Is Catapult Group hamstrung?

Adir Shiffman is the Executive Chairman of Catapult Group, the wearable technology for athletes company that floated in 2014 for 55 cents a share, got to $4, and now it's back at 85 or 84 cents. It's been a terrible disappointment for investors. The share price has been shocking over the last couple of years, after reaching $4 in 2016, which clearly got ahead of itself, but still it seems to have been heading back towards the float price.

The institutional shareholders that came in along the way, particularly those who bought above $3 are not happy. So, what's going on, because all of the news out of the company has been very positive.  They've been signing up teams all over the world, growing rapidly. The stories out of the business, including today's interview, are all terribly positive, so what's happening, and is the company undervalued? Naturally, Adir Shiffman says it is.

Here is Adir Shiffman, the Executive Chairman of Catapult Group. 

Adir, perhaps we can start with just going through the recent management changes that you've been through.  In December, you announced the departure of the CFO and also one of the founders, Igor van de Griendt was stepping back as Chief Technology Officer, replaced by somebody, and then in February, the CEO went.  Put it all together for us, what's going on?

No problem, Alan.  The first thing to say is it's pretty common for rapidly growing tech businesses to have kind of semi-frequent turnover at executive ranks.  I think that the change with respect to Igor was typical of that.  Igor sits on the board.  He's one of the directors.  As you correctly pointed out, he's one of the founders.  So his transition out of a CTO role to a more general technology support and innovation role, that was a planned change and that was well-executed by the CEO at the time, and we're pleased with the way that that's gone.

I guess the more material changes were the CFO and the CEO.  I'll touch on those.  Firstly, there was no connection between those two changes, and in neither case did they relate to business performance or any underperformance.  In fact, the business had been performing very strongly.

Both of them moved on for their own personal reasons, and we were disappointed to see them go, but...

Are you saying that neither of them were sacked?

That's right.  We didn't sack either of them.  In the case of the CEO, both parties mutually agreed that it was time for a transition to a new CEO.  Joe Powell had come in, brought a number of systems and processes into the business that were desperately needed.  He was ex-Seek, had a very senior management role at Seek, and he executed on those and both parties agreed that it was time to transition to a new CEO, to drive the next phase of innovation. 

In the case of the CFO, Mark Hall, we were really disappointed to see him go.  He left of his own personal reasons.  We've replaced him with an interim CFO in the form of Jim [Wallander], who had been CFO of Veda, so really well credentialed and is a board director of Catapult, as well.  Frankly, it's not a great look for a chair to have the CFO and the CEO leave in relatively quick succession, but they left for their own individual reasons.  We didn't sack either of them.  There was no issue with business performance.  It was just unfortunately timing, and we've taken steps to stabilise things.  Really, the company is business as usual, as you've seen from the results. 

But to be honest, I don't fully understand your management structure, because you're executive chairman and I think Shaun Holthouse and Igor, the two founders, are also executives directors, right?  Between the three of you, you control the company.  I think you're the biggest shareholder, aren't you, Adir, with 25% or something?

The way that the reporting on the ASX has to work, is any shares that I'm connected to in any way get lumped underneath my shareholding, but your sentiment is correct.  There's a material stake held by the three of us, and very much we're financially and emotionally invested in the business itself, and the management structure is maybe a little bit difficult to understand from the outside, but let me explain it, because it's quite a simple structure.

We have a CEO that runs the company day to day, and Joe Powell continues to do that role.  He's got a six month notice period, and he continues to serve in that role.  The exec chair role, the way I describe it is, it's only about focusing on the next transformational opportunity for the company and the key risks, what's going to imperil the company severely over the next few years, as is a risk for all tech companies.

The predominant function of my role, other than chairing the board, is staying abreast of what's going on in the industry more broadly and providing that as an input to the board and to senior management.

Yeah, but Adir, that's the job of any chairman.  Why call yourself executive chairman if you're not CEO?  I just don't understand.  An executive chairman in the company normally is the CEO, who runs the company.

Well frankly, that was advice at the time of the IPO, that we received during that IPO, and subsequent legal advice we've received since then, which is there is no way that a chair that's doing this type of kind of market engagement, etc., can call themselves a non-exec chair.  So I take your point, and in fact, we've taken external advice on that, and that has been the feedback we've received.  So in no way is my role to run the company on a day to day basis, and that was clear to the CEO clear to the executive team, and that's the basis on which the business operates.

Yeah but, look, to be honest, I'm not surprised Joe Powell's leaving, and I wouldn't be surprised if you had some trouble getting a new one, because a person's going to come in and report to three executive directors who basically control the company.

