Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive half year results briefing. [Operator Instructions] I would now like to turn the conference over to Mr. Veverka, 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 by our CFO, Jatin Khosla, to present our first half 2024 financial results. Turning to the key highlights for the half. While first half lottery retailing TTV was 3% lower than the pcp, which was a tough comp and included AUD 160 million record Powerball. Revenue was up 11.5%, mainly due to the pricing changes implemented in May 2023. The first half also saw record TTV from non-TLC products as we gain traction in this area. SaaS continues to perform well, and it was great to see Lottery West achieved an 18% TTV growth, which doesn't include the recent AUD 200 million Powerball. I'm pleased with the momentum we have achieved in Gatherwell as it returned to growth and achieved 6 consecutive months of record ticket sales. In Canada, we appointed Marina Avisar to the role of Stride President in December. Marina brings a strong technical product and transformational background and has over 20 years of experience across many technology organizations. The cost line benefited from lower marketing costs in the period, but was more than offset by continued investment in automation, AI and data analytics capabilities. The balance sheet remains in good shape and provides flexibility to drive further growth. We also took advantage of some market dislocation and brought back around AUD 600,000 worth of shares. Moving to the numbers. Group TTV and revenue were up 16% and 18%, while underlying EBITDA and NPATA increased 16% and 15%, respectively. First half '24 benefited from a 6-month contribution from StarVale relative to [only 2] months in the pcp. The lower underlying EBITDA margin of 47.6% primarily reflects the step-up in the service fees paid to the Lottery Corporation and the lower margin profile of the other businesses. Free cash flow was up 24%, and the Board declared an interim fully franked dividend of AUD 0.27 per share, up 17% on the pcp. Moving on to lottery retailing. Online sales of lottery tickets increased 120 basis points to 39.6%. It is pleasing to see a resumption in growth post COVID. There were 28 Powerball and OzLotto large jackpots in the first half with the average value per jackpot down 14% to AUD 35.7 million. Unfortunately, after the AUD 100 million Powerball in August 2023, Powerball did not exceed AUD 60 million for the remainder of the half. Having said that, it was pleasing to see OzLotto Jackpot to AUD 90 million on Boxing Day, its highest level in over a decade. This was our best ever OzLotto draw. Moving to the next slide. This is our usual chart showing our track record of delivering consistent growth. The lower number of new and active players in cost per lead were purely a function of the jackpot environment compared to the pcp where the second half got off to a great start with the AUD 200 million Powerball. The light blue bar on the right-hand side shows the impact after over 6 weeks. Moving to SaaS, where active players in TTV were up 17% and 16%, respectively. On Lottery West, the channel continues to perform in line with our expectations with 18% growth versus the pcp. We're pleased to extend the Lottery West SaaS agreement for another 4 years from November 2023 and continue our jointly funded marketing program. While we anticipated Lottery West to issue an RFP for the central gaming system by now, our understanding is Lottery West are in the process of finalizing the RFP framework, but we are unclear of the exact timing of its release. Looking ahead, we have observed increased activity across the domestic lottery ecosystem, which is encouraging. Moving to Managed Services, which principally includes the contributions from Gatherwell, Stride and StarVale. This segment has grown from approximately AUD 2 million in revenue in FY '20 to over AUD 23 million on a pro forma basis in FY '23. The businesses we have board are generally well established, also led family-run businesses that have long-standing relationships with their charity clients and a healthy number of active players. While we expect these businesses to continue to grow at mid- to high single-digit rates over the short-term, we see a significant long-term opportunity based on digitization and our ability to leverage our lottery platform to meet our clients' needs, leveraging our lottery management expertise, in particular, our ability to grow lottery programs, new propositions, supporting both client-owned and Jumbo lottery programs, revamping the U.K. operating model, including clearer accountabilities for business performance and bolt-on acquisitions to drive scale and access new clients and/or capabilities. I'll now hand over to Jatin to take you through the financials.

