Catena Media plc (CTM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Catena Media's Q2 report. I am Manuel Stan, and today, I'm joined by our Chief Financial Officer, Mike Gerrow. Today, we will be speaking to our Q2 interim report, related financials and our strategy and outlook. [Operator Instructions]. We will start today's presentation with a Q2 high-level overview. Q2 revenue was EUR 12.8 million, down 14% from the previous year. Adjusted EBITDA was EUR 0.7 million, down 67% from previous year. These were both in line with the Q2 earnings update issued in June. I would like to thank the previous management team and CEO and the former Board and Chairman, as well as Pierre Cadena for standing in as interim CEO during Q2 and driving a number of key initiatives that we are now working together to implement. Q2 represented an important reset for Catena Media from key personnel and operating structure perspective. Since April 1, Catena saw the appointment of 4 new members of the executive team. Ed Midolo was appointed CTO on April 1. Mike Gerrow, who was appointed CFO on April 15. Pierre Cadena was appointed COO on July 1, and I assumed the CEO position on July 1. The makeover will be complete by year-end with the appointment of the fifth and final executive team member, a new General Counsel. Another key part of the reset is the implementation of a new product-focused operating model, replacing the old geographical structure. This will allow us to better focus on our key products and priorities. During Q2, we soft launched our new subaffiliation platform, Mrktplays. This is a first step towards our goal to build a leading marketplace for the gaming industry. Towards the end of the quarter, we launched the Spanish version of Bonus.com. This represents our first initiative to target the Hispanic market in North America and a massively underserved geographic with great potential. During May, Google started the implementation of the site reputation and use policy, which has impacted the effectiveness of our strategic partnerships. This led to evaluation and renegotiation of such partnerships, including terminating agreements where the results have been suboptimal. This will have a significant positive impact on the cost base going forward, as Mike will go into further details later in the presentation. While having a negative impact on the effectiveness of media partnerships, Google update had a positive impact on our owned and operating product, which saw an improvement in rankings throughout the quarter. We will give more details about the ranking improvement on the next slide. Starting this quarter, we will begin sharing the performance of a very important internal KPI, the average ranking score of our top keywords. While we rank and meter thousands of keywords, our primary focus is now on a subset of 70-plus keywords. The actual keywords will not be disclosed for competitive reasons and the composition of focused keywords may have small variations over time, depending on the strategy and seasonality. During Q2, we have seen a good improvement as our average ranking score across the top keywords has improved from an average position 5 to below position 4, where position 1 is the best. This KPI only measures Catena's owned and operated products. The positive trend in rankings has continued into Q3. I will now hand off to Mike to give an in-depth update on our financial performance.

Thank you, Manu, and good morning. Moving into our financial analysis from a geographic split perspective, we concluded the quarter at EUR 11.2 million in revenue in North America, down from EUR 12.5 million for the corresponding quarter of last year. Adjusted EBITDA in North America decreased to EUR 4 million, 24% lower than last year, corresponding to a margin of 36%. North America amounted to 88% of group revenue from continuing operations in the quarter, an increase of 4 percentage points from last year. Looking at our North America segment. Sports was down 53% versus last year. This poor performance was driven by increased competition and the impact of the May Google site reputation of use policy on our media partnerships. As previously mentioned by Manu, we have reevaluated and exited multiple low-performing media partnership agreements. Q2 2024 will be the last quarter where direct costs of EUR 1.4 million associated with these minimum guarantees will affect our North American sports business. Our North American casino business, however, increased by 13% versus Q2 2023 and a 4% increase on Q1 2024. We are pleased with this growth rate considering the period of search engine fluctuations following the main policy update. This year-on-year and quarter-on-quarter casino growth is a reflection of our aggressive program of measures, including the soft launch of our sub affiliation platform, expansion of social sweepstakes and recovery of our owned and operated sites following the May Google update policy. Looking at the rest of the world, accounting for 12% of revenue, which contains our e-sports, APAC and Latin America businesses, we saw revenue of EUR 1.6 million, a decrease of 33% versus last year. Adjusted EBITDA, however, increased by 216%, which can be attributed to streamlining the APAC and remaining European operations. Continuing into our full company segment performance. We saw a very large decline in our sports revenue to EUR 2.8 million versus $5.2 million for Q2 2024. NDCs also decreased by 46%. Our casino revenue increased by 3% versus the previous year, while NDCs increased by 5%. The variance between NIST and our 13% North America casino growth is attributable to decreases from historic revenue share players in our APAC and remaining European business. As mentioned earlier, our North American Casino revenue increased by 13% versus Q2 2023 and 4% versus Q1 2024. We are pleased to see growth in most of our regulated casino states as well as sizable growth from our social sweepstakes casino operators, which now account for over 1/3 of casino revenue. Continuing on to our cost development. We continue to invest in our technology platforms, AI, subaffiliation and paid media. Manu will touch on this a bit more in detail in his outlook and strategy portion of this presentation. Overall, our cost base decreased by 5% versus Q2 2023 and 14% versus Q1 2024, which is largely expected with regular seasonality. Returning to the previously mentioned media partnership changes. We incurred costs of EUR 1.6 million in Q2 associated with leadership partnerships, which will not continue into Q3 or subsequent quarters. These costs were primarily minimum guarantees to our partners that did not yield positive margins for us in Q2. The red sections of the Q2 2024 bar chart on the right contained just our direct costs. In Q2 2024, direct costs totaled EUR 3.5 million, EUR2.1 million of these direct costs include PPC, sub-affiliate commissions and media partnerships that are continuing and expected to grow through Q3 2024 and beyond. The EUR 1.4 million in light red have expired and are not continuing in Q3 and beyond. Items expecting comparability in the quarter were EUR 1.3 million. We will continue focusing on cost efficiency per product through this transformation into a new operating model. Despite consecutive quarters of core results, the receipts from proceeds of our divested assets through the strategic review continue to put us in a very healthy financial position. Net interest debt decreased by 46% to EUR 12.4 million. We have a strong net cash position including our future proceeds from divested assets. Our extraordinary general meeting in July authorized the company to undertake share buybacks. We do not intend to initiate a program at this time. Our focus remains to continue reducing debt and investing on internal strategic initiatives. Our leverage ratio increased to 1.53% as a reflection of recent quarters of poor performance, but should improve with more profitable quarters to come. Looking at our capital structure. We currently have no outstanding financial commitments relating to prior acquisitions. Upcoming proceeds are listed on the right-hand side of this slide. To date, scheduled payments for assets sold have been received according to plan. Our cash balance at the end of the year was EUR 18.9 million, reported net debt of EUR 12.4 million at the end of June. If we include future proceeds from divested assets, we have a net cash position of EUR 9.6 million. The 18th and final period for warrant holder to subscribe for shares in the company commences tomorrow, 15th of August and will run until and up to, including August 24. I will now hand back over to Manu to give us some update on the strategy and outlook.

