PointsBet Holdings Limited (PBH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the PointsBet Holdings Limited Q4 FY 2023 Appendix 4C investor presentation conference call. [Operator Instructions] I would now like to hand the conference over to Mr. Sam Swanell, Group CEO. Please go ahead.

Good morning, and thank you for joining our PointsBet Holdings Limited Q4 business update. I'm Sam Swanell, and joining me on the call today is our Group CFO, Andrew Mellor. Before we begin, please note the safe harbor statement. All numbers referred to are unaudited and in Australian dollars, unless otherwise stated. The event during the quarter was the sale of our U.S. business to Fanatics for USD 225 million. As previously announced, we intend to distribute capital to shareholders of approximately $1.39 to $1.44 per share. We expect the first tranche of approximately $1 to be paid in mid-September. The second distribution will be made following final close expected in the March '24 quarter. The sale marks the beginning of an exciting chapter for our company. The new PointsBet will move to a fresh phase of growth and an expediated path to profitability, building on our strong market positions in Australia and Canada, driven by our in-house technology and led by our experience PointsBet team. I'll talk more about this in a few minutes, but let me briefly review the quarter. Turning to Slide 3. Total Q4 group net win was up 19% at $102.3 million, with Australia returning to PCP growth, albeit small at 1%, Canada up significantly versus a nascent PCP and the U.S. delivering strong net win growth of 35% versus the PCP. For the 2023 financial year, group total net win was $391 million, growing 26% versus FY '22. At June 30, 2023, the company held $194.6 million in corporate cash. However, once adjusted for U.S. business sale transaction related costs, of $7.5 million paid in Q4, which will be reimbursed at the second close. Adjusted corporate cash at June 30, 2023 was $202.1 million. And pleasingly, we kept our #3 ranking in Eilers and Krejcik U.S. app testing for the fifth consecutive quarter. Turning to Slide 6 to discuss the Australian trading business. During the reporting period, total net win for the Australian trading business was $55.6 million, up 1% on the PCP. Gross win margin improved to 14.4% versus 13.3% in the PCP, with notable improvements across sports, singles and multis. The result was higher -- was slightly higher than expected due to some favorable results and as we tested different margin strategies, particularly in Racing. Continued focus on promotions efficiency led to the rate of promotions as a percentage of gross win improving to 23% compared to 30.6% in the PCP, this was enabled by tokenization, personalization and data science. Sports performance continues to offset softness in Racing. During the quarter, net win growth from AFL and NRL combined was up 200% and Tennis and Soccer combined was up 50%, both compared to the PCP. We continue to see strong sustainable performance from our mass market clients with net win from this cohort up 36% on the PCP. Improved gross win margin was delivered despite the rating softness, which highlights the positive influence of the change in client mix and multi and Sport margin improvement and penetration. Combined with the improved promotion efficiency, this delivered higher net win margin and led to less turnover that leads to more efficient gross profit margins. Before turning to Canada, I would like to make some comments around the recent parliamentary inquiry into online gambling advertising in Australia. Let me begin by saying we at PointsBet are absolutely committed to responsible gambling. We've already implemented and continue to invest in responsible gambling technology solutions that help protect our customers. These include setting deposit and spend limits, taking a break functionality and self-exclusion options. We welcome many of the changes recommended in the report by the House of Representatives Standing Committee released in June. The report sets an important framework for a very active process of consultation for all stakeholders. This includes the federal government, Racing and sporting bodies, wagering operators and media companies to land on an agreed model that reflects our shared objectives of responsible gambling and harm minimization. Ultimately, we believe this is an important area for the long-term sustainability of the industry. Our view is that with higher standards in these areas, we will see a reduction in the long tail of smaller operators that simply do not invest sufficiently in appropriate responsible gambling measures. Companies in the industry like PointsBet, the value of their reputation and are committed to high responsible gambling standards will benefit over the mid and long term. The final model across the 31 committee recommendations still needs to be finalized. But with the right intent and focus from stakeholders, we expect that the outcome will be a workable, sensible and fair solution. Now turning to Slide 7, Canada. The June quarter is quiet up for North American Sport. Within this seasonality, we were pleased to see momentum in our Canadian sportsbook and online casino offerings during the quarter. Total sportsbook handle was $ 42.5 million with strong interest throughout the NBA and NHL playoffs combined with the opening of the MLB season. Our in-play mix of total handle grew to 68% in Q4, up from 53% in the PCP as customers continue to experience and enjoy our top-tier live betting capability. Sportsbook gross win was $ 3.3 million at a gross win margin of 7.7% and sports bet net win came in at $ 1.9 million at a 4.4% net win margin. We saw another quarter of good gross win margin driven by a higher mix of parlays, and we anticipate margins staying around 7% going forward. On iGaming, we delivered $ 3.6 million in net win. Quarter-on-quarter, net win was flat as a strong performance in April and May was impacted by volatility in June on table games with some partial offset to this driven growth in slots. For the quarter, we delivered total net win of $ 5.5 million, and we finished the financial year with full year net win of $ 18.3 million in our first full year of operation. While the Ontario market is competitive, our Canadian business continues to perform well, the strength and quality of the customers that are making the choice to play on PointsBet demonstrates the effectiveness of our strategy. 12 months rolling cash actives grew to over 30,000, up 8% from Q3. Total marketing spend was CAD 5.5 million in Q4, down 22% versus the PCP as we continue to get more efficient acquiring our target customer. We also delivered key operational and technological enhancements aimed at reducing customer friction throughout the onboarding journey, which resulted in significantly improved performance of our conversion funnel in Q4. As we look ahead to FY '24, we're looking forward to delivering growth in Canada. We have a top-tier North American sports betting product, an exciting product road map and we'll continue to invest in our product and app experience for both Sportsbook and online casino. We are keeping a close eye on developments in Alberta as the recently reelected provincial government continues to consider opening up the regulated gaming market. Turning to Slide 8 on the U.S. We saw solid trading results from our U.S. business. As I've said throughout FY '23, our U.S. strategy continued to be optimized for net win growth rather than handle. We focused hard on the super user cohort that appreciates our leading product. During Q4, we demonstrated efficient monetization of retained clients post March Madness throughout the NBA playoffs and MLB regular season. Total net win was up 35% on the PCP to $41.2 million. We grew revenue PCP across both sports and iGaming. Sports betting net win was up 20% to $ 28.6 million. The improvement was underpinned by a healthy net win margin of 5.5%, which was up 2 percentage points from 3.5% last year. The superior net win margin result came from a combination of higher gross win margin and lower promotional expense. Gross trading margin was 8.2%, 2.1 percentage points higher than the PCP. Adjustments to trading strategy were ongoing throughout the third and fourth quarters. Record quarterly iGaming net win of $ 12.6 million was 9% higher than the PCP. Improved product enhancements during the quarter included Same Game Parlay Combo, where betters can combine multiple Same Game Parlays across different games. We also expanded our MLB offering produced by our OddsFactory factory platform, including in-play player props. During the quarter, we also successfully launched a PointsBet Racing App in the United States. I will now hand to Andrew Mellor to walk through our quarterly cash flow statement.

