Thank you for standing by, and welcome to the Jumbo Interactive Limited 1H 2022 Results Briefing. All participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Mike Veverka, Founder and CEO. Please go ahead.
Good morning and welcome. Today, I'm joined in our Brisbane office by our CFO, David Todd. I'll provide an overview of the first half results and progress we are making with our strategy, while Dave will provide a more detailed run-through of the numbers. I'll then wrap up and move to Q&A. Moving past the disclaimer, and just before I get into the results, this first slide just explains the adjustments used to determine the underlying figures used in the rest of the presentation. Turning to the results, and slide three presents the key group metrics for the half. We are very pleased with this set of results, with all key metrics up more than 20% on the PCP. The results were underpinned by higher jackpot activity in Lottery Retailing and all our Australian SaaS clients contributing on a full run rate basis.
With good momentum in the business, the board has declared an interim fully franked dividend of AUD 0.22 per share, up 22% on the first half 2021. Our strategy on slide four is unchanged, and our focus has been on ensuring we have the appropriate infrastructure and capability to successfully execute on this strategy. Our SaaS business is focused on licensing the Powered by Jumbo platform to government and charity lotteries, while our Managed Services segment provides a comprehensive lottery management service to licensed charities that are looking to establish a lottery program or enhance an existing program. The conditional acquisitions of Stride, announced in August 2021, and StarVale, announced in January 2022, aligns with this strategy and will help build scale in our Managed Services and SaaS segments globally. Simply put, we have a clear strategy, and we're getting on with it.
Slide five is one of my favorites. Here, we show our first half 2022 actual active players in the dark and light blue, but also have the first half 2022 pro forma illustrating the active players that the Stride and StarVale acquisitions will add once the acquisitions are complete to give you a sense of scale. While we continue to build our active player base organically via Lottery Retailing and SaaS, Stride and StarVale will, in aggregate, add approximately 1.6 million active players, almost the total number of active players we reported in FY 2021. This is a key metric for us and provides a foundation for future growth as we seek to use our platform to improve performance and attract new players. Formula is simple. The more active players we have on our platform, the more we can grow.
Our digital skills and ever-improving customer experience engages players and keeps them active, in turn, satisfying our lottery partners and minimizing our contract risks. Moving to Lottery Retailing, slide six captures the key external trends impacting performance. As expected, online sales of lottery tickets continued to trend upwards, increasing by 3.9 percentage points to 36.7% over the half. We had 23 Powerball and Oz Lotto jackpots greater than or equal to AUD 15 million compared to AUD 15 in the PCP, with the aggregate value per jackpot up 11%. Moving to slide seven, can I note that the further details of the Oz Lotto game change were released last week with a planned launch in May this year.
Oz Lotto is a significant part of our portfolio, and we expect the game changes to lead to higher jackpots and increased customer engagement, which in turn will be positive for active players and sales. Prior to the Powerball game change in April 2018, Oz Lotto was our largest game, in part due to name recognition of ozlotteries.com. The new game will increase by AUD 0.10 in the base price, which excludes agent's commission, and we expect to implement the base price increase plus AUD 0.05. Slide eight has our usual chart showing Lottery Retailing sales performance over several years and helps explain both the resilience, as seen in the light blue shaded bar, and the boost we get from the large jackpots, as seen in the dark blue shaded bar.
New players in the half were up 41% on the back of the higher jackpot activity and our focus on player engagement and retention. Active players for the 12-month period to 31 December were up a pleasing 15%, with average spend per player up 11%. Slide nine. As shown on the previous slide, our cost per lead increased 24% to just over AUD 20. I've included this slide to demonstrate the revenue and cost dynamics of new players and why we are comfortable spending more to acquire new customers. The chart on the left-hand side shows the first half acquisition spend as a percentage of new player revenue, with the first half ratio broadly in line with the last three comparative halves. The chart on the right-hand side shows the first half acquisition spend relative to the revenue contribution from the new players.
