Pointsbet Holdings Ltd

ASX:PBH

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by, and welcome to the PointsBet Holding Limited Q2 FY '24 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.

[Samuel Swanell, executive]

Good morning, and thank you for joining the PointsBet Holdings Limited Q2 FY '24 Business Update. I'm Sam Swanell, and joining me on the call today is our 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 reiterate our commitment to responsible gambling and provide insight into what we are doing to adapt to the evolving regulatory environment and community expectations.

During the quarter, our responsible gambling team in Australia focused on enhancing the direct communications with customers who may be at risk of experiencing gambling-related harms. Additionally, during the important Spring Carnival period, we executed a dedicated SMS and in-app messaging campaign, encouraging customers to pause and consider their gambling activity during a period that for some can see an increase in the risk of gambling-related harms.

Also of note, we made advancements to the way we communicate with BetStop, the national self-exclusion register, the way we communicate with customers returning from temporary betting breaks and to the presentation of our customer activity statements. Each of these are critical components of the National Consumer Protection Framework, and these advancements ensure that PointsBet will continue to be best in class.

Turning to Slide 3 and 4. Total Q2 group net win was up 11% at $69.9 million, with Australia growing 3% versus the PCP and Canada up significantly versus the PCP at 109%. The group had over 256,000 cash active clients at 31 December, split between Australia with 218,000 and over 38,000 in Canada. At December 31, 2023, the company held $74.3 million in adjusted corporate cash. We are also pleased to report our first positive operating cash flow quarter in the company's history.

Ownership of 13 out of the 14 U.S. states have now transferred to Fanatics Betting and Gaming, and subsequent sale completion and second capital distribution is on track as anticipated for completion in early to mid-Q4. PointsBet continues to support Fanatics from an operations perspective as part of the transition in each state.

Turning to Slide 5 to discuss the Australian Trading business. During the reporting period, total net win for the Australian trading business was a record $59.5 million, up 3% on the PCP. Gross win margin was 9.8% versus 10% in the PCP, although lower than our long-term average of 12% to 13%. This resulted from significant turnover in the high-staking client cohort in the second half of the quarter that did not yield at expected margins. We expect gross win margin to return to the long-term average in H2.

Net win contribution from racing was in line with the PCP, with net win contribution from sport growing versus the PCP. Through Q2, we continue to see strong activity across our core international sports offering of NBA, NFL and soccer, all sports we operate from our market-leading OddsFactory capability. In-play in Australia is performing strongly with our Darwin-based phone betting team taking record bet placement volumes through Q2. OddsFactory is a key enabler of our in-play offering globally.

Turning to Slide 6. Our continued focus on promotions efficiency led to the rate of promotions as a percentage of gross win improving to 32.5% compared to 38.2% in the PCP. This was enabled by leveraging our proprietary in-house tokenization, data science and CRM capabilities to shift our promotions investment from same from all customers to more 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 promotion spend is now aligned with higher-margin inventory, such as Same Game Multi's and Same Race Multi's. Total marketing spend for the quarter was $13.6 million, 33% lower than the PCP. This is in line with our strategy to reduce total marketing spend by between 15% to 20% for FY '24. Despite lower spend, our brand consideration increased from 34% to 37% year-on-year for the 3 months to November 30.

We've targeted our spend into key verticals that align with our customer strategy: domestic racing, AFL, NRL and U.S. sport. In the period, we have renewed key deals for calendar year '24, including Seven Racing, ESPN and Fox Footy. The net result of our more targeted promotional strategy is that our 12-month rolling active number is lower than at the end of Q1. But the client mix of that active base is significantly improved.

Two important statistics to support this strategy are: compared to calendar '22, the total number of calendar year '23 active clients rated as positive increased, and the total number of calendar year '23 active clients rated as negative declined. And our mass market client base delivered 6% net win growth versus the PCP.

