Catena Media plc (CTM) Earnings Call Transcript & Summary

Good morning, and welcome to the Catena Media Q3 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Michael Daly. Please go ahead, sir.

Thank you. Welcome to Catena Media's Interim Report January through September 2022. I'm Michael Daly, CEO; and I'm joined by Peter Messner, our group CFO. Catena Media continues our journey in North America, seeing a very healthy Q3 there with 25% uplift in revenue from Q2 and 11% growth year-over-year despite the very tough comparables from 2021 for us. The quarter saw the launch of Kansas in September, a relatively small state, but one that overweighted for us in the launch month. The quarter also saw the start to the 2022 NFL season. I am particularly pleased with the 11% annual growth given that last year's Q3 had the strong launch of Arizona, a state approximately 2.5x the size and with more operators at launch. If we were to put aside these onetime launch events of Arizona last year and Kansas this year, Catena Media produced 43% annual growth in sports revenue in North America for this quarter. On the casino side, we achieved double-digit revenue growth across the U.S. and Canada with our teams also focused on this potentially larger long-term business, maintaining our top position. The quarter also saw the start to our partnership with Advance Local's NJ.com in New Jersey. This was our first major media deal, and we're very excited about the opportunity of this new revenue stream. We are already developing other such partnerships. Catena Media has been and will remain more cautious on these as we see great opportunity in them, but only when the partnership and the underlying sites fundamentals ensure profitable development for us as well as our partners. However, revenues were slightly down year-over-year. The 2% decline we attribute to worsening macroeconomic conditions impacting revenue share across Europe as well as lower spend in Japan. Adjusted EBITDA was EUR 11.7 million in the quarter, a 36% margin. This was down from the 50% margin last Q3 with our continued heavy investment in the North American market, growing the business there, preparing for Kansas as well as for 3 more upcoming states. It is worth noting that our North American margins remain well above the total company average despite this heavy investment. And for me, this bodes well for the future of this expanding market. New depositing customers shrank as our focus on North America means targeting higher value customers versus larger lesser value markets. With our optimizing for North America and other regulated markets and the higher-margin business, those are for Catena Media, we divested some less profitable gray market assets during the quarter. This was one -- just one part of our strategic review and is not yet the conclusion for the larger assets included in the process, as described in our May announcement of this review, including AskGamblers and Financial Trading, which, as of this date, remain with the organization, but also on a path for divestment. I will further comment on the strategic view later in the presentation. Italy, a core regulated market saw increased revenues and players captured, thanks to our tech and operations team product development program. There were, unfortunately, continued headwinds in Germany, where operators are still not capturing the value from potential players, our sites to delivery. We expect there are still some months ahead before this accelerates as the learning curves happen there for operators. I'll now turn it over to Peter for some more details on the quarter's developments.

