PointsBet Holdings Limited (OTCQX:PBTHF) Q4 2023 Earnings Conference Call August 30, 2023 8:00 PM ET
Company Participants
Sam Swanell – Group CEO
Andrew Mellor – Group CFO
Conference Call Participants
Rohan Sundram – MST Financial
Phillip Chippindale – Ord Minnett
Bradley Beckett – Credit Suisse
Rohan Gallagher – Jarden Group
Chris Savage – Bell Potter Securities
Operator
Thank you for standing by and welcome to the PointsBet Holdings Limited FY ’23 Financial Results Call. [Operator Instructions]
I would now like to hand the conference over to Mr. Sam Swanell, Group CEO. Please go ahead.
Sam Swanell
Good morning. Thank you for joining this call to present the PointsBet Holdings Limited full year 2023 results. This is Sam Swanell, Group CEO and I’m joined today by our Group CFO, Andrew Mellor. Today, we will talk to our investor presentation which was lodged with the ASX this morning, together with our full year financial report. But before we begin, please note the Safe Harbor statement in the presentation and that all figures are in Australian dollars unless otherwise stated.
Turning to Slide 4. The key event during the year was the approval by shareholders on 30 June 2023 of the sale of the U.S. business to Fanatics Betting and Gaming for a headline purchase price of US$225 million. Completion of the sale will take place over a multistage process with the first stage being referred to as the initial completion and the second stage being referred to as a subsequent completion. Previously announced, the Board intends to distribute the net proceeds of the U.S. business, together with the majority of the company’s corporate cash reserves that will be surplus to the needs of the remaining business. This amount, approximately $1.39 to $1.44 per share will be distributed over 2 tranches, reflecting the closing mechanism of the U.S. business sale. Its 2 tranche distribution of up to $458 million was approved by shareholders earlier this week at the general meeting and the first capital return approximately $1 per share is expected to be paid in mid to late September.
I’ll now give a brief update on the status of the U.S. business sale. The required U.S. state regulatory approvals and other completion prerequisites are tracking as planned and we anticipate that initial completion will occur on 31 August U.S. time in accordance with the terms of the sale and purchase agreement. To be clear, that is within the next 24 hours and we will notify shareholders via the ASX once initial completion has occurred. Upon initial completion, the company will receive US$175 million plus agreed adjustments, representing the initial installment of the headline purchase price of US$225 million and will transfer ownership of the operations in those U.S. states in which regulatory approval has been obtained.
Following execution of initial completion, the company will confirm the details regarding the specific timetable of the first capital return. The sale of the U.S. business to Fanatics marks the beginning of an exciting new chapter for our company, the new PointsBet 2.0 will build on our strong market position in Australia and Canada, driven by our in-house technology and led by our experienced PointsBet team and deliver an expedited path to profitability. I’ll expand on this a little later.
Turning to Slide 5. I would now like to provide some comments on our commitment to responsible wagering. PointsBet endorses the principle of informed choice which is aimed at empowering customers to make informed decisions and exercise choice regarding their gambling expenditure. PointsBet’s commitment to responsible wagering is demonstrated through its collaborative engagement with gambling regulators and suite of responsible gambling tools and evolving range of customer protection initiatives. Customer protection is a core pillar of PointsBet’s sustainability commitment. This is underpinned by contributing actively to regulatory reform to ensure they are effective and evidence-based. We continue to focus on responsible wagering strategies tailored by dedicated staff in region.
During the reporting period, our Australian team lent into technology to create better outcomes for our customers by creating more effective in-app responsible wagering messages to drive awareness of the various tools that can help manage play. These messages are designed as intervention steps in circumstances where customers are identified as displaying behaviors which may be symptomatic of problem gambling.
