For our holiday edition of Stocks Neat, Alex Shevelev, Portfolio Manager of the Forager Australian Shares Fund, is filling in for Steve and Gareth and he’s joined by a special guest, Will Lopes.
Will is the CEO and Managing Director of Catapult (ASX: CAT) which has been an investment of the Australian Shares Fund for a number of years. With origins in the Australian Institute of Sport, CAT has pioneered the sports wearables space and their product is now used by thousands of teams around the world. Despite the impressive growth seen by CAT, Will still believes there is significant room to continue growing the business.
“There is still about 80% of the market that has yet to be penetrated. While we’re the leaders, we continue to find really, really healthy growth within that space today“
Listen to the full episode to hear how CAT is helping professional sporting teams reach their full potential using data analytics and where the business sees the opportunity from here.
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[00:00:40] AS: Hello and welcome to episode 25 of Stocks Neat. Alex Shevelev, Portfolio Manager of the Forager Australian Shares Fund. And I’m feeling for our CIO, Steve Johnson, who is away at the moment.
Now despite this being Stocks Neat, we do not have any whiskies to try for you today but we do have instead a very special guest. Will Lopes is the CEO and Managing Director of Catapult. The ASX ticker is CAT. One of the investments in our Forager Australian Shares Fund.
Now, Will has been with the business for four years and came from Amazon’s subsidiary, Audible. He’s based in Boston. Very kindly joined us today. Hi, Will. Welcome.
[00:01:23] WL: Hey, Alex. Thanks for having me. Excited to be here.
[00:01:27] AS: Now, a little bit of background before we get started. Catapult is about a 330 mil Aussie dollar market cap. And it is listed on the ASX. But it reports its numbers in US dollars. That’s what Will and I will be discussing today. Now, also, during our conversation, Will may mention ACV. That is annualized contract value. Current annual value of all the active subscription products that the business has. With that little background out of the way, let’s get started.
Will, can you give us a bit of background here about how the business actually first came about?
[00:02:01] WL: Yeah. The business actually started as a collaboration many years ago with the Australian Institute of Sports. Ahead of the Sydney Olympics actually. And what the collaboration was trying to do at the time was actually to objectively understand and help improve athletic performance. It was looking at all kinds of different sports.
But out of that really came a wearables device that athletes would wear. And we started to capture every single metric we could to understand what was actually happening. What we called player load. The load management of understanding exertion and usage of energy that a player may take.
And so, since then, the company has become – formerly, I think I founded as a company in ’06. We are now the world’s leading sports analytics company. We have a number of software solutions. But our two core solutions are really a performance and health category, which is our wearable solution.
If people know Catapult in Australia, this is typically what they know us from. It’s used by thousands of professional sports teams across the globe. And then we have a video analysis suite of products that allows our teams to also understand, find insights across video, collaborate and then use that system to educate their athletes as well.
[00:03:20] AS: Now maybe we can talk about the wearables business because that is what Catapult has been best known for over time. Can you maybe describe just how dominant on a global scale the business actually is in the wearable space?
[00:03:32] WL: Yeah. We pioneered the industry really. I think it’s a great actual Cinderella story from Australia, right? Here’s a product that gets used by thousands of teams. We’re probably five times larger than our nearest competitor. I think the metric I always share it with folks is we have about 16% of 20,000 professional teams across the globe. If you add all of the competitors across the globe that sell wearables, you wouldn’t be able to get to 5% of that market.
Two good news. A, we are very dominant and we’re the leaders in that space. And then two, there’s still about 80% of the market that has yet to be penetrated. While we’re the leaders, we continue to find really, really healthy growth within that space today.
[00:04:17] AS: That was one of the interesting questions I think investors have sort of wrestled with for a number of years with Catapult. The business is so dominant in the wearable space. And yet, you’ve shown this over the last couple of years and continue to show it. It’s kept growing in the wearable space. You put out some good data a couple of years ago trying to measure the addressable and serviceable market of the business. I’m wondering if you could touch a little bit on that. And just how much there is to go and where? Is it smaller teams? Is it the junior teams? Is it different sports? How are you thinking about that specifically with wearables?
[00:04:52] WL: Yeah. It’s a great question, Alex. I think when people think about professional sports, they tend to think about four or five leagues and they see our penetration in those leagues and they think, “All right. You must be done. And there’s no more growth from here and out.”
And I think what people tend to forget is, actually, there are a couple of buckets when we say professional sports that are really meaningful in terms of places that we were going to address and sell wearable devices from. Obviously, you have these big leagues that everybody is familiar with. NFL, NBA, MLB, AFL down in Australia. But then I think they forget that there are feeder divisions behind those big leagues. Whether those feeder divisions be secondary divisions. Sort of like the championship leagues in the UK. Or minor league feeder divisions such as baseball.