Well, it would be nice to talk about business performance at some stage, but I'm happy to keep addressing these questions.

No.  All right.  Okay.

I mean, Shaun had stepped out of an executive position just prior to Joe resigning.  The plan is not to, over the medium term, have executive directors who are ex-founders sitting on the board, and we've conveyed that to the board.  I feel like, I take the point, I feel like the line on this is a harsh line, because in fact this was not an issue in the operation of the business.  It was not a motivator for the personal decisions of either of these two executives. 

The structure has delivered strong performance across the company, and I think it's kind of a bit of a side show, this conversation, relative to the performance of the business.

Okay, let's talk about the performance of the business, Adir.  What about it?  What's going on?

The business has performed strongly and it continues to do so.  In the first half, we had revenue that grew 32%.  The revenue was up to $43 million.  In contrast, the operating expense of the business only rose 8%, so we have said before that we're very much a business heading rapidly towards cash flow break even and beyond. 

The most exciting part of the revenue for us, which is the recurring revenue, or we call it ARR, annualised recurring revenue, that grew 25% north of $57 million at the end of the half.  So we're seeing a business that across all regions and across all products is growing very strongly and it's delivering consistent with the guidance that we put out to the market for FY19.

You must be, in the light of all that, you must be disappointed in the share price.  I mean, in 2016 you touched $4.00, and now back to, what is it?  84 cents or something?  I mean obviously at $4.00 it was overpriced, or at least market got a bit carried away, but you must be disappointed that the share price has continued to fall? 

I think if you look at the analysts’ reports, you'll see that none of them feel that the share price is a fair reflection of the value inherent in the company, and on any of the metrics on multiples, it's typically used for listed software businesses.  We're definitely at the bottom end of that, and that's very disappointing, and we think that we need to keep delivering this kind of performance.  We need to do a better job than we have in the past of getting the message out to the market about what this business is about, and the fact that it is a recurring revenue business, with rapidly growing recurring revenues, a very low churn.  Our churn was three and a half percent in the half, and high gross margins.

Over some time, the market will reacquaint itself with the company, is the best way that I can put it, and the share price will come to better reflect the value inherent in the business.  But yes, absolutely.  We feel like the value of the company and the share price have reached a place where they're significantly out of alignment.

How should a shareholder, how should an investor value your business?  What basis do you think is a reasonable way to value it?

The most common ways in which these software businesses are valued globally, and in fact if you look at some of the tables each month that are put out by the likes of Morgan Stanley or Goldman Sachs, etc on Australian technology businesses, generally software companies are valued as a multiple of revenue, provided they've got those characteristics that I spoke about.  So low churn and good gross margins and ideally high growth. 

The midpoint of the software industry in Australia is five times revenue at the moment.  Our revenue is heading pretty close towards $100 million.  We've forecast just short of that in FY19.  So clearly on any of those kind of metrics, at the current valuation we're just south of $200 million as an enterprise value, it's not reflective of anywhere close to that midpoint, generally what we've found is that the ASX has some quirks, in that because we are not yet a business that's generating group free cash flow and reporting group NPAT, it's a little bit more difficult to tell that story and to convey the value in the business. 

But again, we think that we're rapidly heading towards cash flow break even, and eventually like the value in companies is appreciated and I think we're at the voting machine stage of the company, unfortunately, and we're heading towards the weighing machine, as Benjamin Graham would talk about it.

Yes, that's right.  Yeah, look.  I think you describe yourself as a subscription business, right?  Rather than a sporting business.  You're a software subscription business, right?  Can you explain to us what you mean by that?

The majority of the revenue that we generate is linked to software, is a recurring revenue software subscriptions in some way.  Historically, we've been most well known as we sell wearable hardware to elite teams, effectively.  But what people often don't realise is that the majority of that revenue actually is not on the basis of selling hardware.  It is selling a subscription to software, which is an ongoing monthly subscription fee.  Generally, that's paid a year or up to three years in advance.

With that software subscription, which sits in the cloud, comes a piece of hardware, in the case of the wearable.  That's an advanced piece of hardware and it's innovative and all of those things, but the business model is that there is a subscription that is being paid for a software platform, and that hardware comes with it. 

In the video analytics side of our business, that's the same model, except there's no hardware component.  It's purely a subscription to software and so the majority of our revenue is linked to subscriptions, to software.  Typically, three year subscriptions to software. 

Yes.  How many teams worldwide have you signed up?

There's around two and a half thousand teams, using one or more parts of the Catapult technology stack, at the moment, globally.  There’s been substantial growth over the last three years. 

When you approach a team to sell the product to them, are you bidding against others?