I've split the revenue bar by half, so you can see that the initial acquisition spend is fully recovered within the half, typically around the five-month mark. This dynamic is underpinned by player loyalty and our emphasis on ongoing player engagement and retention. This is why we don't shy from being aggressive with acquisition earlier in the year if jackpot cycles are favorable. Moving to our SaaS business segment on slide 10, where TTV growth increased 46% on the PCP after adjusting for the transfer of our Western Australian customers to SaaS in first half 2021. While this level of growth is pleasing, it's important to note that the comparator doesn't reflect the full run rate of all our clients. I've included some pre and post Powered by Jumbo metrics for selected clients in the appendix to give you a sense of like-for-like performance.
We continue to work very closely with Lotterywest, and after some encouraging early results from the acquisition marketing trial in Q2, we are pleased that this will progress to a jointly funded and managed acquisition marketing program executed through Jumbo, leveraging our proprietary analytics tools and experience. In the U.K., our first SaaS client, St Helena Hospice, went live with its first lottery in late November 2021. St Helena's second lottery is now expected to go live in Q4 2022, with a full TTV run rate of approximately AUD 10 million expected to come through in FY 2023. While not surprising, the pace of digital adoption in the U.S. lotteries remains slower than in sports betting, with only 11 out of 48 U.S. jurisdictions having an established iLottery channel. We remain focused on this market and have recently appointed a GM of North America who joined the team last month.
Turning now to Managed Services on slide 11, and starting with Gatherwell in the U.K., which continues to demonstrate impressive growth with TTV up 56% on the PCP and active players up 27%. Gatherwell now supports over 10,000 good causes and has increased its market share of schools and local government authorities with several first-half launches. Also recently, Northern Ireland changed its gambling legislation to allow online lotteries, with Gatherwell currently working on obtaining licenses in this jurisdiction. Slide 12, staying on Managed Services, we are very pleased to have announced the Stride and StarVale acquisitions, which will add significantly more scale to our business. Just a quick recap on the StarVale acquisition, which we announced last month.
The acquisition is transformational in that it significantly increases our footprint and scale in the U.K., with access to over 45 charities and not-for-profit clients, and over 850,000 active players. It also provides us with a significant opportunity to leverage the Powered by Jumbo platform to drive further growth and efficiencies for clients, as well as access to digital payment solutions capabilities. While both Stride and StarVale are still subject to regulatory approvals, planning is currently underway to integrate these businesses and effectively create a blueprint for potential further ELM acquisitions. We have been building our team on the ground in the U.K. and now have a team of 17, which also includes a member of the KMP.
Here in Australia, we are pleased to have signed a new client agreement with Queensland's leading community helicopter service, LifeFlight Rescue, and are currently targeting a May 2022 program launch. I'll now hand over to Dave to take you through the financials.
Thanks, Mike, and good morning, everyone. For my presentation, you will see that I have provided both the 1H 2021 reported and underlying figures, as Mike mentioned at the start of the presentation. Further detail on Lotterywest adjustments are included in the appendix. Underlying EBITDA increased 24.9% to AUD 28.3 million, driven by strong growth in all business segments, partially offset by a higher cost of sales and an increase in OpEx. The increase in cost of sales primarily reflects the increase in the Tabcorp service fee from 1.5% to 2.5% of the subscription cost of tickets. Operating costs were up 35.9%, broadly in line with revenue growth, mainly due to increased marketing and employee costs. I'll now run through the results at a segmental level, starting with Lottery Retailing on slide 14.
The strong revenue growth of 34.9% was a function of the strong TTV growth, underpinned by higher large jackpots and increased customer activity, partially offset by a slightly reduced revenue margin, mainly due to product mix. EBITDA growth of 15.1% was impacted by the higher Tabcorp service fee, which I spoke about earlier, and higher acquisition and marketing costs, which were up almost 80% and equivalent to circa 1.8% of TTV, in line with our expectations, given the favorable jackpot cycle. Non-marketing related costs in aggregate were flat. Turning to SaaS on slide 15, where we saw all four Australian clients fully operational on the Powered by Jumbo platform.
