PBTHF - PointsBet Holdings Limited (PBTHF) H1 2023 Earnings Call Transcript

PointsBet Holdings Limited (PBTHF)

H1 2023 Earnings Conference Call

February 27, 2023 06:00 PM ET

Company Participants

Samuel Swanell - Chief Executive Officer

Conference Call Participants

Ben Brownette - Jarden

Rohan Sundram - MST Financial

Darshana Nair - Goldman Sachs Group, Inc.

Presentation

Operator

Thank you for standing by, and welcome to the PointsBet Holdings Limited H1 FY2023 Financial Results Briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]

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

Samuel Swanell

Good morning. I would like to thank you for joining us [to discuss] PointsBet's half year results. As you know, I'm usually joined by our CFO, Andrew Mellor. Unfortunately, Andy fell ill and is now self-isolating, so I will take you through all the results. Also on the call to answer questions are Johnny Aitken, Andrew Catterall and Scott Vanderwel.

All figures in this presentation are in Australian dollars unless otherwise stated. I will give a brief overview of the half and we'll then open to questions from analysts and investors.

First and most importantly, we continued our global commitment to responsible gambling. This is an important issue for the long-term sustainability of the industry, and we take our obligations in the area very seriously.

Turning to Slide 5. These results show firstly, that our North American strategy is working. Revenue growth is up and costs are going down. Secondly, the Australian business continues to deliver. And most of all, we have built a very valuable company. We expect a normalized EBITDA loss of between A$77 million and A$82 million for the second half of FY2023. This is a significant decrease to both the reporting period loss of A$149.1 million and a PCP loss of A$117.6 million. The bottom line is revenue is growing, and we are driving down costs. We held A$320.7 million in corporate cash as at 31 December 2022, and we have no corporate debt. I think it's important to understand that these results show our strategy, backed by world-leading technology and a world-leading team is building a platform for future growth and profitability.

In the United States, the largest and fastest-growing online betting market in the world, we are the seventh largest online operator out of a field of over 60 licensed online operators. On top of that, our app, which is powered by our proprietary tech stack is independently ranked as top three. This has not gone unnoticed. The amount of third-party strategic interest shown in our company demonstrates we have built a very valuable business. This gives us significant optionality around how we take the business forward to maximize value for our shareholders. The key takeaways during the half were group revenue was up 28%, anchored by an 81% increase in U.S. net win with 17% less marketing expense and strong iGaming performance and a continued disciplined and focused approach to cost management. To put it simply, the jaws at PointsBet are positive, revenue is growing strongly and costs are reducing.

Turning to Slide 9. While you will see that we've included all individual country disclosures in our results release for the purposes of this presentation, I will speak regularly today to North America, that is U.S. and Canada in aggregate. What you can see from the results and from Slides 8 and 9 is that our focus on the Super User over the past six months is really delivering. While overall North America revenue was up 98%, our target segments were up 199%. As you can see on Slide 9, targeting the right customers has led to a 63% increase in online sportsbook gross revenue, understanding these customers better has allowed us to increase bet count, increase multi-product usage and improve gross margins for these clients. This increase in active clients and revenue per active combined with increased promotional spend efficiency, has led to an overall 124% increase in online sportsbook net revenue. Laid on top of these improvements is the improved cross-sell and direct acquisition into iGaming, leading to an overall revenue improvement of 199% for our targeted cohorts.

Turning to Slide 10. Effective targeting and monetization of the right clients is our recipe for improving unit economics and delivering ROI on marketing. In summary, we are acquiring more higher-value players at a lower cost. As is demonstrated by the two charts on this slide, first year net win payback of acquired clients in H1 FY2023 was 264% more efficient than the PCP. And for those clients who have completed two years of activity with PointsBet, we are seeing in the second year 30% more net win than in the first year. These trends provide positive forward-looking indicators that we are building a growing and sustainable revenue base.

Turning to Slide 11. During the half, we executed on our locally focused U.S. advertising strategy, utilizing our exclusive and heavily discounted access to the powerful media properties of NBCU. The correlation between increased U.S. net win and reduced marketing expense during the reporting period is evidence of our more targeted strategy. As mentioned, the North American business grew online sports betting and iGaming net win by 98% from the PCP. iGaming is a critical and important part of our North American strategy. iGaming net win represented 31% of North American net win in the reporting period with total iGaming net win of A$23.7 million, representing a 213% increase on the PCP. These results were driven by ongoing improvement in our ability to convert and retain cross-sold sports betters and by the growth of the casino-only cohort. We still have significant headroom to improve our iGaming product and to increase the net win contributions iGaming can deliver.

