Thank you for standing by, and welcome to the PointsBet Holdings Limited Q2 FY 2020 4C and Activities Report. 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. Sam Swanell, Managing Director and Group CEO. Please go ahead.
Thanks. Good morning, thank you for joining this call for the PointsBet Holdings Limited Q2 FY 2020 Activities Report. This is Sam Swanell, CEO, and I'm joined on this call today by our CFO, Andrew Mellor, and General Counsel, Andrew Hensher. This morning, I'll be commenting on our December quarter Appendix 4C release, which was lodged with the ASX this morning. Please note all numbers referred to are unaudited and in Australian dollars. PointsBet reported a Q2 FY 2020 net win of AUD 18 million, a 117% increase on the prior corresponding period of Q2 FY 2019, to be now referred to as the PCP, which was AUD 8.3 million. This takes the company's group year-to-date net win to AUD 29.8 million. It is pleasing after two quarters to have exceeded the total FY 2019 net win of AUD 28.2 million.
The company's wagering turnover for the quarter increased to AUD 297.3 million, up 169% on the PCP. The company had 185,138 registered clients at 31st December 2019. Of these, 102,155 are active clients, meaning they have placed a bet in the last 12 months, an increase of 123% on the PCP. Net cash used in operating activities, including the movement in player cash accounts in the quarter ending 31st December 2019 was AUD 14.3 million. In the U.S., PointsBet continued marketing and promotional initiatives aimed at attracting and retaining clients as we grow our New Jersey business during the important NFL and NBA seasons. In Australia, marketing and promotion were focused on the crucial Spring Carnival, which culminates in the Melbourne Cup race meeting, Australia's largest single betting turnover event of the year. The cash outflows for the period were circa AUD 700,000 less than the previous Appendix 4C estimate of AUD 34.5 million.
The reduction was driven by lower cash outflows on advertising and marketing during the period of AUD 10.4 million versus the estimate of AUD 12.5 million, primarily driven by the timing of marketing payments. This was offset by higher corporate administration cash outflows of AUD 13.5 million versus the estimate of AUD 12.5 million, driven by increased cost of sales as a result of stronger than expected Australian trading results. Following our successful capital raising in November, the company's cash and cash equivalents at 31st December 2019 was AUD 147.8 million, which excludes AUD 9.7 million of player cash accounts. Following the announcement of the LVD Michigan market access agreement and this morning's announcement for retail and online market access in Kansas, PointsBet now has access to 12 states, subject where relevant to the passing of enabling legislation and licensure. Our market access agreements highlight our ability to continue to win competitive processes.
This provides great confidence that we will gain future additional market access opportunities in other states. We've commenced the project to deliver our in-house online casino platform and product suite, which, subject to relevant licensure and regulations, will be deployed over time pursuant to our market access agreements with Penn National Gaming, Double Eagle Casino, and LVD, and potential future market access opportunities. In Q3 2020, we expect cash outflows relating to obligations under our market access agreements, including a portion of the Illinois retail sportsbook fit-out, to total AUD 7.5 million. We will continue to grow our staff and build and develop our capabilities in our Denver, Colorado, U.S. headquarters with our staff and research and development costs expected to be AUD 9.3 million and AUD 2.5 million respectively for the quarter.
In the U.S., our Q3 FY 2020 marketing efforts will see the introduction of an Indiana marketing campaign as we prepare to launch operations in that state. In Australia, we are moving from a peak acquisition season with a heavy focus on the Spring Racing Carnival into a period of traditionally lower seasonal marketing spend. We expect Australian marketing investment to decrease quarter on quarter. This is reflective of our continued disciplined approach to spending. We expect our administration and corporate costs for Q3 2020 to be AUD 12.4 million. We would now like to comment further on our trading results. I'm very pleased to report that PointsBet's Australian business had an exceptional quarter of trading.
The company's continued investment in its global platform, product, and client experience, together with a favorable run of results for the industry, meant the Australian business achieved a record quarter in all key metrics, namely turnover, gross win, and most importantly, a net win of AUD 14.6 million, a 76% increase from the AUD 8.3 million in the PCP. This takes the company's Australian year-to-date net win to AUD 27.2 million. The Australian business recorded gross win margin of 11.2%, gave away 29% of gross win in gratuities to record a net win margin of 7.9%, up from 7.4% in the PCP. As a further proof point in the company's technological capabilities, PointsBet Australia processed over 192,000 bets on Melbourne Cup day and at its peak, over 900 bets per minute. Turning to the U.S.
