Pointsbet Holdings Ltd

ASX:PBH

Earnings Call Transcript 2024-Q1

[Operator]

Thank you for standing by, and welcome to the PointsBet Holdings Limited Q1 FY 2024 Appendix 4C Investor Presentation. [Operator Instructions] There will be a presentation followed by a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to Mr. Sam Swanell, Group CEO. Please go ahead.

[Samuel Swanell, executive]

Good morning, and thank you for joining the PointsBet Holdings Limited Q4 business update. I'm Sam Swanell, and joining me on the call today is Group CFO, Andrew Mellor.

Please note the safe harbor statement. All the numbers referred to are unaudited and in Australian dollars, unless otherwise stated.

Before we turn to the results, I want to make some comments on our commitment to responsible gambling. As set out in our FY '23 sustainability report, a responsible gambling continues to be a key focus. And PointsBet is playing a leadership role as the industry evolves in both Australia and North America.

PointsBet endorses the principle of informed choice, which is aimed at empowering customers to make informed decisions and exercise choice regarding their wagering expenditure. During the quarter in Australia, we implemented our integration to BetStop, the national self-exclusion register for online wagering. We also implemented 0-day verification, also known as pre-verification, meaning a customer can only undertake wagering activity such as deposits or betting once their identity is verified. Previously, verification had to be completed within 72 hours of account opening. This functionality serves to protect the underage and those individuals have chosen to exclude themselves from betting through BetStop. These are 2 important initiatives for the industry.

Turning to Slide 3. We're at an important stage in PointsBet's journey. Over the past 5 years, the company has grown revenue from $26 million in FY '19 to an anticipated $230 million to $250 million in FY '24. That's 10% to 20% up on last year. As we've also said, we anticipate delivering positive group EBITDA in FY '25.

And importantly, we do not anticipate additional capital will be required to deliver this result. I think it's important to recognize that sports betting and iGaming is a fast-growing global market. The companies like PointsBet with the experience, technical capabilities, and ability to work in highly regulated markets are rare and valuable in this industry. This means we can leverage what we've built to deliver shareholder value now and importantly, increasingly into the future.

Turning to Slide 4 and 5. Total Q4 group net win was up 18% at $58.2 million with Australia growing 11% versus the PCP, and Canada up significantly versus the PCP at 212%. The group had over 267,000 cash active clients at 30 September, split between Australia with 235,000 and over 32,000 in Canada.

At 30 June 2023, the company held $83.5 million in adjusted corporate cash.

To provide a brief update on the sale of the U.S. business. Initial completion was on the 31st of August with Fanatics paying USD 175 million in the first installment. Since initial completion, the operating businesses in 10 U.S. states have been transferred to Fanatics. The transfer of the remaining U.S. state operations will take place as the applicable gaming approvals are obtained.

We completed the first capital return of $1 per share on the 22nd of September 2023, delivering $315.4 million back to shareholders. The subsequent sale completion is on track as anticipated for completion in Q3 FY '24. This will then be followed by the second capital distribution.

Turning to Slide 6 to discuss the Australian trading business. During the reporting period, total net win for the Australian trading business was $52.8 million, up 11% on the PCP. We continue to see strong, sustainable performance from our mass market clients with net win from this cohort up 21% on the PCP.

Grocery margin improved to 12.6% versus 11.9% in the PCP, trending towards our long-term average. Continued focus on promotion efficiency led to the rate of promotions as a percentage of gross win improving to 26.3% compared to 34.9% in the PCP. This was enabled by tokenization, personalization and data science.

The improved promotional efficiency delivered higher net win margin, which in turn led to slightly lower turnover, however, delivers improved gross profit margins.

Net win contribution from Racing was in line with the PCP with sport generating double-digit growth. I'm very confident in our ability to deliver continued net win growth in Australia by continuing to execute our winning strategy. We have shifted our marketing and generosity strategy from broad-based above the line to highly targeted below the line. Like last year, our new Shaq brand campaign was launched in late August, early September. However, this financial year, we have weighted our broadcast advertising spend away from general entertainment on free-to-air TV and only into Channel 7's Saturday racing coverage and dedicated sports channels on subscription TV.

Our spend with social media partners like Facebook comes with strict age gating requirements to restrict the exposure of our advertising to adults that are interested in sports and racing and have not opted out of receiving wagering advertising.

