Jumbo Interactive Limited (JIN) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Jumbo Interactive FY '24 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Veverka, CEO. Please go ahead.

Good morning, everyone, and welcome. Let me begin by acknowledging the traditional owners of the land in which we meet and pay our respects to all Elders past and present. Today, I am joined by our CFO, Jatin Khosla, to present our financial results for FY '24. First up are our key highlights. What a year. The first half started slow, but the second half really accelerated, and we break several records. In Lottery Retailing, while we had a strong jackpot run in the second half, with nearly 1.1 million active players, it's the innovation, positive engagement and customer experience that contributed to the strong results, along with pricing and product changes we implemented in May '23. Our SaaS segment continued the positive momentum with new partnerships with the RSPCA MS Queensland, along with a 4-year extension to our Lotterywest partnership. With the growing business, we've had to really manage our cost base. We've done a great job finding the right balance between cost efficiency and reinvestment for growth. Turning to capital. We've increased our dividend by 27% and have entered into a new debt facility, which Jason will talk about later in his presentation. This really sets us up for growth. We remain disciplined around M&A and will only enter into transactions that fit within our strategic growth plan. We're extremely close to finalizing acquisition in May this year, having favorably concluded extensive due diligence and agreeing material turns. Unfortunately, prior to signing the [ SPI ], the vendor wanted to renegotiate the agreed terms, and we're not prepared to go down that path. Although disappointing, it's important that we remain disciplined as there are a number of opportunities that we are assessing. Moving to the numbers. We've had significant growth across all key metrics. In 2019, we announced our $1 billion vision. And 5 years later, I'm pleased to announce we've cracked that. While it is later than we predicted, I always knew it was a matter of when, not if, this milestone would be reached. Group TTV and revenue were up 24% and 34%, while underlying earnings and profit both increased by 31%. The underlying earnings margin of 48.1% primarily reflects the impact of the higher service fee percentage paid to the Lottery Corporation which will stay flat for the rest of the contract. Free cash flow was up 14%, highlighting the strong capital generative nature of the group. Looking at our FY '24 report card, it's green ticks across the board, but a couple of strong outcomes worth calling out. One, achieving an underlying earnings margin, excluding incentives at the top end of the expected range and improved Lottery Retailing revenue margin following the pricing changes in May '23. Looking now at our Lottery Retailing segment in more detail. FY '24, there were 55 Powerball and Oz Lotto large jackpots, which is a record. This included a record $200 million jackpot, $250 million, $300 million, and the record $90 million boxing day Oz Lotto draw. Looking at the 12-month rolling average graph, you can see that the last 2 towers have benefited from this jackpot run in the second half of the year. The blue cells, which are the TTV from jackpots under $15 million were flat due to the positive skew to larger jackpots. As Powerball and OzLotto revolved and we see more larger jackpots, we'll need to revisit the $15 million threshold. The key metrics that drive our Lottery Retailing business remain robust and underpins solid growth. Digital penetration increased to 40.9%, up 250 basis points, underpinning the general trend to digital, which is in line with our expectations. New players are up 41% to 224,000 with active players, up 19% to over 1 million players along with healthy average spend in revenue. The interesting trend here is that the asset players are going up 19%. Average spend is going up 7%, where the average revenue per player is growing at a faster rate, 13%. This highlights our focus on margin. Moving to Software as a Service, where positive momentum continues with TTV and active players up 19% and 27%, respectively. On Lotterywest, we are pleased with how the channel is performing with 26% growth, but with room for improvement in the year ahead. We remain in a good position and await the release of the RFP. Our charity partners increased TTV by 17%, highlighting the effectiveness of our software platform. We welcome RSPCA and MS Queensland and look forward to helping them transform their lottery programs. Moving to managed services, where the transition to new leadership is complete. Tam and Marina have joined and support their enthusiasm and fresh perspective. They both report directly to me. I'd like to take a more active role in the development of our U.K. and Canadian business. I just returned from Canada, where I work closely with Marina on Stride's strategy and potential M&A opportunities. I'd like to emphasize that we've done a great job digitally transforming Australian charity lotteries. We want to do the same in the U.K. and Canada. This digital transformation will underpin growth in those regions. So I'll just now hand over to Jatin to take you through the financials.

