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The following segment was excerpted from this fund letter.
Global sports economics changed in May 1985: International catastrophe to Catapult International
This may appear a lengthy preamble, but in our view is essential to understand why the environment for media rights - the lifeblood of professional sport - across elite, in-demand sports will not change in the foreseeable future. We acknowledge that "in-demand" sports will change with occasional fads and strong marketing (eg. F1) but can't see changes in the key ball-based sports.
On 29 May 1985, Liverpool FC played Turin's Juventus16 for the (soccer) European Cup Final at the decrepit Heysel Stadium in Brussels, Belgium. Flimsy walls, chicken wire fencing and antipathy between the sets of supporters, with an inability to maintain a "neutral area", led to sectional invasions, a wall collapse and the death of 35 fans, of whom 32 were Italian. Various subsequent enquiries and legal actions led to the conviction of 14 Liverpool fans for manslaughter.
Given the night occurred only ten weeks after a notorious FA Cup game between Luton and Millwall with extreme fan violence broadcast on UK delayed replay TV17 and just over two weeks after the death of 53 people in the Bradford City (Valley Parade) stadium fire, English football's reputation had reached its deep nadir. Then Prime Minister Thatcher - hardly a sports fan - needed no prompting to take action, requesting the English governing body, the Football Association ('FA') to withdraw English clubs from European competitions. UEFA, the European football governing body, needed no second invitation and banned English clubs from competing in Europe indefinitely.
The impact of this ban and the way it played out over the next six years, specifically in the city of Liverpool and in North London - the latter the home of two of England's best supported teams, Arsenal and Tottenham Hotspur - set the scene for enormous change in football broadcasting in England. American readers may struggle to comprehend that this transition, wrought on the dingy terracing of English football grounds, directly led to the transformation in US sports broadcasting from late 1993.
Rupert Murdoch celebrated his 93rd birthday in March. He also got married for the fifth time in June. There is a brilliant irony in that he married a lady whose daughter was formerly married to a man who assisted the significant growth in Mr. Murdoch's net worth18. Murdoch has revolutionised many areas of film and media which have had significant impacts on investment markets, and his own net worth. Outside of the sale of the Fox assets to Disney (DIS), completed in March 2019, two quintessentially Australian aspects have driven the value of his fortune over recent years: property and sport. Property via the astonishing growth of the REA portal in Australia, the 61% shareholding in which comprises an exact 61% equivalent (approximately US$10.4billion) of the enterprise value of News Corporation (NWS).
Whilst investing in property and its ancillary activities has many publicly listed avenues, in theory, the same cannot be said for sports. This is changing, at an increasing pace. Why? Because of the recognition - notably by some of the world's wealthiest people - of the ramifications of a tragedy 39 years ago and a decision made just over 32 years ago in England. Stunningly, in our opinion, it has taken nearly THAT long, at least to work out the subtleties of the decision. In this correspondent's view, it is Murdoch's most brilliant (not necessarily most lucrative) decision in his illustrious business career - which he repeated less than eighteen months later to blindside a group of US executives and magnify the impact of BOTH decisions. "You don't beat live football with old movies".19
The story which unfolds is the background and rationale to the massive tailwind of elite global sports revenues, why a return to the past is unlikely and why the US$331mn market capitalised Australian sports data analytics company, Catapult International, is in a marvellous position - if it can execute.
Creating a global media monster: the English Premier League: 15.5% pa compound revenue growth for 30 years
At the time of the post-Heysal European ban, English football had two "governing bodies" who didn't get along: the overriding body: the FA and the Football League ('EFL;), which organised regular season English football into four leagues from 1958 - 1992 with 92 teams, relegation and promotion, based on season ending positions. The European club competition ban financially pressured the English clubs, together with a Thatcher Government which wanted nothing to do with the game. As is the case with Brexit, Continental Europe happily got on with its (football) life with the folks across "La Manche" living off their past glories; European teams strengthened and pillaged the EFL of some of their best players. Every single British transfer record20 from May 1984 to June 1992 involved the player moving from a major UK club to Italy, France and Spain, as the record transfer fees escalated from £1.5million to £5.5million:
Month | Player | Selling club | Buying club | £million fee |
May 1984 | Ray Wilkins | Manchester United | AC Milan (Italy) | £1.5 |
May 1986 | Mark Hughes | Manchester United | Barcelona (Spain) | £2.3 |
August 1986 | Gary Lineker† | Everton | Barcelona (Spain) | £2.8 |
June 1987 | Ian Rush | Liverpool | Juventus (Italy) | £3.2 |
July 1989 | Chris Waddle | Tottenham Hotspur | O. Marseille (France) | £4.25 |
July 1991 | David Platt | Aston Villa | Bari (Italy) | £5.5 |
August 1991 | Trevor Steven | Glasgow Rangers | O. Marseille (France) | £5.5 |
June 1992 | Paul Gascoyne | Tottenham Hotspur | Lazio (Italy) | £5.5 |
† Top scorer in the 1986 World Cup |
The exclusive TV rights for the top division of EFL (then called First Division) were won by the commercial TV network in the UK (ITV) for four years from 1988-1992, involving the showing of live games, at a cost of £11million per season. There was a strong focus on a small number of clubs, and an effective "Big 5"21 teams shown regularly started to emerge. In late 1990, representatives of the Big 5 met with the largest of the ITV franchises with a view to significantly lifting the value of TV rights on the expiry of the deal.
