Earnings Call: Q2 2020

Jan 30, 2020

Earnings release

Thank you for standing by, and welcome to the PointsBet Holdings Limited Q2 FY twenty twenty 4C and Activities Report. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. I would now like to hand the conference over to Mr. Sam Swanell, Managing Director and Group CEO. Please go ahead. Thanks. Good morning, and thank you for joining this call for the Pointsworth Holdings Limited Q2 FY twenty twenty Activities Report. This is Sam Smonell, CEO, and I'm joined on this call today by our CFO, Andrew Madill and General Counsel, Andrew Hincher. This morning, I'll be commenting on our December Appendix 4C release, which was lodged with the ASX this morning. Please note all numbers referred to are unaudited and in Australian dollars. Formstep reported a Q2 FY 'twenty net win of $18,000,000 a 117 increase on the prior corresponding period of Q2 FY 'nineteen to be now referred to as the PCP, which was $8,300,000 This takes the company's group year to date net win to 29,800,000.0 It is pleasing after two quarters to have exceeded the total FY 2019 net win of $28,200,000 The company's wagering turnover for the quarter increased to $297,300,000 up 169% on the PCP. The company had 185,138 registered clients at thirty first December twenty nineteen. Of these, 102,155 are active clients, meaning they placed a debt in the last twelve 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 thirty one December twenty nineteen, was $14,300,000 In The U. S, Pointsfoot continued marketing and promotional initiatives aimed at attracting and retaining clients as we grow our media business during the important NFL and NBA seasons. In Australia, marketing and promotion were focused on the Crucial Spring Carnival, which culminates in the Northern Cup race meeting, Australia's largest single wedding turnover event of the year. The cash outflows for the period were circa $700,000 less than the previous Appendix 4C estimate of $34,500,000 The reduction was driven by lower cash outflows on advertising and marketing during the period of $10,400,000 versus the estimate of 12,500,000.0 primarily driven by the timing of marketing payments. This was offset by higher corporate and administration cash outflows of GBP 13,500,000.0 versus the estimate of GBP 12,500,000.0, 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 thirty one December twenty nineteen was $147,800,000 which excludes $9,700,000 of player cash accounts. Following the announcement of the Rockview de Weare Michigan market access agreement and this morning's announcement for retail and online market access in Kansas, Hornsbyt now has access to 12 states, subject, very 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, 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 What New Deserve and potential future market access opportunities. In Q3 twenty twenty, we expect cash outflows relating to obligations under our market access agreements, including a portion of the Illinois retail sports book fit out to total $7,500,000 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 $9,300,000 and $2,500,000 respectively, for the quarter. In The U. S, our Q3 FY 'twenty marketing efforts will see the introduction of 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, and 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 twenty twenty to be $12,400,000 We would now like to comment further on our trading results. I'm very pleased to report that Pointsworth Australian business had an exceptional quarter of trading. The company's continued investment in its global platform, products 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, mainly turnover, gross win and, most importantly, a net win of $14,600,000 a 76% increase from the $8,300,000 in the PCP. This takes the company's Australian year to date net NIM to $27,200,000 The Australian business recorded gross margin of 11.2%, gave away 29% of gross premium maturities to record a net NIM margin of 7.9%, up from 7.4% in the PCT. As a further proof point in the company's technological capabilities, Points for Australia processed over 182,000 bps on Northern Cup Day and at its peak over 900 bps per minute. Turning to The United States. While New Jersey is undoubtedly a competitive market, Pointsfoot's marketing expertise and disciplined approach continues to produce encouraging cost per 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 growing 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 twenty twenty turnover of 99,600,000 represented an increase of 80.9% on Q1 twenty twenty as the NFL and NBA seasons progressed. While gross margin 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 hard staking clients area of the business saw an improved performance quarter on quarter, achieving a net win of $1,500,000 in Q2 compared to a net win loss of $3,600,000 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 Department of Game and Enforcement calculation methodologies to handle Poinsford'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 'twenty after launching on August 2019. Net win margin was lower than expected, reflecting again favorable 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 wages on November 20. This represents the company's second online market to commence operations. While it is early days for iLift into the company is pleased with the progress made to date. QuantStep is well positioned to take advantage of the growing opportunity in the wider U. S. As other states can go live with strong leadership and experienced management. This has been bolstered by the nomination of Wethke Harris, the first to ever Chairwoman of the Nevada Gaming Board McDowning Control Board and former Nevada State Senator to the Board as a nominees Director. Furthermore, Pointsport 