While New Jersey is undoubtedly a competitive market, PointsBet's marketing expertise and disciplined approach continues to produce encouraging customer acquisition outcomes. In addition, PointsBet has been investing in building the brand and free-to-play database outside of New Jersey. Not only does this mean that PointsBet is going into new states with existing brand recognition, but it also assists in PointsBet's market access strategy as we expand across the United States. New Jersey digital Q2 2020 turnover of AUD 99.6 million represented an increase of 80.9% on Q1 2020 as the NFL and NBA seasons progressed. While gross win margin received was 6.4%, net win margin was 1.8%, which reflects an important acquisition retention period for the company, resulting in higher targeted promotional spend. It should also be noted that gross win margin was lower in Q2 to 6.4% from 8% in Q1, reflecting a movement towards more sustainable long-term yields.
The high-staking clients area of the business saw improved performance quarter-on-quarter, achieving a net win of AUD 1.5 million in Q2 compared to a net win loss of AUD 3.6 million in Q1. This area of the business is likely to remain volatile until we enter new markets and grow the scale of the segment. Using the New Jersey Division of Gaming Enforcement calculation methodology for handle, PointsBet's turnover market share for online in New Jersey was 5.9%, down from 6.7% in the previous quarter on the back of lower high-staking clients turnover. Iowa retail recorded its first full quarter of operations in Q1 FY 2020 after launching on 20th of August 2019. Net win margin was lower than expected, reflecting the unfavorable results for clients. This is magnified as a result of the lower absolute dollar value of net win in Iowa.
Iowa net win margin is expected to stabilize as retail turnover grows and results normalize. During the quarter, the company also launched digital operations in Iowa, accepting the first online wagers on 20th of November 2019. This represents the company's second online market to commence operations. While it is early days for Iowa digital, the company is pleased with the progress made to date. PointsBet is well-positioned to take advantage of the growing opportunity in the wider U.S. as other states go live with strong leadership and experienced management. This has been bolstered by the nomination of Becky Harris, the first ever Chairwoman of the Nevada Gaming Control Board and former Nevada State Senator, to the board as a Non-Executive Director.
Furthermore, PointsBet recognizes the importance of its media strategy within the growing U.S. market and to strengthen this position, appointed Eric Foote, former CBS Sports digital vice president, to the position of U.S. Chief Commercial Officer. We continue to be involved in numerous conversations with media organizations and recognize this as an important part of our U.S. strategy. As I've spoken to regularly, the rollout of our technology solutions will be a key factor in the success of our strategy. The company continues to invest in our in-house technology platform across the global business as we build the capability of the technology function to capitalize on the opportunities for scalability across our expanding U.S. footprint. We focus on delivering the best practice and user experience across all front-end channels, including web, mobile, apps, and retail.
During the period, development was completed on our new online customer interface, which was recently deployed in the U.S. The results achieved by the group to date are even more encouraging given the initiatives that are planned for release throughout 2020 and the positive impact they will have on the business. Finally, I would like to comment on PointsBet's U.S. state-by-state operational execution. The company is entering into an important period of execution as we roll out operations across our expanding footprint. We are currently operational in New Jersey and Iowa, and expect to launch online in Indiana by the end of this quarter. Subject to approval of regulations by the Illinois Gaming Board, PointsBet expects to have launched both retail and online operations in Illinois by the end of Q1 2021, with Colorado and Michigan to follow pending the relevant state regulations.
As disclosed earlier this morning, PointsBet has entered into an exclusive first skin agreement with Kansas Crossing Casino in Kansas, contingent upon the passing of enabling legislation, as well as obtaining the necessary regulatory licenses. This is another proof point of our ability to win competitive market access processes for both online and retail operations. I would like to thank you for your time today and would welcome any questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Damian Williamson with Bell Potter. Please go ahead.
