Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive FY '23 Results Briefing. There will be a presentation followed by a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Mr. Mike Veverka, CEO and Founder. 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 emerging. Today, I am joined by our CFO, Dave Todd, to present our financial results for FY '23. Turning now to our FY '23 report card. We delivered improvements on most key metrics, most notably, the EBITDA margin. The Powerball run in June this year, including the $60 million and $100 million jackpots, helped us achieve an EBITDA margin, excluding the impact of acquisitions of 51%. This was ahead of the 48% margin guidance in May and ahead of the original margin guidance range of 48% to 50% we set at the beginning of the year. Turning to the key highlights for the year. The weak jackpot run for most of the second half resulted in flat revenue on the PCP. However, the pricing changes announced in May and the late jackpot run led to an overall resilient Lottery Retailing performance. Despite a more challenging environment for the consumer, our underlying player health metrics on like-for-like jackpots remains robust. SaaS continues to deliver good growth, and it was great to see Lotterywest achieved an 8% TTV growth in the year and made volatile jackpots. Both Stride and StarVale continue to perform in line with our expectations, and it was pleasing to see Gatherwell sales returned to growth in the fourth quarter. The cost line benefited from our lower marketing costs, purely a function of the jackpot environment. Notwithstanding this, we remain disciplined around costs generally. The balance sheet remains in good shape and provides flexibility to drive further growth. We ended the year with no debt having fully repaid the amount drawn to StarVale in November last year. Moving to the numbers. Group TTV and revenue were up 29% and 14%, while underlying EBITDA and NPATA increased 7% and 9%, respectively, and includes 8 months of StarVale. The lower underlying EBITDA margin of 49.6% primarily reflects the impact of the higher service fee paid to The Lottery Corporation and the impact of Stride and StarVale. Free cash flow was up 21%, and the Board declared a final fully franked dividend of $0.20 per share, taking the total dividend for the year to $0.43 per share, slightly above the PCP. Active players remain our North Star. This slide shows our growth in active players, including the contribution from Stride and StarVale. The active players we inherit through acquisitions provide the foundation for future growth. 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, key players active in terms of satisfying our lottery partners and minimizing our contract risks. Moving on to Lottery Retailing. Online sales of lottery tickets increased 70 basis points to 38.4%, impacted by the unfavorable jackpot run. We saw a similar trend in the U.K. coming out of COVID where there was only modest growth in the 2022 financial year before increasing around 3 percentage points to 45% in 2023. There were 42 Powerball, OzLotto large jackpots in FY '23, with the average value per down 9.3% to $36.9 million. These figures, however, mask the significant volatility in jackpots observed across the year. FY '23 included only 5 jackpots greater than $50 million compared to 13 in the PCP. First quarter and third quarter large jackpots were relatively subdued, reflecting the third and fourth lowest average value per jackpot period, respectively, in 4 years. Conversely, the second quarter and the month of June 2023 saw a strong recovery in jackpots and benefited from $160 million and $100 million Powerball respectively. This is our usual chart showing our track record of delivering consistent growth. Overall, the weak jackpot run has affected all key metrics. Having said that, during a large jackpots, we didn't skip a beat with significant improvement in our key metrics. Moving to SaaS, where active players in underlying TTV were up 12% and 18%, respectively. On Lotterywest, we are pleased on how the channel is performing with 8% growth versus the PCP. We are in active discussions regarding the future of the channels beyond the current term. Based on our discussions with Lotterywest, we anticipate the RFP will be issued towards the end of the calendar year or early next year. Moving to Managed Services, which principally includes the contribution from Gatherwell, Stride and StarVale. In Managed Services, we provide both the lottery platform and lottery managed services to charities, looking to establish or enhance our lottery program. In the U.K., for example, we now have access to the full spectrum of charity lottery management and [ lotto ] services across grassroots, mid-market and enterprise clients. Over the last 3 years, the segment has developed from approximately $2 million in revenue to $23 million on a pro forma basis. Similarly, EBITDA has grown from $0.4 million to $7.7 million. As I've said before, we are limited by the number of new lottery opportunities in Australia and hence, our focus on M&A. This slide outlines how we think about M&A at Jumbo. Typically, the businesses that we acquire are well-established, founder-led or family-owned businesses, have long-standing relationships with the charity clients, are profitable and have been so for a long time. And importantly, we see an opportunity to drive growth and generate scale using our technology, lottery expertise and existing capabilities. We are very focused and active on future M&A, but want to ensure the terms are right and the fit of existing operations is ideal. I'll now hand over to Dave to take you through the financials.

