Jumbo is giving a presentation at a Macquarie event today.

Included is a trading update for the first 10 months of the financial year:

Good growth is continuing, with increased service fees being somewhat offset by price increases.

If you pro-rata ytd performance, you get a FY24 TTV of $534m. They told us to expect a better revenue margin (last year was 20.3%, but based on the 2nd half to date that's more like 22.5%), so FY revenue should be around $120m, giving an EBITDA estimate of ~$59m (based on 49% EBITDA margin) -- both of which are only marginally ahead of FY23 results. Still, as we saw last year, volatile jackpot results can really move things around.

In FY23, they went from $72m in revenues for the first 10 months and then added $45m in the last 2 months!

So it's hard to know, but my best guess is that shares are on a forward PE of something like 22x, which isn't excessive given the nature of earnings and their momentum.

Not sure it's a level where a buy back is really warranted (they have the capacity to buy back another $25m if they choose). To be fair, for the first half they only bought back $3.2m at an average price of $12.74, so as long as they are disciplined and opportunistic, it's not a worry for me.

Held.

I don't think I'll ever get a job hosting 7:30.. Some of these CEO interviews are like Sean Hannity interviewing Trump..

So apologies for being a bit like a gushing groupie sometimes. But Mike represents so much of what I like in a CEO:

Plain speaking, humble, clear focus and vision, lots of skin in the game, founder, engineering background.

At this point, the guy is worth at least $134m (only counting his Jumbo shares) and he's still in there chasing a bigger vision. Last time he sold shares was April 2022, from what i can tell, and that was only about 5% of his total holding.

Mike stressed a couple times that it was their in-house developed tech that was their moat, saying it'd take (from memory) $100m and 3years+ for someone else to emulate their tech stack.(not that we should take that at face value)

fwiw, they only carry around $16m of capitalised development spend on their balance sheet (most has been amortised away) and last year they spent $6.5m on software development, and $5.5m the year before that.

I think his read on the regulatory landscape made sense -- why would government kill off a big source of revenue, especially when this form of gambling, er I mean "gaming", doesn't tend to have negative social impacts (unlike pokies).

Counterparty risk with ASX:TLC is not a thing until 2030, and at this point Jumbo have a much better negotiating position (although again, we may need to push back on that a bit for the sake of intellectual honesty). At any rate, Mike is clearly a long term thinker, and is looking to continue to diversify away from that single source of revenue, targeting 50% revenue from SaaS and Managed services by then.

In the meantime, they have wonderful cash flows to fund their expansion and it looks like they are being very conservative in their plans.

Anyway, capital light, founder led, economically acyclical, strong balance sheet and cash flows -- what's not to like?

I still think shares are reasonable value (see my valuation). Maybe I've been too kind on some assumptions, but even if you pull things back a bit I think you have a current price that is far from expensive.

Another way to look at it is that you have analyst's forecasting a FY24 dividend of 58c. Well, let's call that 50c which represents a forward yield of 4.7% (grossed up for franking), which aint bad for a company that has delivered such strong growth over the years, and that has plenty of runway left.

Anyway -- as always, keen for a different perspective.

I'm short on time today, but quickly, the Jumbo results look decent.

Management have reigned in cost growth (not that that was ever a problem), and reduced marketing spend (due to lack of large jackpots), which has helped deliver a 51% EBITDA margin, ahead of guidance for 48%, but down a bit on FY22 (52.9%).

TTV growth was strong, up 18%, which helped grow revenue by 14% and NPAT by 9% (ex amortisation of acquired assets). Active players up 39% thanks to acquisitions, but a good sign of future growth.

Free Cash Flow was the standout, up 21% (cash conversion was 146% -- basically, there's a good chunk of non-cash amortisation which is reasonable to strip out)

All debt has been repaid and the company has $53m in cash. Expecting 100% cash conversion in current year, so can easily fund growth and maintain a dividend payout of 65-85%.

So you have a business on a PE of 27 and a yield of 2.8% (fully franked), which should growth at a very decent rate when you consider the StarVale, Gatherwell and Stride acquisitions.

I dont think shares are 'cheap' per se. But not unreasonable given the quality and reliability of cash flows, as well as the ongoing growth potential.

[Held]

Jumbo's latest slide deck shows that there have been only 11 large jackpots (>$15m) so far in the second half (through to the end of April), and with a lower aggregate size. If you pro-rata the current half, the total aggregate jackpot size comes in at around half the previous second half.