Thanks, Mike, and good morning, everyone. I'll start my presentation with the usual underlying EBITDA waterfall where I've removed the impact of StarVale, which contributed only 8 months in FY '23. Underlying EBITDA was up 30%, driven by strong uplift in revenue, particularly in Lottery Retailing. This was partially offset by the step-up in the TLC service fee and higher operating expenses, which I will cover on the next slide. The group underlying EBITDA margin was 48.1%, with the Australia and managed services businesses achieving underlying margins of 52.2% and 26.4%, respectively. Turning now to cost management. Underlying operating expenses, excluding the impact of StarVale grew 26%. There are all key items I'd like to highlight. Firstly, a 76% increase in marketing costs. As a result of the strong jackpot run and player engagement, the benefit of this spend will flow through in FY '25, given the average payback period is around 6 months. Secondly, a 12% increase in employee costs, reflecting the effect of modestly higher headcount, annual pay increases and the effect of higher salaries for replacement roles. Thirdly, a $1.4 million increase in employee short-term incentives, given the strong FY '24 net profit after-tax performance. The impact hurdle in FY '23 was missed, and hence the pcp amount was significantly lower. And finally, the 42% increase in technology costs reflects increased software license fees, continued investment in data, management and analytics tools and higher software development spend in Stride. Turning to the segments and starting with Lottery Retailer. Overall, TTV was up 21% on the pcp, reflecting the favorable jackpot run, strong player engagement and a significant increase in charity TTV. But even strong the increase in revenue of 35% reflects the benefit from the pricing and product portfolio changes implemented in many last year as well as product mix. The 40% increase in EBITDA reflects good operating leverage despite the step-up of the TLC service fee and the increase in marketing spend as a result of the favorable jackpot run. Moving to SaaS, with TTV and external revenues were up 19% and 16%, respectively. The slightly lower external revenue margin of 4.3% reflects the revised license fee structures under the extended Mater and Lotterywest agreements. The 70 basis point reduction in EBITDA margin was due to higher employee and technology costs, which I spoke about earlier. Moving on to Managed Services, where we have operationally consolidated Gatherwell and StarVale into the U.K. business and separately shown Stride, our Canadian operations. The strong U.K. performance reflects a solid performance in Gatherwell and an additional 4 months of earnings from StarVale relative to only 8 in the pcp. Stride's underlying EBITDA was approximately $1.1 million lower than the pcp. The main drivers of the shortfall reflects timing of revenue and cost of sales recognition as previously flagged at the interim results. And some churn across the client base as the team reevaluate contracts across the lottery value chain. Overall, this segment achieved an underlying EBITDA margin of 26.4%, with the reduction on the pcp mainly due to the increased investment to drive future growth. This was partially offset by positive foreign exchange translation effects. Turning now to the balance sheet. We will continue to maintain a strong position with available cash of $61 million. I'm pleased to announce that we have successfully refinanced our existing debt facilities via a new financing package with our existing lender. The new unsecured facility includes a $50 million committed facility and a $30 million uncommitted accordion and reflects improved pricing and terms. This brings our funding arrangements more in line with other listed corporates and provides incremental flexibility and liquidity to support our growth strategy. The Board has declared a final fully franked dividend of $0.275 per share, which combined with the $0.27 per share interim dividend, this translates to a total FY '24 fully franked dividend of $0.545 per share and a payout ratio of 79.2%, which is towards the upper end of our targeted range. As of 30 June 2024, we have purchased $3.2 million worth of shares as part of our ongoing share buyback. The slower-than-expected pace of the buyback was driven by the potential M&A activity that Mike spoke about earlier. Moving on to the usual cash flow waterfall for the cash-generative profile of the business is clearly evident with a free cash flow of $54.1 million and greater than 100% cash conversion. On the right-hand side of the chart, on a pro forma basis, I've shown the impact of the final dividend payment as well as the available funds from the new debt facility. Before I hand back to Mike, I just wanted to touch on our capital management framework. We are committed to maintaining prudent capital management framework that supports our growth strategy while maximizing shareholder returns. Our dividend policy remains unchanged. We will continue to target a dividend payout ratio in the range of 65% to 85% of statutory NPAT. While the new debt facility gives us good capacity to fund strategic growth opportunities, the dividend policy range provides flexibility to repay debt, while maintaining a satisfactory dividend yield for shareholders. Excess cash flow can then be used to fund investments in growth, both organic and M&A opportunities or return to shareholders via our on-market share buyback. I'll now hand back to Mike.