Thank you, Michael, and welcome to the third quarter earnings call also from my end. On the revenue segmentation. So following a very low sports season in North America in the previous quarter, Sports segment, as expected, increased its share of total group revenue in Q3 and represented 43% of the entire group revenue. We also saw a 13% increase as compared to Q3 last year. The Casino segment, been the other way around, accounted for 56% of total group revenue and decreased by 10% as a result of the strained market conditions in Europe and in Japan. There were no material changes in the segmentation by source. And the cost per acquisition, the CPA is the dominating source of revenue with 54% share. At the end of the quarter, the company sold certain low-margin and gray market-focused assets, as Michael also said before. This sale will positively impact the margins in Europe from Q4 now as we entered into, while reducing the revenue run rate. And we are posting the comparable figures last year and of the first half of this year, so that can be considered in any further forecast. As Michael mentioned, these were assets managed out of Europe, focusing on sports in gray markets, has nothing to do with the global casino brands or as AskGamblers or the Financial Trading segment that is still up for divestment in our ongoing strategic review. Turning to the next slide on our cost development. Investing in innovation and the long-term growth has been the continuous theme for several quarters, as you see, and we have reached now a cost base that was only marginally higher than in the previous 2 quarters. The direct costs increased by 19% year-on-year, and that is primarily reflecting the growing revenue contributions from content and media partnerships in North America. The personnel expenses increased by 27%. That's roughly the same year-on-year growth rate as in the first and in the second quarter of this year as we reported. And the main driver there is the continued investment in North America in readiness of all the future market launches. Compared to last year, the number of employees in North America, the headcount increased by 73%. Other operating expenses increased by 22% year-on-year, and that's primarily a result of the investment in technology, SEO and other professional fees and expenses. As part of the ongoing strategic review and also as announced during August, we completed restructuring measures in Europe, and these measures will generate annualized savings in Europe of roughly EUR 5.5 million, partly that will start to be seen in the quarter right now, but in full effect from the first quarter 2023. The majority of those savings around 70% will reduce the run rate of personnel and other operating expenses, and therefore, will have a positive impact on the EBITDA margin of the European part of the business. Going through our 3 segments that we report on, the biggest one, Casino, accounting for 56% of group revenue and saw the strongest month, in fact, in September for our North American casino brands, where we had a double-digit growth. It's particularly noteworthy in the light of all the expected future casino openings in North America where we deem our company to really be in a pole position. Outside of North America and Japan, the decline on a year-over-year comparison has continued from Q2 as a result of the impact there on player surge and engagement. And in addition, from a macroeconomic point of view, the yen also hit a 32-year low that negatively impacted player deposits at the value of those. Else Casino revenue fell in the rest of the world markets due to those challenging market conditions that we have there and continuously reported on. Switching to the second biggest segment, Sports, which accounted for 43% of group revenue. That increase of 13% year-on-year was fueled by the launch in Kansas, as Michael mentioned, and also coinciding of course, with the start of the NFL season in September. North American Sports increased by 6%. Despite that very strong launch in Arizona, taking that effect out and also taking Kansas out for more like-for-like comparison without the effects of the launches and the spikes that we usually see, there was this 43% year-on-year, which is a significant impact. Arizona is roughly 2.5x as big as Kansas from a population perspective. What was announced during August was our first bigger media partnership deal with Advance Local's NJ.com site, which we launched during the quarter, which started, of course, to contribute to overall numbers, and we will continue to explore similar opportunities which we choose very carefully then. We also saw very strong contributions from both our Lineups and i15 media assets acquisitions from last year that played into that, reaffirming the right strategy when it comes to these asset acquisitions. Finally, the smallest segment, Financial Trading only contributed around 1% of total group revenue during the quarter, primarily as a result of these challenging macroeconomic market conditions. There's a lot of risk aversion for traders and the current uncertainty that we have seen in this quarter and also in the previous quarter just added up to that. We saw a certain stabilization though in trading volumes and activity of the more experienced traders. And considering the high level of risk aversion of traders in general, we enhanced offerings or pivoted into lower-risk asset classes like blue chip stocks and commodities such as gold. As traders, the flagship brand in that segment saw traffic increase in several markets. And it is a bit of a waiting game for a market upturn again and see what is then happening. Cash generation, and I repeat this almost every quarter, Catena Media's business model comes with a very strong cash generation. Then, of course, it is a question of out of the operating cash flow, what has any surplus cash outside of the usual reinvestment into the business through capital expenditures and product and software development, what has this excess cash being used for? And primarily, just to remind ourselves in the past year or 18 months that has been used in 3 areas. We have done quite significant M&A, that's the first area, with Lineups and the i15 media assets. And that also came with a deferred payment plan. These acquisitions had roughly a value of USD 90 million. And the last deferred payment will be in relation to Lineups, and that is upcoming then in May and then these deferred payments and commitments with regard to the acquisitions are gone for these 2 acquisitions. Secondly, we have been heavily improving our capital structure by then and continued deleveraging. We have refinanced the legacy debt structure during the first half of last year and since then deleveraged quite considerably. And thirdly, we have distributed to shareholders through share buybacks that have been done between September last year and April this year. And there is, of course, an intention to continue with that as well. We are right now in a situation of the strategic review that we cannot commence as we speak because of restrictions that we are in, in particular, in relation to Market Abuse Regulation and so forth. Operating cash flow was EUR 9.3 million, which is 6% below last year's Q3, but the cash conversion has been 80%, which was 20 percentage points higher than last year. The changes in working capital have been around minus EUR 2 million as compared to more than minus EUR 5 million last year and also reflected a very normal seasonal pattern that we have seen throughout the years. On other cash flow, on the financing cash flow side, we had an outflow of EUR 4.3 million, and that is the usual, so to say, run rate there with -- in relation to the repayment of our bank term loan on a quarterly basis and interest payments in relation to our entire financing setup, which is the hybrid capital securities, the corporate bonds and then the bank term loan and our revolving credit facility. At the end of that quarter, the balance of cash and cash equivalents was EUR 28.3 million. And finally, as I already mentioned, our balanced capital structure, let's view on the balance sheet. At the end of the period, the total assets were EUR 348.9 million, and total equity was EUR 231.4 million, including the hybrid capital securities that are treated as equity. The amounts committed on acquisition that I talked about on the previous slide in relation to our acquisitions of Lineups and i15 media assets amounts to EUR 50 million, and they are all due within 12 months. The first bigger tranche of EUR 10 million is due now in December, and the final EUR 5 million is due in May next year. Borrowings, roughly EUR 76 million, comprised, as mentioned, the corporate bonds, the bank term loan and the revolving credit facility and an amount of EUR 8.3 million is to be repaid within 12 months. That is the down payment of the bank term loan. Other liabilities, EUR 26.2 million are mainly trade and other payables as well as certain deferred tax and lease liabilities, and that's in line with the usual business development. The net interest-bearing liabilities have been EUR 51.3 million, and that resulted in a further reduced leverage ratio, which is debt balance in relation to our last 12-month adjusted EBITDA of EUR 0.86 million. At the end of September, and I usually say this as well, there are roughly EUR 33.8 million outstanding warrants. Those ratios along our hybrid capital securities rights issue in the summer of 2020. And these warrants can continuously be exercised during one of the exercise windows that are following the quarterly or the year-end report until and including the second quarter report in 2024. And with that, I hand back to you, Michael.