We have lots of competitors in the market, because we cover lots of different parts of the technology stack.  Like I said, there's the wearable part of it, which is all about improved player health and safety, player welfare, performance, etc.  we have a video analytics part of the stack, which is much more tactical in the information that it provides to coaches.

We have something called an athlete management system, which is a centralised database platform and because we are the dominant player globally in these markets, we're by far the biggest player in elite wearables, globally.  We would be the number one or number two in elite video globally, depending on how you measure it.  We have competitors, and they tend to be fixated on us as a business, because of the dominance we have in the market.

Our view on competitors is that they are not a limited factor to the sales velocity that we have, the growth that we have, and the opportunity that we have.  Usually, there's a competitor that might be pitched in against us, but in the vast majority of cases across those different product lines, we're successful in that pitch to a customer.

What do you think the size of the market is?

We say that the total addressable market on the elite side is 10,000 teams.  If we penetrated those teams with the products that we have today, not including any market growth, and not including the addition of additional products, there would be in the vicinity of $450, $500 million of TAM available on an annual basis in that market.

So we're a long way from touching the sides of that market.  One of the reasons that we're seeing these strong growth rates is there's still a lot of green field market opportunity.  It's also worth saying that more than 90% of the teams that we have, have only one product with Catapult.  So there is a material cross-sell opportunity in more than 90% of teams, to get more of our products from our technology stack into those clients that we already have.

Right.  Does that mean you've got 25% of what you think is the market?

Yeah, we think that the market heading towards 25% of teams available in the market.  But as I said, that total addressable market, that TAM, refers to us being fully penetrated across the entire product stack, and so in terms of the TAM, we're relatively early in that opportunity, because so few have more than one product from Catapult today.

Are there scale benefits in your business, in terms of the data that you collect?  Is there a momentum that you can achieve or have achieved as a result of your scale?

There's both a commercial and a financial momentum.  The financial momentum is the easiest to touch on.  I said that revenue grew 32% and operating expenses grew 8% percent, and that's a pretty good example of the financial scale that exists in the business and that we're starting to see.  On a commercial basis, the best way to illustrate that is that in a particular league, once we get, it might be easy to get the first one or two or three really innovative teams in that league.

Then the next three or four, we work really hard to pick up.  Once we pass that critical mass, the remainder of that league, or the majority of it, tends to come on board.  We see that there are benefits of scale inside individual leagues.  There are benefits of scale across sports, so we are very well penetrated and continue to grow strongly in American football.  That enables us to have the financial imperative to develop new and better analytics, which further entrenches the quality of the business and the products in that category.

There's also benefits in understanding multiple sports around the world, because it reveals opportunities to see similarities between sport that may not be obvious to the naked eye, and that again enhances the quality of the analytics that we can develop for those teams.

Have there been any recent breakthrough sign ups that are worth talking about?

I mean, we signed hundreds of teams in the last half, so we're currently signing well-known teams, smaller teams, etc.  I think one of the really interesting sign ups in the last six months, was CAF, which is the Confederation of African Nations.  It's the soccer union down in Africa.

The thing that was significant about that, other than it was a fairly decent-sized deal, and it's a material organisational deal, is that that occurred with a brand new product that we released.  It's called Player Tech Plus, and it was essentially taking the Player Tech acquisition that we made in 2016, and that acquisition was all about helping us penetrate more of the sub-elite, or the lower end of the elite market.  We took the product, created an enhanced version of it, and that enabled us to get a part of the elite market at a price point and with an offering that we may not have been able to have attracted with the ultra-premium offerings that Catapult has traditionally offered. 

What we're seeing is that we are diversifying our product set, so there is an offering for every part of the market, and the CAF deal simply wouldn't have happened if we hadn't have developed that Player Tech Plus product.

Right.  I suppose one of the dangers or problems with the share price being where it is, is that somebody will swoop in and buy the business too cheaply. 

Well, I mean, I think the risk of unwanted M&A is always a risk with businesses.  For us, it probably is a slightly lesser risk, just because there is some concentration of shareholding with some of the larger shareholders.  But I think for us, we spend really no time thinking about external M&A and those types of risks, and are completely focused on continuing to grow the business.

Certainly, from a chair and a board perspective, if one of those offers was forthcoming, we've have to give it respect and consider it and so on, but really, that is not the core focus of the board and the executives at the moment.  It's about continuing to drive this growth.  We are completely confident that the stock price will come to represent the value in the business over time. 

Yeah.  Great to talk to you, Adir.  Thank you. 

Thanks again, Alan. 

That was Adir Shiffman, the Executive Chairman of Catapult Group.