11/7/2024

speaker
Manuel Stan
Chief Executive Officer

Good morning, everyone. Welcome to Catena Media's Q3 Interim Report. I am Manuel Stan, and today I am joined by our Chief Financial Officer, Mike Giroux. Today, we will be speaking to our Q3 Interim Report, related financials, and our strategy and outlook. For the first part of the presentation, participants will be in listen-only mode, and during the questions and answer session, participants will be able to ask questions by dialing in. We will start today's presentation with a high level summary of the most important developments in the quarter. During the quarter into October, we have finalized the work on our new organizational structure. This included implementing a flatter content production function that creates a solid foundation for future growth led by a lean product focused organization. The streamlining of the content vertical involved a difficult decision to part ways with 29 employees. This will generate an annual cost saving of around 2.2 million euros starting in Q4. We have also completed a brand new executive management team with the recruitment of Liv Bizemans as chief legal and compliance officer. With Liv's appointment, we will have an entirely brand new executive team with all five members being appointed in 2024. After the successful launch in Q2 of the Spanish version of our flagship casino brand, Donus.com, we have continued the development of the site and also launched in Mexico during Q3, as well as the Portuguese version in Brazil earlier this week. We have also taken steps to clean up the balance sheet, including a non-cash impairment charge of 40 million euros, which was related to a write-down in the book value of certain sports and casino assets. This balance sheet adjustment will help provide a stable and realistic financial basis as we move forward. Moving on to the financial summary. Q3 revenue from continued operations was €10.7 million, down 33% from the previous year , staying in line with our preliminary numbers included in our October 22 press release. Adjusted EBITDA was €1.3 million, down 58% from the previous year. However, adjusted EBITDA improved 97% quarter on quarter, with the margin improving from 5% in Q2 to 13% for the full quarter, Q3, peaking at 18% at the end of the quarter. North America contributed 89% of the group revenue, up from 84% same period last year. From segment perspective, sports remains challenging with continued underperformance in Q3. North American casino revenue decreased 12% year on year, but rose 3% when excluding 1.3 million euro revenue from previous quarter that was recognized in Q3 2023. Mike will go into further details regarding the geographical and segment results later in the presentation. In our Q2 report, we started showcasing our average ranking score for the 70 plus most important keywords across Catena Media's owned and operated products. The core of the keywords will remain mostly unchanged, but factors like seasonality, new segments or new markets may result in minor changes to the list. During Q3, we have seen higher daily volatility than usual as a result of the continuous algorithmic changes. But overall, our rankings have stayed relatively flat with a small improvement throughout the quarter. At the end of the period, our average score was 4.05, which was marginally better than 4.13 at the end of Q2. I will now hand off to Mike to give an in-depth update on our financial performance.