Unknown to many, the Big 5 had the backing of the FA whose relations with the EFL were strained; the Big 5 were frustrated by their need to share the TV revenues across all 92 clubs in the EFL, resulting in their best players being picked off - as shown above at hefty prices - to play overseas.
The Big 5 started to garner other support from the top division to break-away from the EFL in order to retain this TV revenue and in July 1991, 18 First Division clubs with the backing of the FA, resigned from the EFL, effective from the conclusion of the 1991-2 season. The ability to do so was ratified in the UK High Court in August 1991 and the apparatus to run the new English Premier League ('EPL') put in place. From late 1991, an assortment of media companies had started to assess the economics of bidding for the EPL rights, with the full knowledge that higher levels of rights payments - exclusively to the EPL teams - were the sine qua non of the new league.
Between March - May 1992, the EPL negotiated with the various parties for the new season commencing in August 1992. There are numerous public accounts of the discussions involving two bidders - ITV and B Sky B - Rupert Murdoch's merged cable/satellite TV business, then losing significant amounts of money and with no real "pull" for viewers.
With the First Division's expiring contract at £11million per season, the bid for the EPL rights gradually escalated towards £34million per season. However, with guidance from close lieutenant Sam Chisholm and enthusiastic backing from Alan Sugar22 - the founder and controlling shareholder of Amstrad PLC - the major supplier of satellite dishes, Murdoch put in place the "Blow them out of the Water" strategy that has become the playbook for his operations from Italy to the USA.
The advice was given by Sugar - with the full knowledge by all that he would be a double beneficiary if Murdoch won, since he was also the largest shareholder in Tottenham Hotspur - but there was clear recognition that this was the content that would build Sky, as a network and rapidly accelerate the path to subscriber growth and profitability as "must have" content for the average UK resident. On 18 May 1992, Murdoch bid £304million for five seasons (60 live games a year) of EPL (~£60million a season, a 450% increase), way beyond the ambit of ITV.
In mid-December 1993, only eighteen months later, Murdoch used the same strategy to build a network - Fox - in the USA, using the differential economics of network building versus incumbency to massively overbid CBS, the incumbent broadcaster of the National Conference (NFC) in the NFL paying US$250m a year, but willing to go to $295million, by paying just on $400million a season for a four year deal. The magnitude of this strategy can be seen against the renewed bid of NBC for the less attractive23 American Conference (AFC) rights of $250m per annum for four years24,25.
Sky PLC was eventually sold to Comcast for £29.7billion in 2018 as part of the Disney acquisition of Fox.
Over time, it has become clear that these strategies are vitally dependent upon the attraction of the sport and league and the size of market into which it is being broadcast; second tier simply doesn't work from an economic standpoint which is why certain European streamers - notably Viaplay - have failed. Folks in Sweden don't want to watch the Scottish League Cup.
The strategy continues to be replicated in differing areas; in Australia, the second largest telecoms operator, Optus26 who in late 2015 bought the EPL rights for three seasons, forcing aficionados to subscribe to a new streaming platform, but with significant preferential deals for the telecom customers. There has been a significant focus on football, and the company retains the EPL rights through the conclusion of 2027/2028 season, along with other European leagues (LaLiga, Bundesliga).
Since the creation of the EPL in 1992/3, the turnover of the company which owns the EPL27 has ballooned from £45.7million in the year to 31 July 1993 to £3,466million in the fiscal 2023 period - 15.5% pa compound growth over thirty years.
Unlike many other sports and leagues, the reason for the strong growth in EPL turnover is the sale of the foreign rights in separate jurisdictions, notably North America, Asia but also Europe. EPL now derive more for the global rights (~£1.7bn a season) than the domestic rights (~£1.67bn per season).
What makes this possible is, of course, the advent of streaming for sport which enables more broadcast participants to enter the race for "fragments" of the sports league's rights (say Friday night or Monday night). It does mean that most major sports require fans to have at least two separate subscriptions should they wish to watch every game.
Elite sports media deals - for the biggest globally relevant events continue to provide an increasing torrent of money for participants; the US NBA has this month signed off on a series of deals amounting to US$76billion over 11 years with Disney, NBC, Prime, and TNT, a necessity given the sheer number of games28, which are predominantly broadcast locally
Five key landscape changes to global elite sports
With a focus on football - the leading global sport for these trends - we see five key landscape changes over the past fifteen years:
- Emergence of sovereign wealth, UHNW and private equity as club and league owners In August 2008, Sheikh Mansour, deputy prime minister of United Arab Emirates, based in Abu Dhabi, acquired Manchester City FC from the former Thai Prime Minister, Thaksin Shinawatra for an estimated £200million. Whatever your author's distaste for City29 what has now morphed into "City Football Group" is at the forefront of two key aspects of global football: the trend towards multiple ownership of clubs under one banner and the introduction of private equity funds not club ownership. City Football Group ('CFG') owns significant stakes in twelve clubs (including the parent), providing opportunities for young players to be developed in four corners of the globe, loaned out and transferred for profit or development reasons. This is the underpinning of the pinnacle club - Manchester City - for decades to come. US private equity firm SilverLake acquired 10% of CFG in 2019 for US$500million, since increasing its stake to 18%. Since "Abu Dhabi" made their move, the Government backed Qatar Sports Investments acquired Paris St Germain for €70million in June 2011; in December 2023, the US sport investment group Arctos Partners acquired a 12.5% stake in PSG for an effective 100% value of €4.25billion. In October 2021, the Saudi Public Investment Fund (80%) led consortium acquired the EPL's Newcastle United for £300million. The same month, Saudi's Public Investment Fund formally launched LIV Golf, the "breakaway" golf league which has paid significant one-off sums to attract top golfers to its organization. Private equity has full or partial equity ownership in numerous sports teams in USA and Europe, notably France. CVC Capital actually owns a 13% stake in Ligue 1's media rights business30 Recently depleted in value by Vivendi's Canal+ failing to bid for the next four seasons TV deal which has halved in value - don't mess with Bolloré and SilverLake has a 33% stake in Australa's A-League. Only 2 EPL teams - Brentford and Brighton - are now controlled by owners born in the UK.