Thanks, Mike, and good morning, everyone. Starting with the usual EBITDA overall, where underlying EBITDA, excluding the contribution from StarVale was up 11.1%. StarVale completed on 1st November 2022 and hence, the pcp only recorded a 2-month contribution. The main driver of the increase was the strong revenue uplift in lottery retailing, partially offset by the step-up in the TLC service fee and higher operating expenses. Stride EBITDA was approximately AUD 1.1 million lower than the pcp and a drag on the overall margin. I'll cover the Stride performance in more detail later in my presentation. The underlying EBITDA margin, including the contribution from StarVale was 47.6%. Turning to the segments and starting with Lottery Retailing. Overall TTV was down 3% on the pcp as a result of the relatively unfavorable jackpot run and strong comp, which included the AUD 160 million Powerball. Pleasingly, charity TTV was up strongly, given our focus on this channel and the launch of new products. Despite lower overall TTV, revenue increased 11.5%, reflecting the benefit of pricing changes announced in May 2023 and the higher charity contribution. The 33.7% increase in EBITDA reflects strong revenue growth and lower marketing expenses, partially offset by the step-up in the TLC service fee. Moving to SaaS, where TTV and external revenue was up 16% and 14.4%, respectively, the slightly lower revenue margin reflects the revised license fee structures under the extended Mater and Lottery West SaaS agreements. The EBITDA margin fell to 60.5%, mainly due to the 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 a full 6-month contribution from StarVale relative to only 2 months in the pcp. Pleasingly, Gatherwell EBITDA was up 36.6%, reflecting good operating leverage following management actions to sharpen focus and right-size the business. The Stride result was disappointing with EBITDA down significantly on the pcp. The main drivers of the shortfall reflect a AUD 620,000 media expense accrual that relates to an FY '23 client campaign that should have been expensed in the prior year, in line with the revenue recognized. It's worth noting that the Stride's second and final earn-out has been adjusted to reflect this item. And as a result, AUD 714,000 of the estimated earn-up was released and recognized as a fair value gain in the P&L. This benefit, however, is removed in calculating the group's underlying EBITDA. There was a further AUD 280,000 relating to audit and compliance and software development expenses. Adjusting for the media expense would result in EBITDA of around AUD 1.1 million and an EBITDA margin of 26%. StarVale's performance was in line with our expectations, noting there is some seasonality in the business with December reflecting the peak in activity due to a number of Christmas draws. The Managed Services performance also benefited from positive FX translation effects, and I've included the equivalent numbers in local currency in the appendix. Moving now to OpEx. Underlying OpEx, excluding the contribution from StarVale increased 4.4%, with higher employee and technology costs, partially offset by lower marketing and corporate costs. The increase in employee cost reflects a combination of, firstly, a slightly higher headcount versus the pcp. Secondly, the effect of higher salaries from annual pay increases and new or replacement roles at a higher rate; and finally, a higher STI accrual. Technology costs are up 69% on the pcp but only 25% on 2H'23. The higher spend mainly reflects increased license fees and investment in data management and analytics tools as well as the higher software development spend I mentioned in Stride. Corporate costs were lower, mainly due to lower share-based payments, reflecting the termination of some long-term incentive schemes, which did not [rest] and the release of reserves in relation to forfeited rights. Going forward, we do expect FY '24 headcount to be modestly higher, while we continue to invest in our engineering, product and growth teams, including Mike's AI initiatives. Turning now to the balance sheet, where we have restated the 30th of June 2023 numbers to reflect the final acquisition accounting for StarVale. We continue to maintain a strong position, underpinned by the organic cash generation of the business. The Board has declared an interim fully franked dividend of AUD 0.27 per share. This reflects a dividend payout ratio of 84.3% of statutory NPAT at the top end of our targeted range. As of 31 December, we have purchased AUD 3.2 million worth of shares as part of our ongoing share buyback. We will maintain a disciplined approach to the buyback with the timing and number of shares to be purchased dependent on the prevailing share price and alternative capital deployment opportunities. And finally, turning to our usual cash flow order fall where the cash-generative profile of the business is clearly evident with a free cash flow of AUD 31.7 million and greater than 100% cash conversion. The overall cash balance benefited from the timing of large jackpots, in particular, the AUD 90 million OzLotto on Boxing Day and the fact that our payments to TLC are weak in arrears. Even adjusting for this timing effect, cash conversion remains above 100%. On the right-hand side of the chart, on a pro forma basis, I've shown the impact of the interim dividend payment, which will be paid on 15 March as well as the additional AUD 45.5 million of undrawn debt facilities. I'll now hand back to Mike.

