Catena Media plc (CTM) Earnings Call Transcript & Summary

Welcome to the Catena Media Q4 2022 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Michael Daly; and CFO, Peter Messner. Please go ahead.

Good morning. I'm Michael Daly, CEO of Catena Media. And I'm joined by Peter Messner, our group CFO. This is our Q4 2022 and year-end report. Today, we'll cover the Q4 highlights of the group, focusing on continuing operations, thus discounting the impact of assets divested between Q3 2022 and early Q1 2023. The information for full company, including now divested assets as well as the breakout of continuing operations, are all available in our full report. Also in today's presentation in our written report, you will see we have started to breakout our geographic segments, in particular, the North American business, which makes up 78% of our revenues in Q4 of our continuing operations. The North American business is now the primary focus for the Catena Media team to fully exploit the high-margin opportunity there as determined by our 2022 strategic review. In Q4, North American revenues grew by 31% year-over-year with a strong performance by the team in the late November launch in Maryland as well as a very healthy NFL mid-season performance. The North American market continues to see exceptional sports growth for Catena Media, with an 81% year-over-year growth in sports revenue there and 59% for all continuing operations. Media Partnerships, first launched in mid-2022, have now started to demonstrate their value in our market expansion plans, and we will continue to see other opportunities that can provide similar top and bottom line growth across the states and provinces. Concerning the bottom line growth, the adjusted EBITDA for North America rose 9% year-on-year in Q4 to EUR 12.1 million, which is a 57% local margin. This high level is [Technical Difficulty] including the significant investments we've made in North America the last 2 years to create a dominant position on SEO organic search, which is the highest margin type of affiliation. From this strong starting position, along with a very healthy balance sheet, I expect we will now further expand into areas such as the aforementioned Media Partnerships as well as develop at scale functions like played media and CRM marketing. These are affiliation paths where we see great opportunity for additional future growth in North America. But for now, we've been laser-focused on the build-out of our high-margin organic search engine structure, which will remain our cornerstone. For the group, our continuing operations grew to EUR 27.4 million, up 15% in Q4 year-over-year. Continuing to support our targets of double-digit growth, adjusted EBITDA was similarly up at 14%. Continuing operations held to the same high 45% margin in last year. This was achieved through aggressive cost management in our Rest of World businesses. Japan continued to feel the effects of prior COVID lockdowns and yen weaknesses. We continue to develop our teams and products in the market and are excited by the growth potential. Our core markets in Europe, Italy and the U.K. saw higher revenues driven by a strong World Cup, and I'm thankful of the teams for all the work leading up to and during this event. Q4 of 2022 also saw the conclusion of our strategic review, which provide a clear direction on streamlining the operations to focus on the high-growth regulated markets in North America. These are some of the most stable and predictable environments for operators and affiliates like Catena Media. And thus, long-term investment into these markets can be properly planned to provide the highest return on investment. 90% of our group revenues now come from regulated markets after divesting European gray market performance marketing businesses, AskGamblers and Financial Trading. With a continued crackdown by regulatory bodies in gray markets, Canada, Sweden, Australia, the upcoming on the large gray operator market in Curacao, to name but a few, it was Catena Media's determination that we can produce more reliable, sustainable growth by redeploying our capital in markets like North America focusing on products built for those types of regulatory environments. Sale of AskGamblers and associated global brands for EUR 45 million frees up resources for M&A and organic investment to further our position without taking on excessive levels of debt. Robust financial performance in 2022 from continuing operations, particularly in North America, validates the strategic focus on efficient and disciplined operations in high-growth, regulated and stable markets. I'll now turn it over to Peter Messner for some more comments.