The 45.8% increase in TTV is distorted by the fact that 1H 2021 doesn't reflect the full six months contribution from all clients. Only Mater and Lotterywest have been fully captured in the comparator, with Deaf Services and Endeavour only partially captured. External revenue increased 27.1%, reflecting the dynamic I just mentioned. The fall in revenue margin from 5.6% to 4.9% reflects the increased skew towards charities, which are around the circa 3.3%-4% revenue margin. This is not surprising given the subdued growth of Lotterywest over the period, with virtually no acquisition marketing dollars spent.
Operating expenses grew at a slower pace than revenue, impacted mainly by the higher employee costs, both direct and allocated, resulting in EBITDA growth of 39.8% and an EBITDA margin of 68.8%, slightly higher than the PCP. Turning to slide 16, the other one achieved strong TTV growth of 56.1% on the back of new client wins and momentum with existing clients. The fall in revenue margin was mainly due to product mix, while EBITDA grew 8.9% impacted by increased investment in marketing and staff, both of which are expected to result in increased future revenue. Underlying operating costs on slide 17 increased by 35.9% on the PCP, driven by, firstly, an 82% or AUD 2.1 million increase in acquisition marketing costs.
A 28% or AUD 1.7 million increase in employee costs, reflecting a combination of factors, including the establishment of a new senior leadership group, modestly higher turnover and a tighter labor market, annual remuneration increases for staff, and a high STI accrual based on the staff pool on the first half NPAT performance. The other notable increase of AUD 458,000 reflects higher insurance-related costs as a result of expansion of the business and higher premiums. Looking ahead, we would expect marketing costs to continue to track in line with TTV, while any future cost increases will be linked to future growth. Turning now to the balance sheet on slide 18, where we continue to maintain a strong position underpinned by the strong organic cash generation of the business.
The board has declared an interim fully frank dividend of AUD 0.22 per share, reflecting a payout ratio of 83.7% of statutory NPAT. As we flagged when we announced the acquisition of StarVale last month, following completion of the transaction and effective from FY 2023, the board has resolved to adjust the targeted dividend payout ratio to a range of 65%-85% of statutory NPAT. Turning to cash flow on slide 19, where the cash generated profile of the business is clearly evident with a free cash flow of AUD 24.4 million and greater than 100% cash conversion.
On the right-hand side of the chart, on a pro forma basis, I have shown the key items expected to impact the group's cash balance, including the 1H 2022 dividend, Stride and StarVale acquisitions, and the first tranche of our new senior debt facility. Notwithstanding the expected 2H 2022 organic cash generation, this leaves the group with a pro forma cash balance in excess of AUD 40 million. I'll now hand back to Mike.
Thanks, Dave. Slide 20 simply represents our key first half metrics on a pro forma basis, overlaid with the half year contribution from Stride and StarVale. While I know the acquisitions remain subject to regulatory approval, it gives you a sense of our future performance and demonstrates how we are executing on our strategy and diversifying the business. As you can see, on an annualized basis, our TTV is fast approaching the AUD 1 billion mark. Slide 21. At its core, Jumbo is a software company that operates in the lottery sector. We continue to invest in the platform, technology expertise, and tools to ensure the core platform is best in class and is complemented by the latest technology and integration to drive the best player experience.
It's our best in class lottery software and lottery management expertise that has enabled us to expand into new markets like the U.K. and Canada. This is evident to the founders of ELMs that have been operating in the lottery industry for decades, while our digital proposition is compelling to the charities and clients they support, as they look to future-proof their business as the lottery industry becomes increasingly digitized. Before moving to Q&A, I just wanna summarize the key messages from today's presentation on slide 22. First, we do have a clear strategy and are focused on execution. Lottery Retailing continues to perform very well, driven by a favorable jackpot cycle and our focus on player engagement and retention. Our SaaS clients are fully operational on the platform and growing organically. We're very pleased that we will shortly start acquisition marketing for Lotterywest.