Thanks, Peter. Now to the all-important question of our strategic review. We recognize this has been a long process for the organization and appreciate our investors' patience during the process. The parts solely within our direct control have been implemented and completed. Other parts involve third parties and also face changing conditions in the macro environment, which have required a longer process. The good news is we are nearing the end of it all, and I cannot update on much of it today with an even fuller and final view expected to be righted during Q4. The strategic view has 2 parts to it. One part is our streamlining our business for growth. It is clear to Catena Media that the next few years, our largest opportunity, our highest margin opportunity exists in North America. It is a market with an appetite for expansion with a view that gambling can be a safe part of the ecosystem and a market where Catena Media has become the strongest affiliate in our industry. All of that, along with the margins that, as I said, are well above the company's average and the industry's average. Given this environment and the macroeconomics, which North America may be partly buffered from compared to Europe, we see the optimal path to focus our organization on maximizing our opportunity on that continent in the near term. Our strategic review is set out to optimize our organization to have this focus to ensure that every euro spent anywhere was weighed against the value of investing in that same euro in North America. The review led us to the conclusion to focus the European business on fewer core high-margin regulated markets, namely the U.K. and Italy, while building the foundations of long-term growth in noncore assets and markets, such as Germany, where the aforementioned external issues, we made our ability to capitalize on it for now. We have, during the quarter, restructured our European operations to align with this, and this work will produce cash savings of EUR 5.5 million annually, exceeding our initial EUR 5 million target announced in August. This savings includes a 25% reduction in the European headcount, actioned in Q3 with full effect realized by Q1 2023. This was a difficult process for the organization. I want to commend the entire team in Europe for their work on this and their dedication, which led to even larger cost savings than targeted. This savings in Europe will essentially be capital we redeployed in the North American advancement. The other part of the strategic review is the divestment of assets, not aligned with the organization's reaffirmed focus on North America and other regulated and stable markets. During the quarter, we have -- as we've said, we divested certain gray market assets, which will positively impact Europe's gross margin and EBITDA margin from Q4, though reducing revenues. We are in advanced discussions over other specific assets to include assets in our Financial Trading group as well as AskGamblers, among others in our Global Brands Group and have engaged an adviser to help manage the multiple interested parties. We will provide a full announcement in the near future upon completion, likely during this current quarter. Again, we, I appreciate everyone's patience during this somewhat convoluted process. And I fully expect we'll all be happy with the outcome and the focus this allows the organization going forward. Looking ahead, in the nearest term, North America continues to see a strong NFL season with October revenues up 20% from last year. Again, comparable with last year having the parts of the Arizona launch continuing compared to this year's Kansas is a much smaller state continuing. The total group declined 1%, excluding the divested assets. The yen weakness and the aftermath of political issues in the summer in Japan continue to impact the revenues there, also affecting total group performance. In the mid-game, Catena Media's North America continues with what looks like wins ahead. The media partnerships are just starting for us with lots of upside potential if managed appropriately, which Catena Media will. Upcoming launches in Maryland, Massachusetts and Ohio all add to the total market size. And in both Maryland and Ohio, we've now kicked off pre-live campaigns with multiple operators, which bodes for a strong launch in Q1 for Ohio at any time between end of Q4 and Q1 for Maryland. Further out, we see 2 states with active online casino discussions that could see them opening in the next 24 months, and we are by far the leader in that segment. Around the globe, there are other promising developments. Our Japanese teams trailblazing efforts in animated video and social media campaigns indicate a bright future there. LatAm is coming in a focus for our organization and that seems well timed to the blossoming of that market in the next year or years. Even what I say is a very small investment for us, eSports shows glimmers of a bright future. We are seeing rapid user growth and know that over the next number of years, that business will only improve. To sum up all of this, North America is Catena Media's key focus and our strongest business, which is only getting stronger. During Q3, the start of the NFL in Kansas launch, and our team performed well. Our efforts have been in Q3 to refocus the business on this opportunity, and we are now positioned to do so. Media partnerships on the next area for us to explore an affiliation in North America, and there are many opportunities after that. The team's efforts to streamline led to EUR 5.5 million in annualized savings in Europe that will allow further room for investment in North America. And Q4 starts strong with October 20% up year-on-year in North America. That's our journey to date. We'll now open up for questions. Operator, over to you.

