Pointsbet Holdings Ltd

ASX:PBH

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by, and welcome to the PointsBet Holdings Limited Q1 FY 2023 Appendix 4C Investor Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Sam Swanell, our Group CEO. Please go ahead.

[Samuel Swanell, executive]

Good morning, and thank you for joining the PointsBet Holdings Limited Q1 FY '23 Business Update and Activities Report. This is Group CEO, Sam Swanell. I'm joined on the call today by our group CFO, Andrew Mellor; Australian CEO, Andrew Catterall; U.S. CEO, Johnny Aitken; and Canadian CEO, Scott Vanderwel. Before we begin, please note all numbers referred to are unaudited and in Australian dollars, unless otherwise stated.

Turning to Slide 3. The September quarter has been another period of progress for the company. From a market launch perspective, during the quarter, we had successful online sportsbook launches in Kansas and Louisiana, and we launched our retail Sportsbook in Maryland. As of today, we have live online Sportsbook operations in Australia, 12 U.S. states and Ontario, Canada and are live with iGaming in 4 U.S. states and Ontario, Canada. As previously communicated, we have proactively shifted to focus on a further 2 priority online sportsbook launches in Ohio and Maryland, and we expect to be hard launching on the starting line for both.

During the quarter, we delivered continued enhancements of our broader in-play product, which in the United States is referred to as live betting, launching our in-house Major League baseball product in all regions in August, delivering on our stated strategy to leading to improving the better experience, with more markets, higher uptime, a reduction in bet delays, quicker cash out and settlements. Johnny Aitken will provide further details as part of his presentation.

Earlier this month, we announced a pivotal moment in the evolution of our U.S. strategy, through a partnership with 1/ST Technology, a business division of the Stronach Group, North America's dominant Thoroughbred horseracing company, which will deliver a fully integrated white label advanced deposit wagering horseracing betting experience, to PointsBet customers across the United States. Under the partnership, 1/ST Technology will provide market-leading horseracing betting products and content solutions to be fully integrated within the PointsBet Sportsbook app.

This partnership will also deliver a PointsBet branded standalone ADW offering in states outside those, in which the company currently offers sports betting. Utilizing the licenses held by our wholly owned subsidiary BetPTC, PointsBet will own and operate the ADW business with the ownership of customer data remaining with PointsBet. It is anticipated that the PointsBet branded ADW solution will launch in early 2023, delivering PointsBet, an online betting presence in over 30 U.S. states, including in jurisdictions into which we do not currently offer sports betting.

Significantly, the expanding database of racing customers of 1/ST Technology's currently operated brands Xpressbet and 1/ST BET will also be cross sold into PointsBet Sports betting and iGaming businesses. The Stronach Group's consumer facing brand first, is the preeminent horse racing organization in North America, with its portfolio of products and services encompassing 1/ST BET, Xpressbet, Monarch content management and AmTote International, being world leaders in pari-mutuel tote and ADW Technologies 1/ST holds some of the most recognized brands in the industry, including the legendary Preakness Stakes and the world renowned Pegasus World Cup.

With our mature market Australian racing expertise and now an outstanding strategic partner in 1/ST Technology providing us with a market leading portfolio of racing products and services, we can introduce new and existing customers to our dynamic and interactive PointsBet branded horse betting experience.

Turning to slide 4; compared to the group results for Q1 FY '22 to be referred to as the PCP, in Q1 FY '23, sports betting turnover was up 18% to $1.16 billion and total group net win was up 13% at $78.8 million. As you will hear from our regional CEOs, the USA continued its strong trend of net win growth, while Australia cycled through a strong PCP comparison that lacked lockdown assisted growth rates.

Overall, the Group has delivered a pleasing result, as the PCP net win uplift, means our 12 month rolling net win continues to increase toward a new record of $318.8 million. I will provide some concluding comments at the end of the call, and will now hand over to the regional CEO's to provide an overview of their regions.

Firstly, our U.S. CEO, Johnny Aitken.

[Johnny Aitken, executive]

Thank you, Sam. Now turning to slide 5. The U.S. trading business ended the quarter, with sports betting turnover up 50% at $523.8 million compared to the PCP and total net win up 101% at $29.5 million compared to the PCP. The doubling of net win compared to the PCP was driven via our strategy to focus on targeting, delighting and retaining a super user customer. I'll go into more detail around our target client segment, the Super user, a little later.