US UHNW or private equity ownership in EPL - 2024/25 season
American | EPL team ownership | US sports participation |
Wes Edens | Aston Villa (smaller co-owner) | Milwaukee Bucks (NBA) |
Stan Kroenke | Arsenal (100%) | LA Rams (NFL), Denver Nuggets (NBA), Colorado Avalanche (NHL) |
Bill Foley | Bournemouth (majority) | Las Vegas Golden Knights (NHL) |
Todd Boehly/Clearlake Capital | Chelsea (managing owner) | LA Dodgers (MLB) |
John Textor | Crystal Palace (40%) | other non US soccer teams |
David Blitzer | Crystal Palace (18%) | |
Joshua Harris | Crystal Palace (18%) | |
Shahid Khan | Fulham (100%) | Jacksonville Jaguars (NFL) |
ORG/Bright Path Sports | Ipswich (60/40) | - |
John Henry/Tom Werner (Fenway Sports Group) | Liverpool (100%) | Boston RedSox (MLB), Pittsburgh Penguins (NHL) |
Silver Lake | Manchester City (18%) | |
Glazer Family | Manchester United (54% economic) | Tampa Bay Buccaneers (NFL) |
Players Individuals rock up to play for several hundred million (US) dollars over multi-year contracts; at the elite level, it's usually $25-45million a season for star players in conventional leagues, with the occasional outlier.31 Why conventional leagues? Because in 2023, the world seemingly changed again with a new "out of the universe" competition in the overriding global sport - soccer - via the Saudi Pro League. In 2023, three of the top six best paid sportsmen32 were banked with Saudi money - Christiano Ronaldo (#1, football, US$276million), Jon Rahm (#2, golf, $203million) and Neymar Jr. (#6, football, $121million). In a sign of the times as to how globally elite sports matter, of the Top 15 male sports earners, only 2 came from US NFL, but 4 from the globally booming NBA, 5 from soccer (add in Messi, Benzema and Mbappe), 3 from golf plus F1's Max Verstappen.
Sports betting: There has been significant liberalisation and widening of sports betting. In a very sad development, on a Saturday night in Sydney, Australia I can place bets on Norwegian Third Division football as well as the Estonian Second Division. As a guide, EIGHT of the 2023/24 EPL teams had shirt front advertising gaming sponsors, mainly offshore firms; these will be phased out by the start of the 2027/28 season.33 Aston Villa, Bournemouth, Brentford, Burnley, Everton, Fulham, Notts Forest, West Ham. Aside from computerised platforms, apart from mug punters, this expansion of sports betting demands just one thing: data - see below
Changing media distribution: To watch live EPL games, the UK based supporter needs three streaming services - Sky Sports, TNT (the old BT Sport) and Prime (Amazon). In the USA, to watch live NFL takes in SEVEN networks (the three traditional FTA plus Fox, Prime Video, ESPN and the NFL's own NFL Network). The NFL pulls in $10billion a year in media rights.
Women and college: On both sides of the Atlantic, women's sport is taking off in attendances, interest and media spend. Particularly in the US, there have been past resurgences in women's sports competitions, but the increasing fragmentation of media outlets is providing more "space" for the broadcasting of female sport. Consequently, many of the sports are creating their won audiences, further heightened by genuine younger female interest in having their own sporting heroes. Rightly or wrongly, the advent of women's sport does depend on the marketability of the star players; but with adroit use of social media, at both team and individual level, it suggests that the growth in professional female sport will have greater longevity than past phases. In the author's opinion, no where is this more demonstrable than women's football, where the strongest national teams in the world are truly from four corners of the globe, differ significantly from the men's rankings and are in high income countries.34 This comes together in phenomenal competitions like Women's Super League (EPL equivalent) with 60,000+ crowds for major games at large stadiums35 and greater mainstream coverage. In May 2024, NCAA - the organising body for US college sports - agreed to settle antitrust cases to settle lawsuits regarding lack of sharing of media revenues with players; more importantly, players can be paid directly by their colleges for playing. Given that college football (gridiron) attracts significant viewers - around 1.7million per game on ESPN with peaks for the biggest match-ups of 5-7million (cf. average NFL game of 18million and Superbowl at >100million). With the advent of a 12 team national college football playoff and US$1.3billion annual broadcast deal with ESPN signed in March 2024, it appears likely increased rights money will flow to the colleges and players.
Where do you put your bucket in this torrent of media rights money?
The astonishing aspect of elite sports is that there are so few realistic avenues - at present - across global markets to invest in the "business". Consequently, we sense that investors in some of the few exposures that do exist have (in our view, they may disagree) surprisingly poor knowledge of the key drivers. Moreover, elite sports in the key area where publicly listed equities lack a role, has already been categorically supplanted by private equity in areas such as leagues Ligue 1, A- League and large scale teams.