Thanks, Jatin. So in conclusion, FY '24 adds give another important market to our strong track record of successfully growing revenue, earnings and cash. It was also pleasing to declare full year dividend, which is 27% higher than last year. The trend just keeps on going up. Turning to the outlook for FY '25. Following the strong year is a challenge. However, I recall back in FY '20 when we grew revenue 9% when adjusted costs declined 20%. So with our Australian business, we are targeting underlying EBITDA margin between 51% and 53% by focusing on growth and expanding operating leverage. We've assumed fewer jackpots than FY '24 in our targets. Product mix will continue to affect the revenue margin. And I note that plans are underway to refresh [ Sade Lauda ], which is a material part of our portfolio. Marketing costs are expected to be in the usual range of 1.5% to 2% of TTV, subject to jackpots competition and product initiatives. On SaaS, we expect low teens, underlying TTV growth, and we continue to observe increased interest across the domestic lottery ecosystem, which is very encouraging. As we have done before, we will manage the cost base in accordance with revenue growth. Now looking at managed services, we are confident that the leadership changes will provide a solid platform for future growth. As a result, we expect an underlying EBITDA margin in the range of 21% to 23%. We remain focused on building scale and capabilities through bolt-on acquisitions and are actively assessing a number of opportunities. At the group level, we anticipate an underlying EBITDA margin in the range of 46% to 48%. Dividend policy remains unchanged. And given the strong cash position, we intend to accelerate the on-market share buyback. So I've got to where it is today by being an early doctor of technology. AI is an area that we have considerable experience in dating back many years. A dedicated AI team is using multiple large language models to enhance our products and services, pushing us further ahead of the competition. And just to show that it's not all talk, we invite you to try our Jumbo AI annual report chatbot adds the website, jumbointeractive.ai. You can ask any question about our annual report and our chatbot will provide an automatically generated summarized response. I believe the first demonstrates the technology we are building that can be applied to our lottery programs. So I hope you find it useful and the time saver. With over 1 million active players in Australia, we are focused on enhancing the player experience. Following the launch of our loyalty program called Daily Winners last year, we launched the premium tier earlier this month with exclusive prices and partnerships on offer. Splash for Good has also been a success, and we are looking to expand the offering later this year. Lastly, we're working on a brand refresh to enhance recognition and awareness of the exciting products that lie ahead. I'd like to now reflect on how we have grown and diversified the group over the last 6 years. Since FY '18, we've quadruple revenue from $40 million to $160 million. We were, at that time, a 1 customer, 1 region business. Today, 1/4 of the group's revenue is outside of the Australian national gains. We now have a global footprint in the U.K. and Canada, while continuing to grow in Australia and add hundreds of partners in the charity and government lottery sectors. This enormous growth and diversification is a great achievement and positions us for a lot more to come. So what's coming down the pipeline? One, the underlying growth of lotteries has been underpinned by changes in the demographic and game design with lotteries delivering consistent growth over the last 20 years. Two, digital penetration has increased to nearly 41% from 9% a decade ago, and we expect it to continue in line with other countries. Three, our 1.1 million active players, it's a simple philosophy. The more active players we have on our platform, the more we can engage with them and continue our growth. Four, international expansion. We've established ourselves in the U.K. and Canada. We've installed strong leadership and has set the foundations for growth. Five, we've uncovered new revenue opportunities, such as our SaaS partnerships, Splash For Good and Daily Winners premium tier. Lastly, our X-factor, a long list of innovations that keeps growing. Just as Autoplay, [ active play and apps ] kept us out of the computation in the early days, Daily Winners and AI-powered features will keep us ahead in the future. That ends my presentation. I'll now hand back for questions.

[Operator Instructions] Your first question comes from Jack Dunn with Citi.

Just the first one. On that acquisition you walked away from in May, maybe provide some details on like which geographies and maybe the TTB size of that business?

Yes. Look, it was disappointing. It was a U.K.-based acquisition that we're looking at that we've spent quite a bit of money on, and we got a long way down the path. But as I said, the goalpost changed at the last minute. And it was tempting to follow and I suppose accept a lesser deal. But we just thought no, stay disciplined, stick to our plan. It's not like we're short on other acquisitions. So we walked away from it and get our power drive for something else, which we're working on. So, yes, just 1 of those things.

Okay. Perfect. And just my next one. In the first 6 weeks of this financial year, what are you sort of seeing on the average spend per customer on a like-for-like jackpot basis compared to say, the second half of '24?

Yes, very healthy. July was relatively slow, but August has come back with a vengeance as we saw just last night with $100 million. And the average spend and the ARPU is very healthy.