The 11% increase in net win was delivered within the context of our Q1 '24 marketing expense of $14.8 million, being down 41% on the PCP. Not only is net win increased on the back of lower marketing, first-time betters acquired in the quarter delivered 20% more net win than FTBs acquired in the PCP.

As mentioned earlier, we've also leveraged proprietary in-house tokenization and data science capabilities to shift our generosity investment from all customers to one-to-one personalized offers. This has allowed us to ensure promotions returning value to the right clients and revenue is not being leaked. Our larger share of our generosity spend is now aligned with higher-margin inventory such as same-game multis and same race multis. We have demonstrated that this strategy continues to improve our client mix and drive growth in total net win, especially from the mass market cohort, which underpins the prosperity of our Australian operations.

Turning to Slide 7 to discuss the Canadian trading business. We've delivered strong growth and momentum across both our sports betting and online casino businesses versus the PCP. Total sports betting handle of $44.2 million, up 111% versus the PCP as we saw strong engagement across baseball, tennis and soccer throughout the Canadian summer months, combined with the return of the NFL in September.

Our leading in-play offerings continue to resonate with our customers, with in-play bets representing 68% of total Sportsbook handle, up from 59% in Q1 last year. Sports betting net win came in at $2.3 million, up 440% on the PCP. This year-on-year improvement was driven by both improved trading margin on a higher mix of parlays and significantly improved efficiency in our customer promotional spend.

On the online casino side, we delivered $3 million in net win, an increase of 136% versus the PCP. In total, across the full offering, we delivered total net win of $5.4 million, up 212% versus the PCP. This strong net win growth was achieved with marketing expense reducing by 7% on the PCP, and we also delivered higher customer acquisition in the quarter, driven by an improved conversion funnel.

As we look ahead to Q2, we are excited about our plan to continue to deliver growth. The NBA and NHL, 2 of the biggest sports, returned with regular season action. We continue to execute against an exciting product road map that will continue to expand our sports betting capabilities. And at the same time, we are also actively working to significantly enhance our casino product offering in order to improve the overall experience for customers in terms of games offerings, bonusing options, which are both key elements to growing market share in Ontario.

I will now hand to Andy Mellor to talk through our quarterly cash flow statement.

[Andrew Mellor, executive]

Thank you, Sam. Turning to Slide 8. At the 30th of September 2023, the company held $55.5 million in statutory corporate cash with adjusted corporate cash of $83.5 million. Adjusted corporate cash is our statutory corporate cash adjusted for, firstly, adding an amount of $7.5 million being a reimbursable U.S. business sale-related payment paid in Q4 FY '23 that we reimbursed at the subsequent completion of the U.S. business sale as was reported in the Q4 FY '23 4C.

And secondly, adding an amount of $20.5 million held by PointsBet USA Holdings Inc. at the 30 September 2023, as required to operate the U.S. business until subsequent completion. This amount will be transferred to PointsBet Holdings Limited by the subsequent completion date. PointsBet USA Holdings Inc. is currently a legal entity of PointsBet Holdings group, but is no longer consolidated into the PointsBet group for statutory reporting purposes.

Q1 net cash used in operating activities, excluding movement in player cash accounts, was $10.4 million. Receipts from customers for the quarter totaled $58.2 million and operating cash outflows during the quarter included cost of sales of $22.1 million, noncapitalized staff costs of $12.4 million. This includes full year '23 annual performance payments.

Marketing cash outflow of $21.4 million and administration corporate costs and GST paid on Australian net win of $13.6 million. Importantly, the company expects total cash -- total operating cash flows for the remaining 3 quarters of FY '24 in aggregate to be positive.

Investing activities. Net cash received from investing activities during the quarter ending 30 September 2023 was $195.6 million. This is included: firstly, proceeds from the disposal of the U.S. business of $220.5 million, which includes the initial installment proceeds of USD 175 million plus agreed adjustments less transaction costs, such as legal, tax and financial adviser fees and a significant portion of the agreed funding requirement capped at USD 21 million.

Secondly, investing activities includes capitalized staff costs for software development of $4.3 million. This also includes FY '23 performance payments.

Thirdly, investing activities includes the previously detailed and explains funds transferred to PointsBet USA Holdings of $20.5 million.