[Operator Instructions] We will take your first question from Mikael Laseen from Carnegie.

I have a few questions. So I'll start with a strategic review. If you can say something about the approximate cash effects from divesting roughly 8% of your revenue, and I think it was 5% of EBITDA in the first half, if I look at that, that's the first one.

So cash effect was we did dispose of assets related. So there was a net loss reported on that business because of what it was on the books for.

Okay. I understand the impairment implications but that you did get roughly EUR 12 million for the assets. But just wondering if we would have a positive cash effect now in October, maybe in Q4 or if you got the funds for the divestment in Q3?

Maybe I'll switch into that, Mikael. There was a minimal cash effect in the Q3 result as well, which is in the cash flow statement netted out with capital expenditures. Other than that, it was not a huge effect, mainly based on the fact that there is a deferred payment schedule when it comes to that divestment. There is no material effect to be expected now in Q4 that goes then into the next year. Other than that, we haven't disclosed the purchase price based on the agreement and the confidentiality of that.

Okay. Got it. And when it comes to the margins here in the divested units, are they representative of the profitability you have in the European businesses that you haven't divested?

No.

Or are some units much, much higher or much lower?

This was, by far, I think I -- just safe to say, Peter, our lowest margin business in the company, if not just in Europe. So we saw reasons that these gray market assets, which focused on high volume but very low value and made a very low margin for the investment required for that or it made little sense to be part of the business going forward, particularly in some of those markets, which are going to regulate over time and so this business would only shrink in value. So yes, very low margin. It really helps the European business improve its overall margin because of this -- the loss of this impact of that on the entire unit.

