Catena Media plc (CTM) Earnings Call Transcript & Summary

Welcome to the Catena Media Q1 2023 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 Q1 2023 interim report. Today, we'll cover the Q1 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. The North American business, and exploiting the high-margin opportunity there, is our strategic focus, as determined by our 2022 strategic review. In Q1, North America made up EUR 28.9 million of the total company's EUR 35 million in revenue, 83%, at an adjusted EBITDA margin of 67%, helping drive the entire organization to 59%. And I'm very pleased that our leverage ratio is now at 0.44, which we consider to be a good place in today's high interest environment. Peter will talk more about this later in the presentation. In Q1, North American revenues were EUR 28.9 million, up from Q4 of EUR 21.5 million, a 35% quarter-on-quarter increase from a strong Q4 but was down year-over-year by 2% with an exceptional comparable for us given the early performance of New York and Louisiana in Q1 2022. This Q1, we saw successful launches in Ohio and Massachusetts, one early in the quarter and one later. We are very proud of the work there by our teams and look forward to both during the fall and their first full NFL season. During the quarter, we did see an uplift in North American Casino by 8%, with direct contribution from a current media partnership with Advance Local supporting this. In total, North America's adjusted EBITDA was EUR 19.4 million, representing a local margin contribution of 67%. For the group, our continuing operations grew to EUR 35 million from EUR 27.4 million in Q4, growth of 28% but down year-on-year by 5%. Continuing operations equaled EUR 20.5 million in adjusted EBITDA, down on last year with the continued investments in North America and the aforementioned media partnerships. The aggressive cost management and focus in rest of world businesses mentioned in Q4 led to strong profitability improvements in the U.K. and Italy. These are our two core country markets now for Europe. This moved our adjusted EBITDA margin from rest of world to 49% from 45% last Q1. Our small but growing esports business further expanded in Brazil and Japan during Q1. This, like APAC and LatAm, are future growth areas we are making investments into now. I'll now turn it over to Peter for a deeper look at the numbers.

