Thursday 13th February 2020
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Shares of Catapult Group International have enjoyed a meteoric rise over the past year, but the path of the share price has been far from unidirectional since listing in late 2014. We take a closer look at the investment case for this sports technology player that works with many leading teams across a wide range of sports and delivered a maiden positive EBITDA result in FY19.
We believe Catapult hit an inflection point in FY19 with its maiden positive EBITDA result. With the company now hitting scale further revenue growth should be leveraged at the EBITDA level. The company is targeting being net cash flow positive from FY21, which is an achievable goal in our view given the current trajectory.
The company has attracted a seasoned former senior executive at Amazon subsidiary Audible as CEO, a Mr Will Lopes, who began in the role from 11 November 2019. He appears to have the right blend of experience and skills to take the company to the next level.
The sports industry is huge and growing, providing fertile ground for Catapult to grow given some industry-leading technology. Growth opportunities for the group exist from “greenfield” sales to new teams, the upselling capacity to existing clients and vast cross-selling opportunity from customers with only one Catapult product. Growing recurring revenue is a key attractive feature as the company signs more clients on as subscribers for its product suite and services.
On the valuation side, we find a forward EV/revenue multiple of around 3.25 times as palatable for a company that is increasingly becoming a software-as-a-service player.
Catapult cites its goal as “to build and improve the performance of athletes and teams at all levels of sport.” Sports are a huge business, with teams and players always looking for an edge. The broader sports market (and consequently, the Catapult addressable market opportunity) is set to continue to grow as sports content is highly prized by broadcasters and can help sway a consumer on who to sign up with for their viewing needs. Apparel and sports shoes makers often rely on sports stars to promote their products and advertising and sponsorship deals have been growing.
Catapult is a leader in sports science research and innovation with many leading teams using its technology. The company’s wearable technologies that were developed in its early years have expanded to athlete management and video analysis.
Wearable technology products like Catapult’s premium Vector monitoring solution are worn to accurately track movement and heart rate among other many other sport-specific variables to allow coaches and players to optimize performance, reduce injury risk and manage the rehabilitation process.
Catapult’s athlete management system (AMS) is a software solution that integrates a team’s physical, medical and wellness data in one platform. Following the acquisition of XOS Technologies in mid-2016 for US$60 million the company added a leading sports video analytics platform.
A more recent development is PLAYR – the company’s athlete tracking device for the consumer market–to enable amateur soccer players to monitor their performance like professional players. This broadens the potential market, with amateurs increasingly adopting technology to try and enhance their own performance. Nonetheless, in the near term the focus is on the high-value elite professional customer base and the ‘prosumer’ (athletes below the elite professionals level) division has been resized smaller and focusing on controlling expenditure and cash flow.
Catapult was originally formed from a partnership between the Australian Institute of Sport (AIS) and the Cooperative Research Centres (CRC) to maximise the performance of Australian athletes ahead of the Sydney Olympics. It is now a listed company (since late 2014) on the Australian Stock Exchange with a market capitalisation of around $380 million. The share price performance during its time as a listed company has been turbulent, although that isn’t unusual as a company grows from the technology start-up phase in Australia.
Expanding internationally always carries its own challenges and several other factors have contributed to the volatile share price since listing. Over optimistic investor expectations in its early life as a listed company saw the share price surge rapidly, but then later face a sharp correction after peaking in 2016. Capital raising, acquisitions, executive turnover and the challenge of chasing growth while targeting a path to profitability contributed to the bumpy ride.
Positively the company has been a leader in its niche in the sports technology world and put together a broader sports technology portfolio over the years since listing. Catapult currently has over 340 staff across 30 locations, working with more than 3000 teams in 137 countries across 39 sports.
Soccer represents its largest customer base by team numbers, followed by rugby and American football. Ice hockey and basketball are also significant. The Americas and Europe, the Middle East and Africa are key regional markets and the company has a strong presence in its ‘birthplace’ of Australia.
The momentum has been positive of late, with more than 1,100 new teams signed on as customers in FY19. Most recently, in mid-January 2020 Catapult announced that Major League Rugby (MLR), the premier rugby union competition in North America, has implemented Catapult’s technology for all 12 of its teams starting from the 2020 season.