Below that, you also have academies. We get a big football team in Europe. Typically, you’ll have many academies of under 19, under 17, under 13 that they’re using to basically develop their talent along the way. There’s quite a bit of teams around that as well.
The other aspect that I think we tend to forget is that women’s sport has become phenomenal and becoming professionalized over the past five years is also starting to become very meaningful. And then, lastly, there’s the collegiate space. I think collegiate space in the US is gigantic. I think particularly when I’m talking to Australian investors, I’m always fond of reminding them that if you take the University of Alabama’s football team as an example, their single budget is bigger than all of the AFL combined. And so, it’s really big business. And then on top of that, you have national teams and Olympic teams across a multitude of sports.
The way we think – when we put all of that together, there’s about 20,000 teams across the globe that we think is addressable with our technology. Both our wearables and our video technology.
In wearables, we’re sitting today around 2,600, 2,700 teams that are using our device. And we think that, ideally, we should be doubling that in the midterm. About three to five years.
[00:06:59] AS: More generally, I mean, when you talk to these teams, that need for more data, that need for more information about their players’ load about how they’re moving, where they’re moving, how they’re exerting themselves, one would imagine that that is just getting more and more demanding of the technology that is involved in those businesses – in those organizations, I should say.
[00:07:20] WL: Definitely. It’s getting more specialized. One of the things that has been really successful for us is actually specializing under the data that’s coming in around not just the athlete but around the sport, the position. Sometimes even the time of the year that they’re actually looking at it.
As a good example, maybe five years ago we would say here’s what an athlete’s load management looks like in a given week. Load management is our internal terms to say, basically, exertion level. How hard are they working to do a certain activity?
But today, most teams starts to look at and say, “Well, I want to actually calculate that slightly different from my striker, and my midfielder, my defenseman.” We introduced a very specific algorithm last year for baseball. And we went from two teams in Major League Baseball here in the US so nearly half of the field now is using our products. And so, that specialization I think is really what we’re starting to see come in more and more in terms of what they want from the data.
[00:08:24] AS: It’s interesting actually speaking to one of your larger soccer clients. They mentioned something similar. They said it was really good to have that specialized analysis of the data as well as obviously the device itself for their specific sport. But also, taking in the lessons from other sports and bringing it to bear on what they needed to do with the technology. That was really great to see as well.
Yeah, we’ve been talking about wearable so far. You bought a business, SBG. This was mid-2021. That moved you more heavily into video. There was an interesting and remains an interesting nexus between the video and the wearables part. You’ve showcased this product before. Can you maybe describe how the product operates and also how it’s being received by clients?
[00:09:12] WL: Yeah. If we think about video analysis in sports is probably the thing that you know most people from outside of the professional sports could understand, how it’s used. And typically, there are three things that a team is trying to do with video. The first is they’re trying to find key insight moments. Whether that’d be an insight moment of how their opponent plays at different situations. Whether that’d be how their team is playing at different scenarios.
Two, they’re trying to use those key insights to then improve their tactical plans, right? They typically want to you know modify their game plan. And they also want to make sure that they’re using those moments to coach the athlete and showing them actually what is the right behavior or the wrong behaviors that they should exhibit? Whether it’s in training sessions or in-game sessions.
Our video suite will typically take those three elements and combine all of it with our wearable data. Now why is the wearable data overlay on top of this important? Is that, typically, and historically I should say, coaching decisions are made without actually understanding what’s happening inside the athlete. What is the actual – that moment in time, where was the athlete’s exertion level as an example? And there’s all kinds of decisions that gets improved by you understanding what’s happening with the athlete’s sort of physical metrics.
Substitution in a soccer match is a great example. Some days, pulling somebody out at 70 minutes may be the right thing. Some other days, pulling somebody out at 90 minutes is the right thing. It’s going to vary based on what’s happening with the athlete in that moment.
We had a customer today, recently actually, and we were showing them sort of they had these exhaustion spikes that were coming in with one of their shooters in basketball. And so, once we combine that exhaustion spike with video, what you started to see was actually the exhaustion spike was coming in. Because every time he jumped, he was jumping from one foot rather than both feet. And that was driving this sort of spike on exhaustion immediately after jumps. It becomes a very strong training tool significantly.
We had a very successful video business that Catapult had acquired probably about I guess eight nine years ago called XOS in the US. That video solution was very dominant in American football and ice hockey over here. But it wasn’t flexible enough for us to do this integration with wearables.
And so, as you mentioned, we bought a company called SBG a few years ago. We’ve now integrated this wearables data set with video and really sort of enhanced the ability to find those key insights, review and change your game and then sort of broadcast and coach your athletes in a number of solutions. And it’s done incredibly well.