From a public company standpoint, aside from investing in the smartly run media rights owners, such as Fox or Vivendi, or over the top streamers, we believe there are five ways to invest in the ongoing growth of elite sport:
- Invest in sport itself or league: There are two avenues to invest directly in the sport or controlling body of the sport:
- Invest in sports teams: There is a myriad of publicly traded sports teams, mainly soccer in Europe. These securities have universally been lousy investments since most are controlled companies, either by families or by a "mutual" mechanism. Most clubs end up spending windfall media/competition profits badly on expensive sub-par players, which then causes a second round of loss making to rebuild. The two best known publicly listed teams - Manchester United (MANU) and Juventus (OTCPK:JVTSF) - have both fallen into this category. One of this year's European Champions League finalists, Borussia Dortmund (OTCPK:BORUF), is also listed but most German clubs have a "communal" feel to them (massive attendances, low ticket prices) with stability rather than profit maximisation a key ethos. Glasgow Celtic (OTCPK:CLTFF) are not hamstrung by on-field performance or attendance, more by the tiny media deals for Scottish football and failures to advance in European competition. Dynasty Trust has owned MANU in the past, which was a low risk play on the substantial sale of a trophy asset, which did not materialise in the manner we hoped. These scenarios are usually the reason to invest in teams.
- Invest in sports wagering: There are several significant listed sports wagering companies, with the UK based entities Entain (OTCPK:GMVHF) and Flutter (FLUT) having morphed from their roots as bookmakers on horse-racing. In the US, whilst Flutter owns FanDuel, the major listed players have their genesis as genuine sports bookmakers rather than horse racing. The largest entities like DraftKings (DKNG), Penn Entertainment (PENN) Caesars Entertainment (CZR) and MGM Resorts (MGM) are either part of larger casino owning combines or offer casino games. Most have been modest investments over a three-to-five-year period, with increased competition, general lack of a moat and requirement to spend increasing amounts of money on advertising. All have been growing revenue, but have been donating increasing amounts to……..these guys:
- Invest in (oligopoly) data suppliers: There are two significant publicly listed data suppliers who share an effective near-oligopoly of data supply to sports bookmakers from major leagues around the world, as well as providing data and graphics feeds to sports media broadcasters, again on a licensed basis: Sportradar, a Swiss company listed on NASDAQ (SRAD); and Genius Sports, a UK based company listed on NYSE (GENI). Both have had enormous revenue and cash flow growth over the past five years but have been extremely mediocre investments because of the high pricing of their IPO's. Each company has exclusivity arrangements with major leagues around the world, for which they pay handsomely. The two have slightly different balance sheet accounting, with the upfront cost of the arrangements being amortised each period. SRAD carries a significant intangible and offsetting "lease-type" liability in contrast to GENI. Both are avid users of "adjusted EBITDA", which for once, has reason and relevance. A tabular encapsulation is given below. Given the significant decline in equity price alongside growth of the businesses and entrenched positions, both companies have started to attract a coterie of quality, growth type investors, alongside the founder shareholders. GENI has been hard hit by the exit of a cornerstone PE shareholder, Apax Partners, who sold out this month, and the fact it went public via a SPAC. The founder, Mark Locke still owns ~9% of the company, with NFL having warrants over ~8.6% of the capital. GENI has the benefit of the rapid growth of in-game wagering which is growing rapidly in NFL (around 25% of bets) and its prevalence in EPL (80%) of bets, which offer significantly higher margins than pre-game wagering, which partly accounts for the higher revenue growth over the past five years. SRAD has a very constrained share register, with a Swiss-style arrangement of the founder, Carsten Koerl holding Class B shares, which represent 1/10 th "A" share from an economic standpoint, but have full voting rights36 giving Mr. Koerl 82% of the votes. The ~208million tradeable "A" shares are close to 81% owned by four shareholders - CPP Investment Board (Canada) (38%), Technology Crossover Mgt (16%) and a further 7% held by a single fund leaving around a US$450million free float. The two companies represent an effective intermediator between media rights paying companies, bookmakers and the sports themselves. With the US wagering market still deregulating and at an early stage of growth, the two companies arguably represent a higher quality play on that growth versus the sports betting companies themselves.
US$millions | SRAD | GENI |
Sports league betting data exclusives | MLB (ex-US), NBA (ex- China), NHL, ATP (tennis), CONMEBOL (football), UEFA, FIFA, F1, Bundesliga, | EPL, FIBA (basketball), MLB, NFL, CFL (Canada) |
Market Cap. | 3,335 | 1,330 |
Debt/(cash) | (274) | (167) |
Enterprise Value | 3,061 | 1,263 |
Revenue guide 2024 | 1,144† | 490 |
Adjusted EBITDA guide 2024 | 220† | 82 |
EV/adjusted EBITDA | 13.9x | 15.4x |
Revenue CAGR (5ys) | 22.5% pa | 33.7% pa |
IPO price | US$27.00 (September 2021) | US$19.00 (June 2021) |
price & ∆ from IPO | US$11.19 (-59%) | US$5.60 (-71%) |
† Converted from € at US$=€1.09 |
5. Invest in must have technology: In our view, investing in the technology and data analytics software the teams (or sports) must have is a further, high quality source of annuity-style revenues and profitability. The problem? There is only ONE publicly listed global company in the area, where the sports technology business is really meaningful. Catapult International Limited. It's based in America, but incorporated and listed in Australia, which has largely kept it out of the ambit of US investors. That has been to the Dynasty Trust's benefit since it has been one of our top few holdings for over a year, having started acquiring shares at A$0.78 against the 30 June 2024 level of A$1.89.
