Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive 1H '23 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, 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 and present. Today, I'm joined in our Brisbane office by our CFO, David Todd. I'll provide an overview of our first half '23 result and the progress we are making with our strategy, while Dave will run you through the numbers. I'll then wrap up and move to Q&A. Starting with the numbers. Group TTV and revenue were up 27% and 18%, while underlying EBITDA and NPATA increased 7% and 8%, respectively. The lower underlying EBITDA margin of 48.8% primarily reflects the impact of the higher service fee paid to the Lottery Corporation and the impact of Stride and StarVale. Cash conversion remains strong, with the Board declaring an interim fully franked dividend of $0.23 per share, a 5% increase on the PCP. Turning to the key highlights of the half. Lottery retailing was really a tale of 2 quarters, with the average value per jackpot in Q2, double that of Q1, supported by more than 100 million Powerball Jackpots. Overall lottery retailing achieved 8% TTV growth in the half, which was pleasing given the strong comparable period and following us Q1. Specifically, on the $160 million Powerball, which is now our best draw to date, we were delighted with how the platform performed, achieving 100% uptime and breaking a number of internal performance records. SaaS continues to deliver strong growth, and it was great to extend our relationship with the Mater Foundation, our Foundation PPG client. We're pleased to finally complete StarVale in November and for strive to achieve its first earnout milestone. Having secured a gaming license in British Columbia and submitted an application to the Gaming Commission in Ontario, we are now focused on expanding Stride's footprint beyond the existing provinces of Alberta and Saskatchewan. As we grow globally, we continue to refine our operating model to speed up the execution of our strategy. The integration of our 3 acquisitions remains on track, and I'll talk more about this later in my presentation. Following what has been a very challenging labor market, particularly for software engineers, it is encouraging to see both employee engagement and voluntary turnover return to pre-pandemic levels. The balance sheet remains in good shape and provides flexibility to drive further growth. So far, we've purchased approximately $2 million worth of shares as part of our on-market share buyback. Active players remain our North Star. This slide shows our growth in active players, including the contribution from Stride and StarVale. 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 keeps players active in turn, satisfying a lottery partners and minimizing our contract risk. Moving on to lottery retailing. Online sales of lottery tickets continued to trend upwards, increasing by 1.5 points on the PCP to 38.4%. We had 23 Powerball Oz Lotto jackpots greater than or equal to $15 million with the aggregate value per jackpot up 10.3% on the PCP. Lottery retailing this is our usual chart showing our track record of delivering consistent growth. The orange bars demonstrate the resilience of our business, while the blue bars highlight the boost we get from large jackpots. New players were broadly flat on the PCP with approximately 80% of new players signed up in Q2 following the recovery of jackpots. Active players were up 18% on the PCP, with the average spend per player broadly flat. Our cost per lead improved from just over $20 to $17.85, reinforcing the strong return on ad spend dynamics we've previously highlighted. Now a quick look at the Oz Lotto performance following the game and price change in May 2022. This slide shows the average revenue per player for jackpots less than or equal to $10 million as the bellwether of underlying player health, and there are more samples to do a like-for-like comparison. As you can see from the graph, we see no evidence of regression following the price increase with the average revenue per player up 17%. This, however, has been tempered by the absence of an uptick in large jackpots. Moving to SaaS, where active players in underlying TTV were up 20%. On Lottery West, we anticipate the RFP will be issued towards the end of calendar 2023. Both Lottery Waste and Jumbo were pleased in how the channel is performing, and we're in active discussions regarding the future of the channel beyond the current term. We were delighted to extend our relationship with Mater through to November 2028. Mater was the first lottery to utilize PBJ software and is one of the largest and fastest-growing lottery program in Australia. Turning to Managed Services. We completed the acquisition of StarVale in November last year and are pushing ahead with our expansion plans to stride into larger provinces of British Columbia and Ontario. Following a soft half for Gatherwell, we have refined the operating model to improve accountability and accelerate conversion of the pipeline. Future growth potential for Gatherwell is large with a significant opportunity to increase market share, not only across the existing niches of local government authorities and schools, but the broader not-for-profit sector in the U.K. Having now completed 3 overseas acquisitions and with the integration process on track, we continue to seek opportunities in the broader charitable fundraise funding sector that help build scale and deliver shareholder value. Turning quickly now to the integration goals we set last year. Over the last 6 months, our teams have been working closely with the Gatherwell, Stride and StarVale team. We've developed a detailed integration plan and are working through it systematically. We continue to be impressed by the caliber of the team and strength of the client relationships and sector knowledge across these businesses. After a detailed technical review, we see more value in the technology and IP we have acquired than what we initially thought. Rather than fast tracking implementation of PBJ, we come at an incremental cost in dollars invested and management bandwidth, we believe there is significant upside in leveraging the existing technology in injecting a deep technical expertise. To give you an example, as part of a proof of concept in Gatherwell, we've rolled out a couple of our analytics and growth tools to a cohort of causes. And as a result, we've significantly improved the core sign-up flow by reducing friction points in a number of inputs to activate an account. We've created new microsites that better communicate the value proposition, and we've overhauled our tactics for paid advertising. This pragmatic approach prioritizes growth over the technical efficiency gains of PBJ. We continue to believe that the true value of these businesses will be unlocked by going digital. And as they scale and become more sophisticated over time, the cost-benefit trade-off of migrating to a uniform platform becomes a lot more compelling. I'll now hand over to Dave to take you through the financials.