Thanks, Mike, and good morning, everyone. Starting with the underlying EBITDA, which was down approximately 3%, excluding the contributions from Stride and StarVale for 12 months and 8 months, respectively. The main driver of the decline was the step-up in the service fee paid to The Lottery Corporation, which was partially offset by lower operating costs. Revenue growth was impacted by the unfavorable Jackpot run. The underlying EBITDA margin, excluding the impact of acquisitions, was 51%, above the top end of our original 48% to 50% guidance range. The performance was mainly due to the strong Powerball jackpot run in June and group cost control. The inclusion of Stride and StarVale had 140 basis points drag on the underlying margin. Turning to the segments and starting with Lottery Retailing. TTV was down 2.5% on the PCP as a result of the unfavorable jackpot runs, and our tendency performed well win our large jackpots. Despite lower TTV, revenue was flat, reflecting product mix, a lower proportion of Powerball versus the PCP, and the impact of pricing changes announced in May. The 1.4% increase in EBITDA reflects the higher cost of sales due to the step-up in The Lottery Corporation service fee, more than offset by the lower marketing costs. Moving to SaaS, where TTV and external revenue were up 17.6% and 15.3%, respectively, with the revenue margin down slightly. Financial year '23 SaaS TTV and revenue benefited from the contribution from St Helena Hospice in the U.K., which was on a full run rate basis. Excluding this effect on a like-for-like basis, TTV and revenue were up 13% and 11%, respectively. The EBITDA margin fell to 65.3%, mainly due to a lower intersegment fee from Lottery Retailing due to a contraction in TTV, and higher employee and technology costs. Moving on to Managed Services, which reflects the full 12-month contribution from Stride, and 8 months for StarVale following their completion on their 1 June and 1 November 2022, respectively. Gatherwell's performance was disappointing with TTV down 4% on a constant currency basis and revenue down 9%. Although we did see an improvement in average weekly ticket sales in the fourth quarter of the '23 financial year. On a constant currency basis, both Stride and StarVale's revenue and EBITDA performance for the 12 months to 30 June 2023 was modestly ahead of the PCP. Underlying OpEx, excluding the impact of Stride and StarVale, fell 1.8%, primarily due to lower marketing costs in the Lottery Retailing, which were a function of the jackpot environment. Excluding Lottery Retailing and marketing cost, cost growth was contained to 4.7%, primarily due to lower-than-expected employee costs and good cost control across the organization. Employee costs were impacted by 2 factors: firstly, lower short-term incentives due to NPAT growth being below the minimum hurdle rate. This resulted in a circa $1 million saving versus the PCP. And secondly, lower headcount due to the delayed onboarding of staff, in particular, the impact of a recruitment fee that was initiated 30th calendar year and some internal restructuring. 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 programs. In November, we grew $15 million from our senior debt facility to fund the StarVale acquisition, and this was fully repaid before 30 June 2023. The significant increase in noncurrent assets reflects an increase in intangibles and goodwill attributed to the acquisitions. As at 30 June, we have purchased $2.6 million worth of shares as part of our ongoing share buyback. The slower-than-anticipated pace of the share buyback was largely attributed -- attributable to a relatively subdued jackpot environment. Finally, the Board declared a final fully-franked dividend of $0.20 per share, taking the total dividend for financial year '23 to $0.43 per share. This reflects the payout ratio of 85.7% of statutory NPAT, slightly above the top end of our targeted dividend payout 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 $46.2 million and greater than 100% cash conversion. The acquired amortization of $2.7 million reflects 12 months for Stride and 8 months for StarVale subject to FX translation effects, we anticipate a circa $3 million charge for 2024 financial year on a full run rate basis. On the right-hand side of the chart, on a pro forma basis, I have shown the impact of the final dividend payment, which will be paid on the 22nd of September as well as the additional $47 million of debt headroom. I'll now hand back to Mike.