We have demonstrated that this strategy continues to improve our client mix and drive growth in total net win, especially from mass market cohort, which underpins the sustainability of our Australian operations. Off a strong base and improved client mix of 218,000 rolling 12-month actives, we expect this number to grow over the coming quarters. We expect to achieve this growth while aligning our media partnerships, promotion strategy and responsible gambling services towards the core principles we think should underpin sensible and pragmatic reform outcomes from the federal government review into online wagering.

Turning to Slide 7 and 8 to discuss the Canadian trading business. We delivered our strongest net win quarter to date in Canada across both sports betting and online casino in Q2. Sportsbook net win came in at $4 million, up 94% versus the PCP. This growth was driven by both improved trading margin on a higher overall mix of parlay bets and continued gains in customer promotions efficiency. Our in-play mix of total handle remains strong at 65%, up from 63% in the PCP.

On the iGaming side, we delivered $6.4 million in net win, an increase of 119% versus the PCP. In total, across the full offering, we delivered total net win of $10.5 million, up 109% versus the PCP. While marketing spend was down 12% versus the PCP, we drove our highest quarterly number of registrations and first-time bidders in Q2 with our conversion funnel performing at its most efficient since we launched in Ontario in April 2022. Combined with our efforts on driving retention and reactivation across our customer base, 12-month rolling cash actives reached 38,627, up 18% from Q1.

As we look ahead to H2, we're excited about the opportunity in front of us. Q3 in North America brings the NFL playoffs and Super Bowl, along with the heart of the NBA and NHL regular seasons, which we are poised to capitalize on with our market-leading sports betting platform powered by OddsFactory.

As can be seen on Slide 9, importantly, we also recently announced our strategic partnership with Strive Gaming, which will transform our iGaming offering and accelerate our growth in this critical market. Through partnering with Strive, we will be able to bring our customers a broader selection of games and enhanced overall experience. We've been hard at work with Strive working through the integration, and we've begun the progressive rollout of Strive capability onto our platform. We expect this new offering will accelerate the growth of our iGaming business, helping drive more favorable game mix over time with higher gross margins, along with enhanced retention and customer lifetime values.

I'll now hand over to Andy to walk through our quarterly cash flow statement.

[Andrew Mellor, executive]

Thank you, Sam. Turning to Slide 10. At the 31st December 2023, the company held $46.3 million in statutory corporate cash with adjusted corporate cash of $74.3 million. Adjusted corporate cash is our statutory corporate cash adjusted for an amount of $7.5 million being a reimbursable U.S. business sale-related payments paid in Q4 FY '23 that will be reimbursed at the subsequent completion; and secondly, adding an amount of $20.5 million held by PointsBet USA Holdings, Inc. as required to operate the U.S. business until subsequent completion. This amount will be transferred to PointsBet Holdings Limited by the 31st of March '24.

Q1 net cash received from operating activities, excluding movement in player cash accounts, was $100,000, the first positive operating cash flow quarter in the company's history. Importantly, the company expects H2 FY '24 total operating cash flow, excluding movement in player cash accounts, to be positive. This is an important milestone for the company. It reflects the revenue growth and the cost-out initiatives are working and that the company is on the path to profitability.

Receipts from customers for the quarter totaled $69.9 million, and operating cash outflows during the quarter included cost of sales of $31.6 million, noncapitalized staff costs of $8.7 million, marketing cash outflow of $21 million and administration, corporate costs and GST paid of $9.4 million.

Net cash used in investing activities during the quarter was $7.9 million. This included capitalized staff costs for software development of $3.9 million and payments related to the sale of the U.S. business of $3.9 million being transaction costs such as legal, tax and financial adviser fees and a portion of the agreed funding requirements.

Finally, referring to Slide 11. The company reiterates previous FY '24 guidance and also provides FY '24 normalized EBITDA loss guidance of between $9 million to $14 million. This is circa 75% lower than the FY '23 normalized EBITDA loss of $49 million. And as we've previously said, we expect to deliver positive group EBITDA in FY '25. We look forward to presenting our H1 results in February.

I'll now hand back to Sam.