Thank you, Sam. Turning to Slide 9. As of 30th of June 23, the company held $ 194.6 million in corporate cash, however, once adjusted for U.S. business sale-related payments of $ 7.5 million paid in Q4, which will be reimbursed at the second close of the U.S. business sale. Adjusted corporate cash at the June 30, '23 was $ 202.1 million. Q4 net cash used in operating activities, excluding movement in player cash accounts and excluding U.S. business sale-related payments, was $ 28.8 million, a reduction of 51% on the prior quarter. Receipts from customers for the quarter totaled $ 105.9 million, slightly lower than last quarter. Cash outflows during the quarter included cost of sales of $ 56.7 million, in line with last quarter. Noncapitalized staff costs of $ 25.8 million was slightly lower than Q3. Marketing cash outflow of $ 36.1 million was 68% lower than Q3 and administration, corporate costs and GST paid on Australian net win of $ 24.9 million was higher than Q3 due to the U.S. business sale-related payments as previously noted. Net cash used in investing activities during the quarter ending June 30 was $ 11 million, in line with Q3 and $ 1.5 million cash was used in financing activities also in line with Q3. H2 FY '23 net cash outflows, excluding movement in player cash accounts and excluding U.S. business sale-related payments in Q4 was $ 112.6 million, 28% lower than H1 FY '23, in line with previous guidance. The company's H2 FY '23 group normalized EBITDA loss will be in line with previous guidance. We look forward to presenting our full year results on August 31. Sam?

