Catena Media plc (CTM) Earnings Call Transcript & Summary

Welcome to the Catena Media Q4 2023 Report Presentation. [Operator Instructions] Now, I will hand the conference over to the speakers, CEO, Michael Daly; and CFO, Erik Edeen. Please go ahead.

Good morning. I'm Michael Daly, CEO of Catena Media. And I'm joined by Erik Edeen, our Interim Group CFO. This is our Q4 2023 report. Today, we'll cover the Q4 and full year highlights of the group, focusing on continuing operations, thus discounting the impact of assets divested. The information for full company, including now divested assets, as well as the breakout of continuing operations are all available in our full report. In Q4, Catena Media underperformed, seeing revenues decreased by 41% year-over-year. This was a combination of our performance versus growing competition in North America, the lower CPA rates that operators imposed in mid-2023, as well as our move towards more revenue share agreements. The quarter saw 17% of new depositing customers, NDCs on revenue share, a number of which will continue to grow over future quarters, but not in a straight line as some events like the Kentucky State launch at the end of Q3, we'll move this percentage up in a period -- up higher in periods where we see NDC spikes from operators now on rev share. But over time, this payment cohort will grow in contribution and become a meaningful sustaining revenue stream for Catena Media. Q4 saw the launch of Maine, which is one of the smallest states by population and was underwhelming compared to Maryland in Q4 2022, which was not unexpected given Maine is about 1/6 the population and also significantly fewer operators enter the market. We are currently implementing a wide-ranging internal investment program, including large investments in tech and AI to fast track our ambition to be the data and technology-driven leader in our markets. In Q4, we established an AI joint venture to [ beta AI ] capabilities in our brands. And MVP has now been delivered that over the coming quarters, we expect to report on significant milestones in our AI journey. Q4 also saw the completion of our strategic review following the sale of our Italian sports and casino businesses for EUR 19.8 million. With the close of this strategic review, we are now a more focused organization, able to push forward initiatives faster. By working harder on a smaller number of objectives, we will deliver impactful improvements for Catena Media over the course of 2024, spurring our return to growth in H2 and restoring the group to sustainable long-term growth trajectory. Today, we have announced updated financial targets, one focused on the overall group targets as we can with a strategic review now closed. We'll talk more about those later. On January 11, sports betting went live in Vermont and Catena Media was happy with the launch, albeit Vermont is an even smaller state than Maine at 0.5 million population to not expected to be too meaningful or impactful. A partial prepayment of half of the nominal amount of the 2021-2024 bond was made in Q1 and the maturity date extended to 9 June 2025. The bonds outstanding nominal amount is now EUR 27.5 million, of which Catena Media holds EUR 6.15 million. For the full year, revenues were down 22% across the group, 21% in North America, with adjusted EBITDA margins at 33% for the group and 52% for the North American unit. NDCs were down in both group and North America by 19%. I'll now turn it over to Erik Edeen to talk more about the financials.