speaker
Mike Giroux
Chief Financial Officer

Thank you Manu and good morning. Moving into our financial analysis from a geographical split perspective, we concluded the quarter at 9.5 million euros in revenue in North America, down from 13.3 million for the corresponding quarter last year. Adjusted EBITDA in North America decreased to 4.4 million, 24% lower than last year, corresponding to a margin of 47%. This is, however, a 400,000 euro increase on the Q2 2024 adjusted EBITDA, despite lower revenues in Q3. North America amounted to 89% of group revenue from continuing operations in the quarter, an increase of 5 percentage points from last year. Looking at our North American segments, sports was down 60% versus last year. This poor performance was driven by increased competition and, to a lesser extent, the lack of a comparable state launch as September 2023 included the start of the Kentucky sports betting launch. As covered in our recent press release, we've continued to reduce costs within our sports business to align costs with revenues. Our North America casino business decreased by 12% versus Q3 2023. We had an adjustment in Q3 2023 of 1.3 million euros associated with previous periods. When adjusting for the 2023 comparable, we saw small year-on-year growth in the North America casino of 3%. Looking at the rest of the world, this geographical segment accounted for 11% of revenue and contains our esports, APAC, and Latin America businesses. We saw revenue of 1.2 million euros, which is a decrease of 53% versus last year. Adjusted EBITDA, however, increased by 36%, mostly due to the full-year effect of cost reductions made in our APAC business in Q4 2023. As Manu mentioned, we recently launched local versions of Bonus.com targeting Mexico and Brazil. We are not yet expecting to see material results from these yet. Continuing into our full company segment performance, we saw a very large decline in our sports revenue to €2.5 million versus €5.7 million for Q3 2023. NDCs also decreased by 57%. This was driven by underperformance at several brands and challenging comparables from the Kentucky launch in Q3 2023. Our casino revenue decreased by 19% versus the previous year, while NDCs decreased by 5%. As previously mentioned, North America saw slight like-for-like casino growth of 3% when factoring in the one-time adjustment from previous periods in Q3 2023. Continuing on to our cost development, we've significantly improved our cost base by rolling out the new operating model and terminating unfavorable media partnerships. Our adjusted cost base has decreased by 26% versus Q3 2023 and 23% versus Q2 2024. After the quarter ended, we continued to streamline content production and marketing teams and are expected to generate an additional cost savings of approximately 2.2 million euros annually. The organizational changes included a reduction of 29 positions coming to the severance cost of 400,000 euros that will be realized in Q4. We'll be seeing the effects of this cost reduction in our Q4 report as well. Items affecting comparability were 2.7 million euros in the quarter. It is important to note that not all of these were cash affecting items. 500,000 were related to restructuring costs, while 2.2 million of the costs that were recognized against a multi-year capitalized sports data contract remaining to be paid over the next 18 months. We instead negotiated a one-time lump payment of 1.4 million euros to exit this contract instead of the total 2.8 million euros remaining in it. Going forward, we will continue to focus on cost efficiency through a product-led structure. Onto our financial position. Despite another quarter of minimal cash flows from operations, the receipts from proceeds of our divested assets through the strategic review continue to put us in a healthy financial position. Net interest debt decreased year over year by 43% to 14.6 million euro. We still have a strong net cash position, including our future proceeds from divested assets. We will continue to focus on debt reduction over any potential share buybacks. Looking at our capital structure, our cash balance at the end of the quarter was €11.7 million. We reported a net debt of €14.6 million at the end of September. If we include future proceeds from divested assets, we have a net cash position of 7.4 million euros. It is important to note that future proceeds from past divestments do not have any conditions to performance targets and all payments to date have been received according to plan. We currently have no outstanding financial commitments relating to prior acquisitions. I will now hand back over to Manu to give us an update on the strategy and outlook.

speaker
Manuel Stan
Chief Executive Officer

Thank you, Mike. We will now have a look into our strategy and outlook for the next quarters. As discussed in the previous quarter, the speed of regulation and launches in North America has decreased significantly since 2022. So only six states regulated and launched mobile sports betting during the last two years. More importantly, we did not have any major online casino launches in North America since Ontario in Q2 2022. On a positive note, this week, Missouri took the first step towards sports betting regulation, and Market Go Live is expected in early 2025. The market penetration in the US is 50% for sports betting, while online casino currently sits at only 16%. Catena's strategy has historically been reliant on new state launches, and the regulation slowdown has had a negative impact on its performance over the last few quarters. As mentioned in the previous quarterly update, we have shifted our strategy to be less reliant on state launches and diversify the product portfolio and revenue streams. In practice, during the quarter, we have amplified our effort to build our brands, databases, and CRM capabilities to better serve and monetize our customers, position ourselves for future casino market launches by building our brands and databases in the social sweepstakes casino vertical and reach new demographics such as the spanish-speaking segment by doing this we will create a sustainable revenue model independent of new state launches as presented in q2 report our current strategy is focused on three key pillars people product and profitability We finalized implementing the product-led organizational structure, which included rightsizing parts of the organization and appointing key roles in leadership functions. We have both promoted internally and recruited externally across all areas of the organization, ensuring the continuation of institutional knowledge and fresh external perspective. From a product view, the focus is twofold. Optimize our owned and operated products for improved search rankings and develop new tactics to diversify our revenue streams. During the quarter, we have made good progress in areas such as CRM and sub-affiliation, as well as launch our bonus product in Mexico and, as mentioned, more recently in Brazil. Lastly, from a profitability perspective, we continue the work to build a strong cashflow and lower our debt position. We will continue to focus on efficiency and terminate agreements that do not present the right ROI. Lastly, let's recap the key takeaways from our Q3 report. We have now completed our organizational structure, which included right-sizing parts of the organization, better alignment, flatter structure in key appointments, The top line continued the negative trend from the previous quarters, impacted mainly by sports underperformance as well as the discontinuation of certain media partnerships. Reversing this trend is obviously a top priority for us. We have made significant efforts to improve profitability and we are pleased to see positive steps in the right direction with quarter-on-quarter growth for adjusted EBITDA. Thank you very much for listening. I will now hand over to Mike to move on to the Q&A session of our report and open up for questions.

