Pointsbet Holdings Ltd

ASX:PBH

Earnings Call Transcript 2021-Q4

[Operator]

Thank you for standing by, and welcome to the PointsBet Holdings Limited Q4 FY 2021 Appendix 4C and Investor Presentation Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Sam Swanell, Managing Director and Group CEO. Please go ahead.

[Samuel J. Swanell, Co]

Good morning, and thank you for all -- thank you all for joining the PointsBet Holdings Limited Q4 FY '21 Business Update and Activities Report. This is Sam Swanell, CEO, and I'm joined on the call today by our CFO, Andrew Mellor. In addition to our Q4 trading results, we will also speak to the capital raise announced to the market this morning. Further, given this announcement, there will not be a Q&A session at the conclusion of this call. Please note all numbers referred to are unaudited and in Australian dollars, unless otherwise stated. Since inception, PointsBet's Board and management have been working towards establishing the key building blocks that have put us in the strong position we are in today to pursue the expansion of the North American sports betting and iGaming opportunity. In FY '21, we have made significant progress across our Australian and U.S. businesses. We've also recently completed 2 strategic acquisitions. Firstly, the acquisition of Banach Technologies in Ireland, which strengthens our in-play and player profit sports betting and quants capabilities. And secondly, the advanced deposit wagering license, BetPTC, which expands the company's U.S. footprint into the racing vertical. There is no doubt the key driver of our success to date has been the strength and depth of talent we have acquired across all areas of the company, and we will continue to add bench strength as we expand. Key recent hires include Mark Hughes, Group Chief Operating Officer, formerly CEO of Banach Technologies; Scott Vanderwel, CEO of PointsBet Canada, formerly Vice President of Rogers Communications; Nic Sulsky, Chief Commercial Officer, PointsBet Canada, former -- formerly President, Monkey Knife Fight; and Aaron O' Sullivan, Vice President of Online Casino revenue, formerly Head of Games at Bet365, just to name a few. Now turning to Slide 9. Today, we have live operations in 6 U.S. states with iGaming Live in 2 of these states. As can be seen from this slide, by December 2022, we plan to be live in at least 19 North American states or provinces. West Virginia and Pennsylvania will include iGaming, and others, such as Ontario, are also expected to add to the iGaming addressable TAM in the short term. We are greatly encouraged by the release of the New York Gaming Commission request for application. Based on the published criteria, we anticipate that PointsBet will score well. And based on all available evidence, including the Q&A released by the Gaming Commission, we believe we are positioned well. PointsBet views itself as a great partner for the state of New York. With the significant North American total addressable market opportunity, I wish to now remind you of the building blocks we have put in place in preparation to achieve long-term success. As can be seen from Slide 11, we have established the long-term strategic foundations to ensure we are a market leader in North America. From day 1, PointsBet was set up to build a customized, modern in-house technology platform specifically tailored for the North American market. The addition of Banach Technologies strengthens our capabilities further, in particular in the area of in-play, micro and player prop offerings. We have built a very material, profitable Australian business in a highly competitive and advanced market. We have gained strong U.S. market share in live states, and as a top-tier operator, have extensive market access that continues to grow. We secured a transformational U.S. media partnership with NBC Sports providing access to leading national, regional and local television as well as comprehensive digital assets. NBC has the largest sports audience of any U.S. media company, accessing over 184 million viewers. As noted earlier, we have established a market-leading team and continue to add bench strength in key areas. We have attracted outstanding brand ambassadors, including Paige Spiranac, Drew Brees, Shaquille O'Neal, Allen Iverson and Devin Hester. We have entered into strategic partnerships with the major U.S. leagues as well as a host of sports teams across the U.S., and we have assembled a highly experienced iGaming team and built an in-house proprietary iGaming platform and administrative tools, which have been successfully launched in 2 U.S. states. As shown on this slide, we've put together all the pieces of the puzzle needed to