Thanks, Andy. Turning to Slide 10 for an update on the Fanatics transaction and proposed distributions. As can be seen from the detail on the slide, the PointsBet and Fanatics teams are progressing very well with the transitionary requirements. The U.S. state-by-state regulatory approval process across our 14 jurisdictions is tracking as planned. We will send out the notice of meeting asking shareholders to approve the proposed distributions of $ 1.39 to $ 1.44 soon. The targeted first tranche of approximately $ 1 per share is on track for a mid-September payment, subject to shareholder approval and first close of the transaction. Turning to Slide 11. Let's talk about the new PointsBet and why we are so excited about our future in Australia and Canada. Firstly, our proprietary tech stack is a global market leader as validated by our sale of the platform to the Fanatics. While we have sold a copy of the technology to the Fanatics, importantly, we get to keep the technology. That means we can develop and exploit it in a manner that creates the most value for PointsBet shareholders. Secondly, we keep a copy of the Banach OddsFactory technology assets, which drives our market-leading in-play and same-game Parlay products and cash out features, using all of our markets, but particularly powerful in the North American live betting market. Finally, we retain as part of an appropriately sized team, the company's market-leading technologists, traders, quants, based in Australia, Canada and India. The sale of Angstrom Sports to Entain last week gives shareholders a data point for the value of our technology and in particular, OddsFactory. The total consideration announced for Angstrom Sports was GBP 81 million plus contingent payments totaling a maximum of GBP 122 million payable over 3 years. Angstrom Sports is a specialist provider of sports modeling, forecasting and data analytics, and we believe our OddsFactory capability are superior. Our Australian operation has a strategically important place in the Australian wagering market. We intend to continue to grow our share in this market from a current solid 5% position with the benefit of a more focused approach from our people and our tech and product perspective. While further financial details will be provided with our full year results next month, FY '23 will be the fourth straight year, the Australian trading business is EBITDA positive. We are equally excited in the outlook for our Canadian business. The Canadian business provides shareholders continued exposure to the North American market through a jurisdiction that is more attractive than most U.S. states, no partner fees and acceptable tax rate and iGaming complementing sports betting for the entire market. We believe the early stage of the Canadian business complements our more mature Australian business as well as providing an opportunity to leverage attractive features of our tech stack that aren't available in the Australian market, such as iGaming and online live betting. Turning to Slide 12. I would now like to provide some FY '24 commentary on the remaining operations, Australia and Canada to be referred to as the company. Total net win for the company is expected to be 10% to 20% higher than FY '23. Total marketing expense for the company is expected to be 15% to 20% lower than FY '23. Whilst 12 months rolling cash actives at June 30, '24 are expected to be higher than those at June 30, '23. So in summary, we will grow our net win and our active client base while being able to reduce our marketing investment due to our improving product and execution. The current -- the company currently expects EBITDA to be close -- to be close to breakeven post the close of the Fanatics transaction. Global head count is to be reduced to circa 275 FTE by second close, down from 650 FTE as at June 30, 2023. The company expects a significant cost reduction in technology segment expenses, corporate segment expenses as well as a reduction in capitalized technology costs in FY 2024. The company currently expects the positive EBITDA of the Australian trading business to significantly offset EBITDA losses of the Canadian trading business in FY '24 as Canada builds scale. In conclusion, and importantly, we do not anticipate additional capital will be required to deliver positive group EBITDA in FY '25. I'm now happy to take questions.

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

Look, I had a couple of questions on the Australian business. I mean if we look at that net win margin in Australia in the fourth quarter, it was at a record level. I get it. There's some generosity benefit in there, but can you quantify the luck factor and whether that was more in Sport than Racing. And then secondly to that, can you maybe talk to how we should think about a long-run net win margin in the business going forward?

Yes. Yes, thanks for the question, David. I think Q4, A lot of things was a combination of a lot of things that we've been working on through the year. But I did -- I definitely did call out that there were some favorable results that came through there. And it was in both Racing and Sport. So we track expected margin and then we see how actual margin turns out. So I think as it relates to the promotional efficiency and the improvement that we've made through the year, so giving away less of that trading margin to get down to the net win. That's the gradual improvement that we've made throughout the year with our personalization in our tokenization. I don't believe that we will see FY '24 margins at 14.4%. That's not our desired starting point, something a little bit below that would be our desired starting point. But we do expect to see continued marketing promotions efficiency. And so that net win gap between gross and net, we expect that to be around the same mark. So no, we don't expect it to be sort of 14.4% down to 11.1%, a little bit less than that, but we have certainly made improvement in being able to generate improved trading margins from multiproduct, sports, and we did -- as we called out on the call, we did do some experimentation in Q4 around our Racing margins as well. But yes, going forward, we would guide to a little bit lower than both gross and net as what was achieved in Q4.

Great. That's helpful. And just one last question. Can you give any color on the makeup of your book of turnover, the skewing to Sport versus Racing, that would be helpful.

Yes. I mean, look, I don't think we ever disclosed it. What I will say is this is that we've disclosed clearly that Racing has been coming under pressure and Sport has been picking up. Previously, what that would mean would be that there would be pressure on your margins, and we maybe saw a bit of that early on in this year. But as our -- let's call it our sports products has improved as our multi product has improved. That I suppose that differentiation that you lose margin as soon as you lose Racing turnover is less so now. It's getting more like-for-like. So Racing off a bit, Sport growing, raising still the majority at this stage there.