Thank you very much, Michael, and welcome to our final quarter earnings call from my end as well. Taking a look at our segments, we had a very strong quarter from a sports perspective. Sports, the one of the two remaining segments, Financial Trading has been divested, Sports accounted for more than half of the quarterly group revenue from continuing operations and grew by 59%, where North America even grew by 81% during that quarter. Apart from the launch in Maryland in November that Michael just mentioned before as well, we saw continued strength in the multiple already established states that included New Jersey, Pennsylvania, Colorado and West Virginia. Illinois had even a high triple-digit growth following the removal of in-person registration earlier during the last year. Casino, on the other hand, accounted for 48% of total revenue in the quarter. And while it was rather unchanged in North America, the Rest of The World markets outside of North America made the segments totally decline by 11% year-on-year. As Michael said, noteworthy in Japan that is due to historically low yen and lower traffic levels as compared to the previous year, and when the country was still in a COVID-19 knockdown as well. In Europe, the Italian casino declined, although the new depositing customers increased quarter-on-quarter as compared to the third quarter. And Germany still has quite a long way to go as we see that when it comes to player activity and also to operator spending. Turning to our cost development. This organization has been going through the last couple of quarters and the entire last year in a cost transformation with a strong focus on North America in order to be rightsized for that growth that is still upcoming. Our cost base for continuing operations in the main cost lines, which are our direct costs, personnel expenses and other operating expenses, had a very different development depending on that geography. So our cost base in North America, which is roughly 62% of the entire cost base of continuing operations, grew by 75% and that is also in line with the previous quarters from a year-over-year comparison. And that reflects the investment into future growth and in also preparation of upcoming state launches. There is a significant cost already taken now in preparation of content and SEO and technology and sites for those states that we expect to launch in the future. Direct cost in North America grew in line with the total cost growth in North America and is particularly a function of increased media and content partnerships. That cost here reflects the revenue share with our media and influencer partners in particular. Outside of North America, the total cost from continuing operations in the Rest of the World segment and shared central operations decreased by 25% year-on-year. And as Michael mentioned before, that's a result of our European restructuring that was done last year and executed in the third quarter and the continuing cost optimization measures in all these Rest of the World and Central areas. And then all in all, considering the cost transformation towards higher North American costs, the group margin for adjusted EBITDA remained unchanged at 45%, as it was in Q4 in the previous year. Finally, taking a look at our balance sheet, as of the end of December, the total assets were at EUR 322.6 million and total equity was at EUR 222.5 million, which includes the hybrid capital securities of EUR 44.2 million, which all results in an improved equity-to-asset ratio of 69%. We have still a small amount of amounts that are committed on acquisition that is deferred payments from previous acquisitions. It is an amount of USD 5 million or EUR 4.6 million on the balance sheet, and that relates to the final payment for the Lineups.com acquisition that we did 2 years ago, and this amount is due now in the beginning of May 2023. After that, there will be no further amounts committed on acquisition of any previous acquisitions. Borrowings totaled to EUR 76.4 million and that comprises our corporate bonds that had a nominal value of EUR 55 million, our bank term loan that is repaid on a quarterly basis and our revolving credit facility of EUR 10 million. Out of the term loan, we will repay EUR 8.3 million within the next 12 months. By the second quarter of next year, 2024, the corporate bonds with a nominal value of EUR 55 million has to be refinanced, and we already started this process with early talks. Net interest in bearing liabilities totaled EUR 53 million, and that resulted in a leverage ratio in comparison to the last 12 months of adjusted EBITDA of 0.9. Cash and cash equivalents at the end of December were at roughly EUR 25 million, and they are right now also following the first tranche payment from the sale of AskGamblers. That cash balance is roughly EUR 40 million right now. Including these deferred proceeds from the EUR 45 million AskGamblers sale and the expected net cash generation during this year, this company will be in a net cash position in the next 12 months. And with that outlook, I turn back to Michael for giving an outlook and the January trading update.

Thank you, Peter. Ohio launched January 1st this year, after a period of preregistration. Our teams having been forged across numerous state launches, including the phenomenal launches in January 2021 of New York and Louisiana, achieved record initial launch numbers in Ohio for Catena Media. I'm very proud of the team's work on this. Group revenues in January 2023 decreased 4% year-on-year. With our heavy weighting of North America and our exceptional launches in January 2022, where we saw almost 65% year-on-year growth from January 2021, it was hard to exceed those numbers, considering the state of Ohio, which launched this January, is less than half the population of those states launched in January 2022. I was very proud of the team's work there on this launch. Excluding New York, Louisiana in 2022 and Ohio in 2023, revenue from North America grew 19% year-on-year in January, all organically. Looking out a bit, we look forward to the launches of Massachusetts, currently targeted for March. As for the longer term in North America, we're active in 25 states and provinces. Legal online sports betting is available at 49% of the addressable North American market, so a little less than half is with -- and half still to go. That number is only 16% for online casino, already a strong revenue and EBITDA driver for Catena Media in North America, this indicates a significant long-term growth potential for our business. I've mentioned Massachusetts looking to launch online sports betting in March. Vermont and Maine are also moving forward on online sports betting. We see promising signs at Indiana and the giant state of New York may introduce online casino legislation and legalize within the next 24 months, which between them is larger by population than the states of Michigan and Pennsylvania combined, which are 2 very large drivers of online casino revenues for us today. As I mentioned earlier, there are numerous media partnerships and other affiliation channels we're continuing to explore for additional growth across the existing markets. Key takeaways from our Q4. We had strong growth, driven by Maryland and previous state launches and sports betting overall. 90% of our revenues now come from regulated markets, making us more stable and sustainable. We have a streamlined strategy with a North American focus and are in a position for M&A potential opportunities. Our expertise in online search and strategic media partnerships will ensure competitive advantage in existing markets and readiness for many future launches. And we will continue to maintain strong operating margins or strong margins through operating efficiencies. I'm very proud of the team in this quarter, and I look forward to many more strong quarters ahead. With that, we will turn it to the operator for questions.