take advantage of the significant North American opportunity. Our continued focus remains on first-class execution and building upon the growth and success we have achieved to date. Turning to Slide 12. In each of the states we are live, based on available data, PointsBet is either the fourth or fifth largest operator by handle. Our execution strategy continues to be clear. We will continue to invest to remain a top 5 operator in the long term, targeting 10% market share in each of the states we offer sports betting. As we have said since we first launched in the U.S., it is clear that product will ultimately win. We currently have a terrific product as can be seen by our success to date. However, we will continue to invest as evidenced by the recent acquisition of Banach and the ongoing investment in tech and product talent. We have the fastest app in the U.S. market with outstanding stability in UX. We were thrilled to again be awarded the EGR Sports Book of the Year in 2021. Notwithstanding this, we see clear opportunities for innovation ahead for both our sports betting and iGaming products. We will continue to execute strategic and disciplined marketing campaigns, leveraging our media partner, NBC Sports, as the cornerstone, with further innovative integrations across the NBC Sports media portfolio to accelerate client and brand growth across North America. Turning to Slide 16. I was very pleased with the performance of the global trading business during Q4. Performance compared to the prior corresponding period of Q4 FY '20, to be referred to as the PCP, was as follows: turnover was up 182% at $986.1 million; gross win was up 128% at $98.7 million; group net win, including iGaming for the first time, was up 81% at $60.8 million; group cash active clients were up 220% at over 355,000 clients. Turning to Slide 17. It can also be seen that for the full FY '21 year, operations performed strongly, and I was very pleased with the global performance of the following KPIs compared to FY '20. Turnover was up 228% at $3.78 billion. Gross win was up 201% at $353.1 million. And group net win, including iGaming, was up 154% at $208.5 million. PointsBet launched iGaming operations in Michigan on May 5, 2021, and we were pleased to record net wins on 30 June of $1.5 million. Now turning to Slide 18. In Australia, PointsBet continues to focus on growing its market share throughout Q4, supported by the refreshed brand campaign featuring Shaquille O'Neal. Leveraging such an iconic figure in global sport during both the AFL and NRL seasons has continued to build the PointsBet brand across the country. The Australian Trading business Q4 marketing expense was $16.9 million, which assisted in driving 12-month rolling cash active clients to 30 June to 196,585. In the United States, September to March is traditionally peak season for the sports calendar and thus, sports betting. April to August is the lower period. As such, for the June quarter, marketing expense was reduced compared to the March quarter from USD 33.3 million to USD 26.3 million. This U.S. marketing expense assisted in driving 12-month rolling cash active clients to 30 June to 159,321. We continue to have a constant focus on our cost per acquisition, and we're pleased that first-time bettor CPAs across all operational U.S. states, except Illinois, again tracked below USD 500 for the quarter. As with regards to Illinois CPA, as a reminder, the state moved back to an in-person sign-up from what was a remote registration environment on the 4 April 2021, which means for the industry as a whole, reduced acquisition volumes. Given the size of the opportunity in Illinois and ahead of the upcoming NFL season, PointsBet continued its strategic marketing into the Illinois market. And as a result, we were willing to accept high CPAs over the quarter. While an in-person registration environment results in lower sign-up volumes compared to remote registration, we anticipate that our sign-up location advantage will have an increasingly positive impact on market share in line with the commencement of the NFL season, together with increased foot traffic as COVID concerns ease in Chicago. Now turning to Slide 21. The Australian Trading business continued its outstanding performance, ending the quarter with turnover of $494.8 million, up 63% compared to the PCP, and net win of $43.1 million, up 33% from the PCP. Gross win margin and net win margin were an impressive 13.4% and 8.7%, respectively, continuing the trend of strong quarterly margins. It was particularly pleasing that net win grew by 33% compared to the PCP, given the Q4 FY '20 online industry results were significantly boosted due to COVID. And based on