Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

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

Thank you. Good morning, everyone, and welcome. Let me begin by acknowledging the traditional owners of the land on which we meet and pay our respects to all elders past, present and emerging. Today, I'm joined in our Brisbane office by our CFO, David Todd. I'll provide an overview of our FY '22 results and the progress we are making with our strategy, while Dave will run you through the numbers. I'll then wrap up, reaffirm our FY '23 outlook and move to Q&A. Turning to the results, and this slide presents the key group metrics for the year. TTV and revenue were in line with our July update, while underlying EBITDA and NPAT came in marginally higher. We are very pleased with our FY '22 performance with double-digit growth on all key metrics versus the PCP. While underlying EBITDA increased 16%, the underlying margin was approximately 5 percentage points lower, reflecting a step-up in the Lottery Corporation service fee and increased investment in the business. This is a key focus area for us, and I will talk about the margin levers later in the presentation. Given the strong FY '22 performance, the Board has declared a final fully franked dividend of $0.205 per share taking the total dividend for the year to $0.425 per share, a 16% uplift on the PCP. As I mentioned in our Investor Forum in June, we have a clear growth strategy and FY '22 has been all about execution. It has been another record year for Lottery Retailing supported by good jackpots. All our SaaS clients are enjoying the benefits of being on our platform, and we operationalized our first U.K. SaaS client. We are building our active player base globally through the acquisitions of Stride and StarVale. As we said around this time last year, we have invested significantly in the business. Our platform, marketing capability and people. This is all aligned to our growth aspirations. Finally, as part of our proactive approach to capital management, today we are announcing an on-market share buyback of up to $25 million. Our balance sheet, cash conversion and free cash flow remain strong. And when combined with our new debt facility and revised dividend payout ratio, provide capacity for future M&A. This is our strategy on a page, which is unchanged from when we launched our SaaS and Managed Services segment. In summary, we believe we've built a best-in-class software platform, matured this software as we use it every day in our Lottery Retailing segment. When you put this together, we believe we have a unique product that can offer clients value globally and open up the TAM, particularly given the shift to digital lotteries. I now wanted to quickly recap on a few key slides from our Investor Forum. At Jumbo, we're on a mission to make lotteries easier, easier for our clients and easier for our players, and remove the complexity involved in running a lottery. By staying true to our mission, we'll continue to drive growth and become the #1 choice in digital lottery and services globally. We have 3 operating segments, which came into being a little over a year ago. Lottery Retailing is the largest part of the business and has been operating for well over 20 years and has an enviable track record of delivering sustainable growth in revenue, profits and cash. Our Software as a Service and Managed Services segment are a result of our vision to expand beyond Australia and leverage our best-in-class lottery software and lottery management expertise. SaaS focuses on providing our software to existing lottery clients, while Managed Services is simply software plus additional lottery services, including program development, marketing and draw management. While we have not put a specific timeframe on it, our aspiration is to grow these relatively nascent segments to rival that of lottery retailing. Active players are our North Star. On this slide, I've shown our FY '22 active players, which have now surpassed 3 million, which is expected to rise to 4 million once the StarVale acquisition has been completed. As I've said before, the formula is simple, the more active players we have on our platform, the more tickets we sell and the more we grow revenue. Our digital skills and continuously improving player experience keep players active, in turn, satisfying our lottery partners and minimizing our contract risks. So turning to the operating segments and starting with Lottery Retailing. As expected, online sales of lottery tickets continued to trend upwards, increasing by 4.9 percentage points to 37.7%. We have -- we had 43 Powerball and OzLotto jackpots greater than or equal to $15 million compared to $38 million in the PCP, with the aggregate value per jackpot up 28%. FY '22 also benefited from a record $120 million Powerball in February this year, the first greater than $100 million jackpot since September 2019. This is our usual chart showing our track record of delivering consistent growth. The Orange bars that indicate jackpots under $15 million demonstrate the resilience of our business, while the blue bars highlight the boost we get from large jackpots. New players were up 63% on the PCP as a result of better jackpots and player engagement and retention initiatives. Active players, who we define as those players who have made a purchase in the last 12 months, were up 20% on the PCP, with the average spend per player up 12%. This slide shows the revenue and cost dynamics of new players. At the interim results, I explained how we typically recouped our first half acquisition costs in just under 5 months on average. This dynamic gets even better when you extrapolate on a yearly basis, and each cohort of new players continues to play into the future. This dynamic underpinned by player loyalty and our growth marketing capability is why we don't mind spending more on marketing, particularly when jackpots are favorable. Marketing costs were up almost 50% on the PCP, although broadly in line with the average ratio of the last 4 years. This underpins the strong uplift in new players, which in turn drove a 10% decline in the cost per lead to $18.33. Moving to our SaaS business segment, where underlying TTV growth increased 39% on the PCP with all our Australian clients fully operational on the platform and contributing for the full 12 months to 30 June 2022. In May this year, we fully operationalized our first client in the U.K. And while the first lottery took longer than we originally anticipated and as we had to make some adjustments for local conditions, the second lottery took only 3 weeks to be up and running. Consistent with our experience in Australia, as we grow our client base in the U.K., we expect deployment of our software to get faster, better and cheaper. Lotterywest represents the biggest SaaS opportunity for Jumbo, the potential for growth in digital sales is enormous, given only 18% of lottery tickets are currently sold online. Our joint marketing initiative kicked off late July, slightly lower than anticipated due to delays with getting up with Facebook. While we have not yet had a large jackpot to work with, we are already seeing some encouraging signs from this initiative. And as you can see from the quote from Ralph Addis, the CEO of Lotterywest, the teams have worked extremely well together over the past almost 2 years. We anticipate Lotterywest to release an RFP process later this calendar year, and given the strength of our existing partnership, aligned culture and demonstrated value delivery, we believe we've put ourselves in the best possible position to expand our relationship further down the track, but we have to take it step-by-step. Turning now to our Managed Services, and starting with Gatherwell in the U.K., which continues to demonstrate impressive growth as TTV up 31% on the PCP. The active players shown at a point in time with the average player -- average active players for FY '22, up 23% versus the PCP. Gatherwell now supports over 11,000 good causes and has increased its market share of schools and local government authorities, and continues to maintain very strong customer advocacy metrics. The map on the right shows Gatherwell's share of local government authorities and highlights the significant growth runway ahead. Moving now to Stride, which completed on first of June this year and contributed 1 month to our FY '22 performance. We've gotten to know the business well over the last 12 months and have been very impressed with the team, the client relationships and industry knowledge. The average tenure of the senior leadership team at Stride is over 10 years, and we're very pleased with Stride to officially be part of Jumbo. We'll see a compelling growth opportunity for Stride to expand its client base outside of its home provinces of Alberta and Saskatchewan, and into British Columbia and Ontario, and are currently exploring the licensing process for these provinces. I'd now like to hand over to Dave to take you through the numbers.