[Operator Instructions] The next question comes from Oscar Ronnkvist from ABG Sundal Collier.

So just first, on the U.S. target of exceeding USD 100 million, do you have a time line on that, which you had before or how should we interpret that one?

Thanks for the question. We're not giving a time line at this point. One thing we have seen is the ebb and flow of states launch periods makes that a little hard for us to nail down with January with Ohio starting strong, very happy there. Massachusetts ahead maybe in March. But if it falls into April or May, it may look more like potentially in Ontario, which was a bit lackluster at start because it fell in an off-season. So we're not putting out guidance on that, but we are absolutely affirmatively going to pass that number as our objective.

Okay. Understood. And then now, I mean, the business is almost all exclusively consistent of U.S. operations or North American operations is like for a 1/5 of the business in total. And you reiterate your targets of having like organic growth exceeding 10% or double-digit organic growth. When do you think that you can come up to the double digits?

So we were double -- if I understood your question, in Q4, we were double digits.

Yes, yes, yes, sure. I mean, like now you started negative 4% in Q1, for example. And if we just exclude the favorable foreign exchange rates with the strong dollar we've seen in 2022, I don't know if you exclude that one in the organic growth, but -- so just looking FX adjusted, maybe we could see some U.S. dollars coming down relative to euro in 2023? So I was just thinking of sort of a time line from the January basis here. So do you expect to come up to double-digit growth, like already from Q1 or should we expect that one to take a little bit longer?

I don't think we've provided that forward-looking guidance at this point. Q1 will be challenging, in the sense that, yes, we're overcoming very strong comps particularly in the January period, but also that led into New York and the Super Bowl, et cetera, last year. So we are pushing towards that. That is always our goal.

All right. Understood. I'm sorry for the misinterpretation. Just the next one. When we tried to look at the AskGamblers development, it seems like the adjusted EBITDA has deteriorated from EUR 2.4 million in Q4 last year to EUR 0.4 million, but that's obviously on the total continuing operations. So can you just explain like the discontinued operations, adjusted EBITDA deterioration from Q4 last year? And also just the OpEx reductions from AskGamblers that we've seen because you sent out a trading update showing EUR 10.8 million in continuing operations adjusted EBITDA and now you actually reported EUR 12.3 million, so it's a bit of a difference there. So could you just elaborate a little bit on the cost reductions you've made recently from the continuing operations?

I think I can start with that, Oscar. Thanks for that question. So one thing to keep in mind from a Q4 previous year to Q4 this year, so from 2021 to 2022 is that in Q4 2021 within discontinued operations, you had certain European gray market assets that have been divested at the end of Q3 2022. So that is distorting a little bit the year-over-year comparison because in the previous year, you still had that. And in Q4, we didn't have anything either on the revenue side nor on the adjusted EBITDA contribution. That was the divestment that we announced with the Q3 report that was finalized at the end of Q3 2022. So that's one element. The other element is that from the remaining parts of discontinued operations, the Financial Trading segment, that is entirely divested by now, had already a negative EBITDA contribution that a little bit further deteriorated during the quarter. And the third element is in comparison to our trading update that the entire total group adjusted EBITDA of EUR 12.7 million during the quarter was exactly the same that we also mentioned in the trading update, whereas we had a consideration of allocation of the shared central operational cost between continuing operations and discontinued operations, and that is then the remaining piece here in the comparison. That is a cost. I think as you commented in your analyst update, we're not necessarily faster in cost-cutting, we're going exactly according to that plan as we also previously announced in the European restructuring and further streamlining measures that will naturally come as a result of these divestments and the discontinued operations. And that is going to happen now as we speak. But it's not necessarily so much faster than you would have thought. It's according to plan, yes, so there's some deterioration as compared to our plan, but it's not that there's a false misunderstanding that we are cutting even faster than we had planned. No, these are the elements that I just explained before.