While still subject to regulatory approval, planning is underway to ensure we are able to efficiently and effectively integrate Stride and StarVale. Second point, our balance sheet remains strong and the combination of additional debt headroom and a reduced dividend payout ratio provides capacity for future M&A. Third point, we continue to make investments in our platform, marketing and people, all aligned to our growth aspirations. Fourth, finally, we remain well-positioned to benefit from the structural tailwinds supporting the lottery industry globally, notably the ongoing shift to digital. The second half is also off to a great start with AUD 120 million Powerball this Thursday. Make sure you get your ticket on the Oz Lotteries app. On that note, we're happy to take your questions.
Thank you. If you wish to ask a question please press the star key followed by the number one on your telephone keypad. If you wish to cancel your request please press star two. If you're on a speaker phone, please pick up the handset to ask a question. Your first question comes from Desmond Tsao from Goldman Sachs. Please go ahead.
Thank you, operator. Morning, Mike. Morning, David. I've got a couple of questions, if I may. Just firstly, on slide seven, you know, you note the AUD 0.05 increase you're gonna apply beyond Tabcorp's AUD 0.10 increase. I know you guys in the past have said you actively study your customer base for demand elasticity. Just keen to get your thoughts around how you came up with that increase, and to what extent is that conservative and so forth?
Yeah, we do think it is conservative. It's been over a decade since we increased our price in addition to what the standard increase has been. It's only the premium increases from 12% to 14%, so it's not a huge jump. We do survey our customers extensively, and there are particular cohorts that we're aware of that are not that bothered by the price because of the premium service that they're getting. We'd also have a cohort of people that while they do stick to a budget, they just for example they just have AUD 20 to spend. They'll just continue to spend that AUD 20 on the game regardless of the price increase. We are very confident that it's a pretty conservative price increase.
Great. You guys made some comments around marketing, you know, sort of going forward being linked to TTV growth. Maybe just focusing on CPLs for the Lottery Retailing business, which was up 24% in the period to just north of AUD 20. You know, just keen to sort of get your thoughts on that as well, given the red-hot start to this half, you know, as you mentioned, an AUD 120 million Powerball jackpot coming up on Thursday. You know, how should we think about CPLs versus that AUD 20 base, from the first half?
Yeah, look, what you've seen in the first half should continue into the second half, subject to what happens to the jackpots. Obviously, the jackpot cycle, the positive jackpot cycle is continuing with AUD 120 million. We are out in the market aggressively looking for customers with the added knowledge that we know that we can get the money back under six months. You know, we don't feel like we're overspending and we're not being too aggressive. Yeah, look, we expect that to continue in the second half and be able to show through the number of new clients that we get that it's well and truly worth it.
Great. While I've got you, maybe just one last one from me. Just any more color you can provide around, you know, the trading update and environment into the second half, given, you know, the red-hot jackpot sequence. Yeah, any color around outlook would be great.
Yeah, look, we're very much guided by what's going to happen with the jackpots. You know, it's still only February and yes, it's been a great start and if it continues to be strong then we'll continue to trade pretty strongly. You know, just as a precaution, you know, jackpot cycles can fluctuate a little bit. You know, then again, we've got the new Oz Lotto game coming online towards the end of this financial year, so that'll help push things along as well.
Great. Thanks, Mike.
Thank you. Your next question comes from Rohan Sundram from MST Financial. Please go ahead.
Hi, Mike and team. Just a couple from me. First one, a very short-term one regarding this Thursday's Powerball draw. Anything you're comfortable to say around how you're seeing the customer's response to your marketing and if anything has really pleased you versus, say, previous jackpots of such size in the past?
Well, the one interesting thing that we're seeing already, which was not unexpected, was the absence of any jackpot fatigue. It has been a while, almost a couple of years since the last jackpot over AUD 100 million. You know, we've got to AUD 80 million quite a few times, but it's never quite managed to break the AUD 100 million barrier. This week it has, and that has excited the market. As you know, if you get quite a few of them in a row, then jackpot fatigue does set in. If we were to get a few more later this year, we could expect that jackpot fatigue. Right now, we've got the reverse. You know, it doesn't really exist, so we are seeing quite a strong uptake in this week.
Thanks, Mike. Last one from me is on the Lotterywest relationship. Sounds encouraging, your commentary there. Are you able to just provide a bit more color around the KPIs or the criteria that basically the hurdles that you were able to meet and to give Lotterywest the confidence to wanna progress that relationship?