We could see some bigger jackpots in the remaining couple of months (and statistically you'd probably expect that), but given where we are, and how highly ticket sales correlate with jackpot size, it'll be hard to get a good comp for the current half revenue wise.

Of course, this is just the nature of the industry and doesn't hold much relevance to business execution, but it is something to be mindful of.

Cost growth is expected to be in the range of 16-18% as the company continues to invest, but this is down from the previous year's 33% lift, and the underlying operating margin is now expected to come in at the higher end of the original guidance range of 48-50%.

Powerball (which accounts for over half their TTV) is increasing the ticket price by 10c, the first price increase in 5 years. But Jumbo is adding a further 10c to ticket prices. Given the price rise should also lead to more frequent large jackpots, it *should* be a net positive for Jumbo. In fact, on a pro-forma basis, this is expected to drive operating margins from 44% to around 50% from Fy22 to FY23

One small point, the company still has a buy back allotment of $25m, which only 10% or so has been used at an average price of $12.58 (current price $12.71, so maybe that's an area you could see at least some support.

All told, this business is a bit of a cash cow with good secular tailwinds and one that (at least historically) has proven to be very recession proof.

Disc. Held

Some notes from the Chair and CEO addresses:

• Competition for talent resulted in increased turnover & cost pressures, albeit to a lesser extent than peers
• Long term incentive structures in regard to share allocations to be measured against total shareholder return and per share earnings (good!)
• Healthy cash position and available debt facility provide "capacity for further strategic growth" -- i.e. expect more acquisitions
• Machine learning showing good results with a 3-fold increase in purchases of recommended products.
• Stride has significant opportunity to expand into other Canadian provinces
• As we all know, big jackpots are a strong driver of ticket sales and sign-ups. You can't predict when the big ones will come, but it's a mathematical certainty that they will.
• The recent $160m powerball saw 60k new player sign-ups
• Lottery TTV and revenue up 11% and 10%, respectively, from pcp
• Underlying SaaS TTV up 18% with all 5 clients fully operational
• Gatherwell TTV declined 7%, but revenue up 12% due to focus on higher margin services
• Maintain EBITDA margin target of 48-50% for FY23, excluding Stride and Starvale (FY22 was 52.9%)
• Recent acquisition will mean a significant higher rate of amortisation due to acquired intangibles. Non-cash of course, and things like customer lists really can be largely ignored imo. Software less so.

I remain a happy shareholder and think the business should be able to deliver annual EPS growth of at least 10-15%pa for the next 5 years or so at least, but possibly as much as 15%-20%pa.

Lots of cash on hand, and good free cash flow generation. An economically resilient industry. An aligned and capable CEO (who I have reached out to again -- fingers crossed he'll come chat to us soon).

Aside from the growth, shareholders should get a grossed up yield of close to 4.5% too.

I'm thumb-sucking a forward PE of 24 or so, which feels very decent.

Held.

I agree @wtsimis -- Jumbo is an impressive company (i also hold here and in real life).

In the last 5 years:

• TTV has gone from $145m to $660m (CAGR of 35%)
• Revenue has grown from $32m to $104m (CAGR of 26%)
• NPAT has grown from $5m to $31m (a 6x improvement!)

Importantly, it's done this without too much dilution (share count is up 5%pa on average over the same time frame, and flat for the last 3 years), and it's consistently paid a dividend.

Solid structural tailwind in the switch to digital ticket sales, and they've built some impressive tech which now serves as its own white labelled SaaS product. Acquisitions have been sensible and with a clear strategic advantage.

As @Mujo reported, the company is looking to post improvements across all the key metrics for FY22, with TTV, revenue and NPAT up 35.5%, 27.1 and 15.8%

And yet, the market is (as I write) down more than 11% on the news. Why?

Well, margins are down across the board. EBIT margin has gone from 58% to 52% and the company expects this to further moderate to 48-50% in FY23.

I wont pretend that is good news, but a part of that is to be expected. Under the 10 year agreement with Tabcorp – signed in August 2020 – a service fee was introduced, and is based on the cost of ticket purchases from Tabcorp. It was 1.5% in FY21, 2.5% for FY22, and will be 3.5% in FY23, after which it levels off at 4.65% for the remainder of the agreement.

They are pretty sizeable steps, but none of it should be a surprise to the market

Jumbo did say it expected Marketing costs to be in the range of 1.5-2% of lotto retailing TTV. But here too, that's about in line with what they reported for the half year, which was at 1.8%. They've also said they tend to see a 5 month payback on marketing spend, so given the stickiness of players, i say have at it!

