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Jumbo’s online lottery play Alan Kohler May 15, 2019 CEO InterviewsMike Veverka is the CEO and founder of Jumbo Interactive.Mike started the business in 1995 as just an online store but after the crash of 2000, he moved into lotteries. I’m not sure it was caused by the crash of 2000 but it certainly coincided with that and now the business just sells online lotteries. In the last few months, since this year, the share price has doubled from less than $8.00 to $16.00. It’s had a huge run this year and is now selling on a PE of 47 and a yield of 1.6, so it’s not cheap. The reason it’s taken off lately is because they’ve now started selling their software as a service, SaaS, to global providers of lotteries, mainly charities, and they’ve made their first sale on that basis. What’s happened really is the company has shifted from being a domestic provider of lotteries, which is not a bad business, to being a global provider of software. The markets got a bit excited about that and possibly with some good reason, because it’s not that competitive and there’s a lot of potential for growth in the selling of lottery tickets online.In Australia 21 per cent of lottery tickets are sold online. Finland, apparently the global leader in this, is at 48 or 50 per cent, the UK is at 24 per cent but amazingly, the US is at less than 1 per cent being sold online.Arguably, there’s a fair bit of potential for selling online lottery tickets in the US and Jumbo Interactive is on the spot with the software that does it. It’s quite an interesting business. As I say, it’s not cheap, it’s expensive, but it does pay dividends, it’s not burning cash, and it makes decent money, good margins. In Australia it has been growing pretty well although it’s basically hostage to the size of the prizes, when it gets to a $100 million everyone wants a ticket and then once it gets won, it goes back down again so, they’re a bit up and down but lately Jumbo Interactive has had a big increase in numbers of customers, number of sales online partly due to its software, which it’s now selling. Here’s Mike Veverka who is the CEO and founder of Jumbo Interactive to tell us about what’s going on there.Mike, perhaps you could just start with a bit of background on Jumbo. It started in 1995 but it was mainly an online shop for everything or it was an e-commerce play back then but five years later it moved into lotteries and never looked back. Just explain to us how that happened and what brought the company into lotteries.It did start as an online shopping mall. My concept was, back in the 90s, to create an electronic platform for all industries. Basically, I was of the belief that things would get bought and sold off the internet, I just wasn’t sure what. I covered all bases and created and online shopping mall and listed in 1999 on that basis but around about 2000, 2001, the Australian government changed its laws with regards to online gambling. They basically banned all forms of online gambling except for lotteries and sports betting. While a lot of entrants rushed into sports betting, nobody really rushed into lotteries so I was keen to get into that.At that time, we actually were working for a small charity lottery in Queensland so we already had some experience and the penny had dropped in my mind as to the potential for online lotteries. When that came about, we decided to make that our niche. We fine-tuned our software around online lotteries and, as you said, never looked back.Obviously listing in 1999 was poor timing. You sailed right into the dot-com bust. How did you go in 2000?It was an interesting period. I was actually living in San Francisco trying to raise money for my concept with VCs in Silicon Valley and the opportunity came out to list in Australia and not having to move the family over there. So that sounded appealing but the moment we listed I think our share price went from 20 cents to 66 cents very quickly and then crashed back down to 2 cents so it was all a very interesting few months. But look, the share price is what it is, we just kept focusing on what we wanted to do and kept on going through the tough years and kept on building out the business, improving our software, improving our offerings. Eventually, things started to come together. Yeah, it was very interesting but you’ve just got to keep your focus.Could you explain to us the business model for selling lotteries online? You’re just a reseller of the lottery company Tatts, Oz Lotto and Powerball and so on, and clip the ticket do you, is that how it works?Yes, we looked at different models and we didn’t like the model of trying to run our own lottery. There are already established lotteries that needed to be improved and to be sold online so we made the conscious decision to sell established lotteries whether they were the national lotteries like Oz Lotto or Powerball, or charity lotteries. We just take existing lotteries and sell them online. We add value through our software platform, through online marketing, through our app, but essentially, it’s the same product that’s already out there, just delivered to the customer in a more efficient and more convenient way and the financials are very simple, we just take a percentage of the ticket sales.Can you tell us about the percentages and is it the same as the newsagents get?It is. However, with national games like Oz Lotto and Powerball, we run a premium model so, in the market place there’s the standard model where you have The Lott selling tickets and then we do the same thing but as a premium service at a premium price. Which is about a ten per cent increase but if you just apply that 10 per cent. We have extra features, we have a broader portfolio and there are other things that kind of make us the premium model and that sort of dual brand