Turning to Slide 13. Total turnover in Australia was A$1.55 billion, up 14% on the PCP. Total net win for the Australian trading business was A$105.3 million, down 2% on the PCP. As previously reported, our trend improved through the half with a 9% PCP increase in net win for Q2, almost offsetting a 13% PCP decline for Q1. Based on data provided by principal racing authorities, we estimate the online market for racing turnover is down between 5% and 10% for the reporting period versus the PCP. Our total rating turnover is consistent with this trend. The shift in turnover mix towards sport led to a reduction in overall gross margin to 10.7% in the reporting period versus 13.3% in the PCP. Total gross win was A$166.5 million, down 8% on the PCP. However, this was offset by continued improvements in the efficiency of our client promotion spend enabled by our new tokens capability.

Total spend on client promotions was A$11 million lower than the PCP and will be lower again in the second half. The rate of promotions as a percentage of gross win improved to 36.8% versus 14.1% in the PCP. Despite net win being slightly down period-on-period, we are encouraged by the shift in client mix towards mass market, which reduces the reliance on VIPs as seen on the right-hand side of this slide. VIP remains important, however, due to intense promotional spend led competition from new entrants, this remains a highly competitive segment. However, we are confident that in time, the current rate of promotional spend offered by competitors is not sustainable. VIP customers will choose consistent reliable offerings on the best online platforms. Further industry consolidation and attrition is inevitable. Importantly, early Q3 trends give us confidence in continued growth in sports and multi-turnover and combined with continued client promotion efficiency, we expect to see net yields return in Australia to greater than 8%.

Turning to Slide 15, talking to the normalized results. For the reporting period, PointsBet reported net revenue of A$178.1 million, a growth of 28% versus the PCP. Gross profit of A$69.9 million represented growth of 28% over the PCP. Gross profit margin for the reporting period was 39%, in line with the gross profit margin we achieved for the PCP. We expect gross profit margins to continually improve in H2 and beyond with improving operating scale in North America. As previously disclosed in our quarterly activity reports, group sales and marketing expense was A$131.3 million for the reporting period with Australia accounting for A$45.3 million, the U.S. accounting for A$70.6 million, being US$47.3 million and Canada accounting for A$15.4 million, being C$13.7 million. This marketing investment assisted in the delivery of 548,236 rolling 12-month cash active clients. U.S. marketing expense will be lower in H2 being circa US$90 million for the full year. Australian marketing expense in H2 will be circa A$15 million, down from the A$45.3 million in the first half. Canada will also be less in H2. Whilst employee benefits expense product and technology expense and admin and other expenses did increase versus the PCP, I would note that the total of these three operating expense items in H2 are anticipated to be consistent with the total cost in H1, reflecting the stabilization of our cost base. EBITDA loss was A$149.1 million for the reporting period. As previously referenced, in the second half last year, PointsBet delivered a normalized EBITDA loss of A$117.6 million. We expect a normalized EBITDA loss of between A$77 million and A$82 million for the second half of FY2023 as we see the benefits of the operational leverage being realized on the back of our growing revenue.

Slide 16 sets out our statutory segment results. Slide 17 covers the balance sheet. The group has net assets of A$577.8 million as at 31 December 2022.

Turning to Slide 18, cash flows. Reiterating, the company held A$320.7 million in corporate cash as at 31 December 2022 and has no corporate debt. Based on expected trading performance for the duration of the financial year, we expect H2 FY2023 net cash outflow, excluding movement in player cash to be approximately 30% lower than H1. This represents a decrease from the previous outlook of a circa 35% reduction. The change in outlook is primarily driven by two factors in the Australian market, a decline in the online racing wagering market and heightened VIP volatility.

Moving to Slide 20. In summary, today's results clearly show that our North American strategy is working. Revenue growth is up and costs are going down, and the Australian business continues to deliver. Most importantly, we have built a very valuable company. We held A$320.7 million in corporate cash as at 31 December 2022 and expect a normalized EBITDA loss between A$77 million and A$82 million for the second half, which is a significant decrease to both the first half and the PCP results.