Thanks, Mike, and good morning, everyone, and thank you for your time. For my presentation, I've provided both FY '21 reported and underlying figures adjusting for Lotterywest moving from Lottery Retailing to SaaS in December 2020. Starting with the underlying EBITDA, which increased by 16% to $55.1 million. This was driven by strong revenue growth in all operating segments, partially offset by a higher cost of sales and higher OpEx. The increase in cost of sales primarily reflects the step-up in the service fee paid to the Lottery Corporation, which was approximately $5 million out of the $6.3 million cost of sales increase. Underlying OpEx was up 33.2% and I'll go through this in more detail shortly. FY '22 EBITDA also includes a 1-month contribution from Stride, which was not material, and the full 12-month contribution of $540,000 from Intellitron Pty Limited, which was sold on 30th of June 2022. Intellitron was our payroll software subsidiary and is considered to be noncore to the group. The one-off items to reconcile to the reported position reflect one-off expenses of approximately $1.6 million, partially offset by the $525,000 profit on sale of Intellitron. Turning to the operating segments. We start with the Lottery Retailing on Slide 18. The strong revenue growth of 26.7% was a function of the strong TTV growth underpinned by higher large jackpots and increased customer activity, partially offset by a reduced revenue margin, mainly due to product mix. Powerball and OzLotto represents some of our lowest margin gains in the portfolio with Powerball's contribution in FY '22, more than half of Lottery Retailing TTV. EBITDA growth of 4.7% was impacted by the step-up in the TLC service fee and a 47.6% increase in marketing costs. Net marketing spend was up 17.6%, mainly driven by higher employee costs. Moving to SaaS, where revenue growth of 31.9% reflects the TTV growth, partially offset by a slightly lower revenue margin. The TTV increase is distorted by the fact that FY '21 doesn't fully reflect the full 12 months contribution from all clients. Only Mater and Lotterywest have been fully captured in the comparative period, with debt services and Endeavor contributing approximately 1 month and 9 months, respectively. St. Helena hospice in the U.K. was fully operationalized in the second half and contributed approximately $2 million in TTV. The annualized TTV for St. Helena is approximately $10 million. External revenue was up 29%. The fall in revenue margin from 5.3% to 5% reflects the increased skew towards charities, which are around the 3% to 4% revenue margin level. EBITDA margins in this segment remain healthy, although were impacted by higher employee costs. Again, Gatherwell has achieved strong TTV growth on the back of momentum with existing clients and new client wins. The fall in revenue margin was mainly due to product mix while EBITDA grew only 2.9%, impacted by increased investments in marketing and staff, both of which are expected to result in increased future revenue and operating leverage in financial year '23. As we flagged last year, we saw a step-up in operating costs with underlying operating costs of 33.2% on the PCP driven by the 52% or $2.9 million increase in marketing costs, which, as Mike mentioned, led to a strong uplift in new players, a 33% or $3.5 million increase in employee costs, reflecting a combination of factors, including the establishment of a new senior leadership group, reflecting a mix of internal promotions and new hires, including expansion of the KMP, annual remuneration increases for staff and moderately higher turnover in a tight labor market and expansion of the STI pool to include all staff. It was a resumption of travel following the easing of international border restrictions and other reconciling items or operating costs were up $1.2 million, mainly reflecting the higher cost of insurance the cost of the new debt facility and share-based payments. Turning now to the balance sheet, where we continue to maintain a strong position underpinned by the organic cash generation of the business. The Board has declared a fully franked dividend of $0.205 per share, reflecting a payout ratio of 85.6% of statutory NPAT. As we flagged when we announced the acquisition of StarVale in January, following the completion of the transaction and effective from FY '23, the Board has resolved to adjust the targeted dividend payout ratio from 85% to a range of 65% to 85% of statutory NPAT. And today, as mentioned by Mike, we've also announced an on-market share buyback of up to $25 million, which importantly still allows us to pursue our growth strategy. And finally, turning to cash flow, where the cash-generative profile of the business is clearly evident with a free cash flow of $38.2 million and greater than 100% cash conversion. On the right-hand side of the chart, on a pro forma basis, I had shown the key items expected to impact the group's cash balance, including the FY '22 final dividend. StarVale acquisition and the first tranche of our new senior debt facility. Should we draw down the $30 million debt facility, we expect to remain in a net cash position. Business as usual CapEx was $6 million compared to about $6.5 million in the PCP and we expect this to be the range for financial year '23. I'll now hand back to Mike.

