Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive acquisition of Starvale Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Jatin Khosla. Please go ahead.

Good morning, everyone, and thank you for joining our conference call at such short notice. On the call today, we have our CEO and Founder, Mike Veverka; and CFO, David Todd. Mike will make some opening remarks on today's announcement on the acquisition of Starvale, after which we will move to Q&A. May I take this opportunity to remind you that we are currently in blackout with our 1H '22 results scheduled for release on Tuesday, the 22nd of February. With that in mind, can I ask that you please keep your questions related to today's announcement and the strategic acquisition of Starvale. I'll now hand over to Mike.

Thanks, Jatin. Good morning, everyone, and thanks for joining us on this call. Today, we've announced that we've entered into an agreement to acquire 100% of the Starvale Group, a leading U.K.-based external lottery manager. This follows our conditional acquisition of Stride in Canada and Gatherwell in the U.K., which will follow the same strategy of adding scale to our managed services and SaaS business segments. The global lottery industry is in the midst of digital change and our Powered by Jumbo software platform is key to supporting lottery through this change. The acquisition of Starvale, together with our recent acquisition of Stride in Canada, will almost double our active player base from 1.8 million to 3.4 million active players. This is a key metric for us as -- and provides the foundation for future growth as we seek to use our software platform to improve performance and attract new active players. Jumbo will conditionally acquire Starvale for approximately GBP 17 million and up to GBP 4 million to GBP 4.5 million of deferred consideration payable following 30 June 2023 and subject to achieving certain earnings hurdles. The total consideration, excluding surplus cash funds of approximately GBP 5 million, which is to be acquired as part of the transaction, represents an implied enterprise multiple of 7.3x Starvale's expected net profit before tax for the 12 months to 30 June 2023. The multiple does not reflect the acquisition of DDPay Limited, a wholly owned subsidiary of Starvale and a digital payments company that provides in-house direct debit origination services and cost-effective payment solutions to Starvale's weekly lottery clients. We see this additional capability as a potential source of cost efficiencies for Gatherwell and any other potential future U.K. SaaS deals as well as giving us the strategic optionality to gain further access to the Charitable Giving market in the U.K. To fund this acquisition, we have secured a new $50 million senior debt facility for up to 5 years with an initial tranche of $30 million to be used to acquire Starvale and a further $20 million available for future acquisitions and growth initiatives. The acquisition is expected to be completed by the end of the FY'22 financial year and is subject to customary terms and conditions under the agreement and U.K. Gambling Commission approval of the change in [ corporate ] control. The transaction is expected to deliver low- to mid-single-digit earnings per share accretion in the first 12 months post completion. Given the timing of the announcement, Starvale's final audited figures for the year ended 31 December 2021, were not yet available. However, we have included in the release management's latest forecast for the period, which includes approximately GBP 63 million in annual ticket sales, adjusted revenue of GBP 5.1 million at a margin of around 8% and adjusted net profit before tax of GBP 2 million at a margin of around 40%. The adjustments principally relate to removing the one-off benefit from the U.K. government COVID job retention scheme. And finally, as part of a review of our broader capital management framework, the Board has resolved to change our dividend policy, and we will now aim to pay out 65% to 85% of statutory net profit after tax to shareholders as ordinary dividends. We believe this enhances the group's flexibility to repay debt while maintaining an appropriate dividend to shareholders. New policy will be effective from FY'23. So in summary, the Starvale acquisition is a significant step forward in the U.K. market, boosts our active player base to 3.4 million, is profitable and includes a digital payments company, bringing cost efficiencies together well in any potential future deals. So with that, I'm now happy to move to questions.

[Operator Instructions] Your first question comes from James Bales from Morgan Stanley.

Just wanted to check a couple of numbers. Firstly, can you give any color on Starvale's organic growth rate?

Lower single digits at the moment. Starvale was impacted through COVID. So the recent numbers were flat. But over a period of time, I think the 3-year compound annual growth rate was 12%. Is that right, guys?

