Catena Media PLC

STO:CTM

Earnings Call Transcript

[Operator]

Welcome to the Catena Media Q3 2023 Report Presentation.

[Operator Instructions] Now I will hand the conference over to the speakers: CEO, Michael Daly; and Interim CFO, Erik Edeen. Please go ahead.

[Michael Daly, executive]

Good morning. I'm Michael Daly, CEO of Catena Media, and I'm joined by Erik Edeen, our Interim Group CFO. This is our Q3 2023 interim report. Today, we'll cover the Q3 highlights of the group, focusing on continuing operations, thus discounting the impact of assets divested or in process of divestment. The information for whole company, including now divested assets as well as the breakout of continuing operations are all available in our full report.

Q3 was a challenging quarter for the organization. We saw revenues for the group decrease by 28%. This was due in significant part to the undertaking of our journey towards a revenue share model in North America.

In the quarter, we saw 17% of NDCs in North America delivered on revenue share agreements with operators. And that was up to 24% by the end of the quarter, in the most important month, September, start of the NFL season. We expect this share to increase in the coming quarters as we convert more operators to similar deals.

Q3 results was impacted by a change in many operator CPA rates, downward for Sports by as much as 25%. This only further supports our prior decision to move towards revenue share starting this NFL season. Even with such pressures and our adding another media partnership, I am pleased to report our North American EBITDA margin remains strong at 44% for the quarter.

Additionally, we have seen significantly more competition particularly from media outlets that have partnered with competitors. This is an area we expect to combat with similar tactics, such as our signing as a partner The Sporting News during the quarter for coverage of sports, casino and fantasy in the Americas, North and South.

And while early days, we expect this to develop into a healthy revenue stream along with our partners, Lee Enterprise and Advance Local, which also continue to develop. We will continue to explore more of these, working to find partners that make for top and bottom line growth.

At the tail end of the quarter, we saw Kentucky launch for online sports betting, which is a smaller U.S. state at 3.5 million population. We are pleased with that launch date.

Eighteen months ago, we announced our strategic review, a journey about streamlining the organization and equipping us for the next chapter in our story. The plan formed during that review was about focusing the organization on stable regulated markets to drive sustainable growth in our business over the long term.

As part of that, we have evaluated various markets for stability and growth potential and weighed that against the benefits of divesting assets in those markets in order to improve our own financial stability. With the divestiture during the quarter of the U.K. and Australia businesses and post quarter of the Italian Casino and Sports businesses, we now complete the divestment actions laid out by that review.

With this, we have raised EUR 76 million from asset sales. With the scheduled inflow of sales proceeds in the next few years, we are now in a net cash positive position.

During this review process, we have also been able to further streamline the organization, removing additional millions from our cost base. This puts Catena Media in the strongest financial position it can be for future development. It permits us the operating room to transition the North American business to the more sustainable revenue share model which will see higher total revenue over time, particularly with downward CPA pressures now in market.

As the simplistic graph on this slide indicates, while CPA for an NDC, new depositing customer, delivers an initial payment, revenue share development will take some time to grow to that same CPA value, but then will exceed it over time, provided the terms to the share are properly negotiated.

This rebalancing of our CPA revenue share mix will secure a more sustainable revenue inflow but does create a negative short-term impact as the level of CPA payments are being removed while not reducing the costs associated with finding and delivering those players.

We expect this to impact us through H1 next year. Our stronger financial position allows us to weather this while continuing to move forward and invest in a series of other growth initiatives. These include the aforementioned media partnerships, additional growth of our paid media unit, investing in our own sites for stronger keyword performance and investing in forward-looking technologies.

One technology that we recognize is fundamentally going to transform the affiliation business and not just for gambling, is artificial intelligence, AI. Many tasks we do today will be augmented or even replaced by AI functions. We've been planning for this new landscape for some time and are determined to be a leader in AI-based affiliation.

Post quarter, we invested in an AI joint venture with leading experts in the field to develop an AI affiliation platform specifically tailored for Catena Media's affiliation needs. We see the potential in the next few quarters to develop this technology to enable content personalization and scaling for our target audiences in ways impossible with only today's techniques.

I expect AI applications to provide a significant addition to our armory as we compete for new customers in a more competitive and dynamic marketplace. We'll update you on these developments in the coming quarters as we anticipate rapid development.

With the strategic review behind us, we are focusing on investing in our teams and with efforts underway on multiple fronts for growth. Taking into consideration the expected increased percentage of NDCs delivered on rev share which ultimately will further enhance our bottom line, we anticipate these efforts offsetting that revenue share conversion by second half of 2024.