Thanks, Dave. So in conclusion, FY '23 adds yet another important market to our strong track record of revenue, earnings and cash generation. It is also pleasing to declare a full year dividend slightly above the PCP, given the weaker jackpot environment for FY '23. A quick look now at how our portfolio price changes that we announced in May have been received. This slide shows the average revenue per player for Powerball Jackpot less than or equal to $20 million, which is the key indicator of underlying player health. Performance is pleasing and as expected, although it's still early days. We've seen some minor aggression on ticket sales with overall revenue per player, up due to the improved revenue margin. We'll continue to monitor player behavior as the year goes on. While we expect the price -- pricing changes will result in a higher revenue margin, we also plan to invest some of the proceeds on enhancing our player experience in brands, particularly investing more on AI, machine learning, automation and personalization to maintain our premium proposition to customers. Turning now to the outlook for FY '24. We still expect latter retailing marketing costs to be in the range of 1.5% to 2% of TTV depending on jackpots. We do anticipate a higher Lottery Retailing revenue margin following the pricing changes implemented in May, subject to jackpots and portfolio mix. In FY '24, we'll see the final step-up in the TLC service fee of 4.65%. It's important to note that in the 3 years since the introduction of the service fee, we have absorbed over $25 million in [indiscernible] in incremental costs and have been able to deliver what we believe to be a class-leading group EBITDA margin for lottery. As a service fee will now stay constant on the remaining years on contract, we are focused on generating strong operating leverage. Looking at our acquisitions in aggregate, we anticipate mid- to high single-digit revenue growth with continued investments to integrate and grow this segment. At the group level, we expect to see operating leverage with revenue growth outpacing operating expenses, leading to an underlying group EBITDA margin in the range of 48% to 50%. This is despite the step-up in the TLC service fee. Turn over to capital light, highly cash-generative business with strong free cash flow generation. We have a good pipeline of M&A opportunities, supported by a strong balance sheet and debt headroom. And finally, we'll remain disciplined around the execution of the on-market share buyback, balancing shareholder return with our growth strategy. The opportunity stemming from artificial intelligence are truly exciting, not just for Jumbo, but companies everywhere. It's held a particular fascination for me since 1995, and I was fortunate to be part of the private beta for OpenAI's GPT 3 in 2020. Jumbo has always been an early adopter of technology and AI will be no different. We're already using it to improve our customer experience and retention and have more initiatives in the works. Wherever the responsible use of AI is paramount. There are many guardrails we bent place to make sure we use significant technology responsibly. So with that, I end my presentation, I'll now hand back for questions.

[Operator Instructions] Your first question comes from Matt Ryan with Barrenjoey.

Just a question on Slide 11. You've given some financial criteria around a few things like EBITDA margins and the idea that you want your target to be profitable. In the past, you've sort of given some numbers around the potential TAM of what you think offshore markets represent. Just trying to sort of marry those 2 things together and to try to work out what your addressable market is for M&A. And if you could just comment on, I guess, the speed at which you're acquiring businesses at the moment? And just any color on whether you're seeing opportunities in the market? Are you, I guess, a bit more cautious on doing deals at the moment? Are there just deals that just haven't sort of fitted nicely into this criteria. Any comments on those sort of things would be great.