Thanks, Dave. So in conclusion, FY '22 adds another year of strong revenue, profit and cash flow performance to our history. As the economic backdrop becomes more challenging and many question the discretionary nature of lotteries, I wanted to point out that the lottery industry has been very resilient to downturns in the past, with lottery share of household spend being relatively stable over the last decade. A quick look at OzLotto's performance following the game and price change in May. This slide shows the average revenue per player for jackpots less than or equal to $10 million. We look at low jackpots and as they are a bellwether of underlying player health. You can see from the graph, the players are spending more following the change, and we've seen no regression after increasing the price. Moving on to our FY '23 outlook. Firstly, on lottery retailing. The cost of sales will be impacted by the step-up in the Lottery Corporation service fee from 2.5% to 3.5% of the subscription ticket costs, in line with our 10-year agreement. Marketing costs are expected to be in the range of 1.5% to 2% of TTV. Clearly, if jackpots are favorable, we will most likely be at the upper end of this range and vice versa. Moving on to the group. The underlying group cost base, ex Lottery Retailing marketing costs and the increased cost base from Stride and StarVale, is expected to be up 20% to 22%, reflecting continued reinvestment in the business to drive growth. And the underlying EBITDA margin, excluding acquisitions, is expected to be in the range of 48% to 50%. The reduction on the PCP mainly reflects the step-up in the service fee paid to the Lottery Corporation. This TLC service fee will remain a headwind for margins until it caps out at 4.65% in FY '24. The margin dilution is a key focus for management, and we are focused on a number of levers, including game mix. We increased the price of OzLotto by a further $0.05 on top the base price increase. Notwithstanding any future game changes, we'll continue to monitor player behavior closely and not rule out any potential out-of-cycle price increases. Growth. With international travel back on the cards, our business development team is actively exploring new business opportunities. We have also made some personnel changes targeted at growth. Richard Bateson will transition from his role as Chief Commercial Officer to an advisory role with Jumbo reporting directly to me and allowing me to be more involved in international opportunities. I'm also very pleased to announce the appointment of Abby Perry to the new role as Chief People Officer. Abby joined Jumbo 6 years ago and will be responsible for continuing to drive our people strategy, particularly as we become a more global business. And costs. Jumbo started off with a single computer and has grown into the business it is today. So cost control is one thing we're good at. The vast majority of our planned spend is on driving growth internationally. We have also reduced our focus on Jumbo Fundraising Australia, demonstrating our cost discipline, and we'll look at other opportunities in the market. As previously advised, regulatory approval for our acquisition of StarVale is still pending from the U.K. Gambling Commission. However, we remain confident of receiving this by the end of Q1 FY '23. And finally, on capital. Our balance sheet remains strong, and the combination, debt headroom, strong cash generation profile and revised dividend payout ratio enables us to continue to invest in the business, provide capacity for further M&A and return cash through dividends and share buyback. So I'll now hand back over to the operator to open up for Q&A.