Thank you, Mike. We will now have a look into the strengthening outlook for the next quarters. The speed of regulation and launches in North America has decreased significantly since 2022, as only 6 states regulated and launched mobile sports betting during the last 2 years. In the 2 years, 2021 and 2022, the new addressable market was EUR 89.6 million compared to 2023 and 2024, which is likely to close at EUR 28.5 million, which is over 3x lower. More importantly, we did not have any major online casino launches in North America since Q2 2022. The market penetration in the U.S. is 50% for sports betting, while a whopping 84% is used to regulate mobile casino. Catena strategy saw a major reliance on new state launches and the regulation slowdown had a negative impact on its performance over the last few quarters. Our current priority is to diversify the product portfolio and revenue streams to reduce their reliance on market launches. In practice, that means focusing on a few things such as building our brands, data bases and CRM capabilities to better serve and monetize our customers, position ourselves for future casino market launches by building our brands and databases in the social sweepstake casino vertical and reach new demographics by launching dedicated products in languages such as Spanish. By doing this, we will create a sustainable revenue model independent on new state launches. Our new strategy is based on 3 key pillars: people, product and profitability. During Q2, we have made extremely good progress in implementing a new product-led organizational structure and installing a brand-new management team to support it. Over the next few months, we will finalize building the senior leadership team with the hiring of the General Counsel and VP Commercial. I am a strong believer that the success of a business is predicated by having a strong team with high energy levels and great motivation, and this is exactly what we are trying to achieve at Catena. The second pillar in our strategy is the product. We have put in place a clear prioritization framework that allows all teams to align their goals and objectives. Furthermore, the prioritization framework allows us to do a thorough cleanup of the products and areas that are not generating upside for the business and have a high opportunity cost. This will also allow us to focus on the products with the best ROI, particularly in the North American casino vertical. Some of the initiatives above mentioned, like subaffiliation, Spanish language products, leverage first-party data or AI, are key priorities for Catena to build strong products going forward. The third and final pillar of our strategy is profitability. Our focus is twofold: optimize revenues by focusing on core products and strategic investments such as social street casinos; and secondly, revisit all costs to finding efficiencies, such as the terminated media partnerships. Lastly, let us recap the key takeaways from our report. We have a new leadership team in place, bringing fresh perspectives and strategic focus to drive the company forward. The new product-based operating model is being implemented, allowing us to be better aligned behind our priorities and focus on efficiency. The North America casino revenue continues to grow, registering the 13% year-on-year growth. Revenue was impacted by seasonality and decreased efficiency for media partnerships following Google's main policy changes. That, however, is the significant cost reductions of EUR 1.6 million per quarter from discontinued media partnerships. Tech wins with new launches such as technical platform, our subaffiliate platform, help us build first-party data capabilities and diversify revenues. From a financial perspective, we targeted double-digit organic growth in both revenue and adjusted EBITDA from both 2025 and 2026 at the group level. The net interest-bearing debt to adjusted EBITDA target ratio is 0 to 1.75. Thank you very much for listening. I will now hand over to Mike to move into the Q&A session of our report and open up for questions.