Yes, it is just low double-digit growth, James, a few back out the COVID period.

Okay. Got it. And that was of the revenue or earnings line?

Revenue.

Okay. Perfect. And can you give any color on the earnout metrics that you -- that they have to achieve in order to get paid that additional consideration?

Basically, the GBP 16 million is payable as kind of like a worst-case scenario if it doesn't perform, but we expect it to achieve a profitability of around about GBP 2.2 million, of which an additional GBP 4 million will be paid and we've allowed another GBP 0.5 million for overachievement as well. So I suppose the most likely scenario is that we end up paying GBP 16 million for a business that's producing about GBP 2.2 million profit.

Okay. That's helpful. And then can you help us understand what sort of synergies you expect in terms of Starvale's profitability having access to the Powered by Jumbo platform?

Look, having access to the Powered by Jumbo platform is more of a longevity issue for them. They've got 45 clients using their system, about half of them of which are nonremote and the other half are remote. So they are in need of a much much deeper and better digital platform in which to go forward. So it's not so much about cost savings, it's more about giving these clients a much more of a digital pathway into the future. While Starvale, at the moment, was very limited in their digital experience, Jumbo has got the tools to give these clients for the next 5, 10 years.

Got it. And then the other way, what do you think Starvale's impact on Gatherwell's profitability will be with its payment solution?

Look, it will be -- it will have some benefit, but we don't have an exact number on that. It will only be limited at this point in time being -- Gatherwell being a bit smaller. However, by combining these businesses together, I think we can start delivering some of these synergies. And yes, we'll see how we go after that. It could potentially help us in other regions as well. So the idea of having a payments business was key to us as we think that's something that is very interesting, and it's something that we've been meeting to set up for a while now and Starvale have already got that. So initially, probably not too much of an impact, although it will be a positive impact. But longer term, it will be much more relevant.

Got it. And then finally, just to sort of understand your thinking around taking on debt to fund this acquisition and reducing the payout ratio. Is -- are these moves designed to improve liquidity for further M&A? Or how should we interpret the signals here given that you could have funded this completely internally?

Going with debt was the choice because of the impact on earnings per share, and we felt that with our strong balance sheet we didn't need to go out and dilute existing shareholders at this point in time. With the cash that we're generating, in addition to the 50 million facility that we now have in place, we can quite comfortably acquire Starvale, still have some [ powder ] left over for something else. And with the cash we're generating, I think we're still in a pretty good position. We'd still like to pay the dividend. We just like to give ourselves a little bit more room just to make sure that we can pay back the debt, but we'll see how it goes. If we need to reduce it to 65%, we can. However, we will be earning -- we'll have more profits to use. And yes, I think that just puts us in the best position going forward.

James, sorry, just to correct my previous statement, Jatin has mentioned to me that, that growth is double digit in [ TTV ] and mid-single digit on revenue.

The next question is from [ Sasha Crane from Evanson Partners. ]

Good morning. Most of my questions have been answered and asked. But I'll just quickly ask you if I could just quickly ask you in terms of where Starvale ranks in the U.K. in terms of the ELM options available in terms of size?

It's certainly one of the larger ones. The largest one is the Postcode Lottery. But they do dominate that market, but there are a couple there that are sort of the next level down, Starvale and a few more after that, but it's certainly one of the larger ones. [indiscernible] is another one that is out there as well. and then they start getting smaller after that. So it was a decent size, good size for us at this point in time, would have been happy with something a little bit bigger. But in terms of being able to digest this one, I think it's just about the right size for us right now in addition to what we're doing with Stride and Gatherwell, of course.

So there's a bit on -- bit on the plate with integrating both of those two businesses. I mean can you talk a little bit about what the strategy is going forward in terms of continuing to look for acquisitions in the ELM market in the U.K. and Canada?