P2B reporting, it is expected the online industry in Australia had a negative growth versus the PCP. Compared to the PCP, the Australian Trading business has seen improvement across a number of key KPIs, particularly with respect to customers continuing the trend of movement towards higher-margin multi-products. Improvements in marketing tech tools and the refreshed brand campaign also assisted with acquisition and retention compared to the PCP. I'm extremely pleased with the performance of the Australian business across the full financial year, and this strong momentum sets up very well for FY '22, and in particular, the coming football finals and Spring Carnival beginning in September. Turning to Slide 22. The U.S. business achieved a quarterly gross win of $32.3 million compared to a gross win of $1.6 million in the PCP with a quarterly net win of $16.2 million compared to a net win of $1.2 million for the PCP. It should be noted that Q4 FY '20 was impacted by COVID, resulting in the majority of key U.S. sports codes postponing or delaying their seasons. The U.S. business achieved strong quarterly gross win margins of 6.6% and a quarterly net win margin of 3.3%. On 10 June 2021, we announced a multiyear agreement with the Riverboat Group to provide online and retail sports wagering in the state of Maryland. On 20 July, we announced an agreement with Cliff Castle Casino Hotel to pursue online sports betting market access in Arizona. These agreements expand PointsBet United States sportsbook market access footprint to 17 states, subject to the passing of enabling legislation and licensure. On the 8th of July, PointsBet announced that NFL all-time great, Drew Brees, officially joined the PointsBet team. Brees, who this season is transitioning to a broadcasting career with NBC Sports, will deepen the NBC Sports and PointsBet relationship as the company continues to expand and realize the growing North American online sports betting and iGaming opportunity in 2021 and beyond. In addition to Drew Brees becoming a PointsBet global brand ambassador, the PointsBet NBC Sports partnership continue to break new ground as it reached the final quarter of the first year of the deal. PointsBet was integrated into coverage in or around NHL Playoffs, NBA Playoffs, U.S. Open Golf and Indy 500.This allowed PointsBet to reach sports fans during peak events helping it further grow its brand awareness. PointsBet is now operational in New Jersey, Iowa, Indiana, Illinois, Colorado and Michigan. Michigan saw the inaugural launch of PointsBet's iGaming product in May 2021, followed by New Jersey on 23 July. As mentioned earlier, we expect to launch an additional 13 North American jurisdictions over the next 17 months. Turning to Slides 23 and 24, I will now briefly touch on each state. New Jersey recorded a quarterly gross win of $13.7 million at a gross win margin of 6.7%, and a net win of $9.1 million at a net win margin of 4.5%. PointsBet achieved 7.8% market share in New Jersey for online sports betting handle during the quarter. Illinois recorded a quarterly gross win of $10.1 million at a gross win margin of 7%, and a net win of $5.7 million at a net win margin of 3.9%. PointsBet achieved 7.8% market share for online sports betting handle during the quarter, ranking as the fifth largest operator by sports betting handle. In the month of May, the last month for the Illinois state data was released. Michigan recorded a quarterly gross win of $2.5 million at a gross win margin of 5.8%, and a sports betting net win loss of $0.3 million at a negative net win margin of 0.8%. PointsBet achieved 4.9% market share for online sportsbook handle during the quarter, ranking as the fifth largest operator by sports betting handle for the month of June. Sport PointsBet launched iGaming operations in Michigan on 5 May 2021, and we were pleased to record net win to 30 June of $1.5 million. Indiana recorded a quarterly gross win of $2.8 million at a gross win margin of 6.3%, and a net win of $1 million at a net win margin of 2.3%. Indiana. PointsBet achieved 5.5% market share for online sportsbook handle during the quarter, ranking as the fourth largest operator by sports betting handle for the month of June. In Iowa, PointsBet is happy to report we have extended our agreement for sports betting, retail and online, as well as signing a new agreement with Catfish Bend Casino to provide iGaming in the state of Iowa, subject to the receipt of necessary licensure. Both of these agreements will run until 31 December 2030. Details of the company performance in Colorado and Iowa are set out in the quarterly update released to the ASX this morning.I will now hand over to Andrew Mellor.