Thank you, Michael, and good morning. Moving into our geography split from a financial perspective. We concluded the quarter at EUR 12.3 million in revenue in North America, down from EUR 21.5 million in the corresponding quarter last year. The decline was primarily driven by CPA to revenue share shift, but also in terms of increased competition in the North American market as well as some challenging comparables with the Maryland launch in 2022. Adjusted EBITDA decreased to EUR 4.4 million and corresponded to a margin of 36% in the quarter. Positive contribution from our strategic media partnerships, which was expanded here in the fourth quarter, and we concluded at 85% of group revenue from continuing operations in North America here in the quarter. If we look into the rest of the world that currently consists of APAC, LatAm and esports or primarily, we saw a decrease in the quarter, primarily driven by APAC, where we had a negative impact from one of our core sites still recovering from a rebuild. Some positives in terms of development here in the fourth quarter in regards to Slotsia where we saw a double-digit growth in the APAC region as well as some strong growth in Latin America as well as in regards to e-sports growing from quite low numbers. Concluding the quarter a EUR 2.2 million in revenue and EUR 0.9 million in adjusted EBITDA. Continuing into our segment performance, we saw a decline in sports revenue where we concluded the quarter at EUR 5.4 million and again, driven to a large extent by the shift from CPA revenue over to revenue share, which will help us to build a more sustainable revenue model over time. Casino revenue came in at EUR 9 million in revenue and accounted for 62% of our total revenue here in the fourth quarter. If we continue to look into our cost development, we had quite some investments here in the quarter in regards to technology, which Michael will come back to as well as into paid media, media partnerships and sub affiliation. In total, costs in North America, decreased slightly during the quarter from a total perspective. We had lower direct costs as we had some decreased activity around sweep stay casino influencers. And our prior cost-saving initiatives have helped us to offset some strategic investments in relation to AI and technological platforms. During the quarter, we also had an impairment charge that goes below EBITDA as a non-cash item in relation to the completion of the strategic review, primarily related to our European business and the assets in Europe. Our financial position remains strong, and our net interest-bearing debt concluded at EUR 18.4 million end of the quarter, end of the year, and we have a strong net cash position if we include -- was excluding and including our future sales proceeds, and our focus here is to continue to reduce debt and focus on strategic investments, leverage at 0.66x end of the year versus 0.9x here last year. Looking a bit further into our capital structure. Currently, we have no financial commitments outstanding in relation to prior acquisitions. Our cash balance end of the year was EUR 38.5 million. And we had a reported net debt at EUR 18.4 million end of December. If we include our future proceeds from divested assets in 2024 and 2025, we had a net cash position of EUR 14.6 million. And in total, during the year of 2023, we did repurchase EUR 12.3 million in outstanding bonds. As you might have seen, we announced a written procedure successfully completed here during the first quarter in 2024, where we announced a partial prepayment of the current outstanding bonds of 50%, down from EUR 55 million to EUR 27.5 million, of which we currently hold EUR 6.50 million after the prepayment. And in relation to that, we extended the maturity date of the remaining amount to the 9th of June 2025 with a year from the previous maturity date to be in line with our expected incoming proceeds from sales. To date, scheduled payments for assets sold have been received according to plan. And with that, back to you, Mike, to give us an update on the strategy and outlook.