Yeah. Hi, Sam. Well done on the update. Can you just run through, just with the market share being down slightly, where you think you are relative to your competitors? Are you still fighting out third with William Hill? Do you think you've found on your estimates, are there other bookmakers making ground or could you just give a sentiment on where you see the competitive landscape at the moment?
Yes, certainly. Hi, Damian. Yeah, I still think we are around that fighting for third position. I think it's somewhat difficult taking market share look-ins on a month-by-month basis. There's a lot of things as we sort of commented on just then. High-staking clients, in particular, can have an impact on month-to-month measurement. No, we still believe we're around that third-place mark behind both William Hill and DraftKings, who are still obviously dominating the market.
Okay. Also, you mentioned your state rollouts. Is there any update on West Virginia?
Yeah. West Virginia is a small state. We've got a lot of states, thankfully, to be rolling out through. I'm confident that for the next year or two years, there's actually going to be no shortage of continuing state rollouts, which is great. West Virginia is one of the smaller states in our group of states. At the moment it hasn't taken top priority, but we certainly will get to it.
Yep. Also, is there any update on the Mexico business?
Not really, Damian. As we've commented on throughout, the Mexican opportunity is dependent on our partner who will be obtaining the license to first move through that process. Once they've got the license and got their ducks in a row, our role to come in to run the book to support operationally would come into play. That hasn't occurred just yet.
Okay. Just as a final question, how do you found the in-person sign-up process in Iowa? You have to go through that in Illinois. How much success you had in that process or how difficult has that been?
Yeah, it's an interesting one. I think most of the stakeholders in Iowa would now be looking at the in-person requirement and perhaps thinking it would be better to have the full mobile environment. Obviously, we're supportive of that. We want the market to reach its potential as quickly as possible, the in-person registration obviously adds a manual step that shouldn't necessarily be there. Look, I think the positive out of it for us means that the same thing is going to happen in Illinois. In Illinois, obviously, through our agreement with Hawthorne, our physical locations are a competitive advantage. The positive out of the Iowa experience is the practice that we're getting to work through those processes and learn from that, so that when we come to Illinois, we're better prepared. It definitely does have quite an impact on the market potential.
As we've said before, our location in Iowa through Catfish Bend Casino is not a one in the Iowa landscape. Whereas in Illinois, we believe our in-person sign-up opportunities in Illinois are the top seed in that state. Thus, although it's still onerous to have an in-person sign-up, we're better positioned in Illinois than we are in Iowa.
Okay. Thanks. That's all. Well done.
Your next question comes from Phillip Chippindale with Ord Minnett. Please go ahead.
Hi, good morning, Sam. Just a couple of questions from me. Firstly, just in relation to Kansas, can you just give us a sense of what we should be expecting timing-wise from launching the product? I know you've just announced it this morning, but just wondering about the regulations there and when we can maybe expect that to come online?
Yeah. Kansas hasn't passed the legislation yet, so that's happening at the moment. We're hopeful that that gets across the line. I wouldn't expect the market to be taking any bets this year. It'll depend on the legislation getting through the pace at which the regulations get done. It's probably more likely 2021 consideration, and we'd be prioritizing it amongst other states around that timeframe. I would mention that Kansas is expected to be an eight-skin environment. There's four commercial casinos. The draft legislation is looking like two skin each. It's a AUD 129 million GGR estimate from Eilers & Krejcik Gaming as to the size of the revenue. It's an example of a limited licensing environment. Eight skins is far less, obviously, than we're experiencing in New Jersey, for example.
We do think it's an important piece of the puzzle, but not one that's expected to go live until next year.
Thanks. Just turning back to New Jersey for a moment, then in terms of these high-staking clients, can you talk a little bit about the drivers there for why there was that lower share for the quarter? Was it a function of demand, or was it the odds that you were setting? Just maybe give us a bit of color around that.
Most of these high-staking clients are, I think I've spoken about before, they're not necessarily betting as regularly as a very recreational client. Some of them might have particular sports that they're following. They might have particular teams that they support and focus on. Things like certain teams dropping out of the NFL race, getting to the finals in NFL, those sorts of things can result in some of those high-staking clients setting up shop for a period until they come back for the sports that they're interested in next season. That's in general terms the best reason.