Net cash outflow from financing activities during the quarter ending 30 September was predominantly the return of capital of $315.4 million, which represents the first tranche of the capital return post initial completion of the U.S. business sale. The effect of movement in exchange rates results predominantly from the difference in the AUD/USD FX rate at which the initial completion receipt was hedged as compared with AUD/USD FX rate at the initial completion date.

Finally, referring to Slide 9, the company reiterates previous FY '24 guidance.

I'll now hand back to Sam.

[Samuel Swanell, executive]

Thanks, Andy. Now referencing Slides 10 and 11, we'd like to briefly talk about our product and technology capabilities. Building a significant U.S. business and competing in the U.S. online sports betting and iGaming market required us to build a market-leading platform, which has been consistently rated in the top 3 in the U.S. We believe our technology will continue to drive our success in the upcoming year and beyond.

We've harnessed the power of a single unified code base that is agile as it is robust. This versatile code base seamlessly handles low latency requirements for in-play betting and the high scalability needed for handling an impressive volume of bets per second, especially during peak periods, such as Melbourne Cup Day, AFL Grand Final and Super Bowl.

We are very efficient. Our technological foundation accelerates innovation and streamlines development. Fewer hands are needed in the process, which translates to cost savings and faster delivery of new product developments.

The end product we have in the hands of our customers is very strong and getting stronger every month. Our front-end and back-end capabilities are driving our efficient revenue growth and will continue to do so.

The bottom line is our technology organization is not just agile. It's a powerful, reliable machine that can handle both the horizontal and vertical scaling needs of the market, making our app highly user-friendly and efficient.

Slides 10 and 11 provide details on recent investment into product improvements in Australia and Canada.

Turning to Slide 12, but before we open for questions, let me quickly talk about the outlook. Our Australian operation has a strategically important place in the Australian wagering market. I've outlined how we intend to grow our share in this market from 5%.

We are equally excited about our Canadian business. The Canadian business provides shareholders continued exposure to the fast-growing North American market through a jurisdiction that is more attractive than most U.S. states.

As I always remind you, no partner fees and acceptable tax rate, iGaming, complementing sports betting for the entire market. Ontario is the fifth largest North American state or province to legalize online sports betting.

The early stage of the Canadian business complements our more mature Australian business. It also provides 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.

We have a great team, and I'm confident we will deliver our group strategy for EBITDA to be at or close to breakeven post the close of the Fanatics transaction in March 2024. And in today's challenging funding environment, you know how important it is that we don't anticipate we'll need additional capital to deliver positive EBITDA in FY '25.

This means we can deliver shareholder value now and increasingly into the future. I'm now happy to take questions.

[Operator]

[Operator Instructions] Your first question comes from Rohan Sundram from MST Financial.

[Rohan Sundram, analyst]

Just the 1 question for me. Just on the domestic environment, how are you seeing it in light of the consumer and regulatory environment? And how confident are you of further growth in net win going forward? I take on board your comments around the generosities and the yield management.

[Samuel Swanell, executive]

Yes. Rohan, obviously, we -- in Australia, we've had PCP growth of 11% for the quarter. So we're off to a good start. We think the market from a racing perspective is probably a slight decline for the quarter, and we've said that we were level year-on-year. And we've said that we've grown very substantially from a sports betting perspective.

So from our perspective, we're seeing growth. It's a $5 billion online market here in Australia. We've got plenty of room to grow into. We think the market as a whole will have some modest growth this year. Obviously, the only other data point that's really out there is Tabcorp's I think, minus 4% for online. But we think the market can have some modest growth and that we'll outperform that growth. So there's obviously an impact from the macro, but we are concentrating on the job we have at hand, and we're very confident in our ability to grow.

[Operator]

Your next question comes from Don Carducci from JPMorgan.

[Donald Carducci, analyst]

Just a quick one to be clear and maybe understand cash flow movements here. As I look at consensus, it's sitting at, call it, EBITDA negative mid-teens based on guidance. Can you help us reconcile this to your guidance for the last 3 quarters of the year to be cash flow positive?

[Andrew Mellor, executive]

Yes. Don, I'll just -- I'll walk you through that. I mean I think just to sort of walk through what we've presented today. We have a cash balance of $83.5 million on an adjusted basis. We'll receive $50 million in the second close of the Fanatics transaction. So that's circa $76 million, $77 million. We've talked to then a second capital distribution of between $0.39 and $0.44. We don't obviously have a final share count at this stage. But if you were going to assume that was going to be around the $128 million to $130 million mark.