Yeah. It'll come down to CPA, cost per acquisition, how much money we have to spend to acquire a customer. Then also the payback period, which is directly related to the engagement. We wanna show them that once we acquire a customer, we can engage them. Their frequency of play is quite good compared to the platform. Then, you know, it basically shows that it makes financial sense to spend the money for the acquisition marketing, and then we can just keep on stepping up the budget and driving new players. So far, the retention side of things has proven to be quite strong, so now we just wanna do the same on the acquisition side.
Okay. Thank you, Mike.
Thank you. Your next question comes from, Sacha Krien from Evans & Partners. Please go ahead.
Good morning, Mike and David. Also on Lotterywest, are you able to share any of the metrics from that marketing trial that you conducted in the second quarter? Say CPAs or probably too early for payback period, but you know, number of customers you managed to acquire through that trial?
Not in detail, but I can say that they're very reflective of our broader KPIs with marketing. You know, our CPA of around the AUD 20 mark and the average spend is pretty tracks pretty much in line with the rest of Australia and the rest of our business, which is, you know, not unexpected because, you know, Western Australian players are not that much different than the rest of the country. You know, they are tracking in line with our broader KPIs.
Got it. Okay, that's great. Outside of marketing, should we just be doubling the first half 2022 cost base to get to the full year number, or is there some further investment to go in the second half?
Sacha, there will be a bit more investment in the employee side of things. We had previously flagged that we're looking to put on another 24 staff. As you would have seen in the presentation, the labor market is fairly tight, so we've probably only achieved a 1/3 of that towards the end of the first half. We'd like to at least get to another third, so 2/3 by the end of this financial year. We're likely to pause hiring and then review everything in totality. Any additional staff coming on board will be linked to future growth expectations.
Got it. Two more quick ones from me. The Gatherwell revenue margin, is that a permanent step down? Should we sort of forecast that sort of TTV revenue margin going forward?
Yeah. I think that would be reasonable for modeling purposes. Oh, sorry, it does get impacted by set up fees for new causes that are taken on board. Obviously that's at 100% margin. That's sort of where the impact comes in. They are doing more raffles, which is also at a slightly lower margin than the council's annual school lottery. Yeah, that's why we think it would be reasonable to take that lower margin.
Yeah. Okay, great. Just a high-level question around the Oz Lotto game change, Mike. I mean, do you have any sort of feel for how material the impact could be? It's not as aggressive as the Powerball change that was made back in April 2018. Smaller price increase and smaller increase in division one odds. Do you think it's gonna be as big an impact or maybe half that impact? Do you have any sort of feel for what it could do to the numbers?
Yeah, look, a lot will depend on exactly what the jackpots do. You know, the Powerball, the moment the game changed and they had a string of really high jackpots, which really amplified that performance. Look, you know, for our own ideas, you know, we're thinking that around a mid-single digit percentage increase of retailing TTV would be a reasonable impact. You know, right now the Oz Lotto game's you know circa 20% of our overall games and the boost that we would get from the new game would maybe be in the order of around about 20%-25% of that. Yeah, around about mid-single digit percentage of overall retailing TTV.
Got it. Maybe around about 20%-30% sales increase for Oz Lotto itself.
Yep.
Okay. Thank you.
Thank you. Your next question comes from Kurt Gelsomino from Morgans. Please go ahead.
Oh, good morning, Mike and Dave. Just a couple of quick questions from me. Maybe just on the SaaS business, can you just talk to maybe some of the size and timing of some of those hospice customers I think you've called out in your pipeline?
Yeah. The second game from St Helena is due out in the next few months. We've also got a new one starting here in Australia. That's via LifeFlight. That's a brand new or starting off a low base. The LifeFlight one, it's about AUD 10 million. AUD 10 million is what they raised through their funding efforts at the moment. The lottery is starting off a low base around about a AUD 250,000 , which we hope to expand up pretty quickly. Relatively small, but showing some good opportunity.