For Q1, FY '23, sports betting gross win margin and net win margin was 7.7% and 4.3% respectively, both marked increases compared to the FY '22 full year gross win and net win margins of 6.5% and 3.0%. Net win margin performance is expected to be sustainable above 4%, as we continue to reap the benefits of our ongoing investment in in-house sports betting technology, and odds factory, our proprietary trading feed solution. This will also allow us to decrease promotional investment as a percentage of turnover, as we lean on our product and service excellence to drive sign-ups, retention and continued net win growth.

Another core part of our net win growth can be attributed to a continued upward trend of parlay bet types being a growing percentage of overall turnover. Internally built and managed our product features, such as same game parlay, live same game parlay, cash out and quick parlay builder, by yielding returns, and along with live betting, represent features that are critical to the live, retain and monetize a super user customer.

In relation to marketing, we've taken a deliberate prudent approach to this quarter compared to the PCP, remaining hyper focused on ensuring we have a clear pathway to getting a desired timeline of payback on CPA costs. I was pleased with the continued improved relationship between the expected lifetime value of clients and the cost to acquire them.

By being in 5 more states this quarter compared to the PCP, total marketing expense reduced by 17% to USD 22.84 million. A major component of our hyper focused marketing strategy for FY '23, is investing in regions in markets where we are live and operational. An intern to the interim, pulling back from national brand spend.

12 month rolling actives grew by 47% to 272,000 compared to the PCP, albeit we are focused on the quality outcome of delivering continued growing net win, as opposed to chasing pure quantity of actives. Same state total net win grew 31% compared to the PCP.

In Q1, we launched 2 new online sports betting states in Kansas and Louisiana. This saw the total number of online sports betting states operational in the U.S. increase to 12. Kansas was launched at the start of September, and we are satisfied relevant to our investment in the state with our early performance. Our focus in all states is to lead on product and make revenue. We continue to take learnings from new state launches and are primed to capitalize on our next 2 market launches in Maryland and Ohio.

A high priority state for PointsBet continues to be Illinois, one of the largest online sports betting revenue markets and one of our best performing states. Capital city Chicago is a true sports town, with 5 professional sports teams in the Big 4 U.S. Sports. That market loves sports and love betting. Our positioning on sports betting excellence has resonated, complemented with smart investment across marketing, media integrations via NBC's broadcast rights to the Bulls, Blackhawks and White Sox, offering superior core market odds compared to competition, and investing in a Chicago-based loyalty and player development team.

Having taken learnings from last season, in particular the competitive intensity of unprecedented signup and retention offers, this year we took a measured approach to the launch of the new NFL season. As noted earlier, we spent 17% less in total marketing during the quarter compared to the PCP, as well as significantly reducing promotions, as a percentage of gross win. We have continued to improve our product offering for NFL, with enhanced experiences with lives and parlay betting, which continues to increase our expected margin.

Result wise, the 1st 3 rounds of the NFL season in September saw favorable outcomes, albeit we were impacted by a large negative variance from a high staking cohort segment at the end of the month. If not for that short term, the negative variance, Sportsbook net win margin would have been above 5% for the quarter.

IGaming continues to develop on the back of key operation with improvements, and the reinforcement of new content and capabilities within our product offering. U.S. iGaming network was $7.2 million, up 229% compared to the PCP. This represented 10.8% of group net win for the quarter, significant growth from 3.17% in the PCP.

Looking forward to Q2 and Q3, our gaming revenue will be supported by the rollout of further content and bonusing functionality, which will assist with the continued revenue growth we expect from this vertical over time.

Concluding this slide and talking to total net win, ultimately we feel that the 101% growth in U.S. net win compared to the PCP, which was achieved from 17% less in the marketing expense, is indication of our continued long term by revenue growth strategy; that is to offer the best betting experience, with a full suite of products powered by the best technology and personalized service to our target super user customers.

Turning to slide 6. I would like to provide some additional detail on our target customer in the U.S., the Super user, and the focus strategy we are executing to win, delight and get the advocacy of this higher revenue contributing customer. To be clear, this is not a change of strategy, but an evolution of strategy. We have spoken consistently about seeking profitable handle and a focus on net win growth. Being hyper focused with our investments across brand, marketing and promotional spend, to target and convert the super user cohort will continue to improve our LTV to CPA [indiscernible] relationship and assist in driving net win growth. The profile of a super user is someone that is a bettor first, and sports and sports watcher second. That is, their betting interest dictates what sports they watch and when. They bet 3 or 4 times a week, and the majority of their bets are placed on live betting markets, along with parlay bet types, and their activity is across a range of North American and international sports.