As we look towards our exit from the U.S. market later in FY ’24, our strategy will be to double down and reinforce existing regulatory relationships in Australia and Canada to influence a reform agenda that is effective, evidence-based and meets the unique needs of customers in each jurisdiction within which we operate. In Australia, this work is already underway. In FY ’23, we worked with governments and regulators to implement the last of the national consumer protection framework measures, including mandatory transparent activity statements and most recently, BetStop, the National Self-Exclusion Register. We are also actively consulting with all stakeholders regarding the recommendations made by the House of Representatives Standing Committee on social policy and legal affairs, following its recent inquiry into online gambling. We welcome a robust reform agenda that both protects families and ensures the ongoing sustainability of the wagering sector in Australia.
I’ll now hand to Andy Mellor to review the FY ’23 group financial performance.
Andrew Mellor
Thank you, Sam. Turning to Slide 7. In accordance with the AASB accounting treatment as a result of the sale of the U.S. business as approved by shareholders on the 30th of June, the United States and European operations and employees which form part of the Fanatics sale perimeter have been reported as discontinued operations as at the 30 June, ’23. All references to continuing operations include the remaining Australian, Canadian and Indian operations and employees. As a result, the FY ’23 P&L is reported in 3 parts: continuing operations, discontinuing operations and the consolidated P&L. The FY ’22 P&L has also been restated to reflect the continuing operations and discontinuing operations to enable comparability.
For the benefit of today’s presentation, I will speak to continuing operations P&L. However, we have also included consolidated numbers in the presentation where we believe it will aid any reader. Now to the statutory segment results. The Australian Trading Business segment recorded net revenue of $192.1 million, a decrease of 2% versus the PCP and a statutory EBITDA profit of $0.1 million in the reporting period compared to the EBITDA profit of $7.7 million in the PCP. Fall in EBITDA was mainly attributable to increased point of consumption tax in Queensland and New South Wales as well as slightly increased operating expenses.
The FY ’23 marketing strategy was to front-end the marketing expense significantly into H1. The H1 marketing expense of $45.3 million was reduced to $15.7 million for H2. As a result, the H1 EBITDA loss was $20.2 million and then we delivered an H2 EBITDA profit of $20.3 million. In FY ’24, our marketing strategy will be more normalized in line with the seasonality of the sporting and racing calendar. The Australian marketing expense in FY ’24 will be reduced by 15% to 20% and we currently expect a significant amount of that saving to fall straight to the bottom line, whilst the business is expected to deliver net revenue growth in Australia for FY ’24.
In Canada, we completed our first full year of operations in Ontario. Total net revenue came in at $18.2 million, with iGaming net win of $11.5 million and Sportsbook net win of $6.8 million. The FY ’23 statutory EBITDA loss for Canada was $35.8 million and that is expected to be the maximum annual EBITDA loss for the Canadian Trading segment. Let me explain further. As in Australia, the Canadian business will reduce marketing expense by 15% to 20% in FY ’24. We expect this savings to fall straight to the bottom line. With improved final efficiency that is from client registration to first-time better, together with the market-leading in-play experience and a continually improving iGaming product offering we expect Canada’s EBITDA loss in FY ’24 to be significantly lower than the FY ’23 loss.
Importantly, as we mentioned at the June quarterly results, we expect the positive EBITDA for the Australian Trading segment to significantly offset the EBITDA losses from the Canadian trading segment in FY ’24. Turning to the Technology segment. On a statutory basis, EBITDA for the reporting period was a loss of $8.4 million compared to the PCP loss of $3.3 million. We expect the Technology segment will be at or close to breakeven for FY ’24. Statutory EBITDA for the corporate segment for the reporting period was a loss of $12.8 million compared to a PCP loss of $15 million. We expect the corporate segment EBITDA loss for FY ’24 to be 35% to 45% lower than FY ’23.
In conclusion, the total group statutory EBITDA loss for continuing operations was $57 million. Please note, there is a summary of our statutory results on Slide 23 and a reconciliation of the normalized results to statutory on Slide 24. Slide 7 also details the additional cost below EBITDA which leads to the full year statutory loss of $107.9 million for the reporting period.