Perhaps the bigger factor is the jump in operating costs, which were 32% higher in FY22 and are expected to rise a further 20-22% in FY23. At the half they also pointed to this and attributed it to the appointment of a senior leadership group and a tighter labour market (in other words, increased salaries). This is something a lot of companies have reported, and only yesterday we saw just how tight the labour market is. I expect this to remain a feature for a while yet.

So not what you like to see. But to me it's not something that should undermine their ability to deliver attractive growth in operating cash flows. Less than would otherwise be the case, sure. But it's far from a deal breaker for me.

So, looking ahead, while no specific guidance was given, i'd expect continued organic growth and also a nice kicker from recent acquisitions. Starvale should add a further $10m in revenue with a full year of contributions, and Stride generates around $6-7m in annual sales. Also the SaaS and Managed services business seem to have good traction, and they are going after a $10b serviceable addressable market which is presently underserved and with high barriers to entry.

At present, you can buy shares in Jumbo for about 26x earnings and a 3.5% fully franked yield.

I've emailed CEO and founder Mike Veverka to see if he'd like to chat with us.

ASX announcement is here

Jumbo has acquired StarVale -- a UK based External Lottery Manager that provides services to around 850,000 lottery players across 45 charities and non-profits -- for $32.1m, plus up to an additional $8.5m of deferred consideration based on performance measures.

That represents a 7.3x multiple on StarVale's expected pre-tax profit for FY23 and should be mid-single digit EPS accretive in the first 12 months. (forecast NPBT for FY23 is only 10% above FY21 -- so it doesn't appear they are trying to make the acquisition multiple lower by assuming high growth)

The acquisition will be debt funded with a new $50m debt facility, of which $30m will be used for the acquisition, and the remainder for future possible acquisitions. With no prior debt, $80m in equity and $14m in free cash flow (as of last annual report), this doesn't seem too onerous and ensures no dilution for existing shareholders. The company is also reducing its dividend payout ratio (from 85% of NPAT to 65-85%) which will help ensure they can repay the debt faster -- a good call in my opinion.

This latest acquisition follows the Stride purchase last year, and Gatherwell in 2019, both of which (so far) look to have been good moves, and will help accelerate international growth and provide added scale.

StarVale also owns a Direct Debit solutions business, which can be used for Gatherwell and other UK operations, providing some cost efficiencies. It's also worth noting that StarVale generates a pre-tax margin of close to 40%.

Overall, a good move at an attractive price that should enable the group to further leverage their Powered by Jumbo platform. It's also entirely consistent with their stated strategy.

Announcement here

Disc. held

This was another strong result for Jumbo.

Revenue growth of 17% to $83m represents a doubling since 2018. That's despite a transfer of customers to Lotterwest, on which they now get a lower margin of the transaction value (9.5% vs 20%). 

Within retail, excluding this shift, revenue was up 17%

There was a change in the reporting structure too, with retail paying a 7.5% usage fee to the SaaS part of the business, and the commencement of the Tabcorp service fee -- all of which meant gross profit in Retail (selling lotto tickets on ozlotteries.com.au) was down 36%.

But when you factor in the Saas segment -- where there was more than a doubling in TTV and which operates at a near 100% gross profit margin (even though the TTV margin is lower), overall EBITDA was up 13%.

Operating cashflow was up 24% and there was $28m in free cash flow excluding the $15m Tabcorp extension fee. Jumbo even paid an 18.5c final dividend, giving shareholders a record year of dividends (excluding special dividends). The company has a cash balance of $50m and no debt.

For the company to pay out 85% of profits as dividends and still fund double digit growth is impressive, and testament to the strong cash generative ability of the business.

On one hand they are benefiting from the ongoing transition of lottery retailing to online and the associated available TTV growth. Market and market share growth have seen their TTV compound at 20% overthe past 5 years. No wonder they were keen to secure a long term agreement with Tabcorp here, it's a cash cow with them essentially making 10% on all tickets sold on Ozlotteries.com.au. The ratcheting up of the tabcorp fee will drag on margins, but overall it's an extremely reliable and attractive cash generator.

But the SaaS and Managed services segments are really the ones to watch. There's a lot of opportunity -- especially in places like North America and UK. They basically provide full lottery solutions out of the box, and though they get a much lower clip of the TTV, the TTV pie is potentially much, much larger and the unit economics of these segments are incredibly attractive. 