Okay. Good. And I have a question on the sports revenue drivers in the quarter. You had a relatively low NDC intake, but quite high revenue per NDC. What is the reason behind this? And how should we think about the volume/value mix going forward?

So that is an effect of North America where every player is worth that much more. And with our focus on the percentage of our business growing in North America, it's really about high-value players. So it allows us to optimize for a lower number of NDCs, which are more valuable, which actually means we can be more profitable in doing that as well because it allows for higher margins because we're focusing on a smaller amount versus a wide net. Same thing with some of the assets, the gray market asset we divested. They were very large numbers of NDCs, but not very profitable ones in any one of those. So we are optimizing for high-value NDCs, not just for NDCs as a number.

Okay. Has it anything to do with the mix by state with respect performing better or less good?

I don't believe so, but I'd have to look into that further to give you real information if there's any real variation between the states in terms of that impacting that value. But there are different values in states. But overall, most of our deals and many of our deals in North America are nationwide at this point. So our CPA rates per NDC are similar even though it's in different states which have different underlying economic values.

Okay. And just to catalog more questions, if I may. How should we think about direct costs in the coming 1, 2 quarters? Those costs increased a bit sequentially now. Will it go up further in Q4 when the partnership maybe been more in full swing? Or how should we think about it?

Yes. So I think it's fair to say that direct costs will go up if we do -- if and as we do more partnerships so those partnerships grow. Media partnerships are a different animal from our core focus, which is our high organic business, which is the highest margin business you can do. These media partnerships have direct costs. We have a third party -- a partner involved. So they will take some share of this, and that is the direct cost for the most part. So while there's upside of the revenue potential and for us making sure there is an upside on the bottom-line potential as well, there will be increased direct costs for those type of partnerships. And we do see opportunity for a number of more of those in North America.

Okay. So that part is included in the direct cost line?

Well, if you essentially do a media partnership with a media outlet, in our case now at Advance Local, who is the company behind NJ.com, then whatever you do -- because what we bring in or what an affiliate would bring in is the affiliate know-how of monetization. What the media partner brings in is the reach and the traffic to reach the more casual gamers. Their value will be a little bit lower, but it's still a bottom-line contributor. But whatever we then make as a partnership towards the operators, that revenue has to, of course, be shared between the media partner and the affiliate, right? And that cost is considered as a direct cost.

Okay. Yes, of course, you can report a gross or net, I guess, but just curious, sir. We can take it offline maybe in more detail later on. But just a final one. Can you expand your intention with the German focused asset that you have? Didn't really get exactly what you meant.

Sure. I can elaborate on that some. So I think our teams in Germany have been doing a very good job with the products. We have been -- I've been happy with the growth in our traffic. The challenge we have seen to date is still the number of operators and licenses and the marketing spend there and also the conversions quite frankly. So we are sending traffic to a number of operators and the conversion rates are not very healthy from our perspective. They are having trouble with some of the new rules and regulations. And so the market still hasn't stabilized into a churning engine, let's say. We are focusing on, like I said, the U.K. and Italy, we still have, by no means saying that Germany will not grow to a very significant market for us someday. It's just in the next 12 months, we don't see that, particularly also with the other things going on in Europe outside of the gambling industry and just general trends in Europe for the next number of months. So we are being cautious on Germany. We are keeping our teams in place and working on our products, but we don't have the greatest of expectations that it blossoms as a market in the next 6 to 12 months and probably a little beyond that is when that starts to take effect. That's our view at this point. And so again, we're just looking at -- with the euro and dollar almost in parity, where is it best to put that investment for the near term.

[Operator Instructions] As we are showing no further questions at this time, I would like to hand back for closing remarks. Thank you.

So I want to thank everyone for your time and attention today and your interest in Catena Media. It has -- continues to be an exciting journey for us as we grow our North American footprint, optimize the rest of our world and head towards conclusion of our strategic review, which we expect to give further announcement on later in the quarter if things continue as expected. And from there, we expect Catena to move forward with a renewed growth trajectory based on the largest market in the world for gambling. With that, I thank you all. Thank you, Peter. We'll talk again soon.