Thanks, Michael, and welcome to our first quarter 2023 earnings call also from my end. Starting with our segments, we had a slight revenue dip due to challenging comparatives. The Sports revenues from continuing operations accounted for 62% of group revenue during the quarter and decreased 5% year-on-year. That was the net result of two developments. Firstly, the North American Sports revenue that decreased as expected due to the strong comparables from the launches in New York and Louisiana, as Michael just mentioned; but secondly, a very strong performance in the core European markets, which are the U.K. and Italy that have been driving the Sports revenue increase of 5% in the rest of the world. Sequentially, as compared to the previous quarter, the final quarter of 2022, total Sports revenue from continuing operations increased by 54%. In the Casino segment, revenue from continuing operations decreased by 5% year-on-year and was flat versus the previous quarter, the last quarter of 2022, while the adjusted EBITDA margin improved to 61% year-on-year. In there, the Casino revenue in North America increased by 8% year-on-year, and that was driven by both the media content partnerships and noteworthy here, the NJ.com deal, but also Ontario that launched during the second quarter next year -- last year. Turning over to the cost development in the group and the cost optimization measures that Michael also mentioned before. As shown in the previous quarter, the cost base for our continuing operations in the main cost lines of direct cost, personnel and other operating expenses, had a very different development depending on the geography where you look at. In North America, on the one hand, the total cost increased by 46% as compared to the first quarter last year and only slightly around 3% versus the previous quarter. And that is all the result of the growth investments that have been done and that we talked about in the previous quarters in order to prepare for the future state openings in North America. That North American cost base now accounts for 66% of the total group cost from continuing operations. The total group direct cost rose to EUR 4.1 million due to media and other influencer partnerships in North America, and the North American part of these direct costs is EUR 3.9 million or 96% of the group's direct costs. In the rest of the world and the shared central operations together, the total cost decreased by 40% as compared to the first quarter last year and sequentially as compared to the last quarter last year by 15%. And as Michael mentioned, this is due to the European restructuring and cost optimization measures that we have been taking and announced last year. All in all and considering that underlying cost transformation towards North America that has a higher cost, the group's adjusted EBITDA margin for continuing operations was 59%, which is only 1 percentage point below last year despite the strong growth investments that we have in North America. How does it look like then on the balance sheet? The company has a very solid financial position. As of the end of March, the total assets were EUR 342.9 million, and total equity was EUR 245.7 million, including the hybrid capital securities that amounted to EUR 43.9 million, net of EUR 8.6 million, so in a net amount of EUR 35.3 million. And that resulted in an improved equity to asset ratio of 72%. The amounts committed on acquisition that show of EUR 4.6 million, which is the equivalent of USD 5 million, relate to our Lineups.com acquisition and the final payment there. And that was by now settled in early May this year. And with that, there are no further payment commitments in relation to previous acquisitions. Borrowings amounted to EUR 75.4 million and comprise our corporate bonds, the bank term loan and the revolving credit facility. And out of that, EUR 8.3 million, which relates to the bank term loan is to be repaid within 12 months. And by the end of April next year, the bank term loan will be fully repaid. The net interest and bearing liabilities totaled EUR 23.1 million, and that results in the leverage ratio that Michael mentioned of 0.44, which is half of where it was at the end of last year. The cash and cash equivalents at the end of March were above EUR 50 million at EUR 52.4 million, also with the contribution of the first payment in relation to the AskGamblers sale that was received at the end of January. And the group expects to be in a net cash position already in the second half of this year. And talking about achieving a net cash position, I'd like to turn to a final slide from my end where I would like to summarize the development of cash flow and capital usage in the past 13 quarters since the start of 2020. As a reminder, Catena Media runs a very high-margin business, and that translates into a very high cash generation. So during these past 13 quarters, since the beginning of 2020, the cash flow from operating activities amounted to almost EUR 185 million. How has that been used? Well, quite in a well-balanced way in terms of that capital usage. Around EUR 23 million so far have been spent on share buybacks. That translated into roughly 4.7 million shares that have been repurchased and to the largest extent, canceled by now. Further, the company invested into future growth with around EUR 70 million or USD 85 million that had been spent on two very significant acquisitions during 2021. That was Lineups and the i15 Media asset acquisitions, both for the North American market. And they explain also the increase in the net debt, as you see in the chart on the right between March and September 2021 because cash has been used during that time period for the initial payments in relation to these acquisitions. In the summer of 2020, the company issued hybrid capital securities and related warrants. The securities had a nominal value of roughly EUR 66 million. They are treated as equity and that kickstarted the entire path of significantly reducing the debt in the company. The current balance of these hybrids is around EUR 44 million. And these hybrids can be used as a set-off in the payment of the subscription price when the warrants are exercised. The net debt, or the net interest-bearing liabilities, have reduced by 85% from roughly EUR 150 million in the beginning of that period -- at the beginning of 2020, down to the EUR 23 million that I mentioned before. And as a result, the leverage also heavily significantly improved from almost 3.5 to below 0.5 as of the end of March. And again, we expect to achieve a net cash position already during the second half of this year. And with that, I hand back to Michael.

