Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive Limited 1H '22 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Veverka, Founder and CEO. Please go ahead.

Good morning, and welcome. Today, I am joined in our Brisbane office by our CFO, David Todd. I'll provide an overview of the first half results and progress we are making with our strategy, while Dave will provide a more detailed run through of the numbers. I'll then wrap up and move to Q&A. Moving past the disclaimer. And just before I get into the results, this first slide just explains the adjustments used to determine the underlying figures used in the rest of the presentation. Turning to the results, and Slide 3 presents the key group metrics for the half. We are very pleased with this set of results with all key metrics up more than 20% on the pcp. The results were underpinned by higher jackpot activity in lottery retailing and all our Australian SaaS clients contributing on a full run rate basis. With good momentum in the business, the Board has declared an interim fully franked dividend of $0.22 per share, up 22% on the first half '21. Our strategy on Slide 4 is unchanged, and our focus has been on ensuring we have the appropriate infrastructure and capability to successfully execute on this strategy. Our SaaS business is focused on licensing the Powered By Jumbo platform to government and charity lotteries while our Managed Services segment provides a comprehensive lottery management service to license charities that are looking to establish a lottery program or enhance an existing program. The conditional acquisitions of Stride announced in August '21 and StarVale announced in January '22, aligns with this strategy and will help build scale in our Managed Services and SaaS segments globally. Simply put, we have a clear strategy, and we're getting on with it. Slide 5 is one of my favorites. Here, we show our first half '22 actual active players in the dark and light blue, but also have the first half '22 pro forma illustrating the active players that the Stride and StarVale acquisitions will add once the acquisitions are complete to give you a sense of scale. While we continue to build our active player base organically via lottery retailing and SaaS, Stride and StarVale will in aggregate add approximately 1.6 million active players, almost the total number of active players we reported in FY '21. This is a key metric for us and provides a foundation for future growth as we seek to use our platform to improve performance and attract new players. Formula is simple. The more active players we have on our platform, the more we can grow. Our digital skills and ever improving customer experience engages players and keeps them active, in turn, satisfying our lottery partners and minimizing our contract risk. Moving to Lottery Retailing. Slide 6 captures the key external trends impacting performance. As expected, online sales of lottery tickets continued to trend upwards, increasing by 3.9 percentage points to 36.7% over the half. We had 23 Powerball/Oz Lotto jackpots greater than or equal to $15 million compared to $15 million in the pcp, with the aggregate value per jackpot up 11%. Moving to Slide 7, and I note that the further details of the Oz Lotto game change were released last week with a planned launch in May this year. Oz Lotto is a significant part of our portfolio, and we expect the game changes to lead to higher jackpots and increased customer engagement, which in turn will be positive for active players and sales. Prior to the Powerball game change in April 2018, Oz Lotto was our largest game in part due to name recognition of ozlotteries.com. The new game will increase by $0.10 in the base price, which excludes agent commission, and we expect to implement the base price increase plus $0.05. Slide 8 has our usual chart showing Lottery Retailing sales performance over several years and helps explain both the resilience as seen in the light blue shaded bar and the boost we get from the large jackpots as seen in the dark blue shaded bar. New players in the half were up 41% on the back of the high jackpot activity and our focus on player engagement and retention. Active players for the 12-month period to 31 December were up a pleasing 15% with average spend per player up 11%. Slide 9. As shown on the previous slide, our cost per lead increased 24% to just over $20. I've included this slide to demonstrate the revenue and cost dynamics of new players and why we are comfortable spending more to acquire new customers. The chart on the left-hand side shows the first half acquisition spend as a percentage of new player revenue with the first half ratio broadly in line with the last 3 comparative halves. The chart on the right-hand side shows the first half acquisition spend relative to the revenue contribution from the new players. I split the revenue bar by half. So you can see that the initial acquisition spend is fully recovered within the half, typically around the 5-month mark. This dynamic is underpinned by player loyalty and our emphasis on ongoing player engagement and retention. This is why we don't shy from being aggressive with acquisition earlier in the year if jackpot cycles are favorable. Moving to our SaaS business segment on Slide 10, where TTV growth increased 46% on the pcp, after adjusting for the transfer of our Western Australian customers to SaaS in first half '21. While this level of growth is pleasing, it's important to note that the comparator doesn't reflect the full run rate of all our clients. I've included some pre and post Powered By Jumbo metrics for selected clients in the appendix to give you a sense of like-for-like performance. We continue to work very closely with Lotterywest and after some encouraging early results from the acquisition marketing trial in Q2, we are pleased that this will progress to a jointly funded and managed acquisition marketing program executed through Jumbo leveraging our proprietary analytics tools and experience. In the U.K., our first SaaS client, St. Helena Hospice went live with its first lottery in late November 2021. St. Helena's second lottery is now expected to go live in Q4 '22, with the full TTV run rate of approximately $10 million expected to come through in FY '23. While not surprising, the pace of digital adoption in the U.S. lotteries remain slower than in sports betting with only 11 out of 48 U.S. jurisdictions having an established iLottery channel. We remain focused on this market and have recently appointed a GM of North America who joined the team last month. Turning now to Managed Services on Slide 11, and starting with Gatherwell in the U.K., which continues to demonstrate impressive growth with TTV up 56% on the pcp and active players up 27%. Gatherwell now supports over 10,000 good causes and has increased its market share of schools and local government authorities with several first half launches. Also recently, Northern Ireland changed its gambling legislation to allow online lotteries with Gatherwell currently working on obtaining licenses in this jurisdiction. Slide 12 and staying on Managed Services. We are very pleased to have announced the Stride and StarVale acquisition, which will add significantly more scale to our business. Just a quick recap on the StarVale acquisition, which we announced last month. The acquisition is transformational in that it significantly increases our footprint and scale in the U.K., with access to over 45 charities and not-profit clients and over 850,000 active players. It also provides us with a significant opportunity to leverage the Powered By Jumbo platform to drive further growth and efficiencies for clients as well as access to digital payment solution capabilities. While both Stride and StarVale are still subject to regulatory approvals, planning is currently underway to integrate these businesses and effectively create a blueprint for potential further ELM acquisitions. We have been building our team on the ground in the U.K. and now have a team of 17, which also includes a member of the KMP. Here in Australia, we are pleased to have signed a new client agreement with Queensland's leading community helicopter service, - LifeFlight Rescue and are currently targeting a May 2022 program launch. I'll now hand over to Dave to take you through the financials.