strategy with Oz Lotteries, which is our brand, and The Lott, which is Tabcorp’s brand, that’s been around for over a decade and the growth that we’ve achieved over the last decade has been achieved with that dual brand strategy. We’ve shown that having two brands, one premium and one basic does work and we’re still managing to grow despite that premium pricing as long as we keep the features up and we’ve managed to do that quite successfully.What do you mean Oz Lotteries is your brand?Oz Lotteries.com is the website that we use and the app, Oz Lotteries.com, is ours and so when people are wanting to buy an Oz Lotto ticket or a Powerball ticket they typically go and do a search on Google or on Facebook and they’ll either come up with our site – Oz Lotteries or they’ll end up at The Lott, which is Tabcorp’s, and from either one of those apps they can buy a ticket in the Oz Lotto or the Powerball. Although with our app they’ve also got the choice of about half a dozen charity tickets as well so we’re of a one stop shop for a variety of lotteries.I suppose I was getting confused between Oz Lotto and Oz Lotteries. Oz Lotteries is your website but Oz Lotto is the lottery and you don’t own it, is that right?Yes, exactly. Call it cheeky if you like but when we first came up with the name, we chose Oz Lotteries.com because it is quite similar and that gave us an advantage with Google. Even today if you search for Oz Lotto, Oz Lotteries tends to come up as the first organic search result because of the similarity and that’s what sort of helped us to get off the ground in the early days and it’s still a major driver of free organic search results. It was done as a marketing strategy.Who owns Oz Lotto? Aren’t they getting mad at you?No, no, not really because, at the end of the day we’re selling their brand, we’re selling their tickets, we’re helping to expand the market. We have a very strong young demographic which is very important for the Australian lottery industry. With the growth of digital, younger consumers need, you know they’ve got so many options and they don’t really carry round cash in their pocket and they don’t go into stores, so they need a viable online alternative and that has been us over the years. We’ve given the younger demographic the opportunity to come in and play lotteries and that’s the reason why both Tabcorp and the various state governments benefit from what we do by we’re actually helping to grow the market. That’s why we’ve been supported all these years and as you well know, Tabcorp have even recently invested money in us so that we can continue doing what we’re doing.Yeah, that’s right and I note that you’ve got about 21 per cent or 22 per cent of the lottery market that’s going online. A couple of questions about that. Have you got an exclusive deal with these lottery owners that you’re the only online provider?No, it’s not exclusive but there haven’t been any other, anybody else doing it in all this time. Simply because we’re being audited by Tabcorp and we’ve gained the trust of Tabcorp in our ability to operate and manage customers and to operate the online selling of tickets. It is a sensitive topic and it has to be done correctly. There have been major companies over the years that have tried to do what we do but they’ve basically ended up working with us and we’ve done deals with them and they’ve sold their tickets via our platform. At the end of the day there’s a lot of responsibility that goes into managing the customers and we’ve already got those procedures in place, so that’s why we maintain this rather unique position.That 21.5 per cent of Australian lottery tickets is sold online, that is for all online sales of lottery tickets. How much of that is yours?About a quarter of the online market is us and three-quarters is The Lott. The Lott being the standard, always has been and probably always will be the larger portion of the market but us being the premium model, we’re about a quarter of the online market. As you said, of all the tickets that get sold in Australia, about two out of every ten get sold online and eight out of ten are still via stores and out of that two out of ten online, we’re about a quarter of that. That growth of that 20 per cent and rising up and up is a major driver of our growth as well as the growth in The Lott within Tabcorp.Well in fact you’re reporting in your presentation four-year compound annual growth rate at 17 or 18 per cent. I note that from that presentation, Finland has 48 per cent of its lotteries sold online. Do you think that at the current growth rate we’ll keep growing and that you’ll get to 50 per cent or so market share of online sales in Australia?I think so. It’ll take a few years; it won’t happen overnight. It’s been going up two percentage points every year for the past decade. It’s going through a bit of a growth spurt at the moment. It went up three percentage points in only six months so it’s seems to have hit a reflection point. But I think going forward, if it goes up about three percentage point per year on average for the next few years, that feels about right to me.Yep. I asked before what the percentage you get is and you didn’t answer that. Is that because you’re not allowed to or because you forgot to?Oh no, no, I just didn’t get around to it. We get the same 9 per cent as every other agent. That’s the normal royalty that everybody gets. We then mark that up on average about 10 per cent so our gross margin is about 19 or roughly 20 per cent of the tickets that we sell. Because we mark it up 10 per cent, we reinvest that into software development and market development through our online marketing activities.As well as there being a shift to online that you’re noticing, and reporting to us that you reckon it’ll get to 50 per cent. Is there also growth in people using lotteries in