I'll comment on the pace of our M&A and then hand over to Dave, Jatin for further comments. But look, we would have liked to move a bit faster on the M&A front. But it's worth pointing out that the first 3 companies that we bought were all about market entry. We now have that in the U.K. and Canada. So what we're really looking for now is more of a synergistic type of company. So we are just making sure that we -- that there is a good fit with our existing businesses, and our existing culture, and that the turns are ideal for us. But rest assured, it's a priority for Jumbo, a priority for me, and we are working hard. We have walked away from deals along the way, but we do have a strong pipeline that we're considering.

I might just jump in on the TAMs. So we have voted these before. We look at a serviceable available market, which is really the part of the TAM that we can actually go after their existing product suite. We estimate that at about GBP 2 billion in the U.K. and $1.9 million in Canada, that's Canadian dollar.

And so would that TAM fit into the criteria on Slide 11, do you think?

Yes. So that TAM is actually made up of some larger opportunities, and then you've actually got a bunch of small opportunities in there. So I think we've set some criteria around some particular. As you mentioned, EBITDA hurdle that we'll be looking to clear. So if I break that down to what we specifically targeted on in the U.K., that's about half of that GBP 2 billion is what we can go after. Keeping in mind that one of the big players in the U.K. Society Lottery market is people's postcode, we're just roughly half of that.

Got it. Yes, that's what I was looking for. And the buyback comments around being a little bit slower than expected because of the jackpot environment. Can you just explain a bit more about why the jackpots are impacting your ability to buy back shares?

It just meant that earnings were lower that. And obviously, as a result of that, expected cash flow, cash flow generation was lower not as much cash available to buy back.

Okay. And just a minor one. The higher marketing costs in FY '24. I know it's only a small increase. But is that sort of just back to a normal percentage that you would expect in, I guess, a normal year of jackpots, is that how we interpret that change from '23 to '24?

Correct. We're always going to a new year anticipating a normal year. Of course, we never know if it's going to be above normal or below normal year, but we're going to expecting a normal year. In my experience, following these jackpot cycles for many years, you do get the years where you did low jackpot but they invariably get followed by a return to normal or even a good year, which is what we're hoping for.

Your next question comes from Rohan Gallagher from Jarden.

Good afternoon. Good morning, everybody. Can you hear me?

Yes.

Yes. Fantastic. An extension to the previous questions around M&A. Mike, can you talk about what the key learnings from the recent acquisitions, and therefore, what your appetite is for M&A on a go-forward basis? And for Dave, based on your balance sheet, what -- and your future free cash flow, what is your balance sheet capability for acquisition?

Okay. So the key learnings that we've had from the first 3 acquisitions, obviously, a lot of knowledge has been gained about the markets that we're in, in the U.K. and in Canada, and we're getting quite sophisticated understanding about the market dynamics. Then also the deal structure, specifically around the earn-outs. I think we can improve from what we've done in the past, and that's certainly part of the negotiations we have going forward. Just making sure that the founders are comfortable with what's required of them, but we also get significant access to the business prior to them and we can start putting on the trajectory that we need. So we're not just handing over without getting our feet under the table, so to speak. So look, I'm pleased with how the teams have picked up these new markets, how we're integrating it. A few years ago, we were pretty much just a single business company. Now we're a multi-business company, and we have things for challenges, but we're getting on top of that and [indiscernible]

And Dave, the balance sheet capacity?

Yes. So we've got the additional headroom at the moment, and you would have seen that acquisitions today to sort of they haven't been significant in terms of size. We're not talking about a $100 million acquisition or anything along those lines. So we feel that they've got sufficient capacity for the next one that comes up in the short term. And if we get another opportunity thereafter, we still believe that we've got sufficient strength in the balance sheet to take on additional debt if we need to.

And with no debt, we're able to repay, StarVale was a good outcome for us.

Fantastic. And just a follow-up question, guys, if I may. In your outlook, you're talking about margin guidance of around 48% to 50% below what was realized in '23, acknowledging the TLC higher service fee, I think people would have thought that you'd have more operating leverage through pricing, the price increases being implemented. Can you sort of unpack that to sort of what are the other swings roundabout that we should be taking into consideration, please?