[Samuel Swanell, executive]

Thanks, Andy. Finishing with Slide 12. As stated, in Q2, both Australia and Canada have delivered record quarterly net win and built upon our strong Q1 results. The H1 result is a group net win of $128.1 million, up 14% on the PCP. This has been delivered while, at the same time, reducing marketing for the half by 13.1% versus the PCP. The significantly increased efficiency of marketing and promotions is critically supported by the continuing evolution of our products and the advanced technology that drives them. Our strategy is working.

I'm also pleased to report the group has had a strong start to the quarter with an excellent January performance with 1 day to go. With the final closure of the sale of the U.S. business imminent, we're obviously at an important stage in PointsBet's journey. The combined Australian and Canadian businesses have grown revenue from $26 million in FY '19 to an anticipated $230 million -- $250 million in FY '24 as per our guidance that we have reiterated today.

Our ability to deliver strong growth is evidenced by our H1 result. And upon the completion of the sale of the U.S. business, we will be delivering this top line growth profitably, matching it with positive EBITDA and EBITDA growth from FY '25. Sports betting and iGaming remains a fast-growing global market, and 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 have built to deliver shareholder value now and, importantly, increasingly into the future.

I'll now take questions.

[Operator]

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

[Rohan Sundram, analyst]

Just a couple from me. On the Australia business, just noting the higher net win year-on-year despite what looked to be a meaningful sequential decline in the cash actives. Can you just talk us through? Were there any one-off like a cleanup or any one-off yield management drivers there? And maybe can you attribute the yield management in terms of how that compares as a factor versus other factors such as harm minimization, the environment competition that drove that decline in cash actives?

[Samuel Swanell, executive]

Look, I think, first of all, we're really happy with our Australian result. Got a bit unlucky late in the quarter with results. I would have thought that we could probably produce a little bit more net win over and above the good result that we have had. So I think it's pretty clear from the last few quarters, we've seen active pretty much be flat to softening, but it hasn't stopped us growing net win. The softening of active has been a deliberate strategy, as we said in the script. We've grown net win through growing the number of positive value clients and improving our net win from these clients through efficiency.

Just as important has been reducing the number of negative value clients and reducing the revenue leakage to them. There are a bunch of clients out there that are, for want of a better word, bonus chasers. And part of what we've cleaned out over the last 12 months is leaking value to those clients unnecessarily. And that efficiency has been what's helped grow our net win.

We spoke about yield management. I think the other point related to the fact that we got a bit unlucky late in the quarter. The impact of that is, obviously, your yields come down. And because clients are winning, they can reinvest and they can drive turnover more.

So if you look at our results from the last few quarters, the trend has been yields better, in particular, net yields, and turnover down a bit. And that is the way the market has been going. We think the market is in reasonable shape. I think Sportsbet for the half are down 5% for the half from a revenue perspective. That's -- they represent nearly half the market. So that's probably a pretty good indication of where the market is.

And in Australia, I think for the half, we're up 7%. So we're clearly outperforming the market in Australia even with a bit of bad luck impacting numbers late in the quarter. So yes, we do expect that our yields will return to the long-term average, 12% to 13% gross, 8% to 9% net, as we said.

Look, I think from a responsible gambling perspective, I don't see, let's call it, the softening of the Australian market as relating to those impacts. I think it's more related to the fact that operators are being more rational with their promotions and getting better at how they allocate them. And so you have a bunch of clients that were otherwise going around to various bookies. They might have 5, 6, 10 accounts, just taking advantage of bonuses, and there is no value to those bookings. So that turnover naturally sort of goes away.

[Rohan Sundram, analyst]

And just on that, how are you -- how would you describe the competitive landscape at the moment versus, say, 6 months ago? Is it more rational than before? How would you describe it?

[Samuel Swanell, executive]

Yes, I think it's very rational. Yes. I mean I think from a macro perspective, obviously, you have, yes, let's call it, some cost of living pressures not just in Australia but globally. And I think the major competitors here in Australia in Sportsbet and Entain, they're part of global groups and need to operate within the bounds of their global strategies as well. So we think that the market as overall is pretty rational.