speaker
Mike Giroux
Chief Financial Officer

Thank you, Manu. I'll now open it up for questions. If you wish to dial in for questions, press pound key five on your telephone keypad. Our first caller is Oscar from ABG. Oscar, please proceed with your questions.

speaker
Operator
Conference Operator

The next question comes from Oscar Renqvist from ABG Sundell Collier. Please go ahead.

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Thank you and good morning, guys. So I would first just dig in a little bit of what measures are taken in the content and marketing teams to secure that your offering remains competitive. So you are targeting double-digit growth in 2025 while also reducing headcount a little bit. If you could discuss that. Thanks.

speaker
Manuel Stan
Chief Executive Officer

Hi, Oscar. Good morning. I can answer that. So the biggest change that we've done or the biggest two changes that we've done in the last quarter was one to prioritize our products. So make sure that we put our focus and our work on the products that generate the best ROI for us. So we've done a big exercise throughout the quarter to ensure which products are the most viable for us and allocate the teams on that and secondly as we said make sure that the structure of the teams the marketing content product teams are aligned with that so right now i think we are in a in a good position from organizational structure and from priority perspective to do the work we have seen positive momentum also i think from crm perspective we have seen very positive momentum during the quarter and we are in a good place from from that perspective

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Understood, thank you. Just the next one, because I mean obviously looking at essentially the entire group, the revenue trends are certainly quite unfavorable. So can you sort of elaborate a little bit on what is driving this? I mean both casino revenue declined quite significantly now sequentially in Q3, despite in my view looking historically Q3 shouldn't be you know, a major negative in seasonality, especially in casino and in sports, it should be, you know, rather the opposite, that it should be a seasonally stronger quarter than Q2, for instance. So have you seen, you know, further pressure from the operators that, I mean, CPA rates are cut or that, you know, more and more operators are moving away from affiliates or is it purely sort of underperformance from your sites? Thanks.

speaker
Manuel Stan
Chief Executive Officer

Thank you, Oskar. So I think if we separate sports from casino, from sports, we did discuss the headwinds from seasonality perspective, market launches perspective, but mostly from media partnerships that had a negative impact on our sports revenues, but also generally the underperformance and the competitive space in the sports betting segment. In the casino segment, we have continued to see improved rankings or we have talked about higher volatility. Towards the end of the quarter, we've had another relatively large Google algorithm update that has had impact on our rankings. Again, the volatility that we've seen throughout the quarter. But I think from casino perspective, we have continued to keep our rankings or improving in certain areas and we'll continue to do so. Regarding the question from operators and the CPA pressure or reduced marketing spend pressure, we have seen that more in the sports betting segment rather than the casino segment. Casino still remains for us the segment where we see the strongest CPAs. I think back to the year-on-year casino growth, if we're comparing like for like in North America, we did see a marginal increase, granted only 3%, not what we're expecting, but we hope to build on that into the next quarters.