Rohan, it's Jatin. I might just jump in on that one. So that underlying EBITDA margin of 48% to 50%, excluding incentives as well. You'll see on the slide. So the pricing is effectively helping us to absorb the step-up in the TLC service fee. So from 3.5% to 4.65%. And then the different movement in that equation, I guess, or just OpEx, and you heard us today talk about OpEx being less than the revenue line. So you're right, we're taking some benefit on pricing. We shared a slide that how those go on. It's still early days. We've seen some minor regression, but we'll need to give it 3 to 6 months to play out fully. But effectively, pricing offsets TLC service fee, and then it all comes out to getting operating leverage in the business and OpEx rate less than revenue and expenses.

[indiscernible] the business quite well for a return to operating leverage in FY '25 and beyond.

Okay. And I'd be remiss me not to -- I wish you all the very best for your future endeavors.

Your next question comes from Rohan Sundram from MST Financial.

Just a couple for me. Firstly, on the -- Mike, on the environment, and how would you describe player behavior now versus, say, 6 months ago? If it is looking to be a more normal environment. Would you say the player behavior is showing more normal patterns? How would you describe it?

Look, that's always the question that talked about online during a low jackpot environment. But it's pleasing to see that the player behavior and player health is still very, very strong and as expected. We often do our like-for-like comparisons, and that always points to strong player behavior. The underlying player metrics continue to be strong. The response to a large draw was the key in my mind. When the $60 million and the $100 million, and even $160 million start rolling around, player -- the response is always really strong. The $160 million was our best ever. Even the $60 million we had in June was our best ever $60 million. That then went on to $100 million in June, which gave us the big finish, and that was an excellent result. And even the recent one in August, the $100 million that we had there, again, was another excellent response. So as long as players are responding well. Despite the economic climate, despite the pricing, they still turn out the force to buy those tickets at those high levels, which is ultimately the test that we have to pass.

And next one is just around the underlying -- the like-for-like growth across Gatherwell, Stride and StarVale, I see Gatherwell revenue was down at 11%. And was it correct that I heard you say Stride and StarVale combined was up slightly...

Yes, that's right. Yes, Stride and StarVale were up slightly. Gatherwell was down, which we detected early on in the year. We made some changes. We've got some positive momentum going in Gatherwell now. We've put in 2 new BDMs where we've opened up a new area for sporting clubs to add to our local authorities and our schools. And so we're expecting a much better FY '24 out of Gatherwell.

Okay. And is that the key driver? Or is there improvement expected in the growth outlook for Stride and StarVale driving that guidance that you've given as well?

Yes. Yes. Look, we are expecting mid- to high single-digit top line growth for Stride and StarVale. Look, a lot of the focus will be on making sure that the handover happens seamlessly. Both those are on track to meet their earn-outs. We've just got to make sure that their -- that the handover happens smoothly. But we've got some positive momentum there. In Canada, in Stride, we've expanded our agreement with the Alberta Cancer Foundation. We've re-signed our contract in British Columbia, one of our new provinces there, and we even have a new province in North -- New Brunswick. There's a small deal to kick things off there. So there's no positive momentum going forward there. And same with StarVale in the U.K., we've expanded an agreement with the Alzheimer's charity that we work with, and everyone is on track there.

Thank you. Your next question comes from David Fabris from Macquarie.

Just with digital penetration in lottery, it's been stuck for, call it, 18 months now. Is that enough to call it a trend? Or how does the return to growth from here? Have you got any views? Are there any catalysts? And how do we frame that up?

Look, I'm certainly expecting it to get back to the 3 percentage points that we've been used to. Certainly, COVID had an impact, followed by the weak jackpot run. But I look towards what's happened in the U.K., where they've had a 1 percentage point growth over 1 year due to COVID after a big couple of years, of course. And then they have been returned to 3 percentage point growth, taking them from 40% to 45%. So just looking at the U.K. and just sort of general experience with the industry, I see it more as a blip and a return to 3% going forward.