Thanks, Jatin and congratulations on your full appointment as CFO. On conclusion, first half '24 adds yet another important marker to a strong track record of revenue, earnings and cash generation, allowing us to deliver a strong AUD 0.27 per share fully franked interim dividend, up 17% on the pcp. The AUD 200 million Powerball earlier this month has given our second half and the full year a tremendous boost, not only in ticket sales, but also active customers and new customer sign-ups were at record levels. These new customers will be key to making sure it's not just a short spike, but a longer, more sustained sales [fund]. While the ticket sales are impressive, I stop short of calling it a success. The unprecedented customer traffic did cause some capacity issues in the final hour of the draw, breaking our 5-year streak of no capacity issues. The issue was quickly diagnosed the settings in our database layer, which has since been fixed. However, there just wasn't enough time in the final hour to reboot the service. While this is disappointing from a customer's point of view, we acted quickly and refunded affected customers. This was equivalent to approximately 2% of the sales for the draw. So while the overall result was certainly impressive, it could have been better, and our team is motivated and ready for the next AUD 200 million draw. Turning to the outlook for FY '24, which is unchanged from what we said in August. We expect Lottery Retailing marketing costs to be at the higher end of our 1.5% to 2% range of TTV for the full year, depending on jackpots. For example, we are well above this range in the first 2 months of this calendar year when we saw the record AUD 200 million Powerball and marketing was very active. As I have said before, we are comfortable investing aggressively when jackpots are favorable, given the revenue and cost dynamics of new players. The important point to note is given we typically recover our acquisition spend around a 5 to 6 month mark, we won't see the full benefit of this spend in FY '24. As the service fee will now stay constant until 2030, we are focused on generating strong operating leverage while also lifting our investment in product innovation and marketing and initiatives such as Daily Winners and Splash for Good. Relative to FY '23, we continue to expect a higher Lottery Retailing revenue margin following the price changes implemented in May, subject to jackpots and portfolio mix. Looking at our acquisitions in aggregate, we continue to target mid- to high single-digit revenue growth on a like-for-like basis with continued investment to integrate and drive growth. The long-term goal is to progressively introduce technologies to leverage the active player base and improve the yield per player. At the group level and excluding the impact of incentives, we expect to see revenue growth outpace operating expense growth, 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. Jumbo is a capital-light, high cash-generative business with strong free cash flow generation. We have a good pipeline of M&A, supported by strong balance sheet and debt capacity. And finally, we will remain disciplined around the execution of the on-market share buyback, balancing shareholder returns and our growth strategy. I just wanted to quickly recap on our trajectory over the last few years and how we continue to diversify our business. In 5 years, we have almost tripled the revenue of the group, added new revenue streams in SaaS and Managed Services equivalent to 23% of group revenue. We've broadened our focus from purely government lotteries to government and charity lotteries with the latter now representing just over 20% of group revenue. We've broadened our footprint globally to almost 20% of revenue coming from overseas. And we've reduced our dependency on TLC with 26% of the group revenue stemming from non-TLC products. We do remain focused on growing a lot of retailing with our main partner, TLC, but also diversifying with the goal of making our nascent businesses rival that of Lottery Retailing. And finally, I'm excited to share our latest initiatives to boost player engagement and retention in Lottery Retailing. We believe there's huge opportunity to evolve our value proposition and build on the ease of use, convenience and exceptional player experience that Oz Lottery is known for. Our customers consistently tell us they want to win. In response, we've launched the Daily Winners loyalty program exclusive to Oz Lotteries. Our goal with this program is simple, to provide our players with the excitement of a chance to win every single day of the year. And while it's still early days, the feedback on the program has been very encouraging. Another initiative, Splash for Good, stands as a pioneering venture in the market. This innovative feature triggers new draws when a current draw sells out or concludes, ensuring multiple daily draws each with a guaranteed winner. On the day of the AUD 200 million Powerball, for example, we ran 24 draws. The mechanics mean participants can win a AUD 500 promise while contributing to a good cause. In just a few short months, Splash for Good raised around AUD 250,000 for our pilot charity partner. These programs are key to keeping player engagement high during live jackpot weeks, which benefit both TLC and charity game sales. So with that, that ends my presentation. I'll now hand over for questions.