Turning to Slide 8 to review normalized continuing operations P&L. Continuing operations reported net revenue of $210.3 million, a growth of 7.6% versus the PCP. As we have previously guided, net revenue for continuing operations is expected to grow 10% to 20% in FY ’24. Gross profit of $105.7 million represented a growth of 5% over the PCP. Continuing operations gross profit margin for the reporting period was 50.2%, slightly lower than the gross profit margin of 51.4% which we achieved for PCP. FY ’24 gross profit margin is expected to be circa 50%.
Sales and marketing expense was $90.3 million for the reporting period, up 22% versus the PCP with Australia accounting for $61 million and Canada accounting for $29.3 million or CAD 26.4 million. This marketing investment assisted the company having 238,000 cash active clients in Australia and 30,400 cash active clients in Canada in the 12 months to the end of June.
As we head into FY ’24, we identified some inefficient marketing spend in both Australia and Canada in FY ’23 that we won’t repeat this coming financial year. As a result, both the Australian and Canadian — both the Australian and Canadian FY ’24 marketing expense is expected to be 15% to 20% lower than FY ’23. And as we commented a month ago, we expect global cash actives for FY ’24 to exceed FY ’23. That is the reduced marketing spend should not reduce client activity and client growth. Continued operations employee benefits expense increased in the reporting period versus the PCP, mainly as a result of the Canadian employee benefits expense first full year of recognition.
Product and technology expense increased versus FY ’22 as a result of Canada being operational for its first full year and some global technology costs allocated to continuing operations. The normalized EBITDA loss for continuing operations was $49 million for the reporting period. In conclusion, for continuing operations in FY ’24, we currently expect group revenue to grow by 10% to 20%, gross profit margins of about 50%, group marketing expense to be 15% to 20% lower and normalized operating expenses, excluding marketing expense, are expected to be between $60 million to $70 million. The company expects EBITDA to be at or close to breakeven post the close of the Fanatics transaction.
Turning to Slide 9. As it regards to the balance sheet, on the 30 June 2023, the U.S. and European operations were deconsolidated as control over these operations were deemed to be lost and operations discontinued at the date of the shareholder approval. 30 June 2022 balance sheet remains unchanged.
Slide 9 details the major movements resulting from the deconsolidation. This includes an impairment charge of $15.2 million being recognized in the period relating to the group’s internally developed betting platform which supported the U.S. business and which is being classified — which is now being classified as a discontinued operation. Although the group will continue to own the sports wagering iGaming technology platform, there are specific assets which were created and related to the U.S. business which from an accounting perspective, it is not considered probable that future economic benefit will be attributable to these assets. The group has net assets of $501.5 million as of the 30th of June 2023.
Turning to Slide 10. We have talked to our group consolidated cash flows and detailed these as part of our quarterly 4C reporting obligations. But to summarize, net operating outflows, excluding movement in player cash accounts was $218.8 million, slightly higher than the $212.8 million in the PCP. Net investing outflows was $52.8 million as the business continued to invest in the development of the betting platform.
Net cash outflows, excluding movements in player cash accounts for FY ’23 was $276.1 million. As of 30th of June, ’23, the company held $194.6 million in corporate cash, however, once adjusted for U.S. business sale-related payments of $7.5 million that were paid in Q4 which will be reimbursed at the second close adjusted corporate cash at 30 June ’23 was $202.1 million. Lastly, on May 15, when we announced the sale of the U.S. business, the AUD-USD FX reference rate communicated was $0.675. Post the 2 sale completions, we will receive US$225 million in total and we have hedged the vast majority of the USD at an AUD-USD rate slightly below $0.675.
I will now hand back to Sam to provide commentary on the operational performance.