Thank you, Peter. The outlook and events after the quarter. First, I'd like to welcome Erik Edeen as interim CFO starting next week. Erik has worked with Catena Media previously, and we look forward to working with him again during this period while we transition from our current CFO, Peter, who we wish well in his future endeavors and thank him for his time with Catena Media. Peter's rigorous focus on controlling our costs and debt helped greatly in putting us in the strong financial position we are today and only getting stronger. As I stated during our Q4, we will continue to expand our media partnerships going forward as we identify those that will contribute to the company's performance, such as we have now done adding the Lee Enterprises deal to our future mix. We look forward to working with that team in future growing -- in the future in further growing our national reach over the coming months and years. Our April performance was lackluster compared to 2022, down 12%. Last year's launch of Ontario for both Sports and Casino made for a tough comparable in an otherwise quiet part of the North American calendar. As in last year, 2022, we were up 46% from 2021 in April performance, thanks in part to that launch. As this was a launch month last year, April might not be as reflective for the trajectory for the remainder of the quarter. North America and the high-margin business we can continue to develop there is the company's core focus. We are active in 25 states and provinces. 49% of the North American market by population is now addressable with our sites and the growing reach we gain from partnerships like those with Advance Local and now Lee Enterprises. The casino market is still even more nascent at only 16% of the population addressable today. As we've seen, North American operators report that a casino player can be worth 5 or more times the value of a sports player in North America. We see great long-term potential here. We see in the short term, limited state development with Kentucky due to launch sometime later this year. There are a number of other potential states that are candidates for 2024 for up to another 27-plus million population. With the upcoming U.S. election cycle, state and national, of which the campaign processes have already begun, it is likely there will be a slowing in the launch calendar until we get through what is likely to be the most contentious election cycle in U.S. history. This makes for a somewhat unpredictable launch calendar near term. The good news is after the dust settles in late 2024, there are many more states to go and there have been many additional states already starting debates on adding this business to their revenue streams. So the 2025 to 2030 period, it looks like it could be a full second wave, moving us up dramatically from the 49% in sports betting and the extremely small 16% of online casino. Strategic direction update. While timing of state launches remains uncertain in the near 2023 to 2024 period in North America, we see continued growth across the next few years there. We have thus set a North American organic revenue target of USD 125 million by the end of 2025, a 12% consolidated annual growth rate from 2022 through 2025. We will do that while maintaining a North American adjusted EBITDA margin above 50%. While we are in a slower phase of the North American launch cycle, we will continue to expand our businesses by increasing traffic via media partnerships, expansions in other forms of performance marketing and a few other initiatives already underway. At the same time, focus on cost optimization will ensure high profitability while still ensuring we are ready to dominate in future state openings. Catena Media is in a solid financial position, has a core business that delivers strong cash flows and will be net cash positive later in the year. We're in a position that allows our organization to consider the best ways to deploy this capital, when others might be focusing on larger and larger interest payments from growing debt at rising rates. We have the possibility to consider share buybacks, dividends as well as many other strategic opportunities that could mean further meaningful acquisitions in the Americas, among other opportunities. Key takeaways: a high profitability in Europe due to cost optimization measures taken there, we've updated our strategic direction for 2025, we are expecting a net cash positive position in the second half of 2023 and a strong financial position to leverage strategic opportunities going forward. With that, I will turn it back to the operator for questions.

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

So my first question would be on just the financial target. So just to be clear here, the 12% organic growth or annual organic growth target that you gave us. So you say that you maybe want to pursue some M&A in Americas as well. But the $125 million, that is supposed to be reached by just organic measures. Is that correct?

That is correct. We are expecting $125 million from the organic measures, which include state launches and the media partnerships, for example, but not from M&A activities, which could further bolster the business.

All right. Perfect. And then just on -- because you are emphasizing the state launches contribution, right, in the latter part of '24 and maybe in all of 2025. So would that be mainly CPA still? Or are you seeing any changes going for revenue share?

So it's been a mix in North America. We have been moving towards revenue share with a number of operators. However, ourselves and the market, in general, competitors, et cetera, have been forced to reconsider some of that in certain states such as Massachusetts, which did not allow revenue share. And now New York has a measure where they will pull back on allowing revenue share, it looks like, and only keep CPA. So it's going to be a mix still going forward. We believe long-term revenue share will develop across the states, but it is going to remain a mix. And in certain states, it will be only CPA for a period of time.

All right. Perfect. Let's see, also -- yes, in the margin target of exceeding 50%, that is not including central costs. So what do you expect in central costs during 2025? You cut rest of world in Europe, including -- or including also central costs by 40% year-over-year, I think. So what do you expect that to arrive at in 2025, if you could quantify that a little bit?

Peter, do you want to take that?

It depends, Oscar, of course, a little bit on that further strategic trajectory. As we previously announced to the market, there may still be an interest in certain European assets of the business. And the way how the business is built up is where you have central operations, and that's why we have called them out previously in our segment reporting as well, that is providing services and, therefore, supporting the various businesses and the divisions. North America being one of them, APAC and Japan being another one and the European business being a third one. So depending on that development until 2025, that has an impact on how that central operational hub is going to develop, whether it is needed in its entirety of the services to the very different divisions or whether that can be further streamlined and being played much, much more efficient. So it is a function a little bit of that strategic trajectory that we will see. If it is only supporting the key divisions and also as we see that today, there is still the possibility of doing further measures because what you have been seeing now is the first result that we announced last year in the cost restructuring of the European business that only started to be effective now in the first quarter. So the 40% cost improvement on a year-over-year basis, that is to continue to be seen, but we will find more efficiencies over that period.