I'll now turn it over to Erik to discuss the financials further.

[Erik Edeen, executive]

Thank you, Michael, and good morning. Starting off the financial section with one of our geographies, North America, we saw a decline in revenue in this third quarter here of 29%, as Michael explained, primarily in relation to the transition from CPA to revenue share, where the quarter concluded 17% in terms of NDCs being forward pushed to revenue share.

We also saw some increased competition and reduced marketing spend here in the third quarter, but despite those tougher conditions, we concluded with an adjusted EBITDA margin of 44%. And the North American business stood for 84% of the group revenues here in the third quarter.

If we continue to look at the rest of the world, we had a revenue decrease from continuing operations and it was primarily driven now by Japan here where we completed some rebuildings of our casino site in Japan.

We had a strong e-sports revenue here in the quarter, and we had continued positive developments from our LatAm business here in the quarter, growing from low levels primarily in relation to Brazil, ending the quarter at EUR 2.6 million in revenue and an adjusted EBITDA of EUR 0.5 million.

Looking into our segment performance, Sports and Casino, we had a decrease in Sports of 34%, concluded at EUR 5.7 million in the quarter. And again, in relation to the CPA rate and the shift we did hear during the quarter where we saw a CPA drop of up to 25%. We saw possibility to transfer some of those agreements over to revenue share.

In New Jersey, we had higher Casino CPA rates and showed a consistent strong value creation and demand in this large, mature market. Casino concluded the quarter at EUR 10.1 million.

Looking into our cost development, where we saw an overall decline in the cost base on the North American market, an increase in relation to personnel expenses, and that was primarily driven by the investments we've done in the quarter and previously here, if we compare it to last year in relation to our initiatives, paid media and media partnerships.

Worth noticing on this slide page is that the divestment of U.K., Australia that we announced earlier this year. And in relation to that, announcing a cost reduction program will further optimize our cost structure now in the coming periods ahead of us.

If we look at our leverage over time and back to the development we've had with primarily CPA revenue with a very strong cash conversion given the high debt we've had within the company over the past years, we have now managed to reduce the leverage and the debt in the company, and we are getting close to or approaching a net cash position.

And we will continue to focus at debt reduction, potential share buybacks and strategic investments here over the coming period with the proceeds that we will receive from the divestments and have received from the divestments of our assets. The net interest-bearing liability debt was EUR 25.4 million end of the quarter.

Diving a little bit further into our balance sheet and how it currently looks with the proceeds we have upcoming and where we stand right now, we currently have no amounts committed to in acquisitions in the balance sheet. We've done bond buyback so far this year of EUR 12.3 million.

The cash and cash equivalents totaled to EUR 33.5 million end of the quarter. And if we look at the reported net debt of EUR 25.4 million end of September and factoring in the scheduled inflows we have in future proceeds of the divestments we've done of EUR 46.6 million, we will indicate currently a net cash position of EUR 21.2 million, including those future proceeds based on the current debt position. So very strong balance sheet from a cash perspective looking forward based on where we are right now.

And with those words, I will pass back to you, Michael.

[Michael Daly, executive]

Thank you, Erik. Trends after the quarter. Catena Media completed a share buyback program on 7 November, with just over 2.5 million shares purchased between July and October.

We are pleased to announce the hiring of Pierre Cadena in the new role of VP Corporate Strategy. Pierre with his background in online casino media and affiliation is already contributing to our focus on the long-term vision of the organization and the planning required for that to succeed. We look forward to this new role development.

October revenues from continuing operations decreased by 37% year-over-year as we continue forward on a path to shift new NDCs to revenue share with October being 23% for total NDCs on revenue share and a higher level for Sports specifically.

As I mentioned, during the -- despite the short-term effects of the transition, we do expect to resume revenue growth in H2 2024. Finally, the small state of Maine, one of the smaller states, launched at the start of November.

Catena Media has had a healthy growth these last few years from our team's exceptional performances with launches in North America. 2021, we saw 5 sports states and 2 casino markets launch. 2022 saw 4 sports states and provinces and 1 casino, and those sports states populations were almost double 2021. And even the 1 casino was larger than the 2 of the year prior. This year, we've seen less than half the population added for sports that we did last year, less even than 2021 and no casino.

All this is to point out there is a cycle that is part of our revenue growth development ties with the state launch cycle. We have a business optimized for launches historically. Our more recent initiatives, such as media partnerships and paid media, will help offset this during the off launch cycle as we move ourselves also towards a revenue share mix. We will, of course, also continue with the strategy of maximizing launches.