Okay. Thanks, Sam. That's all from me.
Thanks.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Alice Li with Credit Suisse. Please go ahead.
Hi, Sam. Hi, Andrew. Just got a question on customer acquisition in general, given PointsBet doesn't have the daily fantasy sports customer base to cross-sell. Could you please just give a bit more color in terms of how you tackle that area?
We've been talking for a little while about how New Jersey is a bit of an interesting state because it does take the media market from New York and Philadelphia and Pennsylvania. It's very difficult for a group like us who's executing or aiming just for New Jersey acquisition to spend on mainstream TV commercials, for example. The approach we've taken in New Jersey for client acquisition has been very digital-based. I think it's been great learnings. We have to go out there and earn our clients, as you mentioned. We don't have that database that a DraftKings or a FanDuel has. Even in New Jersey, most of our competitors have existing casino businesses and online casino businesses that have been around for a few years. New Jersey is a challenging market from an acquisition perspective from a number of fronts.
Obviously, the final factor being that there are a lot of competitors in that state. We believe we've executed well. We've executed in a disciplined fashion. We've maintained Cost Per Acquisition that we're comfortable with. As I mentioned in my script, we are spending, I suppose, a little bit more broadly on brand recognition across the country in preparation for going into Iowa, Indiana, Illinois, Michigan, et cetera. That does help us also when it comes to market access deals, and the profile of the company as a whole is lifted up. I think DraftKings in some of their releases talked about a 40% conversion rate from active clients on FanDuel since they're a sports betting business. There's no doubting that that's part of the reason.
The main reason why they are where they are in terms of market share, but it's also reflective of the fact that they're spending a lot more money in those markets.
Okay. I presume the methodologies in customer acquisition for high-staking clients and mass market are different. What's PointsBet strategy or focus going forward, in terms of which client hub to focus on?
We always talk about, I suppose in trying to show the market, let's call it the sustainable retail digital model. They slowly sort of separate out the high-staking clients to try and deliver trends that the market can look at that are not necessarily influenced by the volatility of the high-staking clients. The way we attract high-staking clients is more likely through relationships. We do have people on the ground looking to form relationships with high-staking clients. It's more of a one-on-one relationship, business development type efforts. Whereas obviously general acquisition is more traditional marketing: TVC, digital, radio, outdoor, et cetera. It is a different model. Similarly, though, sometimes through your normal marketing methodologies, you pick up some clients that are staking very large, and it makes sense, obviously, to look after them in a more personal fashion.
The high-staking clients can be acquired through traditional means.
Right. Just one more for me. I understand PointsBet has priorities in terms of rolling out in which state, but I noticed that PointsBet seems a little bit behind its major competitors in a few states. Even in Iowa, for example, online, Indiana, West Virginia, has been live for months. What's the reason for that? Is that just navigating politics maybe, or some other reasons?
Yeah, I think it's two main reasons. One, a lot of our competitors are already licensed in most states. If they've got existing casino businesses, then they've already passed probity and they already have checks and balances and relationships in place. They already have the infrastructure in that state. We obviously entering a new state, we haven't previously been in those states. We have to get through certification of our systems probity. It is also a matter of resources. I think we'd acknowledge that. I think we've made a lot of ground more recently building the capability of the team. It wasn't that long ago that the resources that we had were really quite skinny. As we build the capability of the team, we actually expect that this year is sort of a transition period for us.
We are catching up in some of the states where some of our competitors are getting a head start on us. I think we close that gap by the end of this year. I think states like Michigan, for example, I think we'll be very close to the starting line. We are putting a lot of effort into this, and I actually would anticipate that come 2021, we'll be a lot closer, if not closest to the starting line going forward. The licensing process will still take some time. Again, we get better and better at that in making that an easy process for the company. From a technology perspective, it's not necessarily easy to roll out all of these channels.
Actually, I think listening to some of our competitors and their timelines, from 2021 onwards, I'd be very confident that we'll be winning that race rather than coming in a little bit behind.
Okay. Thank you, Sam. That's all for me.
Once again, if you wish to ask a question, please press star one on your telephone. I will now give you a short moment to register your question.