Your next question comes from Rohan Sundram from MST Financial.

Question for Sam. Just Sam, around the pathway to profitability in Canada. How is that looking at the moment? Just looking at the net win of $18 million in the Q4 marketing of $5 million, it looks not far off, but -- maybe can you talk us through the moving parts and how that could all change if there's an outlook for new state entries?

Yes. Thanks, Rohan. Yes, I mean I think if you think about it as broadly a 3-year cycle, this was the first year. You spend your marketing dollars, you start building your client base, [you] starts coming in the door. I think from the guidance that we've given around FY '24, we would expect that Australia would largely offset Canada's losses in FY '24. You'd expect that trajectory to continue and the losses to reduce. And then the guidance that we've given that we think Canada will be EBITDA positive in FY '25. So it's not far off from an EBITDA perspective, sort of a bit of a straight line trajectory that what you lose this year. And you can see what we lost in the first half in our H1 results. Probably you won't have to wait long to see what H2 was, but extrapolate that and reduce that next year and then as I said, get to breakeven profitability in FY '25. I think the difference in Canada, like as we called out, is in America, we were live in 14 states and only 4 of the 14 had iGaming. In Canada, you have one state that's live, and it has iGaming. So you pass the profitability and the efficiency monetization that you get is stronger plus, we're just getting better. We're getting better every quarter. Our product is getting better. That's been seen in the American results, and we'll see that in the Canadian results. As it relates to the potential expansion of Alberta, unlike here in America, we don't anticipate that, that comes with a whole a round of additional costs. When you open a new state in America, it's on country basically. And so Canada will be province by province, but the expectation is that the synergy benefits are far higher. And as it relates to some of our marketing spend your performance marketing is very targeted. So you're only targeting people in the province of Ontario at the moment with your performance marketing, you get that -- you get that very targeted. But as it relates to above the line, there's certainly some spend that we're making that floats into other jurisdictions of Canada. And so if an Alberta was to open up, you naturally get some marketing efficiencies there. And as I said, you don't -- you get a lot of operational synergies. So there's not a lot of cost that increases.

Okay. And last one, just on the Aussie market with the turnover down 16% year-on-year. Is it getting to the point where are you still looking -- would you like to grow that turnover? Or are you looking to manage that for yield and looking for stronger outcomes at the net win line?

Yes, I think historically, we'd always lag the market role in terms of our margins. We were probably lower at the gross level, and we were certainly lower at the net level because when you're starting out, you're extra aggressive on promotions, we didn't quite have the product and personalization to get our promotions as efficient. We've made a lot of that improvement this year. So a lot of it is related to I suppose the profile that you go through. But the reality is, is that we are operating in a higher cost of sales environment over the last few years, there has been more taxes come in. And so if you don't get your net win margin sort of up to sort of 9%, 10%, you're a bit behind the $8 billion in terms of your gross profit margin. So it is -- the fact that we've delivered the same net win as the PCP of less turnover, that is a bit of a sign of the times. So you would expect there to be more net win growth rather than turnover growth. I think that's the reality.

Your next question comes from Donald Nicolas Carducci from JPMorgan.

So maybe, Sam, can you tell us what your assumptions are for turnover over the course of the next year? I mean you flagged out the Racing soft, you've called that out. But are we going to see the market continue to step down for a period of time because the turnover performance feels like it's more of a market issue given what you guys have delivered?

I mean it's a million-dollar question, Don. Look, we don't -- we think the market this year has contracted more than -- we're down 2% year-on-year from a net win perspective, and we believe we've grown our market share. So we're calling out that we think the market as a whole is down greater than 2%, probably greater than 5%. We'll see when everyone starts reporting where that ends up. Obviously, there's a lot of growth in prior years, especially the COVID year. We think the market -- the online market can return to growth. We certainly, again, though, expect to outperform the market. I think this comes down to this discussion, we're just saying with Rowan around turnover growth versus net win growth. We're very much focused on net win growth. You can go out there and by turnover, you can buy gross win. But if you're not getting decent gross profit margins, you just can't -- you can't aspire to good profitability. So we think the market will return to modest net win growth and we think we can outperform that modest net win growth and grow our market share.

So then maybe what's your working assumption around what you guys are going to do for promotions to generate sales into the Spring Carnival. And what would you expect? I mean, no one's really mentioned that , they are here in some time. But are you thinking this Spring Carnival will be different in sale, last year?