[Andrew J. Mellor, Chief Financial Officer]

Thank you, Sam. Turning to Slide 25, which summarizes the quarterly net win breakdown of FY '20 and FY '21 as well as comparing Q4 net win to total net win for the first 9 months of the respective year. In Australia, it can be clearly seen that COVID lockdowns in Q4 FY '20 significantly contributed to net win growth in that quarter versus Q3 FY '20. Therefore, it was particularly pleasing that net win in Q4 FY '21 grew by 33% compared to the PCP. In the U.S., for the 9 months to the 31st of March '21, the business generated $24.7 million of net win, followed by $17.7 million in the June quarter, demonstrating good momentum for the U.S. business. Turning to Slide 26. Given today's announcement of a capital raise, we have provided some additional unaudited disclosures in addition to the 4C reporting requirements. As previously referenced, global net win was $208.5 million for FY '21. Global net revenue is $194.7 million for FY '21. The differences between net win and net revenue are GST payments required in Australia and B2B and ADW revenues post our recent acquisitions. The Australian Trading business is EBITDA positive for FY '21. The Australian marketing expense increased from $20.1 million in FY '20 to $51.4 million in FY '21. The U.S. segment saw a significant increase in marketing expense versus FY '20 to USD 90.1 million, quarterbacked by NBC Sports. This increase was driven by increased number of operating jurisdictions. The business was operational in 2 states in FY '20 and 6 states in FY '21. This strategy is consistent with previous new market entries with upfront investments required to establish and grow market share and drive revenue growth. The U.S. marketing expense is expected to continue to increase as our footprint expands into more American jurisdictions. Technology and corporate expenses rose as trading activity increased, and the business continues to scale the global team and its operations. The unaudited group statutory EBITDA loss for FY '21 is expected to be $163.7 million. Turning to Slide 27 for the quarterly 4C cash flow summary. At the 30th of June 2021, the company's corporate cash balance was $245.5 million. The company has no corporate borrowings. Net cash used in operating activities in the quarter ending 30 June was $43 million. Receipts from customers totaled $62.5 million. Receipts from customers includes net win from Sportsbook and iGaming verticals as well as B2B revenues post the acquisition of Banach Technology and ADW revenues in the U.S. post the acquisition of BetPTC. Cash outflows during the quarter included cost of sales of $26.9 million; noncapitalized staff costs of $12.7 million; marketing costs of $49.3 million; administration, corporate costs and GST paid on Australian net win of $16.2 million. Net cash used in investing activities in the quarter ending 30 June '21 was $37.5 million. During the quarter, the company completed the acquisition of Banach Technology and BetPTC, and the cash payments, net of cash acquired, was $31.8 million. The cost of capitalization of our technology and product staff was $4.8 million for the quarter. I'll now hand back to Sam.

[Samuel J. Swanell, Co]