Thank you, Erik. As previously reported, 2023 was a year of fewer and smaller launches of states in North America versus prior years, with 4 states for sport and no casino. Our business has historically been focused on launches, and we are very happy with the few that did happen in the year. There are many launches still ahead for North America with many states proposing bills for sports betting and iGaming, but not likely any to make it live in 2024 beyond 2 states already in the works. 2024 has already had the aforementioned small Vermont launch. And near the end of Q1, we expect North Carolina, a much more significant sports stage of launch, but it's still smaller than Ohio and Massachusetts, which were in Q1 last year. Catena Media expects to bring our launch expertise to the North Carolina launch and expect a nice blend of CPA and revenue share from the event. We are not relying on state launches to move the needle for us this year. The drivers for Catena Media to return to growth in H2 of this year and sustainably grow beyond that are elements in our control. The team is heads down focused on delivering in the areas we expect will be impactful. This includes, first and foremost, advancing our technology. We're in the midst of rolling out a new platform with improved response time at scale and integration functionality across our business, allowing elements like improved call to actions and additional third-party integrations. It will be the first time in company histories that I'm aware of that the entire organization is focusing on developing one platform for our sites. We've already started to see the benefits of how fast the organization can move when we are more focused. This architecture will roll out over the course of H1 and will continue to evolve from there. On the moving quickly front, the same is true of our AI joint venture established in Q4, which is developing an AI application exclusively dedicated to content production for online sports betting and casino gaming affiliation. This initiative will embed AI in our brands and enables the ability to diversify further at scale as well as personalize in ways to date that were impossible as well as cost prohibitive to attempt. And we've gone from establishing this in Q4 to an MVP launch this month of Q1. I look forward to updating the market as these advances. The other drivers of the team are lasering in on include product development to hold or in some cases, recapture top rankings and further increase our user experience, even more critical as we move towards a revenue share-based business model, which we continue to grow the number and impact of our media partnerships and are engaged in the first of many stages of expanding our paid media business. This, along with work with early partners to develop new revenue streams and we envision becoming operational over the first half of the year. Those drivers will propel us to return to organic growth in H2 2024 with full year adjusted EBITDA expected to be in the range of EUR 20 million to EUR 30 million. The cost optimization measures undertaken during our strategic review and processes in place to continue to optimize costs will ensure continued high profitability, even as we are engaging in lower-margin business areas like paid media and media partnerships. Our solid financial position will enable us to continue to focus on debt reduction as well as strategic investments. Our business has become more sustainable by the markets we serve and the type of products we offer, in line with our long-term strategic and risk reduction goals. Catena's revenues from regulated markets was 91% in 2023. Sustainability also comes with the transition from a CPA dominated business to a higher mix of revenue share, which will yield more consistent revenue inflows over time. Along with the guidance on the full year 2024 adjusted EBITDA range, we are also updating our financial targets for the coming years. This reflects the direction to recruit a higher number of new users under revenue share contracts and also in response to changing market conditions. We are targeting double-digit organic growth in both revenue and adjusted EBITDA for both 2025 and 2026 at the group level and net interest-bearing debt to adjusted EBITDA ratio of 0 to 1.75. Key takeaways. Lower revenues in North America amid increased competition and reduced CPAs. We do expect Q1 will be stronger than Q4. Organic growth expected to resume in H2 2024 with a full year adjusted EBITDA in the EUR 20 million to EUR 30 million range. Significant tech and AI investments ongoing with launches over the course of H1. Early AI MVP launched in Q1 targeted to enhance brand content generation and personalization, and updated financial targets for '24 to 2026. We'll now open it up for questions.

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

First, I just had a question on the revenue share NDC development. I think it came in at 16% of the total in Q4. And I think in the Q3 report that you said that October was 23%, and it was also a bit higher in Q3, I believe. So can you just talk about the -- yes, the development of the revenue share MDCs and why it really hasn't really come up to pace in Q4 and what you expect in Q1 and going forward?

Absolutely. I believe in Q3, the first part of the quarter, we saw a similar rate of what we saw in Q4. And in September of Q4, we saw an increase. September of 2023, we had the launch of a new state. And so, with the moving of certain operators to revenue share, we try to manage this changeover and depending on the states as well and in this case, the state allowed revenue share, we saw a spike in NDCs on rev share from those operators, which were on revenue share contracts. As you would expect, we want to encourage the revenue share cohorts that carried into the beginning of October. And then Maine was not nearly a significant launch for the market. So the ratios came back down to about what we were running at. And so that will continue to climb over time, but there will be spikes. I'd expect, depending on which operators perform the best during North Carolina launch that we'll see a spike there in our revenue share mix potentially. And that will be -- have some adjustment as again, as we bring certain operators over to revenue share versus others, dependent on the markets they're doing best in because certain markets in New York, for example, don't allow revenue share and as we convert over time with the operators.

Got it. Perfect. Just next one on the AI investments that you alluded to. So you think you're talking about diversify and personalized, for instance. So would we assume that the AI investments relate to the content? And if so, how do you ensure keeping your Google rankings high? And have you seen any sort of comments from Google regarding the rankings if they are going to hold AI-generated content a little bit lower in the rankings or not?

Yes, certainly. So the AI that the joint venture that we're involved in does relate to content and SEO work for our teams to help them leverage their expertise by being able to put out more content across numerous topics than one individual can write in any period of time using the AI application, which is focused on sports betting and casino affiliation will help the teams diversify by putting out more content means we can put out more personalized items. We are at the MVP stage, and it is something we are engaged with people who have done AI work before. And so, yes, we are very cognizant of Google and its search engine requirements and its search engine understanding of AI. It is still a moving target with Google. So it is part of the MVP is to make sure we are doing things in a positive life from our Google rankings perspective. And at that point, that's when the MVP will then start to roll out faster to the rest of the sites and the rest of the teams. So it is a work in progress. We are very conscious of potential negative impacts of it, but do expect fully positive impacts from the AI investment. And then there's other AI we'll do beyond the JV, which is things from off the shelf that are able and capable of bringing forward in everything from software programming to other elements of our sites.