Due to the higher frequency of their betting sessions and overall play, the super user chooses where to play based on the consistency, stability of technology, matched with the quality and differentiation of product features, and overall speed and ease of use. We consider this segment to be comparatively underserviced, as these players are not high rollers per se, but definitely seek a more broad segmented centric approach with their service and product experience. They are also not to be confused with a professional or sharp players.

We've mentioned in the past the headroom for greater promotional efficiency. As mentioned earlier, improved personalization and targeting towards the super user customer, has assisted together with improved product, in lowering our overall promotions as a percentage of overall sports betting gross win, from 57% in the PCP to 45% this quarter. The super user simply must have the best technology.

We believe the combination of targeting super users who are drawn to our excellent in-house technology, and market reading live by betting product is our right to win in North America. This is especially relevant, as promotional investment across the sector, continues to reduce and an ever widening group for positive revenue contributing sports bettors select the best product, as the primary consideration point of where they choose to sign up and where they choose to bet.

Turning to slide 7; we continue to make big leaps forward in our state admission to own and create the best live betting experience for North American customers. The last quarter saw us release our 4 sport internally on OddsFactory, our proprietary trading feed solution. This means we now have 4 out of the major 6 U.S. sports produced internally at PointsBet. The progress we have made internalizing product over the last year has been considerable, and by the end of the financial year, we would have also brought soccer, college football and ice hockey onto the OddsFactory platform. It is also worth noting we're the only operator in North America that produces 100% of our product offering on these sports in-house.

The complexity of laying the foundations to offer the best live betting experience in North America and subsequently producing the betting content, is significant. At peak loads across 240 plus concurrent matches, OddsFactory will produce up to 8 billion pricing calculations in 1 second. This is extremely complex to replicate and the extraordinary feat of engineering and modelling. This allows us, through a single pricing engine, to deliver millions of live betting selections, running into the billions of combinations, when considering same game parlay, across these games concurrently.

One pricing engine delivers the broadest core market offering in the industry. Same game parlay for both pre-match and live betting. Lightning bets, referred elsewhere as micromarkets. Player props, cash out across everything we offer, and overall, a market leading customer experience with zero bet delays, and minimized product suspensions.

Owning the production of this pricing in-house gives us distinct advantages. A good example of this is our recent upgrade of our lightning bet product, aka micro-betting. The team worked on optimizing the user experience around the product, positioned it prominently on the app, and within 1 week, the bet count on the product more than doubled and the numbers of users who tried it, nearly tripled.

For NFL, the rollout of next drive got lightning betting has been an instant success. Already since its launch, it's now the most bettor -- on bet type for NFL live betting. This goes to show the levers we have at our disposal, by owning our own technology, a must have to compete in this market. As a result of the sustained progress we've made with our product, live betting accounted for 59% of overall handle for the quarter, up from by 48% I should say, compared to the PCP.

Turning to Slide 8, we're also pleased that our U.S. app was again ranked in the top 3 out of 40 in the latest Eilers & Krejcik's app by app testing, with the testing group commending PointsBet for UX and features such as cash out availability. This recognition is testament to the fact that PointsBet is now hitting its stride and building upon the investment we have made in our technology and product.

Turning to slide 9; during Q1, we expanded our in-house content production capabilities, with the opening of a fully controlled studio in New York City, managed by our Senior Vice President of Content, Liam Roecklein, ex-Senior Vice President and General manager of Cheddar News. This will allow us to leverage our infinite odds and betting stats engine, OddsFactory, to create our own content that is tailored to our target customer, the super user, and form habitual behaviors that are using PointsBet as a source of betting information, not just an app to place bets on.

One of the first deliverables of this content vision we've made is launching embedded content, first of its kind functionality within a sports betting app in the U.S. for this NFL and college football season. This is headlined by signing ex NFL quarterback Ryan Leaf as the face of our NFL and college football shows, titled The Straight Line with Ryan Leaf. These shows are produced to create 20 to 25 clips per day that speak to individual betting markets. Clips provide the user with news, insights and analysis to help form their betting choices.

The app also features increased live streaming, individual custom curated feeds and PointsBet+ our new in app content hub. This approach will be replicated across NBA, college football and other major U.S. and international sports.

I would now like to introduce our Australian CEO Andrew Catterall, to provide an overview of the Australian trading business.

[Andrew Catterall, executive]

Thank you, Johnny. Now turning to slide 10, Australia. Total turnover for Q1 FY '23 was $611.9 million, down 3% compared to the PCP. Compared to the PCP, sports turnover increased and 3-code racing turnover declined. Sports turnover growth was primarily driven by AFL, NRL and tennis. Our tennis product has improved due to the introduction of ITF tennis, which has materially increased the number of events, matches and markets we are offering.