Yes. We're continuing to look for more acquisitions. We're, I suppose, getting better at it over time and knowing what to look out for and seeing where the value is and seeing how it will work with us. Obviously, we'll need to integrate this into the business, so there will be a bit of work, but we've been gearing up for that, as we flagged 6 months ago that we are adding some costs so that we can absorb these businesses a lot more effectively. But the businesses are somewhat similar. So it's not like we're trying to integrate businesses that are quite a bit different from each other. They are quite similar. So we think it should go smoothly and give us some capacity to maybe acquire some more down the track.

Okay. And in terms of Starvale, can you comment at all on the customer concentration there? I think you mentioned 45 clients. Is most of the [ TTV ] within a few of those larger clients and maybe a comment on how long they've been with those clients, so the stickiness of the relationship?

Yes. As typical in this industry, most clients have been there for a very long time. I think 1/3 of the clients have been there for over 20 years, another 1/3 have been there for over 10 years. The spread is not too bad. The largest -- the top largest client is 11%. The top 10 accounts for 2/3 of the business. So there is a bit of -- there are a few large clients there. But with 45 clients there, some smaller ones there as well, they're all in our target market for our Powered by Jumbo platform. So the rationale, obviously, is what can we do with these clients once we put them on to a state-of-the-art software platform and how we can grow them after that?

Okay. Does that suggest they have been having margin upside to their [ TTV ] in terms of what you can -- in terms of your take rates?

In time margin upside, but it's more initially around trying to boost their sales through a better software platform. There are all causes that are -- they have some great brand names and some strong followings. But obviously, during COVID, they've been impacted like many others. And so they're kind of at the point in their growth where they're saying, look, we really need to prioritize digital transformation and this will be what they need.

The next question is from Suthesh Jeyakandan from UBS.

David. Maybe just a followon. It looks like the revenue to [ TTV ] is around the 8% mark, which is probably less than half of what Gatherwell does, but margins still look relatively high. Can you give us a sense of how the business model of Starvale is different to Gatherwell?

Yes, bigger clients, basically. Gatherwell focuses on the smaller clients, which need a lot of work, hence, the more expensive price and the higher percentage of revenue to [ TTV ]. But as you go up the scale and you're dealing with larger organizations that have some internal skills and resources that they can use, the deal tend to vary from a complete external lottery manager to just buying bits and pieces to what they need and hence some of the larger ones need less support. So it's just what looks like when you start dealing with larger clients.

Yes. So would it be fair to say, looking forward, whilst there's potential for those [ seats ] to drift higher, we shouldn't really expect them to ever get to that 15% to 20% mark that what Gatherwell does?

Look, that will certainly be a long-term play to get up to those levels. I'd like to wait and see what the demand is for sophisticated software tools. Right now, it's all pretty basic software tools. But as time goes on and the expertise that's required keeps on stepping up and up and up, there is scope for these organizations to outsource a lot more to us and do less in-house.

Sure. And just on DDPay, how much sort of revenue and earnings is that part of the business contributing? Is that in those forecast numbers that you guys provided, the $9.6 million revenue or the $3.8 million in EBIT?

Suthesh, the contribution is about 16%, 17% of total revenue.

16% of that $9.6 million, is that?

Yes, that's right, of the total group revenue.

Got it. Okay. And just in relation to the debt facility that you guys are taking out, can you give us a sense of where your cost of debt would be sitting on that facility?

Yes. Suthesh, if we look at a 5-year fixed rate, all our costs will be around 3.9%. Obviously, if we go with some floating rates, that will be much lower, probably around the 2.2% level.

That's helpful. And the last question I had was just on the acquisition multiples. So the 7.3x, which seems a little bit higher than what you have paid for Stride. I think that was around 4.5x. Is that sort of a reflection of prices in the market right now? Or more a reflection of the comfort you have in Starvale's sort of operating market given you've already got the business in Gatherwell over there?

It still meets with our criteria of the multiple that we'd like to pay. We took into account the DDPay, that is the payments business, that was something that we thought was attractive. The size and the years in operation -- 27 years in operation and the stickiness of the client was also a big factor. So yes, look, we're quite happy with the multiple that we ended up paying considering every business is slightly different. Yes, the payments business and the size and the big step forward, it gives us -- is well worth the 7.3 multiple.