Thanks, Mike, and good morning, everyone. For my presentation, you will see that I have provided both the first half '21 reported and underlying figures, as Mike mentioned at the start of the presentation. Further detail on Lotterywest adjustments are included in the appendix. Underlying EBITDA increased 24.9% to $28.3 million driven by strong growth in all business segments, partially offset by a higher cost of sales and an increase in OpEx. The increase in cost of sales primarily reflects the increase in the Tabcorp service fee from 1.5% to 2.5% of the subscription cost of tickets. Operating costs were up 35.9%, broadly in line with revenue growth mainly due to increased marketing and employee costs. I'll now run through the results at a segmental level, starting with Lottery Retailing on Slide 14. The strong revenue growth of 34.9% was a function of the strong TTV growth, underpinned by higher large jackpots and increased customer activity, partially offset by a slightly reduced revenue margin, mainly due to product mix. EBITDA growth of 15.1% was impacted by the higher Tabcorp service fee, which I spoke about earlier, and higher acquisition and marketing costs, which were up almost 80% and equivalent to circa 1.8% of TTV, in line with our expectations given the favorable jackpot cycle. Non-marketing-related costs in aggregate were flat. Turning to SaaS on Slide 15, where we saw all 4 Australian clients fully operational on the Powered By Jumbo platform. The 45.8% increase in TTV is distorted by the fact that first half '21 doesn't reflect the full 6 months contribution from all clients. Only Mater and Lotterywest have been fully captured in the comparator, with Deaf Services and Endeavour only partially captured. External revenue increased 27.1%, reflecting the dynamic I just mentioned. The fall in revenue margin from 5.6% to 4.9% reflects the increased skew towards charities, which are around the circa 3% to 4% revenue margin. This is not surprising given the subdued growth of Lotterywest over the period with virtually no acquisition marketing dollars spent. Operating expenses grew at a slower pace than revenue, impacted mainly by the higher employee costs, both direct and allocated, resulting in EBITDA growth of 39.8% and an EBITDA margin of 68.8%, slightly higher than the pcp. Turning to Slide 16. Gatherwell achieved strong TTV growth of 56.1% on the back of new client wins and momentum with existing clients. The fall in revenue margin was mainly due to product mix, while EBITDA grew 8.9%, impacted by increased investments in marketing and staff, both of which are expected to result in increased future revenue. Underlying operating costs on Slide 17 increased by 35.9% on the pcp, driven by, firstly, an 82% or $2.1 million increase in acquisition marketing costs. Secondly, a 28% or $1.7 million increase in employee costs reflecting a combination of factors, including the establishment of a new senior leadership group, moderately higher turnover and a tighter labor market, annual remuneration increases for staff and a high STI accrual based in the staff pool on the first half NPAT performance. The other notable increase of $458,000 reflects higher insurance-related costs as a result of expansion of the business and higher premiums. Looking ahead, we would expect marketing costs to continue to track in line with TTV, while any future cost increases will be linked to future growth. Turning now to the balance sheet on Slide 18, where we continue to maintain a strong position underpinned by the strong organic cash generation of the business. The Board has declared an interim fully franked dividend of $0.22 per share, reflecting a payout ratio of 83% -- sorry, 83.7% of statutory NPAT. As we flagged when we announced the acquisition of StarVale last month, following completion of the transaction and effective financial year '23, the Board has resolved to adjust the targeted dividend payout ratio to a range of 65% to 85% of statutory NPAT. And finally, turning to cash flow on Slide 19, where the cash generative profile of the business is clearly evident, with a free cash flow of $24.4 million and greater than 100% cash conversion. On the right-hand side of the chart, on a pro forma basis, I have shown the key items expected to impact the group's cash balance, including the first half '22 dividend, Stride and StarVale acquisitions and the first tranche of our new senior debt facility. Notwithstanding the expected second half '22 organic cash generation, this leaves the group with a pro forma cash balance in excess of $40 million. I'll now hand back to Mike.