Thanks, Mike, and good morning, everyone. Just a quick correction of the underlying EBITDA slide. At the very top, it's obviously an EBITDA margin, not a revenue margin. So my apologies for that. Starting with the underlying EBITDA, which is broadly flat, excluding the contributions from Stride and StarVale for 6 months and 2 months, respectively. Revenue growth across all segments was offset by the step-up in the service fee paid to the Lottery Corporation, which increased from 2.5% of the subscription cost of tickets to 3.5% and higher OpEx. The underlying EBITDA margin, excluding the impact of acquisitions, was 49.8%. This is at the top end of our financial year '23 margin outlook and benefited from slower-than-expected OpEx growth in the half. I'll go into more detail of the OpEx later on Slide 18. The inclusion of Stride and StarVale has had a 1% drag on the underlying margin. Turning to the segments and starting with luxury retailing. Following a significant contraction in ticket sales in Q1, TTV and revenue recovered strongly in Q2 driven by the $160 million and $100 million Powerball in October and December, respectively. The small decrease in revenue margin was due to product mix, with Powerball representing over 50% of the portfolio. The EBITDA decline was predominantly due to the higher cost of sales, which reflect the step-up in the TLC service fee, which was up approximately 50% or $2.3 million and the internal software license paid to the SaaS operating segment and merchant fees, which were up in line with TTV growth. Moving to SaaS, where TTV and external revenue were up 8% and 18.7%, respectively, with revenue margin stable. The first half of '23 SaaS TTV and revenue benefited from the contribution from St. Helena Hospice, which was reflected on a full run rate basis in the first half of '23. Excluding this impact, on a like-for-like basis, TTV and revenue were up 14%, in line with our expectations. The EBITDA margin fell to 67.7%, mainly due to higher OpEx as a result of additional head count and wage inflation. The TTV trajectory in Gatherwell has improved since our Q1 update, although TTV was slightly below the PCP. Pleasingly, revenue increased 12% following a management-led shift towards programs with higher management fees. As Mike mentioned earlier, we have made some operating model changes in Gatherwell following delays in onboarding clients in Q1. While these actions are gaining traction, the lag to revenue generation from new deals is approximately 6 months. As a result, we do not anticipate achieving operating leverage in the business until financial year '24. Underlying OpEx growth, excluding the impact of Stride and StarVale, moderated to 8.5%. This compares to 36% growth at the first half of '22 and 33% growth at financial year '22. The increase was driven by higher employee costs, mainly due to wage inflation of approximately 6.5% in a tight labor market. Higher other costs, including higher fees for electronic ID verification and lottery retailing, mainly as a result of continued growth, increased travel and accommodation and higher insurance premiums. The increase in corporate costs includes higher audit fees following a change in our external auditor and bank fees relating to our debt facility and the impact of share-based payments. These increases were partially offset by lower marketing spend. Marketing spend in auto retailing was equivalent to 1.5% of luxury retailing TTV at the bottom end of our 1.5% to 2% range and a function of the jackpot environment. Excluding lottery retailing marketing costs, underlying operating costs were up 14.5%. This was below our expected range of 20% to 22% for the full year, mainly due to lower head count growth and some timing effects. Turning now to the balance sheet, where we continue to maintain a strong position underpinned by the organic cash generation of the business. A couple of key call-outs. In late November, we drew $15 million from our senior debt facility to fund the StarVale acquisition. The significant increase in noncurrent assets reflects an increase in intangibles attributed to the acquisitions. As at 31 December, we had purchased about $1.9 million worth of shares as part of our ongoing share buyback. Finally, the Board has declared an interim fully franked dividend of 23% -- $0.23 per share, reflecting a payout ratio of 84.2% of statutory NPAT at the top end of our targeted dividend payout range ratio range. And finally, turning to our usual cash flow waterfall, where the cash-generative profile of the business is clearly evident with a free cash flow of $25.7 million and greater than 100% cash conversion. The acquired amortization of $944,000 reflects 6 months of Stride and 2 months of StarVale. Subject to FX translation effects, we anticipate $2.5 million charge for financial year '23 and increasing to $3 million on a full run rate basis for financial year '24. 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 payment of the first half '23 interim dividend, which will be paid on 17 March and a debt repayment of $10 million. Given the strength of our cash position at 31 December, we elected to pay down $10 million of the $15 million loan we used to fund the acquisition of StarVale. This leaves us with an additional $43.5 million of debt capacity, although our preference is to remain net cash and hold around $15 million to $20 million at the group level. I'll now hand back to Mike.

