thought it prudent to explore what the future of those assets would be in our business with our shift focusing towards wide European gambling markets and North America versus the cash that might be raised for M&A activities in North America and LatAm from selling some or all of these assets. That review continues. As we open it up, we have more interest and that leads to more simulations, et cetera, that have to be run to figure out what is best for the company and our investors. This paradigm shift in Europe also led to further review being started in the last few weeks concerning margins and efficiencies in other parts of that business. We're determining what markets have the best outlook in the coming period of economic uncertainty and what will give Catena the best European baseline to go from with margins that support that. This process targets at least EUR 5 million in annual cost savings. And quite frankly, I would consider disappointing if it only gets to that. And it will be completed before the end of September. So those impacts can start to be felt in Q4. On the discussions of capital and capital deployment, next slide. Our EGM on 10 August allowed us continuation of share buybacks up to 10% of total issued. We already hold a percentage of shares, so at the point necessary, we will consider canceling those at the board. Other uses of capital do include potential strategic acquisitions in Latin America and North America, particularly at a time when valuations may be deflating creating interesting acquisition, and thus, long-term growth opportunities. The outcome of the strategic review on any asset sales will materially impact the decisions regarding capital deployment of any type. So we will be more forthcoming on that in future weeks. Next slide. Takeaways. Some of the very active period for Catena, even though it was a slower period externally, North America is strong and less impact anticipated from economics going forward. Cost reductions implemented across Europe, most post Q2 to improve margins in the EMEA business, stabilize growth and focus the teams. Content partnerships have started in North America and will continue as a new vertical area for us to explore. We are in a strong cash position and remain there. North America timing and rolling of 12 month -- of the rolling 12 months to $100 million, as I said, moves out slightly due to that state launch schedule based on what we know now. We will keep the market surprised as those things continue to shift in and out. With that, I think, Peter, we will open it up for questions.

[Operator Instructions] Today's first question comes from Oscar Ronnkvist with ABG.

Michael and Peter, see, the first one was about the comments you had on the macro environment. So we have seen kind of mixed comments about this from operators and B2B suppliers. I know like Entain blamed some macro impact negatively; and DraftKings raised their guidance; Kindred, Betsson doesn't really see a macro impact. So could you just elaborate why you see or how do you see the macro impacting your business that some others don't see it?

Sure, and again, I will claim not to be an economist, and there are many views on this. There are views that this will be a slight impact or it will be a full recession over a year or multiple years. A, we're going to be prudent and be cautious in what to expect so that we plan for the worst and take the best. The other side of that is the gaming industry back in 2007 and '08 more land-based in North America was slow to see the impacts of what was going on in the economy, but it came around and hit it afterwards. So it was slow to start, but it increased. So I think we would be not prudent and proper if we were not considering that the macroeconomics are likely to get worse. Europe has more so than North America, but North America has a fuel impact on what's going to impact the wallet of individuals. So in Europe, where we're on revshare, that will have more of an impact for us and the operators over time. It is going to be a long winter, I think. Again, that opens up some interesting M&A opportunities on the one hand, but on the other side, we expect it will be a slower period from some of the years past. Peter, anything you want to add?

No, that's good summary.

Okay. Okay. Then moving on to the '21 to '25 targets. So you still have the double-digit organic growth annually. So could you just explain a little bit about the assumptions you have because it's obviously going to be fueled by North America. So does that include assumptions of like New York regulating iGaming, California regulating sports betting or when -- at what point would you need to take a look at that target and maybe revise it?

Do you want to start with this Peter? Or I can.

Well, I mean I can start very briefly. So the starting point for this year is apparently what is still going to happen from the NFL season, which is the beginning of September. From the NFL season, and I'm focusing now on the word organic growth in that financial target, from the NFL season, all our acquired assets from last year will count as organic growth. So one of the reasons why you have seen a negative organic growth is simply the calculation method of not having the contribution of the acquisitions of last year, in the first quarter results this year and up until May in relation to Lineups. But the i15 Media assets didn't contribute to the organic growth. So when the NFL season starts, that will be full year contribution to that organic growth. And as mentioned, the second quarter now is going to be the lowest quarter for the company based on the sports seasonality. So there's still a possibility that the remaining full month from September to December will make a significant contribution. For the entire plan for the upcoming years, of course, there is a consideration of further state regulation and state launches, whether that is going to be now California or whether that includes a casino in New York, that's a very difficult question. I would believe California is not necessarily factored in that. But it is not a guessing of a specific state, but rather what is still in the pipeline and how is the likelihood of a certain amount of additional population -- adult population getting access to either sports betting or also on a casino.