This past 12 months, when we acquired the business, they were doing about 5 million dollars or so of ACV. So, annualized contract. At the end of our reporting period recently reported that it grew to about $8 million. We were up 41% on that. And we also saw the amount of clients now using our video suite. The net number grew about 72%.
We’re really, really pleased. I think the integration has gone well. The technology is showcasing both wearables and video in a different light and I think where the results are starting to pay itself off.
[00:12:28] ANNOUNCER: Stay tuned. We’ll be back in just a sec.
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[00:13:11] AS: Now talk about results. You’re actually a March year-end. Last month, you gave us a result for the first half of 2024. There’s a good reaction in the share price. We saw that rise about 40%. And there are a couple of avenues some of which we’ve already touched on that I think sort of pleased investors out of that result and us included. Maybe we can sort of take them in turn.
I think, firstly and probably foremost an investor’s eyes has been this move to a free cash flow positive position. It’s a big turnaround from this same half in the prior year. Can you maybe describe to us how you moved from more than 13 mil cash out to effectively slightly positive on free cash?
[00:13:53] WL: Yeah. I think it was a significant milestone for Catapult. I think two things were really happening with the business I think even starting a year ago that I started to sort of tell the market that. And obviously, some folks listened and got in the story pretty early and I think it’s paid off.
A couple things essentially. The first is that the cost to scale the business had reached a point where it needed to reach. And so, it was going to start to subside from there on. The way we think about our business is, essentially, there’s variable cost and fixed cost. Variable costs are money that we’re going to spend to drive future revenue growth. And so, sales, marketing, some of the delivery elements that we do. And then we have what we call fixed costs. Or these are costs inside the business that at some point you need to invest to kind of get the business to the right level. Whether that’d be sort of general and administrative costs. R&D as an expense. And a few other things. And we knew we were going to invest to do things that I just mentioned with companies with the acquisition of SBG and the integration.
But coming off last year we said, “Hey, I think the fixed cost now has reached a level of scale.” And what you’re going to start to see is that the variable cost has been very steady here. Our fixed cost has now reached a point where volume, it’s not going to grow much more than 5% to 7%. And we had also pulled back from what was our prosumer business that we had been trying to understand if it was worth driving that incredibly with the marketing dollars going forward.
And what that meant is that once we pulled back in the prosumer business and we had to reach a level of scale in the pro-business that we wanted to, basically, every dollar we were going to add thereafter was going to come in with approximately 30% of profit margin.
Basically, we’re coming off of last year sort of the break-even mark. And then every dollar we started to add thereafter was starting to come in highly profitable. And so, you’re starting to see that play itself out in free cash flow. But we also saw that this past first half, our incremental profit margin on the incremental revenue that we made, as I mentioned, was about 19%. Anticipate that will end the year by 30%. Because we pay commissions on the front end of the year. But it’s a fantastic turnaround. And it’s a real showcase that we’ve hit this inflection point that I think we’ve been talking about for some time.
[00:16:05] AS: That’s great to see. Yeah. And I think one of the drivers there – I mean, video was nice. And we’ll talk about it in a second. But the wearables business continued to grow, in this case, 27% the half you reported on the same half last year that’s adjusting for the foreign currency movements that would have occurred during that period.
I mean, you spoke about the white space still available for you to grow into there. Did you find that most of that incremental ACV, it came from existing teams? It came from new teams? It came from pricing higher? Where did it come from? Because 27, very healthy number for a division that’s sort of has been the core driver and is the more mature in the organization.
[00:16:45] WL: Yeah. I say it’s the tree that keeps on giving, right? But I think part of it is we still have a lot of green field, right? I think as I mentioned, we still have 80% of the market that are not using any device. It’s still quite a bit of green field.
The bulk of that 27% growth came from new logos. That was primarily what drove it. And we did a couple of things this past year that really fueled that growth. First, we brought in a new device to market for indoor sports that we introduced a little less than a year ago. That device was really designed to see growth through basketball. But secondarily, we also started to see some really strong growth in volleyball and particularly around national teams in different regions.
The second is that, also, we’ve introduced a number of algorithms that really start to improve the use of our current sort of outdoor device as well. And as I mentioned, baseball, for example, we were able to see tremendous amount of growth in terms of logos there. And we contined to find regional growth in areas where, as we’ve scaled and added sales teams in the locations, we’re also seeing fantastic growth in Northern Europe, Eastern Europe. We saw some really strong growth in LatAm. Collegiate space for us continues to be a great place. The bulk of it was logo-driven. Or new logo-driven growth.
[00:18:00] AS: It sort of leads us into quite well into this news video solutions part of a business. You mentioned before, it grew 41% in ACV, constant currency terms. The strength of your existing wearables base as well as the business development effort that’s already ongoing for that wearables base, how important is that for these new video solutions and growing those?