Thank you, Manu. We'll move over to the verbal questions now.

The next question comes from Oscar Ronnkvist from ABG Sundal Collier.

Thank you, and morning. So, my first was your confidence in growth in H2, which I think as you talked a little bit about the earnings update that you announced in June. So, the comps were getting a little bit easier down Q2, yes, you declined revenue by 14% with any state launches in H2. So, just what the improvement in H2, do you expect to see growth?

I can start answering Mike, and you can fill in. I could not hear perfectly Oscar, but I believe the question was about age to return to growth, the comparables from 2023. So, we reaffirm our belief that we'll return to growth in the second half of the year. Two key verticals: casino, as we've already seen a second quarter of growth and nice growth year-on-year. So, we will continue to focus on casino and developing the casino product. From a sports perspective, seasonality will be a big help as we know, the start of the football season is the most important part in the sports calendar every year. So, we will see sports accelerating as the football season starts in the first week of September. That combined to all the initiatives that we talked earlier, starting from the organizational setup, the product focus, subaffiliation, CRM building first-party data, everything else that we said that we believe that will help us return to growth into the second half of the year, which will accelerate with the start of the football season.

Just the next one, I think that the sweepstake -- So, a question on the sweepstake, which I think accounted for 1/3 of your revenue in Q2. So just any sort of temporary high in sweepstakes that you feel like that is not as sustainable as the other casino, or do you feel like this is -- has a pretty long trajectory going forward to drive your growth?

But the comment overall on sweepstake is that we see this as the fastest-growing vertical for us, and we expect it to continue growing. We are very well positioned to capitalize on that growth. Our products are focused on growing the sweeps vertical. I think it's twofold. Right now, we see that generally overall in the industry being one of the fastest-growing verticals and we capitalize on it. But also, we position ourselves for post regulation in the bigger states in the U.S., where we will be able to have built our databases around our brands to capitalize when the likes of California and Texas will be regulating. I believe that was your question.

All right. Thank you very much, Oscar. That's the end of our questions for now. So, we'll move on. All right. We have one question here, and the question that I'd like to ask here is to Manu, which is what exactly is the financial impact of the terminated media partnership contracts? You mentioned the presentation, but how does this impact your revenue and operating profit?

Thank you, Michael. We have not disclosed an exact impact on the revenue side of things. We have disclosed the impact on the cost side, which we expected to be EUR 1.6 million from Q3 onwards. From a revenue perspective, we had a number of deals, existing deals with media partners. Some of those deals have been negotiated. Some of those deals have been terminated. But we have not disclosed an actual impact on the revenue side of things. The biggest difference in the P&L that you will be seeing going forward will be on the cost base reduction of EUR 1.6 million per quarter.

Another follow-up question, as the new CEO, what can we expect of you in Catena Media going forward? What must change?

I think our strategy right now is based on the 3 pillars that I've said earlier, people, product and profit. From a people perspective, the new organizational setup product base was a massive undertaking for the company, but it's the right thing to do to position ourselves to focus on the right products. We have hired most of the new management team in the last 3 months, 4 months, and we'll complete that make over by the end of the year. So, the key is to have the right people in place in the right roles and bring again that high motivation, high energy levels in the company. Secondly, from a product perspective, as I commented, I think Catena has done too many things in the past, has spread resources too thinly across the different products. So, one of the key exercises that we've done in the last few weeks was to do a thorough framework for prioritizing both our projects and our products. From a product perspective, now the entire company is focusing on a number of key products for us. We are reducing our website portfolio massively in the next few periods to reduce it to a number of properties, a number of products that we can manage well. And even within those, we have clear priority #1, priority #2, priority #3 to allow the entire organization to focus behind that. And lastly, from product perspective, as we said, we're turning all stones, trying to understand where the inefficiencies are and trying to capitalize on the opportunities. That threefold pillar will be the core of our strategy going forward.

Thank you, Manu. There is one question that was asked that I will answer, which is Catena Media has not reported profit for a while. How long can you continue without the need for additional capital? Should shareholders be concerned about a new issue or the company taking on more tests. And I think it's easy to forget that Catena Media has solid operational cashflows during many of these quarters despite reporting a net loss. During the first half of 2024, we faced operational headwinds, which Manu's talked about, it has severely affected our financials. As we enter the second half of the year, things are going to look a bit better and the cost reductions from the terminated media partnerships will significantly assist us in turning things around. As of June 30, we also had EUR 18.9 million cash and cash equivalents. When we take both debt and further payments from divestments in the calculation, that gets us to a net cash position of EUR 9.6 million. So, to sum it up, I don't think shareholders have to worry, Catena Media is in a healthy financial position, and we have room to invest in the future. Great. And with that, I think we've reached the end of our Q&A. So, I'd like to thank everyone for the questions that have been submitted and hand it over to Manu for final remarks.

Thank you, Mike. Q2 represented an organizational reset for Catena Media and an important step for setting the framework to return to growth. Thank you all for joining today's call. Looking forward to hosting you to the Q3 report on November 7. Thank you very much.