Sam Swanell
Thanks Andy. Turning to Slide 12. The continuing operations reported growth in key metrics for the reporting period. Total net win was plus 7% to $230 million, cash actives plus 9% to $269,000. We retained our number 3 ranking in the Isles and Crytek U.S. app rank testing for the fifth consecutive quarter, again showing the great customer experience delivered by our technology which importantly is retained by the continuing operations. Enhancements through OddsFactory of live betting products drove in-play mix of Canadian Sportsbook handle to 63% in FY ’23, up from 53% in FY ’22.
Turning to Slide 15. The Australian Trading business ended the reporting period with net win of $211.7 million, down 2% from the PCP. Sports turnover increased by 47% compared to the PCP, offsetting declines in racing turnover. Continued focus on promotions efficiency led to the rate of promotions as a percentage of gross win improving to 31.5% compared to the 36.3% in the PCP. Net win growth from AFL and NRL combined was up 86% and tennis and soccer combined was up 53%, both compared to the PCP. We continue to see strong sustainable performance from our mass market clients with net win from this cohort, up 15% on the PCP. As Andy mentioned, we look forward to the Australian Trading segment delivering a significant EBITDA in FY ’24.
Turning to Slide 16. The Canadian business completed its first full year of operations in Ontario. Sportsbook net win was $6.8 million at a 3.5% net win margin. For iGaming, we delivered $11.5 million in net win. For the full year, we delivered total net win of $18.3 million. While the Ontario market is competitive, our Canadian business continues to perform well. The strength and quality of the customers that are making the choice to play on PointsBet demonstrates the effectiveness of our strategy. As we look ahead to FY ’24, we are looking forward to delivering revenue growth in Canada. We have a top-tier North American sports betting product and exciting product road map and we’ll continue to invest in our product and app experience for both Sportsbook and online casino.
The Canadian business provides shareholders continued exposure to the North American market through a jurisdiction that is more attractive than most U.S. states, with no partner fees and acceptable tax rate and iGaming complementing sports betting for the entire market. We believe the early stage of the Canadian business complements our more mature Australian business as well as providing an opportunity to leverage attractive features of our tech stack that aren’t available in the Australian market, such as iGaming and online live betting. Forward to Canada growing revenues and significantly reducing its loss in FY ’24 on its way to EBITDA profitability in FY ’25.
Turning to Slide 19. Before I pause for questions, I’d like to talk about the new PointsBet at 2.0 and why we are so excited about our future in Australia and Canada. Firstly, our proprietary tech stack is a global market leader as validated by the sale of the platform to the Fanatics. While we have sold a copy of the technology to the Fanatics, importantly, we get to keep the technology. That means we can develop and exploit it in a manner that creates the most value for PointsBet shareholders.
Secondly, we keep a copy of the Banach OddsFactory technology assets which drives our market-leading in-play and same game parlay products and the cash-out features used in all of our markets but particularly powerful in the North American live betting market.
Finally, we retain as part of an appropriately sized team, the company’s market-leading technologists, traders and quants based in Australia, Canada and India. It’s very important for shareholders to understand how valuable the PointsBet technology has become. It has been 1 of the critical features of the interest in our company by numerous groups and it bodes well for the value and the future of the Australian and Canadian businesses.
Our Australian operation has a strategically important place in the Australian wagering market. We intend to continue to grow our online share in this market from a current solid 5% position with the benefit of a more focused approach from our people, tech and product perspective. Turning to Slide 20. To reiterate our previous outlook commentary for continued operations, we expect revenue to grow, marketing expects to reduce, OpEx in the range of $60 million to $70 million and to be an EBITDA breakeven or close to — be an EBITDA close to breakeven from April ’24. We continue to anticipate the group will deliver positive EBITDA in FY ’25.
Let me now open up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from Rohan Sundram from MST Financial.
Rohan Sundram
I might start with a question for Sam. Sam, how are you thinking about the long-term growth and profitability of the Aussie and the Canada businesses? Just balancing out that Australia is ahead of Canada at the moment on profitability but it would look as though Canada has got a stronger outlook. Do you think Canada could be bigger than Australia one day? Or how are you seeing them balancing out in the long term?