[Operator Instructions] The first question comes from Ben Wilson at Wilsons Advisory.

I just have 2 questions. Firstly, relating to active player numbers. It looks like you picked up around 82,000 new players in the run-up to the AUD 200 million Powerball draw, which is encouraging. Just wondering if you can comment on what your player acquisition looks like in the AUD 90 million OzLotto run and whether those new sign-ups have largely stayed as active players since then.

Yes. So the AUD 90 million OzLotto was our biggest OzLotto draw. And it worked extremely well for our customer acquisition point of view. And considering that, that happened on Boxing Day and the AUD 200 million only happened a month or 2 months later, those active players went on to play the AUD 200 million. So yes, the OzLotto was very strong with acquiring new customers. As I've mentioned before, we do tend to perform quite well with OzLotto because of our name of lotteries, especially with Google searches, and it certainly helped us this time around.

The second question relates to the Managed Services segment. It was great to see TTV and revenue growth sort of firing back up there. Just a couple of questions on Stride. Firstly, well done on receiving the Ontario approval. Just wondering what the client acquisition pipeline looks like in that province. And then second part is just on returns. The revenue margin did decline a little bit, a couple of percentage points with Stride and obviously, a bit of noise around the expense line. Just wondering what we can expect on the revenue margin going forward and with great investment you're looking to make there when we can expect a return to sort of roughly maybe EBITDA margins of 40%, if so?

Yes. Ben, I'll take the first part of your question. You're right. We did a lot of work through the financial year in getting all of our approvals in Ontario, the biggest province in Canada. So all the heavy-lifting has been done, we now then have to go after the clients, and we weren't able to start until we actually had all the approvals in place. We have just participated in an RFI, which we expect an RFP to come out pretty soon and the pipeline is slowly building. We do have at times hopes for the province. Marina, the President that we've appointed there actually lives in Ontario. So it should give us a pretty good head start. So we're pretty confident about it, but the deal cycle does tend to be pretty long with lotteries. It takes a while before the large organizations come to the market, but they are keen to diversify into new suppliers such as us. So over the medium term, we're quite confident the Ontario will [indiscernible] quite a bit.

Yes. Ben, I might just jump in on the numbers. So look, I mean, clearly, with a disappointing EBITDA results and as you mentioned, there's some noise in the numbers. I would expect the revenue margin to be broadly similar to what plus/minus a few basis points. But on the EBITDA margin, I will expect a slight improvement just given the way some of the timing of the revenue and key campaigns run, but we'll still be below what we reported at the full year, which I think was around 36%. So around 30% level is probably where I'm thinking, a slight improvement from 1H, but still below FY '23.

I might just add on Stride. It's not uncommon that these businesses do hit a bit of turbulence as they come under our management. We certainly saw that with Gatherwell, but given enough time, we managed to get in there and we've turned Gatherwell around, and we expect to do the same with Stride.

The next question is from David Fabris of Macquarie.

Look, first question, just the outlook comments with lottery retailing marketing costs as a percent of TTV. I heard Mike's prepared remarks. But to be clear, should we be skewing this to the high end of the range, so around 2% in FY '24, given the spend that you've done in the first 6 weeks of the second half?

Yes. I think that is right. I think -- obviously, it depends on what jackpots too between now and the end of June. If there's not a lot of jackpots, then it will trend down. But I think that would be an abnormal case. Even just an average run of jackpots between now and the end of June will bring us in at the top end of that 1.5% to 2% range.

Okay. And then I guess, as we think about the number into FY '25, should we kind of be plugging in 1.75% the base case and flex that depending on jackpots or should we start at the 1.5% number and flex depending on jackpots.