[00:18:26] WL: Well, it’s incredibly significant, right? Because it does a few things that are really important for us. First, the fact that we could combine our wearables into our video creates a differentiator in the market that no one could do and catch up to. It’s going to be very, very hard for somebody to actually catch up to that.
I think, two, it allows us to continue to improve and showcase that we actually have this underlying platform that you could count in Catapult not just for as a wearable business but here’s all the other things you could do. And we could become sort of this one-stop place where all of your data needs are going to be delivered from.
And then, three, it’s really where we start with the relationship, right? And so, for us, the way we think about our sort of go-to-market strategy is we land with wearables. We showcase that we have high-quality support. We have high-quality data. We have quality service. And then we expand initially with video and really start to come into a business and say, “Well, now that you have our wearables, let me show you what else you can do with that data particularly when you overlay with video.” We’re going to help you find sort of these key moments and these key insights. And so, it’s been really, really successful from a cross-selling capability to expand our annual contracts with the current teams.
[00:19:39] AS: And the video product, you are actually cross-selling a product that is more expensive into your existing teams than the wearables business that they have, right? It’s driving –
[00:19:49] WL: From a financial landscape, for us it’s a really great win. Our wearables business tends to be an average around 20,000 ACV. And typically, our gross margins, and that is somewhere in sort of the low 80s percentile, where the video suite tends to typically be built two times the amount of that on the contract level. Typically, around 40,000. And the gross margin on that is typically in the 90s, right? it’s just software. It’s not hardware-connected. And so, you’re typically somewhere in the 90%, 95%.
For us, from a strategy perspective, we’re establishing this great relationship with a very strong business that the wearables business is already. But then we’re expanding it with something that it’s even stronger and more creative in terms of the top line and essentially the bottom line as well.
[00:20:35] AS: Now you’ve also presented in that last results presentation a bit of a view to the future. You talked about that 30% management EBITDA number that accounts for the CapEx that you need to do on the software and the platform. That 30% number is from the current level of zero. You mentioned that as well.
The operating leverage that you have in the business, it is quite interesting for people to contemplate, I think. Can you describe how – maybe with reference to a fixed and variable cost you spoke about before, how you’re actually going to drive that operating leverage and those higher margins in the future here?
[00:21:11] WL: Yeah. There are a few things that I think are going in our favor to basically create that sort of 30% profit margin sort of focus. The first, as I started to explain before, we have a variable sort of cost buckets and fixed cost buckets. Our fixed cost buckets from here and out I think have reached a level of scale. And we anticipate that they will grow on absolute dollar terms. But it’s only going to grow 5% to 7% annually.
And so, as a percentage of revenue, that means that it’s going to grow very nonlinearly to our revenue sort of topline growth. And then when we look at our variable costs, these are cost of sales, and marketing, and delivery and cogs is the other components of that as well that are actually intended to improve as we go forward.
And so, today, for every dollar we generate of revenue, it’s costing us about 55 cents. And then we keep 45. And then to your point, we’re probably spending about 45 cents on our fixed cost at the current level of scale. but as you start to see this growth, we anticipate that, at 55 cents of variable cost, it’s probably going to go down to 45 cents.
And what’s going to drive that is improved cogs, right? Our gross margin in selling video is significantly better than it is on wearables. Two, sales efficiencies, right? We’re using the same Salesforce now to sell more than one product. And so, we should anticipate that that cost of sales and marketing to go down. And we’re also improving our technology over time.
And so, our cost to maintain, and deliver and onboard our customers should also come down. Our anticipation is that within sort of a three to five-year mark, we should see that variable cost be around 45. And that our fixed cost is just going to start to decay as our revenue grows as a percentage of revenue.
When we look at our plan about three to five years in sort of midterm, we anticipate that we could double the business from where we are today and be generating about 30% of profit margin.
[00:23:08] AS: Will, anything else you’d like to leave people with from this podcast?
[00:23:13] WL: The one thing that I would say, the Catapult story as a stock I think has been a fantastic one. But sometimes one that I think people jumped onto that story maybe five years ago, six years ago and they just understood the business as a wearables business, right? And it was a wearables business selling a perpetual license to a hardware component.
And I think the message I love to always you know kind of deliver is that that business has dramatically changed since I’ve been here. And in the four years, we have turned this into a true SaaS business model. We have two strong growing software products with really strong margins. And we’ve now reached a level of scale that I think we’re not only showing the right level of growth, but we’re showing the right level of growth while we’re generating cash.
And in the tech space, particularly in the tech space in 2023, that is a unique story to understand. And I think we’re in a unique set of company at this point. But other than that, I appreciate you taking the time. And as always, love sharing the story with you and any investors.
[00:24:18] AS: Thank you for your time today, Will. We’re really appreciative of it. And for everyone, thank you for tuning in. We always welcome your comments, questions or suggestions on future topics. Thank you very much.
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