[Operator Instructions] Your first question comes from David Fabris from Macquarie.

I've got a couple of questions. Just starting off with Australian lotteries, we think that volumes are down around 20% in the first 7 weeks of trade this year, in particular Powerball, which hasn't seen a jackpot above $20 million. Can you comment on how you're seeing spend in your customer base? And then secondly, how do you think about marketing spend with low jackpots? I mean you've given us a guidance range for its TTV but if volumes are down 20%, does that mean you'll be willing to drop below that target range in that period? Or can you help us try to understand that moving part in the business as well?

Yes, sure, David. You're right. The jackpots are lower for the first couple of months compared to the PCP. Powerball was particularly strong in financial year '22. And as you say, we've only had 1 Powerball so far of $20 million. So in terms of marketing relative to the lower jackpots and expected TTV, what you'll see is that the marketing spend will trend towards the lower end of that range. We don't think that will drop below the bottom end of it. It will just trend to the bottom side of it.

Got you. And can you comment on whether you're seeing the same impact on your customer base with the drop in volumes we're seeing in lotteries in the first couple of months of trade?

Well, yes, look, there's always a correlation between the jackpots and player activity and spend, but nothing that we haven't seen before. It is a light run in this financial year for sure. But with the new OzLotto game at longer odds, it can't last like this forever. And we do expect that the jackpots will return, because the underlying odds are basically in the favor of increasing those jackpots. So time will bring that back to more of an equilibrium.

Yes. Got you. It makes sense. And then just with the buyback, are you trying to signal to us that you're pausing M&A in the near term? Or do you think we can concurrently see M&A?

Not at all. We're still pedal to the metal on M&A. In fact, I'm getting a lot more involved in it myself. So yes, we are still very much pushing ahead with our M&A, running the rule of quite a few opportunities that we're seeing. And with the success that we're seeing with Stride and even StarVale looking really good on top of Gatherwell, we think we've got the right formula there.

Okay. And just 1 last question. Just on the M&A pipeline. Can you remind us of potential deal sizes and where you think the acquisition and multiple ranges might be sitting at the moment?

We're looking at all different sizes, but our preference is for deals around the size that we've -- around StarVale, maybe a little bit bigger, maybe a little bit smaller. But there are plenty of businesses around about this size that we think will fit quite nicely.

And any comment on acquisition multiple ranges?

Yes, we'll keep on trying to get at those attractive rates a sub-9% multiple, and we think that can be achieved.

Yes. Okay. A little bit higher than we were previously, but I'll leave it there with questions.

Your next question comes from Matt Ryan from Barrenjoey.

Just trying to get a sense of, I guess, the margin outlook from here. I think in your outlook commentary, you sort of suggested that the step down from FY '22 to FY '23 guidance is primarily the increased service fee to Tabcorp. And I guess from your comments a little bit earlier, we can sort of conclude the cost inflation or the amount that you're investing is increasing. So just from a high level over the next few years, are you sort of anticipating that those rising costs get met with revenue growth, and so I guess the guidance for FY '23 margins is sort of reflective of where we might be over the next few years? Or how do we think about, I guess, the outlook from that perspective?

Yes. Matt, that's quite correct. It's obviously through Lottery Retailing. It still contributes the major component to revenue for the group. And mainly because of the step-up in the TLC service fee, it is a headwind for margins. And as a result, for the group as well, we will see margins under pressure until 2024. So after that, 2025 onwards, we expect to see the operating leverage kick in, and we will then see a rise in those EBITDA margins going forward.

Okay. That's really helpful. And just another question on the buyback. So I guess I'm just trying to understand what the motivation was to announce that, I guess, today relative to maybe 6 months ago or a year ago. And I think the question is probably more about the speed at which you acquire new businesses. So I understand there's potentially a lot of targets out there. Is there something in particular that's stopping you from proceeding with more investments? And I don't want to put words into your mouth, but are you trying to digest, I guess, what you've sort of done so far? Or what -- is it price? What's the -- I guess, what's the key reason that you've chosen to do a buyback rather than pursue some of those other opportunities?