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 you regularly, the rollout of our technology initiatives 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 funding 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 United States. The results achieved by the group today are even more encouraging given the initiatives of the plan for release throughout 2020 and the positive impact they will have on the business. Finally, I would like to comment on Pointspect'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 in operation 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, Plensburg expects to have launched both retail and online operations in Illinois by the end of Q1 twenty twenty one, with Colorado and Michigan to follow pending the level of state regulations. As disclosed earlier this morning, Clansford is entered into an exclusive first lien 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 form of our ability to win competitive market access processes for both online and retail operations. I would like to take you through time today, and we welcome any questions. Thank you. If wish to ask a question, please press 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press 2. Your first question comes from Damian Williamson with Bell Potter. Please go ahead. Yes. Hi, Sam. What What I'm on the update. Can you just run through, you know, just with with the market share being down slightly, where where where you think you are relative to to to your competitors? Are you still probably at service we enjoy? Or is it you stand yet on your estimates, are there other bookmakers making brand or, you know, could you just you can shed some light on where you see the competitive landscape at the moment? Yes, certainly. Hi, Damien. Yes, I think we are around that finding for third position. I think it's somewhat difficult taking market share, looking on a month by month basis. There's a lot of things as we sort of commented on just then price taking clients in particular can have an impact on month to month measurement. But we still believe we're around that third place mark behind the fair and dual and drafting to still obviously dominating the market. Okay. And also, you mentioned your state roll out. Is there any update on West Virginia? Yes. West Virginia is a small state. We've got a lot of states, thankfully, to be rolling that through. And I'm confident that for the next year or two years, there's actually gonna be no shortage of continued state roll, which is which is great. West Virginia is one of the smaller states in our bigger states. So at the moment, it hasn't taken top priority, but we certainly will get to it. Yep. And also, is there any update on the Mexico business? Not not really not yeah. Not really, Damien. As we've commented on throughout, the next given 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, then our role to come in to run the book to to support operation would come into play, but that hasn't occurred just yet. Okay. And and just as a final question, have have you found the in person sign up process in Iowa, you know, in terms of yeah. Because you have to go through that in in Rhode Island, Illinois, how how much success you had in in that process and or how did you have 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. You know, the market to to reach its potential as as quickly as possible and the the in person legislation, obviously, as a a manual step that shouldn't necessarily be there. And if I think the positive out of it for us is that the same thing is going to happen in Illinois And in Illinois, obviously, through our agreement with Hawthorne, our physical locations are competitive advantage. And the positive value of the Illinois our experience is the practice that we're getting to work through those processes and learn from that so that when we come to that, we're better prepared. But it definitely does have a quite an impact on the market potential. And as we've said before, our location in Ireland through Cactus Bend Casino is not a one in the Iowa landscape. Whereas in Illinois, we believe our interesting sign up opportunities in in Illinois are the top seed in that state. And thus, although it's still onerous to have an in person sign up, we're better positioned in Illinois than we are in Iowa. Your next question comes from Philip Chippendale with Ord Minute. 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 in Washington, D. I know you just announced it this morning, but yeah, just wondering about the regulations there and when we can maybe expect that to come online. Yes. So Kansas hasn't passed the legislation yet. So it's still you know, that's happening at the moment. We're hopeful that that that gets across the line. I wouldn't expect the market to be taking any bets this year, and it will depend on, you know, the legislation getting through, the pace at which the regulations get done. So it's probably more likely 2021 consideration, and we'd be prioritizing amongst other states around that time frame. I would mention that Kansas is expected to be an eight skin environment. So there's four commercial casinos. The draft legislation, so if you want two skin reach, it's a $129,000,000 GGR estimate for the hours and projects as to the size of the revenue. So it's an example of a limited license environment. Eight skins is far less obviously than we're experiencing in New Jersey, for example. So we do think it's an important piece of the puzzle, but yes, not one that's expected to go live until next year. Perfect. Just turning back to New Jersey for a moment. Then in terms of these cross staking clients, can you just talk a little bit about the drivers there for why there was a lower share for the quarter? Was it a function of demand? Or was it oddity you're setting yet? Just maybe give us a bit color