Thanks, Dave. So in conclusion, first half of '23 adds yet another important market to our strong track record of revenue, earnings and cash generation. This slide reflects our refresh strategy on a page, which I first unveiled at our Investor Day in June last year. We've updated our mission to encompass the broader stakeholder group we are focused on beyond just our players and clients. Our mission is to create positive social impact through making lotteries easier. This is why we exist. Our strategic pillars remain unchanged, and we've refined our enablers to reflect our learnings to date, particularly from the businesses we've acquired. We've also dialed up our focus on governance and responsible play, which we believe will be a key differentiator and critical to joining sustainable growth. While we have not put a specific time frame on it, our aspiration is to grow our relatively nascent SaaS and managed services segment to rival that of lottery retailing. Internally, we've set an objective for the combined earnings of SaaS and managed services to grow to approximately 50% of group, excluding the internal service fees paid by SaaS Walter retailing. This objective has been key in determining where management focuses their time and in our planned business initiatives. Finally, moving to our FY '23 outlook. We still expect lot of retailing marketing cost to be in the range of 1.5% to 2% of TTV depending on what the jackpots do. Excluding lottery retailing marketing costs and the increased cost base from Stride and StarVale, we now expect underlying operating costs to be up 16% to 18% lower than the original 20% to 22% range. This reflects our continued focus on disciplined cost management. Given the lower-than-anticipated operating cost growth, we now expect the underlying EBITDA margin, excluding Stride and StarVale to be at the upper end of the original 48% to 50% range. I note the proposed price increased to Powerball later this year, and we are considering our options. We are very pleased with how smoothly the Automotive price increase has performed with virtually no player regression. And finally, we will remain disciplined around execution of the on-market share buyback, balancing shareholder returns and our growth strategy. The Board will review the buyback program at the end of FY '23. I'll now hand over and take any questions.

[Operator Instructions] Your first question comes from Darshana Nair with Goldman Sachs.

First of all, I would like to talk about the lottery of retailing. Can you give us a sense of the key customers' trends outside of the big jackpot weeks and how you're thinking about growth here, especially noting that new customers have been pretty flat, but was cost. So what's the balance between cost per feet and customer growth that you're looking for?

So customer behavior is in line with previous years. We're not seeing anything out of the ordinary. Obviously, during low jackpot weeks, our cost per acquisition increases and sales generally are generally lower. But also those players that we acquire at those low jackpot weeks are also high-value players and tend to play a bit more frequently. But certainly, the results are impacted a lot by the larger jackpots and the large influx of new players. And I note we almost reached 200,000 new active players in the 6 months. So summarizing that, we're really seeing no difference in what player behavior has been compared to previous years, and we don't expect it to change over the next few years either.

And secondly, also on the Canadian expansion strategy. Can you give us a thought way or time line of how you're thinking about this? So it's very much dependent on our expansion into the bigger provinces over there being British Columbia to the west and Ontario to the east. So we've received our regulatory approval in [ Bridge ] Columbia, and we're just going through the process of obtaining that in Ontario. Ontario is obviously the biggest province there with Toronto and Montreal. In parallel to that, we've been in negotiations and informational mode with a lot of new charities in those larger areas, and we think that will be the main drivers while our traditional markets in Saskatchewan and Alberta, the clients are very sticky, and we continue that we'll expect them to just continue performing well. And if I may follow up quickly on that where you've already received regulatory approval, how long does it take to launch in that market?

We already have one new client launched in British Columbia, so it can be quite quick. Obviously, the time to sign up a new client can sometimes take a few months. So there shouldn't be more than a few months before a new client launches and when we receive the approval.

Your next question comes from Rohan Sundram with MST Financial.