Perfect. Just a final question on the lower CPA rates that you have seen. Maybe I don't know really if you have a strong view on this, but do you think that you have seen like lower CP rates across the board for all of the affiliates? Or obviously, you have seen lower CPA rates? Just wondered if that's something that you think that all of your competitors have seen as well? Or how should we see that?

So those rates were the beginning of the impact in Q4. Those were the rates we saw a change over the summer of last year. And as we understand it, those went across all those working on CPAs, some of the -- some of us that are the larger affiliates were less impacted, honestly than some of the others, where rates dropped for us by 20% to 25%, in some cases for sports. We heard of others who saw them drop to 25% of what they had been at. So we're looking at where there are opportunities to work with some of these other affiliates, etc., in this changed market.

Okay. Got it. Just -- sorry, I have one more, if that's okay. Then just on the NDC development, which I think has been deteriorating a little bit over the last few quarters, also looking sequentially. So just you to -- obviously, organic growth picking up in H2 on inner comps as in relation to what you have today. But just on a sort of sequential basis, have you seen any sort of -- are you picking out more or less profitable NDCs at the moment? Or how do you see the underlying development going in terms of the NDC development and sort of how profitable these types of NDCs are?

So I'd say the indications are that we are -- again, as we all try to focus on the higher value to our operators NDCs, that is part of the objective. So we've seen a drop in our NDCs in total part in years development of state launches as well as our underperformance in competition. But given that our NDCs are down 19% and CPA rates were also down considerably and yes, we're moving to revenue share I think we are -- based on the revenues and the EBITDA, we are targeting higher value NDCs from what I interpret from that data. It is hard for us to say because we do not see the actual deposits of any players as it is managed by the operators.

The next question comes from Pontus Wachtmeister from [indiscernible].

So I had the question, you mentioned you are investing in this AI, whatever will amount to. In the numbers, given the kind of the collapse in margin, would you say the costs are inflated from this investment at this time? Or is it marginal, i.e., are the margins compressed by the investment and are the costs over what it could be if you just streamline normal operations?

I can start commenting on that. When it comes to the technological investments, those are primarily balanced. So it does not have a direct impact on the P&L. However, we do have investments that obviously give an effect on the P&L on the cost side as well in some of our initiatives. So it's a mix. But when it comes to the larger technological investments that is primarily then put on the balance sheet.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

So we have received a few questions in the chat. So let's go to them. And Michael, a first question to you is in regards to North America and the North American market. And when do we expect profitability to return in that market?

As we said for the group, in which North America is the vast majority of the business at this point, we expect growth in H2, and in -- yes, we expect growth in H2 of this year and growth to continue beyond that in double digits over '25 and 2026.

And another question that we received is in regards to the hybrid capital securities, if they will continue to be reported as equity going forward or if they will be shown as a liability? And the easy answer to that is that, it's classified as equity according to IFRS, and that will not change. So our hybrid capital securities is an equity instrument. We'll continue to be an equity instrument, where we have the first possibility to call those next year, but we are not mandatory to call them in regards to them being classified as an equity instrument. We can keep them for a long time on our balance sheet. However, there is a significant step up in interest in regards to that instrument. Moving on to a question and back to you, Michael, around LatAm. When we are moving in on LatAm and regulated markets, such as Brazil, to give some more context around LatAm in general and our activities there.