The next question is from Kurt Gelsomino from Morgans.

This might be a question for David. I was just wondering sort of where you'd be comfortable taking the balance sheet to from a leverage perspective? Would you sort of be comfortable moving into a modest net debt position? Or is your preference to remain net cash?

Our preference is to remain net cash positive, Kurt. Historically, we've had a very strong balance sheet. There was scope for us to take on some of that debt. But yes, our preference is to retain some strength in there. And that's why we prefer to stay net cash positive.

Terrific. And maybe just the existing management team and founders of today's acquisition, how long are they still committed to staying in the business?

There is a senior management team in place that will stay post-acquisition. The founder will stay through his 1-year earn-out and then potentially longer after that. But now we've got our own resources a lot more developed than they were a year or two ago. We'll be able to have a -- quickly come up to [ spade ] on the business a lot quicker so that we can take on a lot of the managerial tasks in the business a lot faster, which is why we've gone for a much faster earnout than we have in the past. So we think we've got the management side of things covered.

Understood there. And just given some of that managerial capability, I think you have built out over last 12 months or so I guess, can you just talk to, I guess, how quickly you could look to make further acquisitions and maybe what geographies would be of focus next? Do you have sort of the scale that you're sort of happy with in the short term in the U.K.? And would maybe Canada and the U.S. be more of a focus next?

Yes. Well, we are running the two regions. And if you lump Canada and USA together in parallel, we now have a lot more scale in the U.K. So while we'll let -- while we're letting that settle down, we can certainly look towards North America in the U.S. or in Canada as our next acquisition. But we can't always predict exactly how these deals will come. We'll take them when the time is right. And it might come from one or the other, but we are definitely keen to keep the momentum going.

The next question is from David Fabris from Macquarie.

A lot of our questions have been answered, but I just kind of want to understand the strategy around acquisitions. So just to be clear, you've got more acquisitions coming down the track. You want to keep the momentum going. Does that imply you're going to make more acquisitions in the next 12 months? And beyond that, how do you have the propensity to integrate these businesses and execute if you keep acquiring them?

Well, that's the trick, of course. We could get ahead of ourselves and go a bit too fast, and then end up with a business that's not integrated very well. So trying to get that cadence right is important. But it's been more than 6 months since we did Stride. And so we think the timing is right. We know the management are ready to take on the challenge of picking up Starvale and maybe another 6 months although -- or thereabouts for the next acquisition, we can't tell exactly, of course. But we feel we've got it in hand pretty well.

Okay. And just to dig into that, are there targets set by the Board around, I guess, the aggregate [ TTV ], they want to see the business acquire or the number of businesses that are acquired? Or is it a case-by-case basis here?

Yes. Look, it is a, I suppose, bit of both. We have internal targets that we'd like to reach, but it is a case-by-case thing. In a perfect world, we would like to reach certain targets, but the opportunities come up and the founders are ready to sell when they're ready type of thing. So the industry is populated by quite a few businesses around about this size, maybe even a bit smaller. So again, it's not going to be like a massive acquisition or anything like that. It will probably be more of the same of something in the vicinity of Gatherwell, Stride and Starvale.

Okay. Great. And just one last question for me on those comments. If the businesses are of similar size, can you maybe help us understand where valuation or multiples are sort of trending here? Is this kind of towards the low end, the midpoint? I guess do you have to start paying more as people are aware you've got an acquisitive strategy? Or where do you think the multiples go from a transaction perspective?

Yes. Look, there will obviously be a bit of pressure with any new acquisitions, asking for a bit more. But there's a lot of choose from there. So we think that we can still keep the multiples down around the 6 to 7 level. Again, it depends on what we're actually buying. There could be some valid reasons why we go a little bit higher. But there's still quite a few out there. So if somebody wants more than 10, we'll just keep on walking and go to the next one, and we's are not going to overpay for anything. So yes, look, I think there's still opportunity to pick up more around about these multiples.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.