Jack I might just add, I think in Slide 34 of the presentation in the appendix, we put some average TTV per draws just to show you the progression over time. And so far I think the $50 million data point is in there, it's all looking pretty resilient.

Your next question comes from Ben Wilson with Wilsons Advisory.

Just first question on Stride. Just wondering if you can talk to the -- you've guided to a reevaluation of customer contracts this year. Can you just give a sense of, I guess, the scale of the revenue downside there? And does it relate to the slightly more subeconomic contracts? And could there be upside to, I guess, revenue margin going forward once you complete that?

Look, yes, there is upside to revenue margins, but the work that needs to be done in Canada is trying to bring it out of the dark ages and into the future. And that's what we're focusing on last week when I was in Canada. We've got really good clients. They're really good partners with great lottery programs that are still stuck doing it the old way. And as a result of that, a couple of their programs have been reevaluated. However, the main partners that we have there, the Alberta Cancer Foundation, Calgary Stampede and STARS are great partners, no issues there and are open to a lot of the suggestions that we're giving them. Marina is absolutely the right person to lead the charge over there. And so I'm confident that she'll put it back on track. Just like we did with Gatherwell, if you remember, a year or 2 ago, we had to place some work together well. Gatherwell is now on the right track and growing. So I expect the same thing to happen in Stride.

And good to see Gatherwell sort of continuing to rebound there. Just turning to StarVale, can you confirm what it's, say, TTV and EBITDA growth was in constant currency in FY'24? Just obviously, the comparative period in the presentation on the 8 months, understandably for FY '23.

Yes, Ben, I'll take that. So look, it was reasonably consistent with that mid- to high single-digit revenue growth that we spoke about probably closer to the 5% level. And then the margin is a little bit softer, given some investment that we've made in the business. So those are the 2 dynamics over there.

And just lastly, if I may, just further to the question about recent Lottery Retailing performance. Can you comment on early days, but how the $100 million went last night, just noting you've got a record number of active players now. Was it, I guess, was it a strong performance off the back of those active players?

Yes. I saw some numbers this morning when I came in, and it was a strong performance better than the last $100 million. It was quite a long strength of jackpots that came through last year. So it was good that the jackpot fatigue wasn't as bad as what we thought it might have been. But it was also -- the aspect of it that was, most pleasing to me was that it happened at a time when we just launched the Daily Winners premium tier, and that really helped us launch that and got a pretty good uptake on that. The amount of number of draws for Splash for Good was also pretty strong. So it was more the knock-on effect with the gain initiatives that we've been doing. That was the best bid about it.

Your next question comes from James Bales with Morgan Stanley.

So I just wanted to circle back on managed services. Can you help us understand what changed in Canada so drastically to be guiding down on revenue that much and also on margins. And if you're still hunting for acquisitions, can you help us understand why that's still a priority if this is such a battle, especially in the early years? And how you can avoid that going forward?

Starting with your question about Canada. As I said earlier, it was some of the smaller lottery programs that need a bit of reevaluation on how it's going to work, et cetera. Marina has put together a pretty short and sharp strategy to get it back on track, which we are supporting. So it's a matter of -- take a bit of pain now for gain in the shorter term on that 1 there. So that's the way we went far than just left drag on for too much longer.

James, I might just add, look, on the revenue side. So effectively, we've seen 2 lotteries discontinued and there's an impact -- revenue impact for that that's going to flow through in '25, it's about CAD 800,000. And the point I'll make on that is -- so both of those contracts are in the fulfillment space for Stride, so Stride operates across lottery strategy, fulfillment and customer management. So both of those contracts were actually on the fulfillment side. So we didn't run the lottery strategy for those. And I guess the point we'd like to make is with Marina coming on the board, where we'd like to play is actually in the lottery strategy side. We're happy to do the fulfillment. But if we can actually get control of the lottery and drive strong lottery outcomes for our charities, we're much more of the driver seat to get some good margin accretion and growth. The second aspect to your question is, look, we have put some additional cost in that business. There have been some personnel changes. We're happy with those personnel changes. And the other factor that's impacting the cost line is we've decided to bring software development in-house. I referenced that in my OpEx walk. So we think, look, these changes give us the platform to really transform that business going forward, but I think 25% will be a year of transition.

I was just going to sort of ask about the avoidance of this going forward if you do execute on more M&A.