I think the midpoint of the range is reasonable, David.

Okay, clear. And then look, just on M&A, I feel like we've been teased for a while around a possible transaction. I can see in the deck today, you've disclosed your process very clearly. Are you able to talk about the M&A pipeline and how you're seeing things and any potential transactions, for example.

Yes, point taken, David, I know it's taken a bit longer than even I would have liked. But that's how it goes in these markets. We're dealing with founder-led family businesses that generate quite a bit of cash. So from a founder's point of view that they're sitting on cash generating businesses. There are no hurry to let it go. But they understand the long-term implications if they don't. So look, all I can say is we're still working on it extremely hard. It does take up a lot of my time. We will make sure we're going to get the right pick. We've got to make sure that we learn from the first 3 and that the next ones are an improvement. We certainly have learned from the first few ones. You've probably noticed in the results somewhere that there has been spent in this arena. So we have been active. Yes, look, that's what I can say, we're trying very hard, and we do expect something to come out of it, but very hard to put a time frame around it.

And look, one last question from me. Can you just remind us of the skew of your lottery retailing business to the lottery products? I'm just wondering with the launch of Weekday Windfall, which includes Friday lottery in May by the Lottery Corp. Do you expect to get any benefit from that or are you kind of more skewed to the jackpot products?

David, it's Jatin. So obviously, skewed more towards the jackpot products. If you look at the big 3 games, that's roughly 90% of our portfolio. Looking at Monday Windfall, that's about 3% of the portfolio. So it's not overly material in the scheme of things but hopefully incremental going into '25.

Next question is from Rohan Gallagher at Jarden Group.

Jatin, congratulations on your full appointment. A question in relation to the lotteries. What have you seen regards the customer retention following the Powerball price increase? In other words, have you seen any degradation post that? And is there possibilities of further flex going forward with OzLotto, for example?

Rohan, thank you for your good wishes. So we have put a slide in the presentation. I think that shows effectively the regression that you're talking about on the AUD 20 million Powerball. Look, what I'll say was it's been pretty healthy. Probably up until November, we did see some slight degradation in December, and we attribute that to the stronger OzLotto run. So I think on a -- where we're at, at the moment is we saw about a 1.6% regression in ticket sales. I would say that was probably flat to slightly positive up until November and then we had that weaker December because of OzLotto. So more or less in line with our expectations.

And you mentioned sometimes the margin can skew because of product mix. Can you just sort of comment around the profitability of the respective jackpots versus the sort of group average? I just won a Powerball obviously, the major [culprit].

Yes. I think we've said that obviously, Powerball and OzLotto of some of our lower-margin games. And what we saw in the first half is Powerball and OzLotto were a significant part of the core portfolio, probably a bit more than it was in FY '23 and also first half 2023. If you look at the Oz Lotteries performance, the margin is around the 22.4% level, just exactly where I thought it would be just given the lower margin profile of OzLotto and Powerball. Where we got the kicker was on the charity side. So you would have seen that's grown at about 40%. We've got some new products in there. Obviously, charity has performed better for us as well and the margins in the low 30s over there. So that's what really drove the 22.7% overall lottery retailing margin.

Next question is from Rohan Sundram at MST Financial.

Just a couple from me. Firstly, just going back to that question on customer retention, especially during the -- post the AUD 200 million draw, was there anything that surprised you around the retention? And thank you for the disclosure on that Slide 19. I just was keen to understand how does the retention compared to what you've seen in previous mega jackpot runs or mega jackpots.

Maybe a little bit too early to conclusively comment. But look, it wasn't ideal that the Powerball got stuck at the AUD 4 million level. So I think it was 3 weeks. But I do know it has kicked on after that. So we'll be trying to reactivate a lot of those players that we got in during the AUD 200 million one. But this is exactly why we're trying to come-up with innovations like the Splash for Good and things like that, which key people need. And yes, AUD 500 is not the same as AUD 200 million. But it does, if there's a winning feeling, keeps people engaged and we're seeing people do that. So here we just have to see how the jackpots go over the next month or 2. Ideally, a nice good run in one of the games of the idea just to reactivate some of those players. But failing that, I think we're sort of quickly building on tools that we've -- in our own arsenal that we can use to keep them active.