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Perfect, thank you. And then just, I mean, you're still targeting double-digit growth into 2025. I mean, the run rate has kept decreasing a little bit now in the last few quarters. Just what makes you confident in reaching the targets? We only have like Missouri, which is, what is it, like 6 million in population, I think, in sort of tailwinds going into 25 on that sort of sense. Is it anything else that you think, I mean, should be able to support your double-digit growth into 2025?

speaker
Manuel Stan
Chief Executive Officer

So as we said, we're trying to be less reliant on market launches, so putting our efforts into new tactics and new segments. When it comes to markets per se, you're right, Missouri is probably one of the key targets for next year. We're also expecting Alberta to go live at some point during next year, and obviously there's There's Brazil, that's a new market that we also just launched our bonus product earlier this week. So there are some markets that present some opportunities for us, but we are focusing on making sure that we are less reliant on that and generating the growth from organic growth on our existing properties. Again, referring back to the CRM efforts that we're making, the sub-affiliate platform that we continue to develop and so on.

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Perfect. Just have a final question on the CPA versus revenue share NDCs. So is there anything that you are expecting to change? I mean, I think you sent 13% of the NDCs on rev share accounts in Q3, so we haven't really seen that pick up. So would you still say that 25 and also Q4 and going into 2025, you are more leaning towards going for the CPAs rather than rev shares at the moment. Thanks.

speaker
Manuel Stan
Chief Executive Officer

Thank you, Oscar. As discussed in the previous quarters, I don't foresee any major changes in terms of the distribution from CPA to revenue share. We've been relatively flat around the 15% mark for a few quarters now for revenue share. And I think going forward, we'll continue to be around those levels. The distribution is... led by where we're getting our top operators and top verticals. And I think right now in the casino segment and in the sweepstakes segment, we'll continue to see more CPA deals rather than revenue share. So we will, in my view, we'll continue to see similar numbers in the next few quarters.

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Thank you very much.

speaker
Manuel Stan
Chief Executive Officer

Thank you, Oscar.

speaker
Oscar Renqvist
Analyst, ABG Sundell Collier

Thank you, Oscar.

speaker
Mike Giroux
Chief Financial Officer

That's all of our callers for now. So we will move on to written questions. So the first one for Manu is what is your view on growth in H2 of 2024?

speaker
Manuel Stan
Chief Executive Officer

So I think obviously we have had tougher conditions. They were triggered by the algorithmic changes from search engines and the media partnership that were discontinued, which obviously has had a negative impact on the top line, but positive impact on the bottom line. um we we continue to work diligently to towards that target but at this point we do not have any further specific guidance for for q4 thank you mano uh the next question is will you do further layoffs or further cost cuts i think we are always evaluating uh our efficiency and obviously we continuously look to optimize our profitability However, from layout perspective, we are confident now that we have the right structure in place. We have put a lot of work into this over the last couple of quarters. And now we feel that we're in a good place from from that perspective, we have a flat organization or flat organization that's well aligned with the product focused view or strategy. And at this point, we do not foresee any further staff cuts in the near future. Thank you Manu.

speaker
Mike Giroux
Chief Financial Officer

Another question for you, which is, how does the lack of new state launches affect your operations? Kind of similar to what Oscar asked on the call.

speaker
Manuel Stan
Chief Executive Officer

Yeah. So as, as, as mentioned in the presentation and the answer to Oscar, I think obviously we, we understand that it's, it's becoming increasingly, increasingly evident that this has a negative impact on the business and obviously not, not Katina per se, but the, the affiliate segment, it, it has an impact on a new access to a new customer base, but also the, the spillover effect into other states when it comes to increased marketing span and media, uh, media interest and so on. However, from our perspective, we are taking all the measures to reduce the reliance on that and promote our organic growth, focus on our organic growth. But we do welcome positive news, as we've seen yesterday from Missouri, or we're hoping that Alberta will obviously regulate and go live at some point mid next year. And we're hopeful that Brazil will do the same. So combination of the two. But when it comes to our strategic view is to move away from that reliance and put our efforts towards organic growth.