Thank you. The team here and myself will now take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question today comes from Ben Brownette from Jarden. Please go ahead.

Ben Brownette

Hi, Sam. Can you just – sorry, you were speaking rather quickly. And I just missed your reasoning for the cash flow to be a little bit better than you thought before. What was that, sorry?

Samuel Swanell

Yes. Good. Ben, hope you're well. We spoke about the fact that guidance for cash flow, we're saying is now going to be 30% lower than H1. And the reason that's a slight downgrade for what we previously said was a decline in the online racing wagering market in Australia and heightened VIP volatility. So there's just two Australian factors that I referenced.

Ben Brownette

Right. So just to be clear, the cash outflow is going to be greater or less than?

Samuel Swanell

30% less than H1 is what we've guided to.

Ben Brownette

Right. So is that better or worse?

Samuel Swanell

It's better, a 30% improvement on H1, yes.

Ben Brownette

Yes. Okay. Got it. So just as well, just with the – I'm just wondering, I know that there's some obviously media articles and things going on that you've announced. And I didn't want to specifically talk on that, but I did want to talk about potentially with the improved EBITDA guidance that you've provided. And again, you've spoken about the second half marketing in Australia going to be greater than what it was in the first half. But presumably, if you're in these kinds of discussions…

Samuel Swanell

Sorry, just to correct you there, Ben. So what we spoke about was Australia's first half marketing was A$45 million, and we expect the second half marketing in Australia to be A$15 million. So it's a dramatic drop-off. Now that's consistent with what we did last year. So last year, we heavily weighted marketing in the first half, and that led to a lot from an EBITDA perspective. And then as per last year, we ease-off on marketing in the second half.

Ben Brownette

Right. So there's no change with respect to that because of other things that may be going on?

Samuel Swanell

Absolutely not. That's always been our strategy. I think even on previous 4C calls, we've spoken about the fact that we will wait marketing to the first half and ease-off in the second half.

Ben Brownette

Yes. Okay. Cool. And then just with respect to Slide 16, and I know you're not the numbers man, but if you could speak maybe more qualitatively around exactly what expenses there, so in the first half 12% on technology and 18.6% in corporate. I know it's difficult to split them between Australia and the U.S., but can you kind of give us a bit of a guide in terms of what you would need as if you were running two separate businesses?

Samuel Swanell

So can you just repeat that, Ben?

Ben Brownette

So Slide 16.

Samuel Swanell

Yes. Got that.

Ben Brownette

So in terms of the technology and corporate spend.

Samuel Swanell

Okay. So the way we run our business from a technology perspective is the technology segment charges the trading businesses, okay? So it's basically 8% of net win in each jurisdiction is charged for the technology services that our group provides, okay? So from a P&L perspective, the P&Ls are clean and they represent the support that comes from our technology segment. I've spoken before about the fact that we run 16 instances of our platform, we're in 14 states of America. We're in Ontario, Canada. We're in Australia. And every one of those jurisdictions needs its own instance of the platform, stand-alone instance. So in terms of the scalability and the separability of our platform, that already happens very, very clearly. What I've also spoken about is that from a technology perspective, why do we run that global tech teams because we believe we can get some synergies from doing so rather than necessarily having certain roles to support roles, I suppose you would say duplicated. There's nothing in the way that we're structured that reduces our optionality and flexibility around breaking things up or doing other things that would help us realize shareholder value. So everything can be done, but that doesn't mean at the moment, we are structured in a way that the global technology function can support the entire business.

Ben Brownette

Okay. So like if you were to think about like half-half, like would that be a reasonable assumption?

Samuel Swanell

So if you're talking about the product and technology expense, that's like the left-over pose extra expenses not covered by the 8% that is charged to the various entities. In terms of practicality, I'm not going to comment on that. I mean, we have local resources in every jurisdiction that are very focused on local and product initiatives. So we have local sprint teams, we have local parts of our tech function, but then we also have some global sort of support functions that allow us to add some extra efficiency.

Ben Brownette

Okay. Thanks very much, Sam. Cheers.

Samuel Swanell

Thanks, Ben.

Operator

Thank you. [Operator Instructions] The next question comes from Rohan Sundram from MST Financial. Please go ahead.