The net decline in quarterly 3-code racing turnover was driven by a decline in turnover from the 2 states that were still in lockdowns during the PCP, being our 2 most populous markets, Victoria and New South Wales. Offset by continued growth in racing turnover from the other states and territories that have less noise from lockdown effects during the PCP.

We understand that this normalization of racing turnover from the inflationary effect of lockdowns in the PCP, is consistent across the online operator category. Lockdowns were lifted by the end of October 2021, so we expect to get back onto a more consistent year on year growth profile for racing turnover across all states by the middle of Q2.

Our gross win for the quarter was $73 million, down 17% versus PCP. Our trading margin was lower, at 11.9% versus 13.9% in the PCP, primarily driven by the increased weighting towards sports turnover in the quarter and short term negative variance for multis and racing singles. We expect this negative variance in margins to be short term and a return to our long term average of around 13% over time.

In Q1 FY '23, we focused on improving the efficiency of our client promotions. The rate of client promotions as a percentage of gross win improved from 37.7% in the PCP to 34.9%. Our strategy prioritized retention and reactivation of known high value clients. We continue to shift our investment away from less efficient above the line offers available to everyone, to more efficient personalized and targeted offers for our known higher value clients.

12 month rolling actives as at 30 September 2022 were 231,600, up 4% on PCP. It should be noted that during the PCP we ran aggressive promotions aimed at attracting and retaining clients during the lockdown periods. We are pleased with the 12 month rolling actives, which reflect a churn of less valuable promotional clients gained in the PCP.

The lower rate of promotion spend helped offset the impact of lower gross win margins on our overall net win position. Net win for Q1 FY '23 was $47.5 million for the quarter, down 13% on the PCP. Total marketing expense for Q1 was $25.2 million, up 14% on PCP. This includes production budgets and media spend for the new Shaquille O'Neal, an inspired unemployed campaign successfully rolled out during the quarter.

The intent of our FY '23 marketing strategy was to invest in Q1, to increase brand and product awareness to new and existing clients leading into the Q1 peak wagering period of AFL and NRL Finals, building momentum into a strong Q2 calendar of major events, including the Melbourne and Sydney Spring Racing carnivals, the NBA and NFL seasons and the 2022 ICC and FIFA World Cups.

At a product level in Q1 FY '23, we launched successful app upgrades, including, the option for users to switch to light mode; the integration of racing.com expert form factors and race selections into our Thoroughbred racing event cards; new same game multi offerings for NFL, NBA and the 2022 ICC and FIFA World Cups; and fast withdrawals, delivered within the hour on peak days and weekends to clients of all major banks. Through our continued investment in brand, product and promotions efficiency, and a return to normal trading margins, we expect that consistent revenue growth for the Australian business will resume after the year-on-year effects of lockdowns and racing turnover have normalized.

I'd now like to hand it over to Scott Vanderwel to run through highlights of Canada.

[Scott Vanderwel, executive]

Thank you, Andrew. Now turning to slide 11. We have now completed our second quarter of operations in Ontario, and continue to make progress in both Sportsbook and online casino. Total Sportsbook handle was $20.9 million, up 31% quarter-on-quarter. Sportsbook gross win was $1.6 million, up 138% quarter-on-quarter and net win came in at $400,000, almost a $1 million improvement quarter-on-quarter. We made a series of improvements to our online casino offering during the quarter, and saw immediate results with casino net win coming in at $1.3 million, bringing total net win to $1.7 million in Q1, up from 200,000 last quarter. While we are pleased with the sequential improvements, we believe we're just getting started.

The Ontario Regulator released its first report on the state of the market during the quarter, which affirmed our belief in the size and strength of the market. That said, PointsBet is a new brand to Ontario, in a place that has a long history with the gray market. We have spoken on recent calls about how our approach to the market is unique and differentiated from our competitors and we're starting to see those efforts begin to cut through.

As an example, we recently held the PointsBet Invitational, the first ever March Madness Style, Single Elimination Curling Championship, which featured 32 of Canada's top Men's and Women's teams. All tournament draws were broadcast nationally on TSN, Canada's number 1 sports network. This combined with our new brand campaign Play-On is leading to improvements in brand awareness and consideration among our target customers.