Just a couple for me. Firstly, on the operating cost growth guidance for '16 to '18, I take on board lower than the previous, but a bit of a step-up in the second half. Is that reflecting the timings you talked about, David? And is there going to be a catch-up in the head count? What's it reflective of...

Yes, that's quite right Rohan. Those are the 2 key ones. One is staff. So we originally flagged that there were 17 employees or new employees that we thought we had get for 2023. There were 6 that were employed in the first half -- and whilst we did that, there was actually no net increase because there was some churn and a couple of redundancies, but there are still 5 additional positions that will be filled in the second half that we expect to take place. And that will basically be it for 2023. So really only 11 rather than the original 17 that we had planned. So it's extra 5 and obviously getting to the full run rate from the first half. And then some of the timing of OpEx expenses is mainly around some legal expenses that we thought would be incurred in the first half and that now looks like will be in the second half.

Okay. And was that -- that have followed through into the cash flow as well, very strong conversion. I appreciate underlying is usually quite strong, but at 122%, -- was it the timings as well that benefited?

Yes, we did get some benefits like we did for the PCP as well. There was a -- we had the $100 million Powerball and, of course, the New Year's Eve draw that were both at this side of the 31 December. And because we pay TLC or weekend arrears, obviously, we've got the benefit of having the cash, and we only pay them in the new year. So if there was that element.

Your next question comes from Ben Wilson with Wilsons Advisory.

Certainly, good to see some cost control in the half. My first question just relates to the digital share of total lottery turnover that we saw out of TLC yesterday. It was a bit disappointing to see digital share go backwards on the prior half for the first time in a long time. Just wondering on your thoughts whether we have hit a bit of a plateau in terms of digital share growth post COVID? And then what levers can Jumbo pool to increase its share of digital volumes, I guess, outside of stepping up its marketing investment?

Yes. So we've -- from where we sit, we've seen no slowdown in digital adoption, we've had a pretty solid 8% increase in ticket sales compared to a pretty strong comparative period. And if you just look at our main games of Oz Lotto and Powerball, that grew 12% over the PCP, which was a strong PCP. So there's absolutely no slowdown in digital adoption from what we're seeing. I've had to think about what it could possibly be. And I can only put it down to a post-COVID return on retail, on non-TLC side of things, which affects the balance. They've obviously performed pretty well, which is good to see. But from our perspective, the digital adoption is still going strong.

Just turning to SaaS. Just wondering the likelihood of additional contracts in the U.K. following the launch of St Helena Hospice, just potential timing of any additional contracts on whether or not they be of a similar or different sizes to St Helena?

I'd probably put that as moderate at the moment because we did change Gather well's focus to be less on SaaS and more on their immediate business. There is opportunity for growth there, and we've got new teams working on that, but it's still kind of early days to see that. We have 2 senior executives actually based in the U.K. at the moment, just overseeing with what's happening over there and making sure that both StarVale and Gatherwell are going well. So yes, I'll probably put like moderate expectation in -- for SaaS in the U.K.

And then just last one for me. In terms of Stride and StarVale, you guided at the full year results that you'd be taking some cost investment to put them on a firmer growth footing going forward. But EBITDA margins were pretty encouraging, nonetheless, in the half sort of between 36% to 40%. Just wondering what you see as the margin potential for these 2 businesses as they grow TTV over time and you hopefully get some operating leverage.

Yes, that's right, Ben. There is a bit of expense that will go into the business. Some has already and there's just a little bit more to go. So we think that over time that we'll be able to increase those EBITDA margins sort of up between 40% and 45% with growing the top line. Obviously, with Stride, the biggest potential is expanding the business into Ontario and British Columbia. And with StarVale, it will be about acquiring additional customers and growing the top line that way.

Your next question comes from James Bales with Morgan Stanley.

You mentioned you're considering the pricing changes post the Powerball game change. Can you maybe speak to the range of outcomes that you're considering there?

Yes. Look, we are still considering our options, and we haven't finalized on it. There is still a bit more work to go, and we'll see what some of these price increases are going to look like as they come through. But based on what we saw with [indiscernible], we had an additional $0.05 increase, which worked really well. There's obviously another option there for another $0.10 increase. But really, we want to crunch a few more numbers and arrive at a position that we're comfortable with. But we're quite confident a price increase to expand our margins is -- will work well. Just a question of how much. And that will depend on what other street price increases we see come through. So it's still a work in progress, but we're encouraged by what we've seen so far.

And then maybe just on the Gatherwell operating leverage. Can you help us understand what's changed there? And why there's been a delay in the leverage you thought you'd see this year being pushed into FY '24?