Rohan Sundram

Thanks. Just one from me. Sam, what are you able to say around the decision to withdraw the application in Massachusetts. Is that just consistent with the strategy or what were the circumstances there?

Samuel Swanell

Yes. Good. Rohan, hope you're well. Look, we've launched a lot of states in recent times. We've spoken about the fact that our job is to approve the unit economics and the path to profitability of our North American business. And we think that the total addressable market that we have access to now being 14 states of America plus Canada is huge. And so I suppose we made the prudent decision that adding Massachusetts was probably one step too far.

And the other thing that gave us some encouragement is we're not launching at this time, but that doesn't mean that we can't launch into Massachusetts at a future time. It's a bit like a state-like Tennessee, Rohan where we've basically said, look, we can go in there at some time, but at the moment, we're going to let it go. So yes, we felt like we've launched a lot of states recently. We've got enough of total addressable market to focus on. We need to prove as we are the unit economics and the path to profitability. And so that's a sort of a prudent decision, a prudent balanced decision.

Rohan Sundram

Thanks, Sam. Seems fair enough. So are you saying that with upcoming state launches in some states, does it make sense to be there on day one, whereas others the economics may not quite stack up to even be there on day one?

Samuel Swanell

Yes. I mean I think we were really happy with our Ohio and Maryland launches, Rohan, like we definitely got off to a fast start, faster than we'd ever got to in any other state. We spoke about that. But I think it also needs to be recognized that our competitors, they've all spoken very heavily about the fact that they put a huge focus on early state launches as well, right? So even though we're getting better and we're getting faster, I think they probably are, too. So no, we don't expect – Massachusetts was probably the obvious one that was a new state launch for calendar year 2023. We don't expect that there's going to be others popping up. We'll assess any new state on its merits and at a point in time.

Rohan Sundram

Thanks, Sam.

Operator

Thank you. The next question comes from Darshana Nair from Goldman Sachs. Please go ahead.

Darshana Nair

Hi, Sam. Thanks for taking my question. Just keen to understand as we have now finished about two months into the quarter, how have you seen Australian market operations settle in terms of both trading as well as the promotional environment, please?

Samuel Swanell

Yes. We basically made some comments around that in the run-through on what we are seeing. And it is a continuation of what we've sort of seen in the first half. And that racing – online racing turnover continues to be under pressure. And let's call it, the promotional intensity, predominantly the VIP sort of segment continues to be pretty strong. So, yes, we're flagging those two areas as probably challenges for the sector. Having said that, as it relates to the latter, I think it's not sustainable for some of the smaller operators to be as aggressive as they are from a promotion perspective. And as those sorts of things normalize, again, we expect players to congregate back to the best products and the best services which we have won. So definitely some headwinds in those two areas, like I heard the Tabcorp called the other day or saw the outcomes of that, and they spoke to, obviously, some macroeconomic factors, cost of living increases. So you can probably overlay that a little bit, too. But specifically, we're pointing to racing turnover coming under pressure and some increased intensity in VIP generosity, the latter of which we don't necessarily think is sustainable.

Darshana Nair

Got it. And as a quick follow-up, can you remind us how much is your exposure to racing versus sports betting?

Samuel Swanell

We haven't disclosed that. But what I will say is the weighting is changing. Obviously, our percentage of our turnover that's coming from racing is coming down and our percentage for sport is going up. And to some degree, that's also driven by our product enhancements. We're getting our sports on the Odds factory, our in-house odd factory models, which improves our product suite, including multi, and we've got some features coming out in the coming months that will further improve that. So yes, there's some things happening in the environment relating to racing coming on, but we also are probably driving that sport switch by the innovation that we're bringing to sport.

Darshana Nair

Okay. Thank you. And a quick follow-up. I think you mentioned this earlier in terms of the guidance for marketing in the various regions. Can you remind us of what that was for Canada in particular for the second half?

Samuel Swanell

Yes. All I said for Canada was that it would be reduced. So we've given – obviously, the Canadian market is a little bit newer. But we've given firm guidance on the U.S. being a total of 90 for the year and Australia being circa 60 for the year.

Darshana Nair

Got it. Thank you very much.

Operator

[Operator Instructions] At this time, we're showing no further questions. That does conclude our conference for today. Thank you for your participation. You may now disconnect.

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PointsBet Holdings Limited (PBTHF) H1 2023 Earnings Call Transcript