Catapult also inked deals with the Cleveland Indians and Toronto Blue Jays (Major League Baseball), Texas Tech University, Stanford University, University of Iowa, and Los Angeles FC and New York Red Bulls academy (Major League Soccer). Prior to that in early January, Catapult announced that it had signed a league-wide deal with DIMAYOR, Columbia’s premier football competition, which has chosen to adopt Catapult wearable and video analysis technology across all 36 of its teams in the first and second divisions.
Catapult delivered its maiden positive EBITDA result in FY19 in a year that still included significant investment in R&D and the launch of new products. With the top line set to continue to grow at a fast pace and most growth coming from recurring revenue due to subscription software sales and significant scope for cross-selling, we believe the company has hit scale and EBITDA is set to grow quickly in the years ahead. Catapult should also be able to attain its target of becoming net cash flow positive by FY21.
Catapult reported revenue of $95.4 million in FY19 (year ended 30 June 2019, up 24% over FY18. Annualised recurring revenue grew by the same pace to $66.1 million and is highly prized by investors due to the stability of that type of revenue.
North America is the key market for the company and generated $65.4 million of revenue in FY19, up 19%. There remains a large market opportunity in the Americas for Catapult to address. The EMEA region starred from a growth perspective, with revenue surging 44% to $19.6 million. The Asia-Pacific region also impressed with growth of 40% to $4.97 million and has significant untapped potential. Australia revenue increased 20% to $5.44 million.
By segment, the Elite wearables revenue was up 33% to $45.3 million as the company sold a record 15,700 units. Cumulative subscription units were up 25% to 17,100 units. Unit ARPU was down only marginally from $109 per month to $108 per month and subscription churn fell from 8.4% to 5.2%.
Catapult’s elite video revenue grew 14% to $44.8 million, with 544 teams using Catapult’s video products. The company said demand “continues to be strong,” and the product line delivers high gross margin subscription revenue. There is significant scope for the company to expand beyond its traditional focused on North American clients to be more international. To aid this effort, FY19 was an important year following the launch of Catapult Vision, Catapult’s newest video solution that delivers “high margin subscription revenue and addresses a wider range of international sports.” The company noted “positive early adoption of Vision across all regions.”
The prosumer category surged 54% to $5.3 million, driven by the PLAYR consumer product. Nonetheless, as noted earlier, the division has been resized smaller and is focusing on controlling expenditure and cash flow. Recurring elite customers are the main short-term focus.
Growth opportunities for the group exist from “greenfield” sales to new teams, the upselling capacity to existing clients and vast cross-selling opportunity from customers with only one Catapult product. We believe the new CEO Will Lopes is the right person to spearhead this effort and the next stages of Catapult’s commercialisation. He commenced as CEO on 11 November 2019 and is a former senior executive of the Amazon subsidiary Audible.
Improving scale is allowing operating and labour expense as a percentage of revenue to fall even as headcount increased 14% in FY19.
EBITDA moved from a loss of $1.9 million in FY18 to positive EBITDA of $4.1 million in FY19 and as the top line grows and the company has hit scale we expect more of the additional revenue to drop down to the EBITDA line. NPAT remained in negative territory, but improved relative to FY18 with a lesser loss of $12.6 million (FY18: – $17.4 million). Substantial depreciation and amortisation of $17.04 million weighed on the reported bottom line.
The company ended FY19 with cash on hand of $11.7 million, but by 30 September 2019, cash on hand had grown to $26.9 million.
We believe Catapult hit an inflection point in FY19 with its maiden positive EBITDA result. The company has attracted a seasoned former senior executive at Amazon subsidiary Audible as CEO, a Mr Will Lopes, who began in the role from 11 November 2019. He appears to have the right blend of experience and skills to take the company to the next level.
The sports industry is huge and growing, providing fertile ground for Catapult to grow given some industry leading technology. Growth opportunities for the group exist from “greenfield” sales to new teams, the upselling capacity to existing clients and vast cross-selling opportunity from customers with only one Catapult product. Growing recurring revenue is a key attractive feature as the company signs more clients on as subscribers for its product suite and services.
On the valuation side, we find a forward EV/revenue multiple of around 3.25 times as palatable for a company that is increasingly becoming a software-as-a-service (SaaS) player.
Greg Smith is the Head of Research at Fat Prophets
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