general?Yes, there has been a steady growth, albeit a bit slower. Typically, if you look back over the past 20, 30 years, lotteries have grown about 3 to 4 per cent per annum. Obviously, the online side of it is a lot faster. As you said, our growth, compound annual growth rate has been around 17-18 per cent. We benefit from the growth in the overall market plus the expansion in the online market. Driven by people shifting from offline to online but primarily from younger demographics moving into the market.In your most recent half-yearly, for the December 2018 half, it was more than 3 or 4 per cent growth in both average spend and number of customers, a huge increase. From $368 per year to $419 per year and also an increase in the number of active customers, 389 to 576 was that an aberration or something?Well, certainly those types of growth numbers we can’t keep on doing that every year. Those numbers came about for two reasons really. The number one reason is that we had actually just released our new software platform about a year ago. Just in time for the new Powerball game and that made a world of difference to us. Basically, we’ve been doing this since 2000. Our software, which had been written since back then was getting very old so about five years ago we had to bite the bullet and rewrite the whole platform and that really was a huge difference for us. In the past when we had big draws, we had to shut down our system to make sure that everybody, all the tickets were sold correctly but now with the new system our capacity has gone through the roof and we’re able to make the most of it. When we had the new Powerball, and as luck would have it, the Powerball hit $100 million in August last year. That brought in a tremendous number of customers. In the past we would have had to, in that final few hours, where the traffic is just enormous, we would’ve struggled, but this time round we handled it with a breeze and we signed up record numbers of customers. Yeah, it’s a two-pronged thing really, the new software system and the new Powerball game that went live about a year ago.The other big shift, apart from the number of new accounts that you’ve signed up, basically almost doubled from 104,000 to 199,000 new accounts for the half year. But the cost per lead collapsed from nearly $19 per lead back to $13. Amazing, what was that about?Yeah, again, it was because the software platform enabled us to sign up all those customers. You see, lotteries, during those really large draws, it really penetrated the entire market. Everybody buys a ticket when it gets to 70 million or 80 million or 100 million, everybody wants a ticket and if you go into a store you can maybe sell one ticket every minute while we were doing up to about 15 transactions per second. So obviously everything’s faster online, and with our new software platform we just signed up people in record numbers so we were able to go from 100,000 every six months up to about 200,000 new customers and the cost that we had to spend to acquire those customers plummeted because they came in on their own free will because they just wanted to get in on the big 100 million draw. That set us up pretty well for the future, we now have those customers in the database and we’re obviously in contact with them digitally so that they’re continuing to play the lottery.Yeah, it was a combination of having that $100 million, which also happened again in January this year, and having the tools to make the most of it.Obviously, you’re a hostage to a large extent to the prize money in the lotteries. How volatile is that likely to be? Huge increases recently which have produced a terrific first half result but is that going to go down again? Are the prices going to go down again?It does fluctuate within sort of well-known bounds so you know it’s quite possible that next year might be a bit more or a bit less. However, there are periods where it does get a little bit slower but that’s where, having digital customers, we can then help keep them active by switching them to our charity games or switching them to our Lotto Party product, or just basically mixing things up and keeping them interested in the game and avoiding the jackpot fatigue. Certainly, having the big jackpots is a big help and it does help keep things moving along but we can’t rely on that big jackpot every week so we’ve developed marketing techniques to keep everything going nicely even though there are no big jackpots around.Yeah, so your share price has had a huge run lately. I’d imagine you would think that that can’t last, or can it?Well I think it can because there are a couple of structural changes that have happened with us. Number one, the new software platform, that’s here to stay. The new Powerball game, that’s here to stay. The customers that we’ve signed up over the last year and even before that, we have about 2.5 million customers in the database. A lot of them are dormant. We managed to re-invigorate a lot of them. They’re here to stay. It has gone on a great run but I think we can defend that quite well.What’s your intention about dividends? You’ve just paid an 8 cent interim dividend and 15 cents in March and then another eight cents now. What’s going on with dividends?Our policy is 85 per cent of net profit after tax we pay out in dividends. Any big surge we pay out in special dividends so as you said we’ve just paid out our third special dividend which was an 8 cent dividend and that leaves us with another final dividend to come in a few months. We do pay an interim half year dividend after the first half and then the final dividend and every now and again a special dividend as well. It’s quite a profitable business. We’re not a tech business that’s burning cash. We’re making good profits and returning them to shareholders as well as investing in the market.I’m