We're already -- as we've said before, we're already marketing and promoting in a way that we think is responsible and where advertising outcomes will likely not inhibit the way we're executing our business. Where we think the government inquiry outcomes will end up, we don't believe it will inhibit our business to continue to market the way we're doing so, and we're doing so really effectively.

There is still a long tail of operators, I think, in the marketplace that perhaps is not overly helpful. But I think the economic realities of operating businesses that can't yield at the appropriate levels and can't invest in responsible gambling, et cetera, will probably help a natural rationalization of the market in time.

[Operator]

Our next question comes from Don Carducci from JPMorgan.

[Donald Carducci, analyst]

Just one for me. I'm just trying to understand maybe this high-staking client cohort impact. So turnover was down 4% in Australia. If we take out that high-staking cohort, would turnover be down more like, what, 10%?

[Samuel Swanell, executive]

Yes. I mean I think it will be down. Don, we've said previously that higher the yield, obviously, there is a cannibalization effect on turnover. That's reality. So we've yielded at a net level below our long-term average. So that has helped bolster turnover.

But I think the main point where I'll try to take everyone in the market and all the analysts these days is don't focus on turnover, focus on net win and revenue. That's what we want to see growing. And yes, we're clearly growing it. As I said, the market is probably slightly negative growth with Sportsbet down 5%.

But yes, to answer your question, you would expect that if yields were more at the natural level of where we would see them being, that would have had an impact on turnover. But we would have expected our net win result to be net better off if we hadn't had that sort of run of results.

[Donald Carducci, analyst]

Yes, that makes sense. You guys have done a good job on net win, I guess. Yes. I think maybe you've guided to -- with the high stakes cohort spend in the past. Is that kind of a 10%, 20%, 30% of turnover? Or just, again, trying to understand -- not necessarily a number, but just trying to understand the direction of the market. And down 10% feels about sensible, but just wanted to kind of confirm what that high stakes cohort was as a percentage of your book.

[Samuel Swanell, executive]

No, we don't disclose that. I suppose the general definition has been that someone that turns over in a sort of above-average abnormal amount but generally might have a -- our experience has been that generally a lower-yielding client. But we -- it's interesting, Don, the PCP actually had a similar profile. We had some turnover and slightly lower yields compared to, for example, the quarter that preceded it.

So we've seen a little bit of history repeating that the PCP was probably a little bit overstated on turnover and a little bit understated on yield. Same things happened this year. But if you look at the other quarters in between, that's clearly the trend that we would point to.

[Operator]

Your next question comes from Phillip Chippindale from Ord Minnett.

[Phillip Chippindale, analyst]

First question, as much as we are sort of focused on net win margin, I just want to look at the Canadian business and the turnover figure, noting your comments you just made there, Sam. But turnover has come down versus the PCP even though activity has almost doubled. I mean you mentioned strong net win margin does tend to impact your turnover, but it surprised me a little bit. Can you just unpack maybe what's happening in terms of the Canadian dynamic?

[Samuel Swanell, executive]

Yes, yes. I think, look, again, it definitely is the same broad trend that I just spoke about. If you double net margins from 2.6% to 5.4% and -- that is going to have an impact on turnover. I mean that's just -- you are winning client -- you're winning money more effectively after clients, so less ability for them to reinvest.

What I would say is not to the same extent of Australia, but we've had -- the Canadian market only launched in April '22. I think as you go through these periods for the first time, you're in more acquisition mode. You're trying things. It's just more focused on bringing clients through the door. And then as business gets a little bit more mature, we execute a little bit better. You get more refined with your approach.

So yes, I mean, we definitely want to be yielding at -- we don't want to be yielding at net margins of 2.6% like we were at this time last year. We want to be yielding more. 5.4% is probably above expectations, to be honest. But we seem to have settled there because in the first quarter, we had 5.3%. I would also point out that in Q1, handle was 44.2. So we haven't quite doubled it, but it's a pretty big step up, but reflective of, again, that in Q1, net win margins were also above 5%, so particularly high.