Thanks, Dave. Slide 20 simply represents our key first half metrics on a pro forma basis, overlaid with the half year contribution from Stride and StarVale. While I note the acquisitions remain subject to regulatory approval, it gives you a sense of our future performance and demonstrate how we are executing on our strategy and diversifying the business. As you can see, on an annualized basis, our TTV is fast approaching the $1 billion mark. Slide 21. At its core, Jumbo is a software company that operates in a lottery sector. We continue to invest in the platform, technology expertise and tools to ensure the core platform is best in class and is complemented by the latest technology and integration to drive the best player experience. It is our best-in-class lottery software and lottery management expertise that has enabled us to expand into new markets like the U.K. and Canada. This is evident to the founders of ELMs that have been operating in the lottery industry for decades, while our digital proposition is compelling to the charities and clients they support as they look to future-proof their business as the lottery industry becomes increasingly digitized. Before moving to Q&A, I just want to summarize the key messages from today's presentation on Slide 22. First, we do have a clear strategy and are focused on execution. Lottery Retailing continues to perform very well, driven by a favorable jackpot cycle and our focus on player engagement and retention. Our SaaS clients are fully operational on the platform and growing organically. I'm very pleased that we will shortly start acquisition marketing for Lotterywest. And while still subject to regulatory approval, planning is underway to ensure we are able to efficiently and effectively integrate Stride and StarVale. Second point, our balance sheet remains strong and the combination of additional debt headroom and a reduced dividend payout ratio provides capacity for future M&A. Third point, we continue to make investments in our platform, marketing and people, all aligned to our growth aspirations. And fourth, finally, we remain well positioned to benefit from the structural tailwinds supporting the lottery industry globally, notably the ongoing shift to digital. The second half is also off to a great start with $120 million Powerball to assist that to make sure you get your ticket on the ozlotteries app. So on that note, we're happy to take your questions.

[Operator Instructions] Your first question comes from Desmond Tsao from Goldman Sachs.

I've got a couple of questions, if I may. Just firstly, on Slide 7. You note the $0.05 increase you're going to apply beyond Tabcorp's $0.10 increase. I know you guys in the past have said you actively studied your customer base with demand elasticity. Just can you get your thoughts around how you came up with that increase? And to what extent is that conservative and so forth?

Yes, we do think it is conservative. It's been over a decade since we increased our price in addition to what the standard increase has been. It's only a 12 -- the premium only increases from 12% to 14%. So it's not a huge jump. We do survey our customers extensively. And there are particular cohorts that we're aware of that are not that bothered by the price because of the premium service that they're getting. And we'd also have a cohort of people, that while they do stick to a budget, they just, for example, They spend $20 to spend. They just continue to spend that $20 on the game regardless of the price increase. So we are very confident that it's a pretty conservative price increase.

Great. And you guys made some comments around marketing sort of going forward being linked to TTV growth. But maybe just focusing on CPLs for the lottery retailing business, which was up 24% in the period to just north of $20. Just can to sort of get your thoughts on that as well given the red hot start to this half as you mentioned, $120 million Powerball jackpot coming up on Thursday. How should we think about CPLs versus that $20 base from the first half?

Yes. Look, what you've seen in the first half should continue into the second half, subject to what happens to the jackpots. Obviously, the jackpot cycle -- the positive jackpot cycle is continuing with $120 million. So we are out in the market aggressively looking for customers. With the added knowledge that we know that we can get the money back under 6 months, we don't feel like we're overspending. We're not being too aggressive. So yes, look, we expect that to continue in the second half and be able to show through the number of new clients that we get that is well and truly worth it.