Sam Swanell
Rohan, yes, I think Canada, Ontario is a circa $2 billion market. The online market in Australia is a circa $5 billion net win market. So as we think about Ontario compared to Australia, it doesn’t have the same size of market just at the moment. We do expect the TAM in Canada to naturally increase. We believe that there’s a good chance that Alberta as an example, gets added to the TAM, let’s call it, in the second half of calendar year ’24. And thus, that $2 billion market could become $2.5 billion. And to be honest, we probably think that those market estimates for Canada are probably conservative given that they do have online casino, live betting and the pre-map sports betting.
So yes, Canada has certainly got more natural growth because it’s an earlier stage market. What’s it got going forward? Well, the product mix, obviously, whereby, as I just said, you’ve got live betting on sport where we are one of the market leaders and it’s one of the reasons we’re so keen on Canada and you do have the online casino. So I think Canada is obviously the extra growth part of the opportunity that PointsBet currently represents. But we think in Australia, the year that we had, clearly, we grew our market share. We’ve now seen Sportsbet TAB and others report, let’s call it, FY ’23. So we know that even though this was a correction year for the online market following COVID, that we were down 2% but we’ve grown our market share.
So we certainly — the things that we can control — we’re very confident about our ability to grow our market share but we also do believe that having had that correction here that the online market in Australia will get back to some modest growth driven by the continued strength of sports and hopefully, racing can get back into positive territory.
Operator
Your next question comes from Phil Chippindale from Ord Minnett.
Phillip Chippindale
Firstly, just in terms of the U.S. states, how many have you received approval for so far? And then is there any sort of major conditions precedent to the first settlement which is obviously due at last 24 hours?
Sam Swanell
Phil, yes, look, we’ll leave with the statement to what we put out in the release and what I just referenced which is everything that’s tracking according to plan.
Phillip Chippindale
I want to switch to the residual business. And just on that marketing expense, you spoke about the seasonality being a little bit more normalized. Could you just give us a rough split ratio between first half, second half of ’24?
Andrew Mellor
Phil, it’s Andy. Thanks for the question. I think we would still probably see a little bit more spend in H1 than H2 but certainly not to the extremes that we’ve attacked the market in the last 2 years.
Phillip Chippindale
Final one from me. Just in terms of the active plan for FY ’24. Presumably Canada will be growing, given it’s a much earlier stage market. Does that imply the Australian business that you’re sort of thinking about it being broadly flat over FY ’24?
Sam Swanell
No. I mean we want to see Australia grow. But you’re right. I mean Canada is going to provide the bulk coming off that earlier stage starting point. I’d make the point that part of what we see for PointsBet when we talk about revenue growth is not all just about acquisition. It’s also about share of wallet and getting greater play from our clients from other operators. But to answer the question, no, we want to see Australia growing its active clients. But yes, it won’t be as strong as Canada.
Operator
[Operator Instructions] Your next question comes from Bradley Beckett from Credit Suisse.
Bradley Beckett
Hoping you could add a bit of color around the cash active clients in Australia. It looks like about a 10% reduction in net win per average active over ’23, ’22. How much do you think that’s attributable to sort of the softer VIP market versus consumer spending and content mix? Any color there would be appreciated.
Sam Swanell
Brad, yes. Look, I think our revenue was largely flat and our active clients was largely flat. So the average revenue per active would be largely flat. So — but what I would say and one of the pieces of color that we have provided in talking about the fact that is largely a flat number year-on-year is that the mix of clients underneath that has changed. So we’ve seen that recreational client mix, the mass market mix actually grew 15% that was the number that we called out. So you can take it that revenue that we’ve generated this year, while largely equal to last year is sort of more spread, even though the average has come out about the same, has certainly been growth in that mass market and we’ve talked about some weakness around VIP. So we certainly believe that, that revenue mix is far more sustainable, less susceptible to any shocks from the VIP segment.