Okay. And when the Friday Lotto product is launched in May, will you have immediate access to resell that or will there be a -- is there a time lag?

No, we'll have immediate access to that. We've been working on that already.

The next question is from James Bales of Morgan Stanley.

So I just wanted to understand a bit more about your expectations for the Stride business within Managed Services. So you have called out some moving parts there, but there was a massive differential in TTV growth versus revenue. What is your expectation for that TTV growth profile, the take rate and how that flows through into profitability going forward?

So look, like I said to Ben, I think we're expecting a modest improvement in the second half, and that's really driven by the timing of key initiatives, so revenue initiatives. But look, there has been some cost that's gone into that business. I talked about some compliance costs and some software development costs. I do expect the revenue margin to be similar to where we are at the first half. But I am hoping that given the way some of the campaigns fall, we will see a slight uptick in the EBITDA margin. So 25%, I agree, is obviously disappointing. But if you adjust for that one-off item that I spoke about, which is the media expense accrual, you immediately get that AUD 600,000 benefit that would come through. But clearly, that will still impact the full year. But our expected EBITDA margin for the full year to be in that 25% to 30% EBITDA range.

Okay. And should we expect that the operating expenses run rate of AUD 2 million for the half is what the go-forward cadence should look like?

Yes. I think so. Like I said, there might be a little bit more cost that goes in there. We're making some changes in that business. Like Mike mentioned we've got Marina who's joined, and there will be a few changes, maybe some additional resources that go into that business. So a slight uptick perhaps on the employee cost side of things.

Okay. Got it. And then maybe just on the SaaS side. Can you help us understand the reason for the lower take rate there? And why the step-up in OpEx and what should be extrapolated there in the second half?

Yes. So there are a couple -- I mean, there's a few factors over there. I guess from a TTV perspective, the first half is probably a good proxy for the second half. There's a little bit of timing in there withdrawals for key clients, Mater, Endeavour. I do expect some pressure on that revenue margin. So 4.4% is what we reported. I think it will be slightly lower than that for 2 main reasons. One, you'll know the Lottery West extension that we announced back end of last year. There's a slightly slower take rate over there. I think it's 8% up to AUD 35 million and then 9% above. And also, we've seen some really strong growth in Mater. And as we announced when we did the renewal, there's a new tiered structure over there that benefits from the scale of Mater. So there will be some downside pressure. So I expect that 4.4% margin to come in a little bit lower at the full year, just given those dynamics. And then the other factor, I guess, I mean, keep in mind, SaaS the inter-segment fee was lower for SaaS given the contraction in lottery retail in TTV. So that was a drag on the overall margin. But we did see higher employee costs and technology costs in that segment. So the employee cost mainly related to additional people that I talked about. And then the tech costs, I think we mentioned on the call as well, data management, analytics and also some AI expenditure. So that's what's driving that reduction in the EBITDA margin.

Okay. Got it. And then maybe 1 more question on some of the retention amongst your customer base. So with these new initiatives that you've got in terms of Daily Winners and Splash For Good, the customers that have taken up either of those products, are you able to help us understand the retention differential you're seeing and the average change in spend from those cohorts versus the rest of the base?

Yes. Look, the Daily Winners is more of a loyalty program, and we are seeing some numbers that indicate that people that sign up to that and it's free to sign up, do on average, spend a lot more than those that don't. So it is indicating increased activity. The Splash For Good game is actually a purchase game that cost AUD 2 to buy. And so it's a lot easier to manage the benefit or to see the benefit on that. And look, it's only been in the market for a few short months. But again, that's showing some pretty early signs. So really with those 2, and we've got some more ideas as well brewing in the background. If these continue to perform well, then we may even expand them out of service as time goes on.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Veverka for closing remarks.

Thanks everybody, for your time. That concludes the presentation. And any questions, please don't hesitate to contact us. Thank you all.

That does conclude our conference for today. Thank you for participating. You may now disconnect.