And there are still many launches ahead for North America. 2024 as of today, appears a bit lackluster on that front with only 2 on the board so far: North Carolina, a state of about 8.5 million, good size, expected sometime during H1; and Vermont, almost an afterthought at 0.5 million population.

While not exceptionally exciting for 2024, we are still at less than 50% of states with online sports and only 16% for casino. Catena Media meanwhile has scaled ourselves to be effectively ready for any future state to launch.

So is the expectation that much of the growth in revenues, when it comes, will translate to the bottom line as well. It is not a matter of if this market grows, just a matter of when. And while next year is currently not that active, we've had many a year where states pass laws and then launch within the same calendar year. So much is possible.

Our road map towards future growth involves a couple of pillars, maintaining top rankings. Organic keyword ranking is our strongest core competency and most profitable part of the affiliation model. We continue to invest in this area and now with a more streamlined organization can focus the teams on fewer markets and fewer assets to maximize those returns.

Media partnerships, the biggest challenge to our organic keyword ranking and at the same time, an opportunity for growth for Catena Media by aligning with the right partners and in relationships for long-term development.

Exploring paid media, traffic volumes, finding opportune keywords and timing using analytics and our growing team of experts is another opportunity that we are just beginning to exploit.

And advancing with AI integration, an area to invest in and be the industry leader in with a platform optimized for affiliation. We are building this to create stronger engagement via customization, personalization and more dynamic acquisition tools.

As our use of AI develops, it will infuse in the other 3 areas in numerous ways. All of this is built on a foundation of producing high-quality content into developing outstanding platforms with our user-centric approach and focus on our stable regulated markets.

Key takeaways. Completion of the strategic review, EUR 76 million raised from asset sales, sale proceeds primarily to be used for reduction in debt, a strong financial state with net cash position when factoring in the scheduled inflow of asset proceeds in 2023 to 2025.

Stronger financial position allows a transition to a more sustainable revenue model with higher total revenue over time. Investments in AI and internal expertise to establish Catena Media as the AI affiliation leader and we expect organic revenue growth to resume in the second half of 2024.

This completes our presentation of our Q3. We now open it up for questions.

[Operator]

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

[Oscar Ronnkvist, analyst]

So first of all, I just wanted to ask you about the underlying trends. So you say that you have seen a 25% take rate cut or CPA rate cuts in Sports, which is obviously weighing on the revenue figure and also the transition towards revenue share contracts. But then, just looking at the NDC number, which is down 34% year-over-year. And now I'm talking about North American operations.

Could you just expand a little bit on how we should think about the NDC number, just comparing to the 25% take rate cut. So I mean the NDC number is obviously worse year-over-year than the revenue number despite seeing CPA rate cuts and the transition towards rev shares. So if you could please just help us understand the underlying performance.

[Michael Daly, executive]

Absolutely. Yes, there are a couple of factors at play. There is the CPA rate cut, which was significant, impactful. There's the rev share conversion, which is by our own choice and has a short-term effect. And we have a decrease in NDCs year-over-year.

Part of that is the competition, the media partnerships of others, in particular, and our ability to combat that, which we are undertaking steps to improve upon to fight now that we understand how some of those are being used.

We do that through our own media partnerships, which are just essentially getting off the ground and growing in each quarter and as well as adding paid media and some other elements and strengthening our own sites for our organic keyword protection there.

There also are just some factors in market on size and shifts of market as operators spend on marketing overall. So that has some influence on our ability to gain NDCs. But I expect, Oscar, we should be able to increase our number of NDCs as we move forward.

[Oscar Ronnkvist, analyst]

Understood. So just to follow up, just to clarify, how has the CPA rates for Casino developed in North America in the quarter?

[Michael Daly, executive]

Casino has developed in the opposite direction, though less significantly. Our teams have been able to -- in the places where we are not moving towards revenue share, we've been able to establish some higher CPA rates, as I think Erik mentioned about, for example, New Jersey. So we have seen some strength there from the high value that we deliver, we were able to demand at the same time the operators were pushing on Sports to push up some CPA rates in Casino.

Obviously, there's a lesser market for Casino than Sports at this time, but we expect in the long run that will help. Also, converting to revenue share means even if we bring a player in on Sports, when they are converted by an operator to Casino, we will see additional revenues from that player flow as part of the rev share.

[Oscar Ronnkvist, analyst]

Got it. Just the next one on the transition then, just you say or you recently said that it's a higher total revenue over time with revenue share compared to CPA, which is obviously the case. But in terms of net present value, I think you've talked about CPA being better in net present value before.