[Phillip Chippindale, analyst]

Okay. Appreciate it. Just the last one. You might have made a comment but perhaps I missed it. Just on the U.S. distribution now being pushed back to the June quarter. Is that just relating to the approval of the last state?

[Samuel Swanell, executive]

Yes. I mean I think previously we spoke to the fact that regulatory approvals, we thought, might take until sort of late March, and then the distribution would occur shortly after that. So that was always sort of looking more like in April. I think we're being just a little bit conservative here in saying that the closure of the last regulatory approval might drag into April. Probably 50-50, to be honest. It could come through March, and we're sticking to our original time frames, but we just wanted to err on the side of caution as it related to that timing.

[Operator]

Your next question comes from Kai Erman from Jefferies.

[Kai Erman, analyst]

Just one question from me. In relation to your comments about growing active clients over Q3 and Q4 in Australia and understanding the change in strategy, how do you guys view a sustainable level of Australian client growth going forward? Is that something that you expect to be low single digits, around 1% to 2% a year?

[Samuel Swanell, executive]

Yes. I think the best way I can answer that, I don't think it'd be 1% to 2% a year. I think the best way to answer that is it should more closely reflect net win growth. So we've had this disconnect through this year as we cycled out of 0 value clients basically that we've been able to keep growing net win despite active clients being soft. We'd expect active clients to pick up in the next half, probably still to be a little bit behind the net win growth that we can achieve because we still believe we're getting better at share of wallet from existing clients and reactivation of existing clients and the like. But you would expect it to be more parallel with net win growth going forward.

[Operator]

[Operator Instructions] Your next question comes from Chris Savage from Bell Potter.

[Chris Savage, analyst]

Maybe a question more so for Andy given its his second last call. Andy, is the cash where you about expected? Because I note there was a negative exchange rate impact in Q2 or at least for the first half. So is it a little bit less perhaps than where you thought it would be now?

[Andrew Mellor, executive]

Chris, no, it's not. It's tracking as we expected. I think as it relates to that FX movement, that's sort of not -- that's not FX as related to hedging the cash coming into the Fanatics. That's a cash flow movement that relates to balance sheet movements and P&L movements, et cetera. So yes, the cash is where we expect it to be. We're obviously pleased this quarter to deliver our first quarter of operating -- positive operating cash flows.

We've obviously given the guidance now that we expect that to continue through the second half. And now that's an important change for the business. We've talked previously about how CapEx will look as it relates to the software development costs. That's pretty consistent quarterly. And then the last element will be assumptions around final transaction costs and restructuring costs. So now the cash is broadly where we'd expect it to be. And it's just now for the business to continue to execute and hit our guidance numbers.

[Chris Savage, analyst]

And just as a follow-on on question. It might be a bit unfair, but if the cash is where you thought it would be in terms of the second capital distribution, should we be thinking about it sort of being around the middle? Or are there other factors still to determine?

[Andrew Mellor, executive]

No. I think we've given the range of $0.39 to $0.44, and we've also been specific that the final amount will be determined post the second close, which, as Sam guided to, will be likely April. So the Board will make the determination at that particular time, what part of the range that will be. I think we can't sort of provide any more clarity to that at this point.

[Chris Savage, analyst]

Fine. And Sam, just one for you. When you were talking about active cash clients in Australia, you made a comment about the mix between positive and negative, being more positive. Can you just explain what you mean by positive and negative in relation to those clients?

[Samuel Swanell, executive]

Yes. So the easiest example I can sort of give you is you don't really want to be giving value to nongenuine clients. If you're leaking net win to nongenuine clients because you're giving them bonuses and free money, that's a negative drag on your net win. And so part of our performance this year has been getting better outcomes from our good clients, our genuine clients and growing their share of wallet and having them deliver.

But part of our performance has also been by cutting unnecessary leakage to nongenuine clients who are just there really to take advantage of the promotions and not be a genuine client spend. So those -- that trend where actives have been soft has been on the back of really getting rid of those nongenuine clients who now know that there's no point trying to take advantage of us. They're not going to get free money in terms of inefficient promotions coming their way.

[Operator]

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