Look, there is -- it is part and parcel of buying a business and then trying to transform it digitally that you have to deal with the change from the old to the new. So with each 1 that we're doing, we're learning a lot more, and we're doing a lot more streamlined fashion. These first 3 acquisitions that we did a couple of years ago were pretty much to get ourselves established in these regions. And we're only sort of half done. It would be a mistake for us to stop it now. We really need to get a couple or a few more businesses in to sort of complete the picture. The picture is not quite complete. And from what we're seeing on the horizon that there is plenty to choose from. So we're okay on that aspect. But [ we're reducing ] and we're going to get these businesses without any issues at all. There will always be something to deal with, but they're not major. There's things that just come in the normal process of bringing them under our umbrella and then setting them on the right path, which is what we've done.

And then maybe just 1 other question on SaaS. Can you help us understand for your revenue growth -- external revenue growth guidance for '25. How much do you expect to come from like-for-like growth within the existing cohort versus the impact of the new customers that you're onboarding?

So James, I'd say the vast majority of that is like-for-like. So the 2 new additions in '25 are RSPCA, which you would have seen our release on that's about $8 million to $10 million in TTV. They'll come on board -- they just come on board. And then the other is MS Queensland, which is around $3 million to $5 million of TTV. The margins are slightly better on those from a revenue perspective. But that low teens guidance that we've talked about is mainly the existing cohort and includes Mater and Lotterywest.

Your next question comes from Rohan Sundram with MST Financial.

Questions pretty much answered on the Canada front. But just 1 question on the federal government's response and the review into offshore lottery providers and match lottery providers. Can I just hear your thoughts on how you saw that and will Jumbo be making a submission?

Yes, we were entirely surprised when it was announced. Obviously, we've been working behind the scenes on a few things together with TLC who are the main drivers there. So not surprised. I think I've been saying it all along that I think -- some of the other business models out there are not quite right and need a bit of work. And so I see things going in the right direction there. And we'll continue to support the industry and particularly TLC to make sure that the right business model, paying the right amount of taxes continue to shine through and that ultimately...

Your next question comes from Rohan Gallagher with Jordan Group.

Just in terms of establishing the base for FY '25, could you quantify the TTV revenue impact of the overrun following the strong jackpot FY '24 season just gone.

Rohan, it's Jatin here. Look, I think I'll just go with what's been publicly stated, I guess, I think TLC called out a $500 million tailwind from lottery. So at back at the end level on that, if you take the digital penetration of 40.9%. And I estimate our market share around the 15%, 16% mark. I think that's exactly equivalent about a $30 million [ TCV ] benefit based on those numbers.

And just from experience, I have gone through about 3 or 4 of these moments where we have a very big year, and we have to follow that up, the most recent being from FY '19 to FY '20, where FY '19 was the monster year with like 60%, 70% growth. In FY '20, we still managed respectable growth, 9% revenue given that jackpot went down 20%. So it is something that we've seen before, and it's something that we can manage pretty well. So that gives me a bit of confidence.

And just a follow-up on the M&A questions. Given Canada is likely to go into a transition year, 1 could assume that the greater focus will be on the U.K. where you'll be pursuing more synergistic versus beachhead acquisitions, is that fair?

That's certainly correct. But we are focusing on Canada M&A opportunities as well, which is something that's needed over there. While I was in Canada, I did give the opportunity to look in depth at an opportunity over there. And that's something that Stride definitely needs. We've only done 1 in Canada, and we've already done 2 in the U.K. So I'd like to see another one to get done in Canada as well. But yes, getting those synergies out of the U.K. business with potentially another 1 would -- is what we need.

And just on your strategy, Mike, from an M&A perspective, in life you tend to get what you pay for. You have a lower risk international strategy by purchase price so that if things go Australia, like they have done in Canada, for example, it's not the end of the world type thing. Is that something that you've reviewed? Or is that something you'll consider reviewing and maybe pay a higher price or a better quality business more established, et cetera, going forward?

Yes, this is something that we're reviewing. You do get what you pay for. And we knew that going in, like I said, we were just trying to establish our talk in those regions. We're very impressed with the partners that they had. We were so impressed with their operations and their technology, but that wasn't what we were buying. And hence, we didn't have to pay a lot for them. But so it comes with no surprise that we're having to fix up some of those operations and the technology that are in those businesses. But it's the charity partners that are the real value there. But yes, going forward, we don't necessarily have that much of a need for more charity partners. What we have -- what we're looking for is companies that have shown good operational ability, better technology, more growth, they're the types of synergies and the other business that would fit in what we've already established.

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