We have spent a couple more dollars on marketing in the U.K. to increase the visibility of the Powered by Jumbo platform. The guys have attended a number of conferences, you know, like hospices, and other sectors as well, just to make sure that the market is aware of the platform. Yeah, it does take a little bit of time to warm up new leads, as we saw in Australia. You know, once we got Mater signed, it did take a little while before we got the other SaaS customers on board. Yeah, it's a 2023 story. Yeah. More likely second half, I would think.
Yeah. I guess the question was more around, Dave, just the pipeline of those new potential hospice customers. Yeah. Above and beyond St Helena. I think you sort of talked about that pipeline there and customers building the next two years.
Yeah. Certainly the interest is there. Yep.
Just anything you can provide on the TTV magnitude of some of those customers?
Probably a bit, a little bit premature. We know the market is a good size, but you know, very hard to work out the timing of it. A bit premature to actually put a number around it.
Yep. That's all fine. Maybe just on in terms of the Stride and StarVale acquisitions, are you still comfortable both with those businesses getting regulatory approval in the fourth quarter of FY 2022?
Yeah, very confident. It's a bit of a laborious process to go through, but it's something that we've gone through many times before, and we've always got our approvals. Yeah, we're very confident it'll come through.
Great. Just a final one, maybe Dave, just on OpEx again. I think from memory, you'll obviously be cycling a stronger second half 2021 jackpot environment. Is it fair to that delta and acquisition marketing costs obviously won't be as strong as we saw in this first half? Maybe alternatively, can you just remind us what you sort of spend as a percentage of TTV in second half 2021?
Yeah, that's what it'll be geared towards, Kurt, is around about the percentage of TTV, which will continue to be between 1.75% and 2%.
Can you just remind me, sorry, what was that percentage in the second half 2021?
Good question. I'm sorry, Kurt. I don't have it here.
We can come back to you on that, Kurt.
No dramas. That's it from me, guys. Thanks for your time.
Thank you. Your next question comes from James Bales from Morgan Stanley. Please go ahead.
Oh, hi, guys. Just firstly a question on slide 19 and that cash flow statement or cash flow reconciliation. Is the GBP 5 million from StarVale surplus cash available? Is there some reason why you've sort of carved it out there as not being in the general account?
The reason why we did that, James, because there's a net zero flow. We haven't included it in the payment consideration that we've got there at AUD 31.1 million. It would flow out and then flow back in basically. Zero effect, and that's why it wasn't included.
Okay. Got it. Just another question on some marketing costs. In the past, when there's been a run-up to AUD 100 million plus jackpot levels, you've annualized or you've sort of been spending about AUD 1 million a month. How much different have these changes in acquisition costs mean that. Well, how big is the difference versus what you've done historically? What should we expect for the last month or so on a run rate basis?
Yeah, look, when the jackpots get up very high, it, you know, we treat it basically on what we can get at that point in time, you know. We're quite aggressive about what we can get at the time. It perhaps doesn't fall into line with normal week 'cause it just doesn't happen that often. You know, we do get a lot of customers coming through, a lot of word of mouth that sort of balances it out, so which helps drive the CPA back down again. Look, it's not a particularly clear answer, of course, because there's just so many factors at play. It only happens two or three times a year, if that.
Basically, you know, the way we treat it, you know, you've got one week to get as many customers in the door as you can. We just look everywhere we can to find a customer, get them in, and in addition to that, we get organic customers just come through anyway because of the word of mouth. The same thing's happening again this week.
Okay. Maybe for WA, is it fair to think that you'll be wearing the full cost of acquisition, and these will be treated with the same economics as the customers that you transferred over to Lotterywest when the deal was first made?
The cost will be split 50/50. We've created a fund with Lotterywest, which we both contribute to. We manage it, and we bring in the customers. Because the margin's half, we only pay half. Then the rest of the KPIs should track broadly in line with the overall business.
Yeah, we get the same metrics on those customers, James.
Does that mean that if you're spending AUD 20, it appears to you guys as a AUD 10 acquisition cost?
Yeah.
Okay, got it. Thanks, guys.
Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.