We're then referencing CapEx of Q1, which was just over $4 million. So if you roll that forward for 9 months, that's about $13 million. so that ends up being at circa around about $19 million, $20 million, and then you'd need to make an assumption, as we've said today, that operating cash flows for the next 3 quarters will be positive, and you need to make an assumption then to see where a cash balance ends.

We haven't given guidance on EBITDA. I see where consensus is, and we're -- we'll obviously be reporting our P&Ls at the half, but I think where consensus sits we're comfortable.

[Donald Carducci, analyst]

So I guess, to make it a little more clear in terms of being cash flow positive, that includes the one-off USD 20 million receipt, so it's not necessarily operating performance that's achieving that?

[Andrew Mellor, executive]

No, no, the receipts from the Fanatics would not be part of operating cash flows. That would be part of investing cash flows.

[Donald Carducci, analyst]

Got you. And maybe one for Sam. Where do you see your folks sitting naturally in terms of market share in the next, call it, 3 quarters?

[Samuel Swanell, executive]

Don, yes, I mean, I think our starting position would be that 11% in Australia given the data point from Tabcorp that they were down 3.9% for the quarter would mean that we've done -- I think we're going to -- it's proved that we've grown our market share pretty well for the September quarter. We think that we're around just below 5%. And we think we can push above 5% and grow from there.

So we are -- even though our marketing came down for the quarter, we are investing strongly in marketing. I think as a proportion of our market share, we'd be overinvesting compared to our competitors. We've got better at our promotions efficiency very clearly. We think we've pretty much go close to leading the market in terms of the tools that we have from a promotions perspective.

So we're investing in growth, and that's part of the reason that we're growing. And the other reason is that we're just getting better. But we think the market as a whole, as we said, racing this quarter has probably been a little bit negative. We've been largely even. We've grown very strongly on sports, so we'd assume the market is growing on sport. We think overall, for FY '24, online will be modest growth somewhere, but we'll be outperforming that modest growth and growing our market share.

[Donald Carducci, analyst]

So then I guess my last question on that point, should we expect to maybe see increased churn of actives or as a result of some of the call it, customer management initiatives or promotion efficiency tools that you're investing for growth. Is this going to get better because you're pushing above 5% market share, but sequentially, you've kind of churned out some of those rolling 12-month actives. So should we expect that churn to increase? Or in the next quarter, you would have gained share as you're investing for growth, getting better, more promotional efficiencies?

[Samuel Swanell, executive]

Yes. Yes. So we've called out the fact that last Spring Carnival, we definitely had some wastage from a marketing perspective and some less personalized promotions. So that -- we've got better at that. And so what does that mean? You're no longer delivering value to clients unnecessarily, let's call it, maybe promotional users or 0 sort of value clients.

So we are definitely still sort of cycling out of the change of approach of being more targeted. I think the rest of the Spring Carnival, which let's call it ends in the middle of November, we'll continue to see some of the clients that were only here for the promotions this time go away. But by the end of -- as we've called out, I think, at the full year results, we certainly expect to grow our actives over the financial year.

[Operator]

Your next question comes from Phil Chippindale from Ord Minnett.

[Phillip Chippindale, analyst]

And first question, just on that improved cash flow outlook on the operating side, I think for the next 9 months. Is that really just a function of the timing of marketing expenses this year? And if there's any else we should just be aware of to drive that improvement?

[Andrew Mellor, executive]

No, I think -- Phil, it's Andy. No, I think the timing of the marketing this year from an Australian perspective, as we've spoken to previously, will be much more normalized than last year. But no, I just think of it more as broad operational performance across the next 9 months.

[Phillip Chippindale, analyst]

Okay. And just in terms of those marketing efforts, I guess, just trying to take a step back and think about your business in terms of getting back into a more aggressive mindset. When should we sort of expect you to head back towards more of that above-the-line marketing sort of efforts? Is that sort of an FY '25 phenomenon perhaps?

[Samuel Swanell, executive]

No. I mean I think the -- when we talked about this, the full year results, we are investing above the line. We're doing it in a more targeted fashion. We're doing it on our racing coverage on Channel 7, on Foxtel to sports-centric audiences. We don't foresee a world where we head back to general entertainment, broad-based mass market advertising.

