Like many local technology trailblazers before it, Catapult (CAT) has endured a turbulent first 5 years as a listed company on the ASX. One only has to view its historic share price to be reminded that the journey from emerging technology upstart to profitable global category leader is rarely straightforward. The saying “Things are never as bad or as good as they seem” certainly springs to mind…
To reflect on CAT’s history since listing in December 2014 is to note several familiar features that have become something of a rite of passage for many formative local tech companies.
Chief amongst these:
– Executive turnover
– Capital raisings
– Concerns around organic growth rates
– Difficulty managing investor expectations
– Challenges balancing growth and market leadership ambitions with the path to profitability
Despite the challenges what’s clear is that CAT has continued to be a leader in its field. Specifically, wearable technology and accompanying analytical software, including video. From its origins in the early 2000’s as a partly Commonwealth funded research project developed in conjunction with the Australian Institute of Sport, CAT now enjoys presence in over 130 countries with a customer base that exceeds 3000 and use in more sports (40) than its nearest competitors comfortably.
Having followed the progress of CAT since its IPO the Chester High Conviction Fund took a position in the company shortly after it delivered its F19 result in August last year. The result delivered the company’s maiden positive EBITDA result, in line with guidance issued in October 2018.
Ahead of investing in CAT, Chester had continued to follow the progress of CAT for a pretty simple reason. In short, it is a company that remains exposed to favourable industry tailwinds. Investment in top level sport continues to rise globally as broadcasting (both traditional and non-traditional mediums), advertising, sponsorship and apparel deals rise. The flow on effect has been the adoption and integration of technology into these elite sporting programs globally as teams and athletes have sought an edge over competitors. There’s little doubt that CAT has been at the forefront of this push and a long list of championship winning CAT adopters across numerous sports is a strong endorsement of the technology.
Despite only entering international markets a little over 10 years ago, CAT maintain several customers that are amongst their longest tenured in offshore markets and significantly, are amongst their highest spending. In fact, of CAT’s largest 15 clients (by revenue) 11 are US based. With churn rates (customers not renewing their elite wearables software subscriptions) continuing to fall (5.2% at the end of F19), it’s apparent that the CAT product is becoming more entrenched in sports programs globally and teams are continuing to derive considerable value from their investments. This is an important point that should not be understated. CAT have a product that customers stand to gain more value from over time as the accumulated athlete data becomes a more comprehensive database for benchmarking. At risk of using just a little creative licence, Chester sees Catapult and their powerful athlete data as fast becoming the ‘Bloomberg’ of the sports industry.
In addition to the 3000+ teams that in one form or another now utilise the CAT suite of products it’s significant that CAT has continued to have success signing ‘League-wide’ deals with various sporting organisations. Numbering in excess of 10, these deals which typically see all league teams gain access to the CAT wearable units and accompanying software platform are significant because they represent a further level of validation for the product. On top of all teams gaining access to the technology designed to optimise athlete performance and welfare monitoring league’s too can gain from having access to a considerable centralised database of athlete data. It’s very likely that we remain at the early stages of the commercialisation of league-wide athlete data and its integration with broadcasters and the like.
In the past 12 months it’s significant that CAT has extended existing contracts with both the Australian Rugby Union (ARU) and National Rugby League (NRL) despite the ambitions of northern hemisphere rival STATSports to establish a customer beachhead in CAT’s home market. With further league-wide deals up for renewal over the coming 12-24 months it will be important to watch the success CAT has on this front.
A Leading Sports Technology Portfolio
Looking ahead, recently appointed CEO Will Lopes joins the business at an exciting time. Joining as CAT’s first US based CEO and with considerable experience as a senior executive with Audible, Amazon’s global audio content business, Lopes assumes control of a portfolio of sports technology assets that are becoming increasingly integrated with each other. This is significant because increasingly, CAT’s future growth should be driven by existing customers adopting other products from the CAT portfolio.
Having acquired XOS Technologies in mid-2016 as a leading product in the digital and video software segment and representing about 500 of CAT’s current customer teams, we’d anticipate the fruits of a number of years of investment and development will increasingly see this product sold beyond the product’s traditional markets, football and ice hockey in North America. CAT’s recent announcement of a league-wide deal with the Colombian Premier Football League that includes implementing both wearable technology and video analysis products supports our belief that CAT’s video products will have wider use than traditional high-speed, stop-start sports such as US football.