Catapult International: a high quality "pick and shovel" play on elite sports
[Note: Catapult releases significant data from a SaaS perspective on a group basis, and management financial data on a divisional basis. For obvious competitive reasons - see later - the company is guarded regarding contributions by sport. We choose to assess the company with regard to cash flow rather than EBITDA given significant R&D investment in intangibles, which are fully disclosed by the company. We encourage readers to with additional interest to consult Catapult's results presentations.
Background and volatility of operating and share price performance
Catapult has 262m shares on issue, trading at $1.895 at 30 June 2024 for a market capitalisation of A$496mn (US331million) with no net financial debt.
We believe it is one of the most misunderstood companies listed on ASX. It has few sell-side analysts, who in any event can only spend limited time on the company, given their other commitments. There is a need to disaggregate the accounts and reconcile cash flow, which takes some degree of time, and the company has differing margins across its three main businesses (including media). There is no publicly listed cohort, and the unlisted competitors (especially Agile Sports Technology - "Hudl") guard their financials and IP closer than nuclear launch codes.
More pointedly, we see few analysts who have a comprehension of what's happening with sports media and the long-term high growth in revenues to elite sports/sports teams. That's why we have spent significant space in explaining why we don't believe this is a trend which will be under meaningful pressure, though inevitably there will be abatements of growth rates from time to time (eg French football post the recent TV "deal").
Bluntly, we have rarely seen an industry environment so conducive to a company's growth; so it's simply down to Catapult management to execute. As we discuss below, past management hasn't always done so, and there remain significant sceptics in Australia regarding the business. Interestingly, outside of the management shareholdings, there are a group of slightly unconventional investors who hold major stakes in the company, reflecting (in our opinion) their greater knowledge base of the underlying drivers. This is not a conventionally institutionally owned company.
Catapult was founded in 2006 after the conclusion of Government funding at Co-operative Research Centre for Microtechnology in Melbourne which was working with Canberra's Australian Institute of Sport combining inertial sensors with GPS tracking. The technology was placed into a company backed by the two founders Shaun Holthouse and Ivor van de Griendt plus outsiders Dr Adi Schiffman and Calvin Ng. The first three of these individuals remain on the board of Directors with substantial holdings (or having established funds with these holdings).
Catapult International: share price performance from IPO
The early focus of Catapult was around "wearables" - trackers worn by players which measure all aspects of their performance, notably speed, acceleration and positioning. This has morphed over recent years, notably from 2021 onwards sophisticated integration with video analysis and predictive technologies, to provide greater tactical insight for coaches based on player performance.
Catapult's first sales were to Australian domestic sports37 (AFL, rugby league) but rapidly grew to overseas organisations. Until 2021/22, the model was ostensibly a capital equipment sales-based affair which meant that the company was free cash flow positive by 2020 on ~3,000 team clients. In addition, from 2016 (via acquisition) the company targeted the "prosumer" market - amateur athletes keen to measure their performance in a more sophisticated manner. The scaling down of efforts in this market have been one important component to recently improved financial performance.
Catapult IPO'd in December 2014 raising A$12million at A$0.55 (proceeds to company) with a market value of A$66million. The shares advanced sharply over 2015 with a succession of league and team client wins and closed the year at A$1.90. Further earnings upgrades and local enthusiasm for one of the few "technology" companies with strongly growing revenue saw the shares double again in seven months to hit A$4.00 in August 2016.
The strong rise in the shares enabled Catapult to cement a merger with the US based XOS Technologies, in July 2016, being the first of two company changing acquisitions since listing, Catapult had been engaging in partnerships with XOS since June 2015, and the A$80million acquisition instantly added 143% to Catapult revenue, bringing with it 66% of NFL teams, college basketball and football plus over 66% of NHL teams. XOS was the "missing link" with digital video solutions specifically designed for gridiron and with media applications. Catapult funded the acquisition via part acceptance by the vendors of scrip plus A$100million worth of equity issued to shareholders and new owners at A$3.00 per share.
Over the next five years, Catapult shares were buffeted by an assortment of profit warnings (early 2019) unexpected capital raises (A$25million at $1.10) in March 2018, COVID fears (not realised) and a cynicism by investors regarding the company's "prosumer" strategy - selling to smaller, non-elite teams.
In June 2021, what should have been the death-knell for prosumer was signed with the acquisition of the London based SBG Sports Software, the second company changing acquisition. SBG was acquired for US$45m split in half via cash and shares; the company raised a further US$40million via placements and share purchase plans at A$1.90. SBG and the motorsports clientele - teams, F1 and NASCAR - is a KEY differentiator versus its competitors.
SBG brought significant expertise in video solutions based around analytics from motor sport, notably Formula 1, which was capable of being adapted to "field" sports to provide real time insights into performance. SBG accelerated the integration of "wearables" - now known as "Performance and Health" - with video analysis, "Tactics and Coaching" which is significantly higher margin. Pre-acquisition by Catapult, SBG's key sports of football, rugby and motorsport were generating gross margins of 96% and brought a whole new market (motorsport) and clients (Mercedes, BMW, F1 race control) into Catapult.
The excess equity raising was designed to invest US$17million in technology and product plus drive the business away from capital sales to a 100% SaaS model. As with virtually every other "capital" to SaaS transition we have observed, it took longer and losses were greater than investors anticipated.
We have made adjustments to Catapult's stated results to illustrate clearly that the company lost over US$43million in negative cash flow in the two years to March 2023, implementing the integration of SBG, new products, business growth, still pursuing the prosumer strategy for a period, and most importantly, transition the business to a full subscription model.