just kind of wondering whether investors should see you as an income stock here I mean at your current share price, which is enormous, you’re only yielding 1.6 per cent so not exactly an income stock, I guess.No, no, but at least it does have an income. It’s still very much a growth story because the ticket selling side of the business is only part of the business. It’s the software as a service that has caught the imagination of the market. I think that has huge potential. That’s where we’re actually selling our software system to other lotteries around Australia and around the world. We’re not only selling lottery tickets but we’re selling software to other lottery ticket sellers. That side of the business has helped revalue us as more of a software business, which is what we are at heart anyway.Right so tell us about the software as a service business. What do you charge and what sort of growth is possible there? Who are you selling it to?Our system which we’ve been developing in-house for the last 15 years has now gotten to the point where we can sell that as a service to other lottery operators. Doesn’t matter whether they’re small, like a charity lottery, or large as a national lottery. Our system can run it and it’s something that we’ve been – it’s been tried and tested in the field so it’s very rock solid. We’re beginning with the charity end of the market which is a smaller end because there’s less competition and we’ve signed up our first customer which is the Mater Lottery Foundation. They’re using our software now to sell their tickets and we have a pipeline of new customers coming in. It allows us to look into the UK, into Canada. Even just the charity market in the three countries of the UK, Canada and Australia is about three and a half billion. Our percentage varies but it’s sort of within the band of about 3 per cent to 5 per cent of ticket sales so it could grow. If we manage to sign up a couple of customers every year for the next few years it could grow to rival the ticket selling business in terms of profit. Highly scalable, highly profitable and I think we’re in the right place at the right time.You’re not charging a fixed percentage subscription for your software; you’re charging a percentage of the ticket sales?Yeah. A percentage of ticket sales, which lowers the risk for the lottery operator. If you take the Mater as an example, they’re in the business of selling lotteries via physical outlets as well as online. Our software helps bring them into the 21st Century. Gives them more tools to do that with and for that, if they sell less tickets, they pay us less but if they sell more tickets then they pay us more because it’s pure percentage of ticket sales model which is very common in the lottery industry.Yeah right. Oh well so that enables you to be global otherwise doesn’t it? I suppose that’s the thing.Yeah, yeah.Otherwise you’re purely a domestic business but selling the software makes you global.Yes, exactly. If you look at the global landscape for lotteries, most lotteries still have not embraced the internet. Australia’s done pretty well. We’re at about 20 per cent Finland’s done about 50 per cent but there’s still a lot of countries out there and a lot of lotteries that are still wading into the waters of selling online and that’s where we come into the picture. Still a huge future. The United States, for example, still has less than 1 per cent internet penetration when it comes to online lotteries so huge potential there.Less than 1 per cent. That’s amazing. Less than 1 per cent?Yes, it’s mind boggling actually but it’s very political in the United States between the state governments and the federal governments for one reason or another. I won’t bore you with the details here today but it is what it is, but there’s huge demand in the US to buy tickets. You see the news reports when they’re jackpot reaches $1 billion, people line up around the corner and down the street because you can’t buy it online there. It’s the only time people in America will line up for anything these days.Why does someone need to buy your software to run their lottery online? Why can’t you just sell tickets? What’s special about the software that you’ve developed.Selling tickets online is not at east thing. Technically it’s quite difficult. It is a gaming product so there are special conditions around age verification. Everything has to be done very carefully. If there’s an error in the way that a ticket is sold, you know somebody thinks that they’ve bought a ticket and their numbers come up but the ticket wasn’t lodged correctly. They think that they’ve won $100 million but they didn’t. That would be a disaster so a lot of belts and braces approach goes into making sure the system works. It’s just not an easy thing to do and then to have the real-life experience of, in the early days we certainly learnt a lot of valuable lessons about how things can go wrong with selling it online, which we’ve now solved. As a result of that, the number of people around the world that can sell tickets successfully online you can count on one hand. It is quite a difficult activity to do and we’ve managed to solve it.What about the number of companies like yours selling online lottery software? Are there many of those?Even fewer of them because most of the time the lottery operators develop their own software platform for their own use, but they’re not in the business of selling that. Like Tabcorp for example. They have their own software system which they develop internally to sell tickets but they’re not in the business of selling that software to others. While Jumbo, as an independent, can do that, and we’re doing it quite rigorously.Well that’s fascinating Mike, thanks very much. Good to talk to you.Thank you, Alan, thanks very much.That was Mike Veverka, the CEO of Jumbo Interactive.