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PointsBet stock tumbled by more than 17% after the ASX-listed operator revealed record net win was overshadowed by an increase in cash burn during Q2 2023.

Topline numbers

PointsBet’s total net win, the difference between profits from losing bets and payouts to winning bets, rose 34% year-on-year to A$103.4m for Q2 2023 (three months ending 31 December).

However, its cash burn and negative cash flow increased to A$75.7m from A$60.7m sequentially due to marketing costs and lower profit margins. This was because a major portion of revenue came from sports bets, rather than higher-margin bets on horse racing.

News nugget

The US has become PointsBet’s largest market. The company reported a 68% increase in total net win of A$40.6m from the US and a 9% rise in Australia net win of A$57.7m on the previous corresponding period (Q2 2022).

Sports betting continues to generate the lion’s share of PointsBet net win, accounting for A$88.2m. However, iGaming reached record net win of A$15.2m, up 183%.

“We’re now live in 14 states, plus Ontario in Canada, and we really feel the work we’ve put in over the last couple of years in the US market as a new entrant is starting to pay off,” said PointsBet MD and group CEO Sam Swanell (pictured).

PointsBet, which began operations in the US in January 2019, justified its rising marketing and sales expenses as part of the expansion.

Sales and marketing spend rose from A$54.7m in Q1 2023 to A$67.5m in Q2 2023.

Australian marketing costs came down in Q2 to A$20.2m, while the US and Canada marketing costs increased quarter-on-quarter to US$24.5m (A$35m) and C$8.2m (A$8.7m), respectively.

However, Swanell said PointsBet’s marketing expenses in the US would decrease to approximately US$90m this year, down from $118m last year.

One reason for this is that the operator managed to renegotiate its partnership deal with NBCUniversal.

The original agreement had a five-year term ending in August 2025, and the parties have now agreed to extend the agreement by two years to August 2027, which will allow PointsBet to spread out its remaining marketing commitments over four years.

PointsBet CEO Sam Swanell: “Put simply, we firmly believe a dollar spent in marketing on any other platform does not come close to rivalling the terms and efficacy of the partnership we now have with NBC.”

“PointsBet has trialled and gathered key learnings from a media perspective since going live in the US market,” Swanell said.

“We are thrilled to have agreed with NBCU on mutually beneficial adjustments to our agreement that fit perfectly within our more targeted, localised strategy, which is informed by those learnings.

“Put simply, we firmly believe a dollar spent in marketing on any other platform does not come close to rivalling the terms and efficacy of the partnership we now have with NBCU,” he added.

US chief strategy officer Eric Foote said that PointsBet has now shifted its strategy form brand-building to highly targeted marketing, with the focus now on acquisition and retention of players.

Swanell concluded that the end of the year marked a turning point for PointsBet, and that the company was looking forward to delivering another full year of growth and EBITDA positivity in Australia due to an improving product and greater efficiency.

Importantly, Swanell noted that with operational scale now reached, the impact of growing revenues would start to be seen in H2 as cash burn was expected to be reduced by approximately 35% from H1.

Best quote

PointsBet CEO Sam Swanell: “As can be seen from our H1 trading results, together with the realigned NBC deal and commentary on our cash flow outlook, we believe this is an important and positive juncture for the company and for our path to profitability.”

Best question

In December, PointsBet announced that it was in early negotiations with News-Corp backed betting start-up betr over a potential sale of its Australian business.

Despite declining to comment on those discussions, Swanell was asked by Phillip Chippindale of Ord Minnet about the competitive betting landscape in Australia.

Swanell responded: “We expect to grow this year while remaining EBITDA positive in Australia.”

He believes PointsBet can get trading margins back to 4% or higher as some low-margin products like tennis head-to-head bets had significant turnover during the quarter.

Additionally, PointsBet Australia CEO Andrew Catterall added that the operator made a deliberate effort to be more efficient in its promotions, while also being more competitive with its product offering.

He said brand partnerships, product, withdrawals, and other factors also play a role in the company’s strategy.

Current trading and outlook

PointsBet projects a reduction in net cash outflows (excluding player cash) in H2 2023 to around A$70m, a decrease of 35% from H1, due to the performance of their Australian, US and Canadian operations.

Moreover, the firm said marketing expenses in Australia would be lower in H2 compared to H1 as the company front loaded the expenses in the first half of the year.

In the US, marketing expenses for H2 2023 will also be lower than H1, with a total budget of US$90m for the fiscal year, down some 24% on full-year 2022.

Investor scepticism over PointsBet’s cashflow outlook was expressed via a 17.4% dip to $1.40 per share at market close.