It is over this period that investors lost confidence in the company, simply because the losses were so high against a reduced equity capitalisation of ~US$165million (at say 90c and f/x of 0.7) and with the company carrying US$20million of debt, from Western Alliance Bank.38
Catapult International: Key pre-tax metrics as adjusted by East 72 Management
The table above adjusts historic key components of Catapult's results from IPO, modifying:
- All metrics to US$ at relevant exchange rates for the period prior to 2020;
- Adjusting disclosed operating cash flow for investment in intangibles (effectively R&D) plus payments for leases to bring the business onto a proper operating cash flow/burn basis;
- Noting capital expenditure to obtain a "free cash flow" from business; and
- Building in Catapult's own disclosures of annual contract value at the end of the period and a rough approximation of team numbers.
The turning point
Having been appointed as CEO in October 2019 and with board backing, driving the company down the SaaS path, ironically at the time of the Western Alliance "difficulty", in this analyst's opinion came the real turning point for the business, outlined in the H1FY23 presentation as "resized and reprioritized business to be FCF positive in FY24"39
Whilst the phraseology was subtle, effectively it was a case of reducing headcount and associated costs, which was coming out of the prosumer business with over 30 personnel and significant marketing costs removed from that area. There is an argument that Catapult was a part of the "tech-bloat" prevalent at the time (remember Meta?), but the management response was dramatic in a short period of time.
By the end of September 2023, Catapult has reduced cost of goods sold plus fixed and variable costs by US$6.25million between H1FY24 versus H1FY23; this resulted in the company being marginally free cash flow positive (East 72 Management definition) in the six months to 30 September 2023.
There were investors willing to back the management in early-mid 2023 (including ourselves) but many others, stung by the company's history opted to wait for additional confirmation which came with the H1FY2024 results in November 2023. The ongoing 17%pa growth of revenue laid upon a lower fixed cost base and far higher gross margin, was clearly propelling free cash flow, as per the company's projections. The lessened cash burn started to remove the consensus view that Catapult would require further equity raisings.
Catapult International: FY23 and FY24 key metrics by half year
How is Catapult aiming to benefit from these massive tailwinds?
The key - arguably only question - is whether Catapult can execute tactically and strategically in this highly favourable environment. The signs since its formation are that it can generate revenue growth, but as discussed in the preceding section, can it make that revenue growth scale into real profitability and free cash flow? The past eighteen months suggest that is the case and is cemented by our assessment of the "on the ground" efforts.
Catapult has three main divisions:
- Performance and health (P&H)- wearables - which account for 55% of revenue
- Tactics and coaching (T&C) - video analysis - accounting for a further 32%; and
- "media & other" which ranges from the supply of stats to media organisations for immediate broadcast (effectively in competition with SRAD and GENI) plus repositories of data for further team interrogation.
The key for Catapult is to grow the cross sell of P&H into T&C since it has the desirable impact of locking in the client, lengthening signed contracts as well as enhancing margin, since profitability in the T&C vertical is commensurately greater than P&H (note that SBG were earning margins of 96% in the area preacquisition). Based on the company's numbers at 31 March 2024, Catapult had 483 pro-teams (up 32% on prior year) across the two verticals. That's around 11.5% penetration of Catapult's client base.
Not only does that modest figure provide scope for growth, but gains in the area are additive to the average US$24k per year average contract value. One of the features of the business we love is that as a top-line professional team, you cannot do without products such as Catapult for match day but specifically for training. Moreover, consider the cost - even for a top line team such as Chelsea FC40 - who pay upwards of US$150k a year for these services, it's chicken feed. It's effectively the same weekly salary paid to Malang Sarr, the French defender who made NO appearances for the club last year and was loaned out most of the season, not being in then coach Mauricio Pochettino's plans.
Moreover, the most elite teams are now specifically set up for products such as Catapult, particularly in the area of injury prevention or rehab and data science. No elite team wants their £100million capital outlay, £240,000 a week in wages star player41 laid up because you didn't have the technology to properly judge his physical condition. EPL club Arsenal's backroom staff, heavily focused around the 25-man first team squad, has:
• Sporting Director | • Head of Football Operations |
• Head Coach (Manager) and 2 assistant coaches | • Tactical Assistant Coach |
• 2 x goalkeeping coaches | • Set piece specialist |
• Head of Psychology and personal development | • Head of Sports Science |
• 2 x strength and conditioning | • Executive Chef |
• Doctor | • Lead Performance Physio |
• Physio | • Soft Tissue Therapist |
• Head of Analysis/Coach Analysis | • Football Methodology Analyst |
• 2 x Analysts | • Head of Software and analytics |
• Analytics Strategy and application | • 3 x data scientists |
That's 25 personnel of whom 9 are specifically analysing data; none of the last five named positions in "data analysis" have a background in football. The head of Software spend ten years at Microsoft.
Hence, product pricing, within reason, is simply not an issue within the (very) elite sports category and reinforces, in this analyst's view, that Catapult has no requirement to pursue a prosumer strategy. What is clearly important is competitive edge against the cohort. To date, Catapult appears on the right track, with churn rates falling successively to a low of 3.5% in FY2024.
The market for elite sports teams is still relatively untapped by the company. It believes there are 20,000 global elite teams; as a guide, in English football there are 208 teams who are fully professional (or semipro) down to the seventh tier. The author's favourite team, Scunthorpe United, are in tier 6 (National League North) and were using Catapult in the 2023/24 season - admittedly they ARE far more price conscious, but still require this technology to be truly competitive.