I'll let Dave go into the details on that. But just as a broad brush stroke look at Gatherwell, it's the smallest of our 3 acquisitions, and it's come off a pretty big jump increase the year before about 30%. But it still has a lot of potential. It does tend to be a little bit more up and down in the other businesses, but we're still quite confident of how it's going. But Dave, can give you a bit more color on that?

So the main thing there, James, is that there was a strategic focus by the existing sales team on the SaaS U.K. business. Obviously, they got St. Helena and we're looking at growing the SaaS side of the business, which meant that the traditional external lottery manager or the managed service side of the pipeline reduced. And there's a fairly long lead time in building that up. And that's what we found is that the pipeline on the ELM or managed service side is a bit dry and we're going to have to rebuild that. So we've taken some actions, put some plans in place. Part of that additional head count that I mentioned earlier on is having some dedicated BDMs and a commercial manager in Gatherwell that will focus exclusively on the SaaS market, while the existing sales team that has always been there will rebuild the -- sorry, the managed service pipeline. But as I say, it does take some time for that to build up, and that's why we've pushed out that positive operating leverage into the -- into the '24 financial year now.

Got it. And maybe just one other question on margins. Stride has a big second half skew. Do you expect the margins in the second half to be to step up versus what you reported in the first half?

No, I don't think so, James. It will be around about the current level.

Okay. Got it. And then maybe one last one. You have talked to lottery West RFP being in late 2023. Can you maybe give us some color on what's happened there to push that out again and how you feel you're positioned in that process?

The feedback we got is that they want to take their time and make sure they go through the process properly. There are no hurry to go through the RFP. They want to make sure it gets done correctly. I think that's going to put us into an even better position because it allows us to develop a relationship with them even further prior to that. So we're not concerned by the by that delay, if anything that's going to play to our strengths.

Your next question comes from Ben Brownette with Jarden.

Mike, I'm just wondering through these periods where it's a little bit slow with respect to customer acquisition and marketing. What are some of the things you're doing? Are you doing anything different? Or are you just like last half where it was softer and then it was big, you just wait and hope for that mean reversion? Or are you doing anything differently to drive sales?

As in previous years, we often turn our attention to internal marketing, working on those customers that we've already bought and are already in our system and giving them more reasons to continue playing even though the jackpots are low. And that's when our strong portfolio comes into play. We quite often switch them over to charity games and try to keep spacing things out that way. It obviously doesn't have the same impact as a nice big large jackpot of course, but it keeps our team busy and it keeps everybody active, and it's a former that's worked well in the class, and we'll continue doing that. That doesn't mean we don't -- we completely stop customer acquisition marketing. We're still out there marketing. We just have to get a bit more tactical about it. We are prepared to pay a bit more for those customers because they are higher value. The numbers are always a bit lower and they're not as spectacular as the big jackpots -- but they are meaningful over the long term. So we're still busy, but we certainly don't sit around just waiting for the next big quite there's plenty for us to do to keep things moving along. And this is nothing out of the ordinary than what we've seen over the last decade, and I think we've refined it down to pretty finite.

Right. And then you mentioned with Oz Lotto, graph there suggest that I think it suggests that all of your customers just embraced the price change, they like playing Oz Lotto. And is that the right way to interpret that when you're saying that the average spend went up greater than the revenue?

Yes. Yes. The numbers pretty much confirm what we sort of intuitively know, and that is people -- they like to buy a certain number of tickets. And if there's a moderate price increase, then they just keep on buying the same number of tickets. We're in an environment now where there are prices going up everywhere. And so people are not fazed by the fact that their lotto ticket goes up a small amount. So if that wasn't true, then we'd certainly see it in the numbers. But of course, the numbers are showing that people are quite happy with it, and that gives us some really good data when we look forward to the Powerball increase. And again, we'll see what happens with the other games as well. That was also flagged yesterday.

Yes. So on that, what would you intend on doing? Would you intend on thinking about a margin or the same sort of dollar value in terms of loan margins as a percentage or dollar value? And what are the pros and cons on potentially passing all of it on to a customer or not?

Well, we'll have to see what it actually looks like once we know what the street price will be. But any change in the street price gives us an opportunity to change our pricing. It's hard for me to speculate just one day out, just thinking about how it's going to play out, but we've got tons of data that can help us model what it's going to be. We've always been premium product, premium price, so we can put it up a little bit more. We have been active in trying to increase that margin to offset the service fee. So the way I see it right now, there's some opportunity for some more price increases coming through. So we'll make sure we wait this out.

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.