Great. While I've got you, maybe just one last one from me. Just any more color you can provide around the trading update and environment into the second half given the red hot jackpot sequence. Yes, any color around outlook would be great.

Yes. Look, we're very much guided by what's going to happen with the jackpots. It's still only February, and yes, it's been a great start. And if it continues to be strong, then we'll continue to trade pretty strongly. But just as a caution that jackpot cycles can fluctuate a little bit. But then again, we've got the new Oz Lotto games coming online towards the end of this financial year. So that will help push things along as well.

Your next question comes from Rohan Sundram from MST Financial.

Just a couple for me. First one, a very short-term one regarding this say Powerball role. Are you able to -- anything you're comfortable to say around how you're seeing the customer's response to your marketing? And if anything has really pleased you versus, say, previous jackpots in such size in the past?

Well, the one interesting thing that we're seeing already, which was not unexpected, was the absence of any jackpot fatigue. It has been a while, almost a couple of years since the last jackpot over $100 million. We've got to $80 million quite a few times, but it's never quite managed to break the $100 million barrier. So this week, it has, and that has excited the market. As you know, if you get quite a few of them in a row, then jackpot fatigue does sit in. So if we were to get a few more later this year, we could expect that jackpot fatigue. But right now, we've got the reverse. It doesn't really exist. So we are seeing quite a strong uptake in this week.

And last one for me is on the Lotterywest relationship. It sounds encouraging your commentary there. Are you able to just provide a bit more color around the KPIs or the criteria, basically, the hurdles that you were able to meet and to give Lotterywest the confidence to want to progress that relationship?

Yes, it will come down to CPA, cost per acquisition, how much money we have to spend to acquire a customer and then also the payback period, which is directly related to the engagement. So we want to show them that once we acquire a customer, we can engage them, the frequency of play is quite good compared to their platform. And then it basically shows that it makes financial sense to spend the money for the acquisition marketing, and then we can just keep on stepping up the budget and driving new players. But so far, the retention side of things have proven to be quite strong. So now we just want to do the same on the acquisition side.

Your next question comes from Sacha Krien from Evans & Partners.

Also on Lotterywest. Are you able to share any of the metrics from that marketing trial that you conducted in the second quarter. So say CPAs or probably too early for payback period, but a number of customers you managed to acquire through that trial?

Not in detail, but I can say that they're very reflective of our broader KPIs with marketing. So our CPA of around the $20 mark and the average spend is pretty -- tracks pretty much in line with the rest of Australia and the rest of our business, which is not unexpected because Western Australian players are not that much different from the rest of the country. So they are tracking in line with our broader KPIs.

Got it. Okay. Great. And outside of marketing, should we just be doubling the first half '22 cost base to get to the full year number? Or is there some further investment to go in the second half?

Sacha, there will be a bit more investment in the employee side of things. We have previously flagged that we're looking to put on another 24 staff. As you would have seen in the presentation, the labor market is fairly tight. So we've probably only achieved 1/3 of that towards the end of the first half. We'd like to at least get to another 1/3, so 2/3 by the end of this financial year. And then we're likely to pause hiring and then review everything in totality. And any additional staff coming on board will be linked to future growth expectations.

Got it. Two more quick ones for me. The Gatherwell revenue margin, is that a permanent step down, do we sort of forecast that sort of revenue margin going forward?

Yes. I think that would be reasonable for modeling purposes. It does impact -- or sorry, it does get impacted by set up fees for new courses that are taken on board. And obviously, that's at 100% margin. So that's sort of where the impact comes in. They are doing more raffles, which is also at a slightly lower margin than the councils and your school lottery. So yes, that's why we think it would be reasonable to take that lower margin.

Yes. Okay. Great. And then just a high level question around the Oz Lotto game change, Mike. I mean do you have any sort of feel for how material the impact could be not as aggressive as the Powerball change that was made back in April 2018, smaller price increase and a smaller increase in division why not. Do you think it's going to be as big an impact or maybe half that impact, do you have any sort of feel for what it could do to the numbers?

Yes. Look, a lot will depend on exactly what the jackpots do. The Powerball, at the moment, the game changed and they had a string of really high jackpots, which really amplifies that performance. But look, for our own ideas, we're thinking that around a mid-single-digit percentage increase of retailing TTV would be a reasonable impact. Right now, the Oz Lotto games circa 20% of our overall games. And the boost that we would get from a new game would maybe be in the order of around about 20% to 25% of that. So yes, around about mid-single-digit percentage of overall retailing TTV.