Got it. I just have one more question, more on the outlook in the U.S. because, I mean, obviously, we have seen -- for a while now, we have seen some comments about marketing cuts from operators, but that doesn't really seem to affiliate that much also when you look at like Better Collective's U.S. performance and then also your strong Q4 performance here despite the marketing cuts. But then just on -- well, we can see like Better Collective, for example, pushes for revenue share contracts and it's, I would say, perhaps one of the main competitors in the U.S. space for you, still you don't really seem to put out any rev share contracts in the U.S. Am I correct there? Or how are the talks going? And what are the demands from the operators in these types of markets where they are trying to reach EBITDA breakeven or actually make some profits?

We've started to do some revenue share in North America. It's just getting off the ground. We've signed some significant revenue share with operators that we expect to see the fruits of over the coming months and years as the rev share works that way. So we are seeing some start to look at transitioning that in revenue share deals that we find acceptable, which for us are truly lifetime revenue share. There've been other things put to market that are shorter term and don't make sense, given the value of the CPA versus the net present value of a revenue stream from a rev share. But we have started to do some and we expect that to continue. And I expect the operator desire for profitability will continue to forward those discussions.

[Operator Instructions] There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

Thank you. We do have a few written questions. So we have questions around how is the divestment of European assets progressing? So this is an ongoing process for us to evaluate any bids for European assets. When and if those will be sold, we cannot say, but we foresee any of that concluding during 2023. So that's about where we can comment on that at this point of that investigation. Another one I see is, as we say, there's a question concerning the U.S. casino online regulation lagging sports betting and do we see that catching up during 2023? I don't see that catching up during 2023. Casino -- online casino in North America is a more contentious thing. It is less acceptable right now than sports betting. Sports betting has had an easy go essentially being regulated across the states and that continues on and we'll continue on probably at a faster pace for the next few years. Online casino, though, is proving very valuable to the states that have it for their tax collections, et cetera, much more so than online sports betting. Online casino will continue to go across the markets, and that will happen over the next number of years. Catena Media is exceptionally well positioned to take advantage of that, and we'll continue to hold that positioning. Online Casino is a higher-margin business and a more -- it's a more unique niche part of the business than anybody even talking about sports. There are lots more media outlets handling sports than they are focused on online casino. We expect that to be a very significant part of our business in the long term. You had another Peter?

Yes. So a combined question in relation to our cash deployment and what are we doing with proceeds also in relation to buybacks and any other usage of cash flow? So in relation to buybacks, no, we have not announced with this report that we would immediately resume with the buybacks, so we will announce that as soon as that happens. On the bigger scheme of what are we doing with the cash, we currently have, as I said in the presentation, a cash balance of EUR 40 million. And there are several use cases for that. One is, and to keep that also in mind, debt refinancing. We will be in a net cash position next year, and we have outstanding corporate bonds with a nominal value of EUR 55 million that are to be either repaid or to be refinanced during the second quarter of next year. The other use case is, of course, the aforementioned share buybacks, where we have the mandate and potential dividend payments and, of course, acquisition, strategic M&A. So there is a toolbox that exists. When that happens, we will announce that, obviously, in further detail, but these are the options that we apparently have.

I'm not seeing any further questions that we're going to comment on. Do you, Peter?

No. I mean the only question may be in relation to the Latin American market and other markets apart from North America, if I may start here. So North America is the focus, as we said. That is very obvious also from the market update that we had in our deck in relation to the growth potential. You saw that only roughly half of the North American population in these addressable markets have access to online sports betting. And therefore, for us is a target market from an affiliation perspective, whereas it is only 16% in casino, and Michael just explained before that question in relation to lagging behind and what the potential continuously is. The compound annual growth rate in North America, when it comes to online in the upcoming years, is 17%. It is a little bit high in casino, 19% in the upcoming 5 years and sports 16%. So there's a lot of potential, it makes a lot of sense to focus on that. We have focused previously on Latin America. It is still very small. It is upcoming. There are other markets like our APAC region. So there are sort of potentials. But the main focus and the outcome of that strategic review from last year is, of course, the focus on North America and the potential there.

With that, I think that will conclude the questions section of this and our presentation for today. We thank you for your time and attention, and we look forward to talking to you again at the end of Q1 with a similar report. Thank you.

Thank you.

The presentation has now ended. Thank you for your participation.