Rounding out the CAT portfolio are some less established products, albeit with considerable potential. CAT’s ‘Athlete Management System’ (AMS) product has been developed to complement the wearables and video analysis products as a platform that can consolidate athlete data and allow for greater interaction by athletes for monitoring not only performance but also health and wellbeing which are considered increasingly important by sporting teams. Complimenting CAT’s ‘Elite’ wearables technology solutions are some products and solutions designed to meet the needs of the tier of athletes that sit just below the top echelon of professional athletes – termed ‘Prosumers’ by CAT.
In the near term, we anticipate Lopes will prioritise sales to elite customers and seek to build on the momentum CAT has enjoyed with their latest wearables device, Vector, which was released in mid-2019 and has been very well received. Favouring elite customer sales over the larger but less developed prosumer market should deliver a number of benefits to CAT.
Firstly, by focusing largely on penetrating the top professional sports should allow CAT to continue to control their operating costs better than they have in the past. By narrowing the focus of their sales staff we anticipate current staffing at around 360 people can be broadly maintained in the near term. With staff representing about ~65% of the groups operating costs (after COGS) improved cost control should see investors gain greater confidence in the prospect of margin expansion and a more predictable earnings profile. On the expectation that product development capex should be maintained at similar levels to F19 in the next couple of years, the prospect of free cash delivery by F21 looks readily achievable, if not sooner.
Source: Chester Asset Management
By prioritising elite customers the likelihood that more sales will be contracted on a subscription basis, consistent with history, should see subscription, or recurring revenues (as a percentage of total revenue) rise once more from current levels of ~70%. Again, we’d expect this would be well received by investors who continue to show a strong appetite for high recurring revenue business models. The fact that CAT trades at an enterprise value (~AUD340m) little more than 3 times its consensus F20 sales currently, a significant discount to many domestic technology peers (with global operations), suggests there is strong re-rate potential for the share price if this strategy is well executed.
Source: IRESS (Consensus F20 forecasts) – at 15/1/20. All figures quoted are AUDm
An additional outcome of higher elite sales is the prospect that the recent declines in the group’s gross margin should slow as a greater percentage of higher value units are contracted over the next couple of years. Together with the potential to grow Average Revenue Per User (ARPU) above the AUD108/month (per elite wearable subscription) it has averaged over the last couple of years as existing customers transition to the latest generation Vector product, these developments would likely be viewed as incrementally positive.
The US Opportunity – A long way to go
Chester expect the US to remain a key driver of CAT’s growth in the near term. Despite counting over 1000 teams as customers in this market already, we believe that the market continues to underappreciate the sheer size of this opportunity. Beyond the globally recognised four major US sports bodies (Football (NFL), Basketball (NBA), MLB (Baseball), Ice Hockey (NHL)) which together with the English Premier League (Soccer) are the five highest turnover sports in the world, huge opportunities exist for CAT.
College sport in the US, regulated by the powerful National Collegiate Athletic Association (NCAA) is extremely big business and the distinction between professional sports and college sports continues to narrow – albeit with one key distinction. College athletes still cannot be paid. Therefore, as the money from broadcast and sporting apparel deals continues to flow into college sports programs at record levels the pressure on these colleges to invest in their student athletes across all sports builds. Considering that there are >9000 teams that compete in NCAA sporting competitions across the US it’s clear this remains a large opportunity.
To highlight this point, we see the recently announced partnership CAT has with the University of Louisville as a useful reference. Possessing the largest sporting apparel contract with global brand Adidas in the US College ranks1, the University of Louisville’s implementation of CAT’s AMS product across all 23 sporting teams and adoption of CAT’s wearable technologies2 offers an insight to the types of opportunities that exist in this market.
Chester consider CAT a strong investment opportunity at current prices. Trading at a healthy discount to our current DCF derived valuation of AUD2.50 (WACC 9%, TGR 3%), with upside potential should CAT achieve some price inflation over the medium term, we think CAT is well placed to capitalise on favourable industry conditions and its category leadership. With a unique portfolio of products that extends its sales opportunity well beyond its key competitors, we see CAT as extremely well positioned as it enters its next 5 years on the ASX.
Past performance is not a reliable indicator of future performance. This document is for general information purposes only and does not take into account the specific investment objectives, financial situation or particular needs of any specific reader. As such, before acting on any information contained in this document, readers should consider whether the investment is suitable for their needs. This may involve seeking advice from a qualified financial adviser.