speaker
Mike Giroux
Chief Financial Officer

Thanks, Manu. One final question that came in for you, I think, which is if I read the report right, you've managed to cut costs with almost 50% during the last two quarters. Why hasn't some of this work been done sooner?

speaker
Manuel Stan
Chief Executive Officer

Great question. Thank you. I think there are a few different things to it, so we can put it down on maybe four different areas. One, it's obviously the media partnerships that uh that were impacted or their profitability was impacted by the the google algorithm changes in q2 in may uh so obviously the the termination of those was related to the point where they become when they became less profitable uh secondly mike has talked about the the successful negotiation of the the release from the addition from the long term capitalized contract in Q3 that had a 1.4 million savings. Thirdly, we've been talking about streamlining our operations and the parting ways with a number of employees earlier earlier this quarter but also earlier in the year those were those were changes that were made gradually throughout the year and then the last part are minor cost savings that we continue to look into different areas of the business but to sum up on that some of the some were changes that could have potentially been done sooner but also a lot of this as we said were impacted by external factors such as google updates that At that point, those deals became unprofitable and were led by that. So a combination of things that could have potentially been done earlier with things that were dictated by external factors.

speaker
Mike Giroux
Chief Financial Officer

All right. Thanks, Manu. There's a couple of questions that have come in that sit on my side, so I'll ask them to myself and then respond. So what is your view on the hybrid instrument? And do you still plan on having the hybrid instrument in your capital structure after next summer? And on this one, like I say, so our plan, as we've outlaid before, is to repay our senior bond and to grow our operating cash flows to finance our remaining obligations. This includes the quarterly payments associated with the hybrid capital instrument. We are always going to evaluate alternatives to make sure that we have the best capital structure for us as a company, but our intention is to be able to make our commitments on hybrid capital. Another question that came in is in relation to the write down or the impairment. And it said, will there be any future write downs? And on this one, what I have to say here is that like, essentially the impairments happen on an annual basis. We do an impairment testing, and this is in line with international financial reporting standards and our annual wheel with our auditors, essentially. So our intangible assets have always been stress tested as part of our Q3 review, and we'll continue to evaluate our assets appropriately, but we do not currently anticipate any other further write downs. And then there's one final question. which is why have you taken a 2.2 million euro hit to EBITDA? What type of contracts are these? And so the response to that is that there wasn't early sports data content automation contract that did not yield positive results. So we negotiated a lower cost to exit that versus staying in it from a longer period of time. Because of the capital nature, capitalized nature of that contract, it's not as simple the amount that we paid out, but there's an accounting treatment that has larger effect, 2.2 million versus the 1.4 million that we paid out. Overall, it's a cash savings of 1.4 million euros over the next 18 months. All right, and I believe that's all the questions that we have for today. So with that, I'll hand it back over to Manu for some closing remarks.

speaker
Manuel Stan
Chief Executive Officer

Thank you, Mike. I will repeat the three key things that are the three key takeaways of the quarter for us. Number one, during the quarter, we completed our new organizational structure, which included rightsizing part of the organization and establishing the new management team. Number two, from top line perspective, we continue to see the negative trend from previous quarters impacted mainly by sports underperformance, as well as the discontinuation of the media partnerships. And reversing this trend remains the top priority for us. And thirdly, we have made significant significant efforts to improve profitability. And we are pleased to see a positive step in the right direction with slight growth quarter on quarter for our adjusted EBITDA. With that, I thank you all for joining today's call. Looking forward to hosting you for the Q4 report on February 11, 2025. Thank you very much.

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