There is increased evidence that the company are able to operate to their "model" of ~80%gross margins, 25% variable costs and approximate 25% fixed costs (at current levels) being G&A plus R&D, including capital expenditure. We expect the company to be able to grow revenue by at least 10-15%pa organically with new teams and products but also be able to add incrementally to price, to provide for 20%pa revenue growth into the next few years.
We also view the company as having established the appropriate fixed cost base - important in our modelling of valuation, which we assess later. But if this is such an attractive market, aren't there other players? In our view, Catapult has two major competitors - Hudl, which is focused more in the high school and college systems of the US but is also prevalent in the elite arena, and STATSports, which has significant penetration of football in the UK. Unlike Catapult, neither of the cohort companies have a background in motorsports
Hudl: the key competitor
"Hudl" is the trading name for Agile Sports Technologies Inc and is based in Lincoln, Nebraska. The company grew up from original attempts to improve the data provision for the University of Nebraska football team under its coach Bill Callahan42 and utilised three students from its "Jeffrey Raikes School of Computer Science"43 one of whom was David Graff.
Hudl is at the heart of some very tight relationships; Mr. Graff is a non-executive Director of NelNet Inc (NNI) a publicly listed student loan servicing and education technology business; NNI is a co-tenant in the same office building as Hudl plus NNI owns ~21% of Hudl's equity, which it carries at a value of US$165.5million (at 31 December 2023). This implies a value for 100% of Hudl of US$788million; NelNet believes "the fair value of its ownership in Hudl is significantly greater than its carrying value".
That comment is borne out by the progressive fund raises for Hudl from its initial raise in late 2008, issuing US$1.04m of shares at 42c for a post money valuation of $3.46million. Hudl made small further raises in early 2010 (at post money valuations of US$9million) but in April 2015, raised $73million in two tranches at a value of $300million. The second of these raises brought in Jeff Raikes, a 27 year former key executive at Microsoft, who served as CEO of Bill and Melinda Gates foundation for six years to mid-2014. The raise also brought in Accel Partners, a well-known early stage venture capital investor based in Palo Alto as well as NelNet.
A further $30million raise in July 2017 to Accel and Raikes at a value of $444m preceded the key raising. In May 2020, Hudl raised $120milion from Bain Capital Tech Opportunities at a value of $900million (post money) and has added a small $36million raise in May 2021 at a $980million post money valuation.
Aside from knowledge of money raises, Hudl's financials are a closely guarded secret. There is an assortment of revenue estimates in the public domain, many of which appear wildly inaccurate. An assortment of old papers by students from University of Nebraska, in our opinion, represent an excellent source of material, suggesting revenues of around $320million in 2000. We have also been provided access to invoicing, which is highly complex, being a mixture of hardware (cameras) differing levels of subscriptions to "gold" and "platinum" level subscriptions ($1,800 - $4,500) each. Hudl claim to service 230,000 "sports teams" which probably represents individual teams in specific sports at single colleges or universities. Based on likely average spend per team, we guestimate Hudl revenues to be around $750800million in 2023.
The key difference between Catapult and Hudl is their market segmentation. Hudl's core market is high school and US college teams, based on the founders' backgrounds; that market - as Catapult discovered - requires significant personnel to service. Hudl has over 3,500 employees across the world, suggesting a personnel cost base of ~$315million (c.f. Catapult 460 employees all in cost of $54million)
Based on the $980million implied value in the last raise just over three years ago and growth in the business, we would estimate that Hudl would have a current private market value around $1.4billion or 1.76x our "guestimated" revenue base. As we note later, on an IPO, based on public metrics and the US market, we suspect this would likely double to close to $3billion.
STATSports
STATSports is based in Newry, Northern Ireland and is focused on the provision of GPS trackers (Branded "Apex") and related software for football, gridiron, athletics and rugby; the company was founded in 2007 by Alan Clarke and Sean O'Connor who remain as CEO and Director.
Based on corporate filings, we can line up Statsports with Catapult's "wearables" (performance and health) business around the 2022 and 2021 calendar year (last available for Statsports):
£/US$000's | Statsports (£) | Statsport (Conv. US$) | Catapult P&H (US$) | |||
CY2021 | CY2022 | CY2021 | CY2022 | Year 3/22 | Year 3/23 | |
Revenue | 13,492 | 19,032 | 16,675 | 23,664 | 36,496 | 42,646 |
COGS | (4,160) | (6,362) | (5,141) | (7,910) | ||
Gross Profit | 9,332 | 12,670 | 11,533 | 15,754 | ||
Gross Margin | 69.2% | 66.6% | 69.2% | 66.6% | Estimated 81% | |
Admin costs | (17,431) | (20,580) | (21,453) | (25,589) | ||
Operating profit | (7,168) | (7,837) | (9,920) | (9,837) | ||
Statsports appears to be showing the strain of growth of having 145 employees in CY2022 (average 138) earning £59,200 on average for a wage bill of £8.2million - nearly half of the company's "administration" costs. The company has raised new equity in 2021 and 2022; in 2021 they raised over £15.7million in convertible notes and equity with a further £5million net in 2022. The 2021 raising was supported by England men football stars Harry Kane, Harry Maguire and Phil Foden plus Steph Houghton from the "Lionesses" - Kane is the "face" of the brand, Apex, which appears to be used by over half of EPL teams.