Two things on that. First of all, we've identified that we don't believe we were getting the ROI when we were spending those areas last year. We believe we can grow our brand, grow our client base through the marketing strategy that we're executing at the moment.

So we're investing, and we're investing in TV and we're investing in social. We're just not doing it in the mass market, free-to-air general audience sphere because we don't believe that there's an ROI there. Now I suppose equally, we have a view that in terms of community standards and where expectations are around marketing from online bookmakers is going, we think that is the area where change is warranted, and we support that change. But again, we're already operating in a, I suppose, in a manner that changes that would see less advertising on free-to-air TV is -- mass market general audience is not going to have an impact on us.

[Phillip Chippindale, analyst]

Okay. Last one, just a little bit of housekeeping. Just that USD 50 million of the remaining consideration. Can you just remind me if that's hedged or not in terms of FX?

[Andrew Mellor, executive]

Yes. It is hedged.

[Operator]

Your next question comes from Chris Savage from Bell Potter Securities.

[Chris Savage, analyst]

Sam, Andy, the second capital return of $0.39 to $0.44, when do you expect to be able to narrow that and come up with a final number? And what are the key variables that you're still waiting on there?

[Samuel Swanell, executive]

Chris, I think the most critical -- I mean, there's the practical elements of share count that goes into the equation. We've largely removed FX by hedging. The most critical thing is how we trade over the next 6 months. We expect that subsequent completion will most likely occur around March, and the distribution will be made shortly after that. And so you think about what's our momentum like come that period, we get through the rest of Spring Carnival, we get through Super Bowl, large way through NBA season. We'll have a really good view on the momentum and the trajectory of the Australian and Canadian businesses.

We're very confident in the guidance that we've provided. And then that will [ dictate ]. Are you thinking about keeping slightly more or slightly less as it relates to looking at FY '24, ensuring that -- sorry, FY '25 and ensuring that the capital needs of the business is sufficient. And we certainly think within that range of $0.39 to $0.44 we've allowed ample to whichever in that sort of ends up at that will be sufficient. But I think it will really be determined by just how strongly we hit that March, April period.

[Chris Savage, analyst]

I remember around the time of the acquisition, you guys were talking about corporate cash sort of $30 million to $40 million. Is that still the target you want to have?

[Samuel Swanell, executive]

Not sure we ever spoke specifically about a number. We gave some waterfalls that the missing link of that was how much operationally would we spend in FY '24 sort of thing. And we now provided a little bit of guidance around that. But no, we haven't given a specific number, but it will be sufficient to ensure that as we move forward, we don't have any further capital needs.

[Chris Savage, analyst]

And just a final general question, Sam. Is Canada basically progressing as you thought? Is it going better or slower than a comparable U.S. state? Or how is it performing overall, you think?

[Samuel Swanell, executive]

Well, in general, it's definitely going better. I mean, we're clearly on a path to profitability. It's very clear. We've spoken about -- we completed E1, let's call it that in FY '23. That was the largest investment year. This year, FY '24, we increased revenue and we reduced the losses. In FY '25. We want Canada profitable. So when we talked about the U.S. as a whole, we never got that definitive about the path to profitability. And that's facilitated by the fact that, one, the operations -- sort of the operating environment is more favorable from a gross profit margin and a path to profitability, but it's also on the back of that we're very pleased with the progress that we're making.

So now it's on track. Obviously, this is the big quarter for Canada. You have NBA and NHL joining NFL. So December is the biggest quarter and March is not far behind. We've talked about some improvements that we're going to bring to the iGaming product as well. So we're on track and really excited for the next 2 quarters.

[Chris Savage, analyst]

I guess what I'm asking, Sam, is you've obviously sacrificed some investment, given your focus is on getting to profitability there as quickly as you can. Do you feel like you've had to give up much in the way of growth? Or is it going pretty well regardless?

[Samuel Swanell, executive]

Yes, good question. The 7% less in marketing is a little bit similar to Australia. We spent some money on some things last year that we've identified, didn't really generate too much in terms of an ROI. Clearly, we are focused on we want to be a growth company and we want to get to EBITDA positivity. So that is part of our thinking. But no, you shouldn't read into the 7% reduction. We just see that as efficiencies. And as we said, we actually acquired more clients this quarter than the PCP despite spending 7% less.

[Operator]

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