And just -- I mean, obviously, with CPA or at least in Sports, CPA rate cuts, the net present value could look different, but also, I mean, just taking the risk-free interest rate into consideration, I think the U.S. 10-year treasury is up like 4 percentage points since the trough.

So when you previously said that, I mean, the net present value is better than CPA, could you just please expand on your thoughts on your sort of calculations, how you arrive or how you did arrive at that number? And then what has changed now?

[Michael Daly, executive]

Sure. A couple of things have changed. And again, we are still working through as we get more data, as we get more revenue share of our own going. So we've been working with operators to understand how some cohorts have developed over the last few years. How that then relates to market conditions as certain states have added Casino as also as states have developed over time.

Comparing that to CPA rates, which are going to have a downward pressure on which changes the math also. And we have been able to determine that given current conditions, current CPAs, which we expect they will need to be downward pressure going forward, not a great increase back on the Sports side, in particular, that it was logical to make the transition at the point that we could financially afford to do so with the stability that is now allowed from the strategic review and the debt reduction moves or ability to be able to reduce the debt.

So it is a calculation. Again, we'll provide some more guidance, I think in coming quarters about when that revenue curve and the CPA are expected to equal each other and when it exceeds. We have, as I said, some data from operators, but we really like to collect some more of our own data before releasing that for this is what we expect it to do with our revenue share.

Also, Oscar, it was very much about getting ourselves to the right revenue share agreements. You can get a revenue share agreement pretty easily from certain operators, but they might not be the ones you want to be on long term because they then don't pass that CPA value. For us, it was about having long-term revenue share agreements at good percentages that made that calculation then move in the other direction.

[Oscar Ronnkvist, analyst]

Understood. So just next one on, I think you mentioned the Kentucky launch that you were pleased with launch. So if I'm not mistaken, I think that launch was 28th of September, so which should mainly impact October, right? And you did not have any, if I'm not mistaken, again, launch in October last year. So we see a deceleration in October. It's down 39% year-over-year.

So if you could just maybe expand a little bit on that as well. So you said that you're pleased with the launch. I think you had a little bit of thinner comps in October. Correct me if I'm wrong, please. And also how we should see the Kentucky launch then because also, I mean, compared to September, at least, it was, I mean, less -- a lesser share of revenue share contracts than in September. So if you could say anything about that.

[Michael Daly, executive]

Sure. Absolutely. So Kentucky launch at the end of September, there was preregistration in Kentucky. So Kentucky was built up. So a lot of those players delivered actually in those last couple of days of September pretty well. It didn't have a comparable in October. As you say, last year, we had Kansas, which is a larger state at the beginning of September and ran through.

We also had New York, which was in its first NFL season. It started September, October of this year. Last year, we had Ohio. So we've seen some of that, but again, it's October revenue share felt the same as where we ended September for percentage, for total NDCs and higher by a bit for the Sports, which is the larger part of the season in October.

And then, yes, the CPA rates and the competition, and again, so we are impacted by that, and we are underway making the moves to adjust and overcome that competition factor. The CPA factor, we will overcome as well by taking on some of these additional moves in paid. It takes some time to get going for that to get that to where we can scale that because we want to be able to do that at reasonable margin and the media partnerships, which we're developing.

[Oscar Ronnkvist, analyst]

Perfect. Just a final shorter question for me and that is just maybe to Erik, just the refinancing of the hybrid bond or if you are going to refinance it, do you have any color on that, please?

[Erik Edeen, executive]

So Oscar, do you mean the bond or the hybrids?

[Oscar Ronnkvist, analyst]

The hybrid capital, I think we should see a step up pretty soon, right, in interest, if I'm not mistaken.

[Erik Edeen, executive]

Well, when it comes to the hybrids, we have the new 2025. So it's a bit away. We have the bond now upcoming next year in June and given the maturity on those, the bond would fall due before the potential step-up on the hybrid than 2025. So yes, what we do right now is obviously to prepare for the upcoming matures on our different instruments.

[Oscar Ronnkvist, analyst]

All right. So just looking at your net cash position, adjusting for the incoming sort of reversed earn-outs, I suppose. Could we expect you to pay down the debt, pay back the bonds? Or should we rather see as new investments into, for example, M&A in North America? Or what's your main focus now with capital allocation?

[Erik Edeen, executive]

Our current main focus is, as we also elaborate on in the report is to reduce debt, potential share buybacks and invest in new initiatives within the company. That is on the agenda now going forward short term.