Looking ahead, we are very excited about the opportunities to continue to drive growth. The NBA and NHL returned this month, and as an official partner of Maple Leaf Sports and Entertainment, the owners of the Raptors and the Maple Leafs, we have an incredible opportunity to leverage those partnerships, to drive strong player acquisition and retention.

What we have done with partners ClubLink, Ottawa Sports and Entertainment Group, and Curling Canada to activate on the ground throughout the quarter will serve as a playbook for us as we move forward. Combine this with the return of the NBA and NHL, the NFL in full swing, baseball playoffs and the FIFA World Cup, and we expect to continue delivering sequential performance improvements through Q2.

It should be noted that the Ontario market structure is well set up commercially for operators, not being tethered to a casino, racetrack or a retail footprint to operate, that is no partner revenue share agreements required. A nominal licensing fee and an effective tax rate of 18% of GGR, make the overall future economics favorable, as our platform attains further scale.

Lastly, we're pleased to see that the Ontario regulator has recently set a deadline of the 31st of October, 2022 for unregulated operators and suppliers to cease operations, should they intend to enter the province on a regulated basis, at any time in the future.

I would now like to introduce our Group CFO, Andy Mellor, to provide an overview of the cash flow statement.

[Andrew Mellor, executive]

Thank you, Scott. Turning to slide 12 for the quarterly free cash flow summary. In the quarter ending 30 September, 2022, net cash used in operating activities, excluding movement in player cash accounts, was $58.5 million. Net cash used in investing activities was $14.9 million, and net cash used in financing activities was $900,000. Please note that there was a positive impact from the movement in exchange rates on the USD cash hold of $16 million, due to the move in the USD -AUD spot price during the quarter.

I'll now move through each of the main line items. Net cash used in operating activities, excluding movement in player cash accounts during the quarter ending 30 September, 2022, was $58.5 million, slightly higher than the $54.8 million of operating outflows, excluding movement in player cash accounts in the prior quarter. Receipts from customers for the quarter totaled $81.6 million. This includes net win from Sportsbook and iGaming verticals of $78.8 million, and the balance includes cash receipts from our European and New York B2B operations and cash receipts from our U.S. racing ADW business.

Cash outflows during the quarter included, cost of sales of $40.9 million, which was lower than last quarter, non-capitalized staff costs of $27.6 million, which was higher than Q4 mainly due to the payment of FY '22 annual performance payments. The velocity of hiring in Q1 FY '23 continues to reduce versus FY '22.

Marketing cash outflow for the quarter was $54.7 million, in line with the prior quarter. As previously spoken to the Australian, the marketing expense was $25.2 million for the quarter, and the U.S. marketing expense was USD 22.8 million for the quarter. The U.S. marketing expense in Q1 was lower than Q4, mainly due to the business taking a more targeted approach, as previously outlined by Johnny. The Canadian marketing expense was CAD 5.5 million. Administration, corporate costs and GST paid on Australian net win was $17.2 million for the quarter, lower than Q4.

Turning to investing activities; net cash used in investing activities during the quarter ending 30 September, 2022, was $14.9 million, higher from $11 million in the prior quarter. Over the course, the company capitalized $11.3 million of technology and product staff wages, as part of the continued development of our sports wagering and iGaming platform, up from $10.4 million in the previous quarter. There were also additional investing payments relating to our Maryland retail operations fit out, and security deposits in relation to our expanding U.S. racing footprint.

Turning to financing activities; net cash used in financing activities during the quarter ending 30 September, 2022, was $900,000. The company has no corporate borrowings and at the end of September, the company had $412 million in corporate cash. We continue to take a disciplined approach to expense management, as previously stated. We have slowed the velocity of hiring through Q1, and as previously stated in the last earnings call, our U.S. marketing expense for FY '23, were no more than FY '22.

I'll now hand back to Sam.

[Samuel Swanell, executive]

Thank you, Andy. It's clear from our results in the U.S., that we are delivering on our stated aim of growing net win. We have invested in our team and in our technology and products, and that investment is delivering revenue growth. Our marketing is more targeted, and this has allowed us to deliver this revenue growth with a reduced marketing spend compared to last year.

From a USA seasonality perspective, Eilers & Krejcik estimate that the June and September quarters are equal in terms of being low season, whereas they estimate the December quarter to represent 1/3 of annual handle and revenue. Both in the U.S. and globally, we're excited to see the continued revenue growth that we can achieve this quarter on the back of our ever-improving product and execution.

Thanks for your time. We'll now take questions.

[Operator]

[Operator Instructions] There are no questions at this time. That does conclude the conference for today. Thank you for participating. You may now disconnect.