Absolutely. So we are investing in LatAm. We have a small team there with a number of sites focused on markets such as Brazil, and Brazil is very exciting now with the regulations or it's been approved by the government. The regulations are due, I believe, at the end of March and a launch to happen sometime later in the year. Our teams are growing their content, focusing on now that we understand how the operator landscape may look in terms of where operators are going to base. There are still lots of unknowns that I've heard as many as 100-plus operators may be applying for licenses and how that process is going to work on timing versus launch is unclear, but our goal for our team right now is to build up our content on our sites to focus on Brazil as the market in LatAm, while we still do things in some other markets. The vast majority of our focus will be in Brazil for this year, I expect and probably beyond, given the size of that market, the fact that they have approved sports betting and online casino, it looks very promising for the long term. Again, though, it is still very early days for Brazilian it is expected to be a low per capita player market. So it will be a longer path to large numbers in profitability, I'd expect.

And perhaps back a little bit to the transition from a revenue -- CPA revenue to revenue share and more from the longer-term perspective, how long do we think that will take? And where will it bring us?

Absolutely. So revenue share transition is a multi-quarter, multiyear process most likely. And it will not be ever 100% revenue share in our markets. So we will -- we are trying to work this in a way that we don't completely disrupt our CPA business with revenue share in one large batch because that would have a negative impact on near-term revenues. So the idea for us is to grow the revenue share percentage over time, build up that cohort, so that as we convert over, it's a little more painless in the transition one or the other. This is very much also depends on negotiations with operators, which some are more favorable towards rev share than others. So some will be sooner than others later, which is okay in that balance. And then the other part of it will be what states allow, many states are allowing in North Carolina, for example, which will launch roll around rev share. Massachusetts, which launched last Q1 didn't allow a rev share on CPA. New York started with rev share and then decided not to keep revenue share as an option. So there is a balance, and we'll never be in certain states like New York with revenue share until they allow it legally, but we will have agreements with operators for what states they allow us to be in our rev share, we will work with them there. And again, it will be a multiyear process. I really expect to be over to the maximum we can achieve.

Michael, and another question that we have received this in regards to breaking down our NDCs further into details and provide updates on, for instance, social casino sweet steaks. And the comment from my perspective on that is that, the information we currently provide in the report is the level we are providing at this stage. But over time, depending on the development and our new revenue streams, our reporting might be adjusted. But as for now, that's the level we disclose. And back with a question to you, Michael, on AI, and that is in relation to what makes AI unique for us and not something that our competitors can just copy.

Absolutely. So our AI investment in our joint venture focused on content and SEO work for personalization and expanded amount of content is as far as we can tell, a first for our industry in terms of developing this specific level of an application on top of the LLMs. It is [Technical Difficulty] early stages, it is unique in the fact that we are working with a group that have done AI development before and are experienced in this on multiple fronts. Is it something a competitor can copy? I don't know that they can. They can start down a development path. They need to probably find AI resources that have the same level of skills. And then with AI, it's a matter of playing catch-up. Technical developments are difficult to catch up on as is. And AI is a learning curve. And the faster we are going and the sooner we are on it, the further ahead, we will be on that curve. And that will be the hardest part, I think, for the catching up process is, if we're always a few levels ahead, then that is puts us on the cutting front edge of this. Everyone will be doing some level of AI. Will they be doing something that's just off the shelf because that's what they can find? Or will they invest and develop their own unique applications? I can't say. That's what we have done. That's what we saw was the need. We also see it potentially as an opportunity to even offer it to partners we work with as a tool because we do not find anything like that in the marketplace.

Very good. Thank you for that, Michael. And I believe we have been through the questions we have received. So back to you with a closing remark.

We recognized Q4 was a disappointing quarter for all of us. We were happy to complete the strategic review, which now allows us to be heads down focused on the future of the business as it now is, which is growth in H2 and moving forward with our technological and AI developments to be on the cutting edge for our industry for the markets we serve, utilizing technology and our strong teams to do so. You can expect more and better performance from us in the coming quarters and the coming years, and we will keep you updated on significant developments on the progress of our AI journey, among others. So we thank you for your time today, and we look forward to speaking again.

Thank you.