around that. Yes. Most of these high stakes in clients are I think I've spoken about before. I mean, they're not necessarily getting every as regularly as a as a, you know, very recreational client. So some of them might have particular sports that they're following. They might have particular teams that they support and focus on. So things like certain teams dropping out of the NFL race, getting to the finals in NFL, Those sorts of things can can involve him in some of those high starting clients, showing up shop for a period until until they come back to the sports that they're interested in next season. So that's generally, in general terms, the the the best reason. Your next question comes from Alice Lee with Credit Suisse. Just got a question on customer acquisition in general given PointsFudge doesn't have the daily fantasy sports customer base to cross sell. So could you please just give a bit more color in terms of how you track all that area? Yep. Yeah. Listen, we've we've been talking for a little while about how you're doing it in a bit of an interesting state because it does take the media market from New York and and Philadelphia and Pennsylvania. And that's it's very difficult for a group like us who's executing or aiming just for sort of just for New Jersey acquisition to spend on mainstream TV commercials, for example. So the approach we've taken in New Jersey, the client acquisition has been very digital, but based. I mean, I think it's it's been great learnings. We have to go out there and and earn our clients as as you mentioned. We don't we don't have that database for the DraftKings or Fangirl has. And and even in New Jersey, most of our competitors have existing casino businesses and online casino businesses that have been around for a few years. So New Jersey is a challenging market from an acquisition perspective from a number of fronts. And then 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 disciplined fashion. We've maintained cost per acquisitions 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 in preparation for going into Iowa, Indiana, Illinois, Michigan, etcetera. And that does help us also when it comes to market access deals and the profile of the company as a whole But, yeah, it's you know, I think DraftKings in some of their releases talked about a 40% conversion rate from active clients on Founders into their their sports betting business. There's there's no doubt in that that's part of the reason the the main reason why they are where they are in terms of market share, but it's also reflected in fact that they're spending a lot more money in those markets. Okay. And I presume the methodologies in customer acquisition for high stakes in clients and mass market are different. So what's point that strategy or focus going forward in terms of which clientele to focus on? Yeah. Now we always talk about I suppose in trying to show the market, you know, the let's call it the sustainable retail digital model. You know, that's why we should separate out the high staking clients to try and do the trends that the market can can look at that are not necessarily influenced by the the volatility of the high staking clients. So, you know, the way we attract high staking clients is more likely through relationships. We do have, you know, people on the on the ground, you know, looking to to form relationships with with sales breaking clients. So it's more of a a one on one relationship business development type of it's where it's obviously general acquisition is is more traditional marketing, you know, so they see digital radio, outdoor, etcetera. So it is a it is a different model. Similarly though, you know, sometimes through your normal marketing methodologies, you pick up some clients that are not staking very large, and and it makes sense obviously to look after them in a more personal fashion. And so you have a hot stack in college can be acquired through traditional means. Right. Just one more for me. So I understand Pointsback has priorities in terms of rolling out in which state, but I noticed that PointsBack seems a little bit behind. It's major competitors, you know, for your states, even in Iowa, for example, online, Indiana, West Virginia has been live for months. So 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. So 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. So when we also enter a new state, we haven't previously been in those states. We have to get through certification of our systems, probity. But it is also a matter of resources. I think we've acknowledged that. I think we've modeled on the grounds more recently building the the capability of the team. It wasn't that long ago that the resources that we had were were really quite skewed. So as we build the capability of the team, we actually expect that, you know, this year is sort of a a transition period for us. We are catching up in some of the states where some of our competitors are getting a a head start on us. And I think we closed that gap by the end of this year. So I think states like Michigan, for example, I think we'll be very close to the starting line. And 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. But the the licensing process will still take some time, again, we get better and better at that in in making that an an easy process for the company. But from a technology perspective, it's not it's not necessarily easy to roll out all of these channels and actually keep listening to some of our competitors in their timelines. From 2021 onwards, I'd be very confident that we'll be winning that race rather than coming a little bit behind. Okay. Thank you, Sam. That's all for me. Once again, if you wish to ask a question, please press 1 on your telephone. I will now give you a short moment to register your questions.