[Operator]

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

[Erik Edeen, executive]

Okay. So let's then move over to questions we received during the call and to start off with a question for you, Michael. In relation to Florida and our business in Florida when Florida Sports betting is coming up, how are we prepared for that? Or how do we prepare for that?

[Michael Daly, executive]

So Florida has under their laws passed has one essential operator, which is the Hard Rock group Seminole. We have relations with them for their operations in various states. And in Florida, we expect they will start working with us as an affiliate at some point here in the not-too-distant future. It's been a moving market in terms of lawsuits and launches and relaunches. So the timing has been interesting. It is going to be a -- while it's a large state, it is going to be a limited market in terms of number of operators based on what was passed. Again, Hard Rock is a good operator of land-based casinos and has online presence in various locations. So we expect and they've indicated they intend to do affiliation to some levels, but I don't think it's going to look probably like all of the other states where there is a larger number of operators, which is a better environment for affiliates.

[Erik Edeen, executive]

Okay. Thank you very much, Michael. And 2 questions that I will respond to myself. First one that we received here is around the hybrids and for us to repurchase hybrids in the open market, why we aren't doing that. And yet again, back to where we are from a financing point of view. We currently have the bond falling due next year. We have the hybrids with a step-up in 2025.

We're obviously tracking this very closely, and we are not excluding or saying no to any potential options there. So we will continue to evaluate and look into what possibilities we have in terms of dealing with our debt/equity structure as our hybrids are classified as equity. So that's on the agenda going forward.

Second question that we received here is if we will do any further buybacks. And yet again, as we said here in the report, just to make that really clear is definitely on the part of the tools that we can use in the toolbox, reducing debt, looking into further share buybacks as a potential option as well as investing in the growth of the business going forward. So those 3 kind of key items or tools are on the agenda, and that's what we are looking at from different perspectives here over the coming period.

Question back to you, Michael, and that is related to the divestment of AskGamblers and why AskGamblers has seen an increased revenue after the sale? And what they are doing differently, the new acquirer or the new company at both those assets?

[Michael Daly, executive]

So I don't know that I can comment particularly on what they are doing. I know when we had AskGamblers, we were continually being sent letters from countries that said that there were -- our operations targeting those countries, and we were turning them off. The percentages that we went down, if you went back up, would have been significant growth if you really targeted those markets.

So that was one of the things we contemplated. But the challenge we had was if we did that, we would have to probably consider splitting the company into 2 companies, one that focused on regulated markets and one that focused on gray or even what are black markets now in Canada and other places that are outside of the legal provinces.

So those were the decisions we made. We weren't sure that our investors would want to see that split of the stock in terms of giving them something that was a much grayer or black market. So those were the evaluations we went through.

We've sold the product. Others are going down their approach on different views on whether regulated versus unregulated markets versus what is stable enough for their businesses.

So they are doing a different strategy than we were able to do with our focus on regulated markets, which we believe to be sustainable and also would not jeopardize the licenses in those sustained and regulated markets by doing activities in markets that had declared themselves either gray or black. So that was what we couldn't do. And to what they are doing specifically, you'd have to ask them.

[Erik Edeen, executive]

Thank you, Michael. And back to a finance-related question that is related to our expected shared central operations costs, and when we expect those to come down and how much, and yet again, to comment on what we said here in the press release during the summer that we expect a decrease.

And we expect about 90% of those costs to be materialized by year-end, but the full effect or the greater effect will be shown here in 2024, and we are tracking well towards what we announced previously in terms of the cost reductions for central operations.

I think that was it from a questions point of view. So back to you, Michael, for some closing remarks.

[Michael Daly, executive]

I want to thank everyone for joining us. I want to thank everyone for joining us for the journey. We are on a journey. The strategic review laid out a plan. We're executing on that plan. It is a difficult one with the transitions to revenue share, with the divestment of various assets necessary to put us in a stronger financial position.

Some were underperforming assets, some were assets that were in decent markets and decent performance, but it was a balancing for focus versus expansion across the globe. We're focused on various markets with the highest revenue growth potential in the near term of 5 to 10 years and how best to optimize ourselves for that.

We are on that path. We will continue down that path. We will accelerate on that path and you will see stronger performance, as we said, in the coming quarters from the other areas of our business beyond the launch phase cycle of paid media, media partnerships and the new infusion of AI into those businesses across the board in the coming quarters.

So we expect good things in the coming quarters as we get those activities underway as well as a very large launch cycle yet ahead in the North American marketplace.

With that, I say thank you, and we'll talk to you again next quarter.