I think that's put well, Peter. It's a pool of states, particularly in -- the North American states that are impacting that forecast and that planning. There are many things that can change. Again, macroeconomics could slow things, but they can also accelerate more states looking at other tax advantages from legalizing online sport or online casino. There's Latin American growth. There are a number of factors in there. We'll assess that through the rest of this year and how this NFL season and World Cup goes, and we'll look at that again as we go through how 2023 and beyond looks. So we'll continue to assess this. But at this point, there are still a lot of factors and the fall season will tell us a bit.

Okay. Okay. So then on the annual savings, you target the European annual savings of EUR 5 million, so could you just talk about the net effect? Because I mean, is that EUR 5 million going into North American and Latin American investments? Or how should we think about that?

So a couple of things. So that savings is both operational and capital expenditure. So the effect there will be also offset by where it's going. Some of that is going into North America, already on a plan. We already have a plan for North America. We're following that plan. It is meeting and exceeding those plans in terms of the revenue side. So the operational costs continue to follow plan. So there is cost savings compared to our original plan, but it doesn't mean we're -- yes, we're just going to sit on our cash. We're going to be investing in the opportunities that exist. Right now, North America, Latin America, probably esports, are higher trajectory growth rates than our current European markets. So we need to look at those. We need to optimize the products in the markets we're focused on and maybe pull back or save costs particularly during an uncertain time in the macro picture, but invest in the places where there is less uncertainty and more promise, and that's what we're going to do.

Okay. Then I have a question on the current trading. So considering Ontario may be ramping up in the latter part here, also, on Japan, just looking at like the current run rate and if you see signs of rapid improvements after July? The thing I'm trying to get a sense of here is the dynamics of Q3. So obviously, you grew 8% year-over-year in July. But just comparing to last year, I think that August and September was really, really strong, primarily September with Arizona launch. So how should we think about full Q3 growth comparing to the trading update in July?

Many factors out there, as we say, Oscar, and many things in flux. Japan remains in flux. So I don't know that there is a clear trend as of yet. One month looks different from the next, but it really depends how the news cycle shifts there. And a lot of the press that has been talking about gambling moves off to [indiscernible] other things where they never talk about gambling, and that allows us to do what we do there. So I think that's over this next quarter, that's going to remain shaky there. North America is going to be very strong. We have the new states of New York, Louisiana and Ontario for sports additions. We don't have a state launching particularly and is known to be definitely launching in September. We have Kansas coming in, so that's another bolster into the Q3 or Q4. So North America's looking strong. Yes, September is a hard comparable with the state launching the first month of sports season, a state the size of Arizona with 20-ish operators. But I'm very, very bullish on the North American forecast for the rest of the year. And then let's not forget the World Cup. We're gearing up for that in many of our other markets because most of the other markets follow that sport. And so that's a Q4 event. I expect Q4 will look very strong. So I don't know if there's anything else to add, Peter, on that?

No, just to put in a question that also came in here in the chat that maybe fits into that as the remaining part of the year looks particularly strong from a North American perspective, and the question was, is North America going to be 2/3 or even more of total group revenue? Well, we cannot really state how that is going to look like. But naturally, North America already contributed almost 2/3 in the first quarter. That was in relation to a launch in both New York and Louisiana. But very, very clearly following the trends that we have seen over the past years with an increase over the years from '18 to 1/3 to 1/2 and now to more than half, that is definitely, of course, the direction that we are going to. It also depends on the outcome and the consequences of the strategic review, which is a little bit too early now to share. But what is the future setup in Europe. For example, what are we focusing on there from a margin perspective, from markets, as Michael mentioned that before, that will naturally have an impact on the relative shares in our group.