This has been touted for a while, but i think there's some good evidence the company is executing well. 4 new clients have been onboarded, and the Gatherwell acquisition appears to be working out very well, where TTV has compounded at 26% per year over the last 3 years.

In fact, the $11m acquisition of Stride looks to be on point. Acquired on a 5x earnings multiple and EPS accretive from day one, it gives them a solid footing into the Canadian market. I also like how 70% is paid upfront in cash, with the remainder based on performance of the business (smart) and that the existing management team are staying on.

Shares are on a PE of 36, (based on underlying EPS of 45c) which just doesnt seem too much of a stretch for a company that has delivered attractive growth and is better placed than ever to capture more TTV. It seems a very defensive type of business too with a very strong balance sheet.

Disc: i own

Jumbo reported a 9% lift in revenue for the half year FY21, which came in at $40.9m. Not great, but there's a lot context needed here.

The demand for lotto tickets is very much tied to the size of the jackpot on offer. The large jackpots (eg $100m Powerball) draw in a lot of extra volume, whereas the saturday $2m is far less popular. TTV and revenues for Jumbo can be lumpy as big Jackpots arent consistent in their timing.

So the result wanst too bad when you consider large jackpots were down 35% in the 6 months period. Despite this, revenue for the reselling business was up 2.3%.

And this is by far the largest segment -- it captures over 90% of revenue for the business.

So this hides the really encouraging result, which was a 25% lift in Total Transaction Value (TTV) and a 200% increase in external SaaS revenues (albeit off a very small base).

Importantly, the run rate for TTV at the end of December was $120m pa, compared to the $39m they reported for this half. This will grow as already signed customers are onboarded.

So expect even more growth in this segment in the current half.

The new Managed Services division is also seeing some good early growth, and there seems some good potential there. I think it's a very neat offering that levereges off the company's know-how. 

Moving further down the income statement, Jumbo reported only a 3.7% rise in underlying EBITDA and a 5.8% drop in NPAT.

The reduced margins were to do with the new Service Fee to Tabcorp (that added over $2m in cash and non-cash costs), and also establishing expenses for the Managed Lottery Services business.

In regards to the former, although less ideal than the previous agreement, it's still a very good source of revenue for the business and one that now has a lot more certainty for the long term.

Overall, i think the dynamics of the industry are very supportive, and Jumbo is well placed to capture an increasing stake in it.

32% of all lottery tickets are now sold online, up from 28% last year. You have to assume that figure has a lot further to rise.

But the key thing to watch is for the growth in new SaaS business. That's the real growth engine.

Disc: held

Although not marked as market sensitive, Jumbo Interactive today announced that the British Gambling Commission (GC) has approved and issued a remote gambling software license to Jumbo. 

This allows the company to sell its SaaS platform to GC licensed operators -- and is a key step to drive growth in the UK charaties market. That's a huge market btw -- with over 168,000 charities that have over 77b  pounds in revenue

ASX announcement here

Shares have been on a good run recently, up 27% in November.

Disc: held

Jumbo has signed a term sheet with the WA Govt. owned Lotterywest to negotiate an agreement to supply it with its Powered By Jumbo lotteries platform.

The details will be worked out in the coming momths, but key terms include:

• Jumbo will receive a service fee for each transaction on the platform
• A 3 year initial term, with options to extend for a further 3 and 4 years.
• Customers on the white labelled platform will be owned by lotterywest

Exisiting Jumbo clients in WA contributed $33m in totall transaction volume (TTV) last year. Exactly how the margins will differ with the service fee as compared with the current arrangement, and how players may transition to the new platform is not really clear.

But it seems likely it will mean a net increase in the TTV Jumbo is exposed to in WA, and gain some contractual certainty for a good number of years.

The software integration is planned to be completed by the end of 2020. 

Announcement here.

Jumbo has signed a new 10 year reseller agreement with Tabcorp for the sale of their lottery products. 

This will cost $15m in an upfront extension fee, and a higher service fee per ticket sold, which will be 4.65% phased in over the next three years.

Full details here

It represents a higher cost, but is the longest reseller agreement ever signed and provides a lot of certainty (removes a good deal of counterparty risk) and still leaves Jumbo with very high net margins. The move should be seen as a temporary step down in earnings, rather than a sustained loss of growth in my opinion.

Jumbo also reaffirmed guidance for the full year, which is expected to see ~6% rise in revenue. It is hoping to roughly triple ticket sales by the end of FY22.

Shares are presently on ~9x sales for FY20.