Statsports is clearly a competitive threat in Europe where it does 60% of its business, but potentially lacks the back end to use all the data provided by its trackers; further, a year ago, it was clearly looking to scale and still a respectable money loser. Of some note, however, is that Catapult grew P&H sales by 28% in the ear to March 2024, suggesting some market expansion. We are unlikely to have CY2023 accounts until October of this year to reassess the picture.
What might Catapult be worth?
With significant investment in capex and R&D (capitalised intangibles) over the past three fiscal years amounting to over US$72million, we believe Catapult has reinforced its product suite, started the introduction of AI and remote athlete monitoring and significantly inculcated its products into the key motorsports competitions.
We expect the company will have to continue to maintain this overall level of spend in the $15-$25million area as it has publicly flagged.
Catapult now appears to have reached the "SaaS crossover point" where incremental revenue gains - which we clearly view as highly likely - fall to the bottom line in material fashion at over 40% margin. The key test will be to see Catapult meet their 5,000 "mid-term" elite team target by mid-way through FY 2027 (March). Each incremental team represents an opportunity for gradual upselling and cross-selling as their "experts" are convinced of the necessity and usability of the technology. Hence, in valuing the company, it's reasonable to expect per team revenue and margin to increase on a known fixed cost base with forecastable variable costs.
Our approach has been to use a 'lifetime value of client" approach, common in SaaS companies, whilst cross-checking our valuation against a DCF valuation at 12.5% discount rate and also - with great trepidation - other medium sized (by US standards) SaaS companies relative to revenue.
As a starting point, amazingly, if we reverse engineer the rating of SRAD and GENI in the sports data area and apply EV/Revenue multiples to Catapult (the company has no net debt) we arrive at the exact closing share price on 30 June 2024 of A$1.89.
Our assessment of five mid cap US SaaS companies (US$2 - 5bn market cap) across a range of consumer services, work management, software repository, content storage and search optimisation, none of which have debt, yields an average EV/Revenue multiple of 3.8x for the 2025 year44 on a comparison group whose shares trade at an average 28% below their 52week high. Simplistically applying this to Catapult would yield an equity value of A$2.76 per share (at fx A$1=US$0.66) under the assumption of 20% revenue growth in the period to 31 March 2025 to US$120million.
Our DCF valuation using 10%per annum client growth, for the next five years, incremental gains in gross margin from the 81% current level, applying constant variable cost to revenue ratios, and 3.5% cost inflation to the fixed cost base, yields an after-tax valuation of $2.65 per share at the same exchange rate.
In our opinion, the risks with our valuation and thesis reside with management execution, since there are a myriad of opportunities at this stage of development.
We do not rule out a friendly corporate play for Catapult, most obviously from private equity investors, who had a serious look at the company in March-April 2019 with the shares around $1.00. Somewhat surprisingly, no-one made a pitch in late 2022 and early 2023 at even lower prices. With board and management, including the two founders directly owning or having influence over ~23% of the company, their thinking will be a determining factor. With the gargantuan tailwinds of sporting monetisation, we wouldn't be in a big rush.
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Footnotes 16Juventus has historically been controlled by the Agnelli family, who own 64% of the publicly listed club via EXOR (held) 17Luton v Millwall 1985 - Crowd Trouble 18Elena Zhukova's daughter Dasha was formerly married to Roman Abramovich, the former owner of Chelsea 19Apocryphal 20Football is one of the few sports where a player still under contract can have his/her services "transferred" to another team for the payment of a transfer fee from the buying team to the selling team. 21Liverpool, Everton, Arsenal, Tottenham and Manchester United. 22Now Sir Alan Sugar, now known for his hosting of the UK version of "The Apprentice" and a former major shareholder of Tottenham Hotspur. 23Based on popularity of teams, size of cities etc 24ABC was left untouched with its "Monday Night Football" for the time being. 25The story of this "heist" is brilliantly told at The Great NFL Heist: How Fox Paid for and Changed Football Forever 26A subsidiary of Singapore Telecom 27The Football Association Premier League Limited 2882 games per team before playoffs = 1,230 games (82 x30/2). 29The author previously lived in Manchester and is a United fan 30Recently depleted in value by Vivendi's Canal+ failing to bid for the next four seasons TV deal which has halved in value - don't mess with Bolloré 31Shohei Ohtani, the LA Dodgers two-way (bats and pitches) baseballer with a $700m 10 year, heavily deferred deal. 32Various sources, includes endorsements 33Aston Villa, Bournemouth, Brentford, Burnley, Everton, Fulham, Notts Forest, West Ham. 34Source: FIFA In order at 14 June 2024: 1-12: Spain, France, England, Germany, USA, Sweden, Japan, Canada, Brazil, North Korea, Netherlands and (of course) Australia. 35Arsenal v Manchester United at Emirates Stadium in February 2024: 60,160 36A replication of the Rupert family's holding of Compagnie Financière Richemont 37Hawthorn AFL team in 2007 38In March 2023, Western Alliance Bank (based in Phoenix, AZ) was one of the regional US banks hardest hit by runs on liquidity in the wake of the Silicon Valley Bank failure sparking fears of loans to Catapult being recalled 39Slide 7, half year results release 16 November 2022 40Some may debate the comment "top-line team" 41Declan Rice of Arsenal 42Callahan was previously the Oakland Raiders head coach (2002-2003) and has subsequently held numerous NFL offensive line coaching roles 43A good synopsis of the early days of Hudl is contained in "Forbes" 2 April 2020 44Freshworks, Asana, JFrog, Box and Semrush respectively. 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