Bradley Beckett
Okay. Maybe just 1 for Andy. In regards to the player account, cash balances, it looks like about a 60% reduction, is that from the discontinued operations or other sort of drivers at play there?
Andrew Mellor
Yes, that’s correct. It’s from the discontinued operations.
Operator
Your next question comes from Rohan Gallagher from Jarden Group.
Rohan Gallagher
Two questions, if I may. Andy, what is the sustainable sort of cash balance you would be looking for, for PointsBet 2.0?
Andrew Mellor
Rohan, thanks for the question. I think the way that we think about the move forward is ensuring that the company has enough capital to fund both its working capital and its CapEx. And we haven’t given any guidance as to what that number looks like. But the way that we think about it and have thought about it is that ensuring that we have that amount of capital to fund those 2 items is obviously crucial. If we sort of want to walk through and it might be helpful just to walk through the waterfall of what is public. We have an opening cash balance of $202 million, proceeds from the sale will be circa $333 million which leaves us with $535 million. You would need to make an assumption around the distribution but let’s say, it’s $445 million. We have spoken to the fact that the funding for the U.S. from the first 1st of July will be capped at approximately US$21 million. So that is about AUD 31 million and then you would need to make an assumption around transaction costs. But if you say that’s around $20 million, that leads the balance in the high 30s. And then there will be some funding requirements to remain co, we haven’t spoken to that yet. But we certainly feel from a border management perspective, that is about the right amount to move forward with in PointsBet 2.0.
Rohan Gallagher
Super helpful. Second question, Sam and Andy, please weigh in. Obviously, the market getting confident with 2.0 is that the continued growth in Australia Board that offsets the losses, albeit lower losses in Canada in the next 12 to 24 months. How does a potential entry into Alberta impact the shape of that pathway from EBITDA losses to EBITDA profitability in Canada over the next 2 years?
Sam Swanell
Yes. Look, we don’t see it as being material. So unlike the U.S., whereby each state really was like a brand-new country which came with significant sort of infrastructure overheads increased compliance costs, et cetera. So we believe that the synergy is far greater. We expect that some of our marketing spend that is non-performance marketing or non-targeted, well, it already bleeds into our Alberta. And so you’re going to get the benefit of, let’s call it that above-the-line marketing that bleeds into that jurisdiction anyway. So now you’re going to be able to monetize it. Yes, you would spend a little bit more on performance marketing because you’d now be targeting the residents of Alberta. So your marketing would go up. But really, apart from that increased marketing, we really don’t see a lot of incremental cost.
Operator
Your next question comes from Chris Savage from Bell Potter Securities.
Chris Savage
Just picking up on your comment, the clear path to secure a top 4 position in Australia. So correct me if I’m wrong but your number 5 or equal number 5 at the moment with about 5%. What sort of assumptions are behind that in terms of growth or what might happen above you, like with the net or Ladbrokes, for instance?
Sam Swanell
Chris, yes, I think the way we look at the online market is Sportsbet TAB, Entain and Bet365 are slightly above us. Bet365 is a private company. So they don’t — the numbers aren’t as easily or readily available but they produced some numbers a month or 2 ago that gave us an insight into their Australian business. And we think that, that’s within touching distance of us being able to, on the back of our growth, outperforming there in the broader market to go past them. So obviously, it’s a bit of a gap then up to the combined Entain business. But we — as we flagged, we’ve outgrown the market this year with the extra focus that we are going to bring back to the Australian business. I think everyone can understand that the U.S. has been somewhat all encompassing getting through this process and now getting through the sale process. Bringing that focus and that expertise purely play in Australia and Canada, combined with our already strong trajectory, we’re really confident in our ability to grow our market share in Australia.
Chris Savage
And is there any update on the better sale process?
Sam Swanell
I don’t know. I don’t know.
Operator
There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.