Turning to Slide 29. I would like to provide some comments on iGaming, which is a key part of our U.S. strategy. iGaming revenues in the United States have grown exceptionally since the repeal of PASPA in May 2018. Across New Jersey, Pennsylvania, Michigan and West Virginia, iGaming revenues reached nearly USD 900 million in the June '21 quarter, which if annualized, would equate to greater than $3.5 billion per annum. The size of the opportunity is evident. PointsBet has assembled a highly experienced iGaming team with deep experience developed at Aristocrat, Ainsworth and Bet365, just to name a few. Turning to Slide 30. As I've previously said, owning and controlling in-house technology will become an increasingly important strategic advantage. On 5th of May 2021, PointsBet launched iGaming operations in Michigan. We now have 30 slot video, poker and table games. We were pleased to record net win in Michigan to 30 June of $1.5 million. Since the launch of the iGaming products, around 40% of all Michigan cash active clients have placed an iGaming bet. This inaugural launch was followed by the launch of iGaming operations in New Jersey on 23 July 2021. The company will bolster its iGaming offering in H1 FY '22 with the addition of strategically selected slot games, live dealer table games and other innovative initiatives. Pending regulatory approval, PointsBet will roll out iGaming operations in Pennsylvania and West Virginia in FY '22 and expect Ontario to also be added to the list. PointsBet has also secured iGaming access in Ohio, Indiana, Missouri, Louisiana and Iowa, pending the passing of enabling legislation. I would now like to provide some commentary on the emerging Canadian opportunity. On 22 June 2021, the Canadian Senate passed Bill C-218, legalizing single-event sports betting, previously only parlay sports betting was allowed. Regulatory details will be worked through at the provincial level, with Ontario, population of 15 million people, anticipated to go live in late 2021, with an open licensing system, followed by Alberta with a population of 4.4 million people in 2022. Goldman Sachs states the combined online sports betting and iGaming opportunity for Canada represents a USD 3 billion opportunity. Turning to Slide 32. In anticipation of this significant opportunity, PointsBet has already made some key management hires in Canada, including Scott Vanderwel, as CEO of the Canadian operations. Scott previously served as Senior Vice President for Rogers Communications, where he oversaw corporate strategy, operational improvement and digital operations. Nic Sulsky is Chief Commercial Officer. Nic is the former President of Monkey Knife Fight, the third largest daily fantasy sports operator in the U.S. And Chantal Cipriano as Vice President, Legal Compliance and People. Like all markets PointsBet enters, we are committed to creating products that fit the Canadian consumers' needs, satisfies the important requirements of regulators, enables fans to engage with their favorite sports in new and exciting ways. Scott, Nic, Chantal and the team we are building in Canada will help us to adjust that. Moving to Slide 33. In addition to Drew Brees becoming a PointsBet global brand ambassador, the PointsBet NBC Sports partnership continued to break new ground as we reach the final quarter of the first year of the long-term partnership. In addition to the regional sports network integrations, PointsBet was integrated into coverage in or around NHL Playoffs, NBA Playoffs, U.S. Open Golf and the Indy 500. This allowed PointsBet to reach sports fans during peak events, helping us further grow its brand awareness. PointsBet on-air talent Teddy Greenstein and Jay Croucher continue to be integrated further into NBC content during the quarter. The NBC Predictor app has now delivered over 385,000 leads for PointsBet. As we enter new states like Maryland and Arizona and others, this provides us with a database of potential clients to target. The Predictor app will again be super popular this NFL season, and we continue to be the exclusive partner of this valuable digital property. With the NFL season approaching quickly and sports betting advertising being allowed around NFL for the first time, PointsBet looks forward to working with NBC to capitalize on this new opportunity. It's been a great year for PointsBet. I'm happy to also report that FY '22 is off to a strong start, with July trading tracking very well. With 3 days of July still remaining, the Australian trading business has already achieved a record month for net win. The investment in the Shaq marketing campaign has delivered strong momentum as we head towards spring. Similarly, the U.S. business has started the financial year well. As we approach the 2021 NFL season launch and the rapid expansion of our North American footprint, we are excited by the position we have put ourselves in. I will now hand back to Andrew Mellor to provide some commentary on the capital raise.

[Andrew J. Mellor, Chief Financial Officer]

Thank you, Sam. I'll now be speaking to Slides 38 to 42.This morning, the company launched a fully underwritten equity capital raising of approximately $400 million, comprising an institutional placement of $10 per share to raise approximately $215 million, and a 1 for 9 pro rata accelerated renounceable entitlement offer with retail rights trading at $8 per share to raise approximately $185 million. Also, as announced on the ASX this morning, PointsBet cofounders: Andrew, Nicholas Fahey, and Sam Swanell will sell a combined 2.9 million shares, representing 15% of their respective interest in PointsBet. The company's Chairman, Brett Paton, has agreed to purchase 1.5 million of the shares under the cofounder sell-down at the placement price of $10 per share. The remainder of the cofounder sell-down shares will be placed at the placement price with an institutional investor, independent of the capital raising. The cofounders, independent of the company, have sought and paid for their own financial and legal advice, with regards to the cofounder sell-down. Sam Swanell has confirmed he does not intend to sell any additional shares for a period of 12 months. Also, PointsBet Chairman, Brett Paton, has indicated that he will be participating in the entitlement offer for approximately $6 million for his eligible entitlements. Proceeds from the placement and rights issue will be used for North American marketing and client acquisition, technology and product development, both across sports betting and iGaming, U.S. market access and government licensing fees, continued investment in talent and scale of operations and balance sheet flexibility. The Board of PointsBet believes this is an appropriate time for the company to raise additional equity capital, provide a strengthened balance sheet as we continue to execute in North America and leap forward on the back of our operational success to date. I'd like to thank you all for attending the call today, and thanks, operator. Operator, that concludes the call.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.