Got it. SO maybe around about 20% to 30% sales increase for Oz Lotto itself.

Yes.

Your next question comes from Kurt Gelsomino from Morgans.

Just a couple of quick questions from me. Maybe just on the SaaS business. Can you just talk to maybe some of the size and timing of some of those hospice customers, I think you've called out in your pipeline?

Yes. So the second game from St. Helena is due out in the next few months. The -- and we've also got a new one starting here in Australia, that's by LifeFlight. That's a brand new or starting off a low base. The LifeFlight one, it's about a $10 million is what they raised through their funding efforts at the moment and the lottery is starting off a low base of around about $0.25 million, which we hope to expand up pretty quickly. So relatively small, but showing some good opportunity.

We have -- sorry, Kurt, we have spent a couple more dollars on marketing in the U.K. to increase the visibility of the Power By Jumbo platform. And the guys have attended a number of conferences like hospice and other sectors as well, just to make sure that the market is aware of the platform. It does take a little bit of time to warm up new leads as we saw in Australia. Once we got Mater signed, it did take a little while before we got the other SaaS customers on board. So yes, it's a 2023 story, yes, more likely second half onwards thing.

Yes. I guess the question was more around, Dave, just the pipeline of those new potential hospice companies, yes, above and beyond St. Helena. I think you sort of talked about that pipeline there in customers building the next 3 years.

Certainly, the interest is there, yes.

And just anything you can provide on the TTV magnitude of some of those customers?

Probably a little bit premature. We know the market is a good size, but very hard to work out the timing of it. So a bit premature to actually put a number around it.

Yes. That's all fine. And then maybe just on -- in terms of the Stride and StarVale acquisitions, are you still comfortable both with those businesses getting regulatory approval in the fourth quarter of FY '22?

Yes, very confident. It's a bit of a laborious process to go through, but it's something that we've gone through many times before, and we've always got our approval. So we're very confident it will come through.

Right. And then just a final one, maybe, Dave, just on OpEx again. I think from memory you still obviously will be cycling a stronger second half '21 jackpot environment. So is it fair to that delta in acquisition and marketing costs obviously won't be as strong as we saw in this first half? Or maybe alternately, can you just remind us what you sort of spend as a percentage of TTV in second half '21?

Yes, that's what it will be geared towards, Kurt, is around about the percentage of TTV, which will continue to be between 1.75% and 2%.

And can you just remind me, sorry, what was that percentage in the second half '21?

Yes. Sorry, Kurt. I don't have...

We can come back to you on that, Kurt.

Your next question comes from James Bales from Morgan Stanley.

Just firstly, a question on Slide 19 and that cash flow statement. Is -- for that cash flow reconciliation, is the GBP 5 million from StarVale, is that surplus cash available? Is there some reason why you sort of carved it out there as not being in the general accounts?

The reason why we did that, James, because there is a net 0 flow. We haven't included it in the payment consideration that we've got there at $31.1 million. So it would flow out and then fly back in basically. So zero effect, and that's why it wasn't included.

Okay. Got it. And then just another question on some marketing costs. In the past, when there's been a run-up to $100 million plus jackpot levels, you've annualized or you've sort of been spending about $1 million a month. How much different have these changes in acquisition costs mean that -- how big is the difference versus what you've done historically? And what should we expect for the last month or so on a run rate basis?

Yes. Look, when the jackpots get up very high, which we treated basically on what we can get at that point in time. We're quite aggressive about what we can get at the time, It perhaps doesn't fall into line with normal way because it just doesn't happen that often. But we do get a lot of customers coming through, a lot of word of mouth that sort of balances it out, which helps drive the CPA back down again. Look, not a particularly clear answer, of course, because there are so many factors at play, but it only happens 2 or 3 times a year if that -- but basically, the way we treat it, we've got 1 week to get as many customers in the door as you can. So we just took everywhere we can to find a customer, get them in. And in addition to that, we get organic customers just come through anyway because of the word of mouth. So the same thing has happened again this week.

Okay. And then maybe for WA, is it fair to think that you will be trying to -- or you'll be wearing the full cost of acquisition, and these will be treated with the same economics as the customers that you transferred over to Lotterywest when the deal was first made?

The cost will be split 50-50. So we've created a fund with Lotterywest, which we both contribute to. We manage it and we bring in the customers. But because the margin is half, we only pay half, and then the rest of the KPIs should track broadly in line with the overall business.

Yes. We get the same metrics on those customers, James.

So does that mean that if you're spending $20, it appears to you guys as a $10 acquisition cost?

Yes.

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