Okay. That's helpful. And just so we're thinking about that lottery business, can you sort of let us know your exposure to Monday and Wednesday Lotto, I guess. They've got game changes probably coming in FY '25 and maybe the launch of Friday Lotto. I'm just trying to work out how exposed you might be to some improved volumes on the back of those leading parts?

Yes. The Monday, Wednesday game is less than 5% of that portfolio. So it's not huge for us. As the digital-only channel, we're more exposed to the big jackpotting game of Powerball and OzLotto. But we're happy to welcome any new games, and I'm sure we'll have some benefit out of it.

Got it. And just one last question. I guess I was just curious on your views on the regulatory environment. I guess, in particular, how to deal with disruptors like the lottery office. And are you seeing any impact on your business recently?

Not overall, the impact has been negligible. It had a bit of an impact on the marketing cost side of things, and they've been quite active during the low jackpots and not active during the high jackpots. Look, our position is that we'll stand by TLC and provide support for them. And even the [ news agent ] lobbying that they'll do, we'll provide help with that. But overall, we haven't seen any impact, but we have discussed with TLC and confident that they'll be able to manage it very well.

Yes. Got it. Sorry, I do have one last question. Just any update on Lotterywest and the opportunity to take on more earnings from that region?

Yes. So Lotterywest, we're still patiently waiting for the RFP. But to be able to deliver an 8% growth in the TTV during a period where everybody struggled to get any growth in the rest of the country, certainly points to the potential that exists in Western Australia. So relationship is still excellent. We're just waiting for the wheel to turn and we can get to the RFP like expected, expected towards the end of this year or early next.

Your next question comes from James Bales from Morgan Stanley.

A couple of questions on guidance. Firstly, the Managed Services guidance of mid- to high single-digit. Just to clarify, is that an organic growth rate? Or does that include the annualization of StarVale?

That's an organic growth rate, James.

Okay. Great. And is there any reason not to interpret the 22.8% as your best estimate on take rate for FY '24?

Yes. Look, I think that's a fair assumption. But like we said, subject to jackpot and portfolio mix. But when you apply a new pricing jackpot in '23 and you use that mix, that's what you end up with.

Okay. So that number is based on the FY '23 mix with a lower than trend Powerball sequence?

Yes, slightly lower than '22, correct.

Yes. Okay. And given the uplift in take rate relative to the service fee, I'd just like to go back to that earlier question on how we should understand the expected OpEx uplift in order to restrict the EBITDA margins to 48% to 50%. Can you help us understand what are the cost buckets that are going to grow to sort of inhibit that margin expansion beyond 50?

Yes. I have to jump in.

Yes, that's fine.

Sorry, James, that 48% to 50%, as I said to Rohan earlier was excluding incentives. And you can see why we did that because we benefited a roughly $1 million in incentives in FY '23. I guess what's driving that is, look, there will be a little bit of headcount growth. We're expecting a few roles in the plan. But really, we've given our teams a zero-sum budget. If you want to put someone on, you need to find that within the existing budget. Marketing is obviously the other factor. And we spent Lottery Retailing marketing costs to be back in that 1.5% to 2% range, given the normalization in jackpot. And I guess we have had some increase on the employee side, just on the KMP. And you'll see that in our Rem disclosures that we've released today, there is an increase over there as well. And the rest of the spend really comes in tech costs. Our SaaS team and Chief Operating Officer have some sites new software that will be flowing through, and then the rest just corporate costs. We are seeing an increase in insurance for the group as we get bigger and also audit fees. Hopefully, that gives you enough color.

Yes, that's great. And then in terms of CapEx for next year, can you give us a steer on what we should be expecting there?

James, it will be pretty much in line with what we've seen over the last 2 to 3 years, which is around that $6 million, $6.5 million.

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