Ratios

2019 was a breakout year for Jumbo as quoted in their 2019 annual report. There was a 64% growth increase for this year due to a strong run of jackpots including two $100 million Powerball jackpots and a new SaaS (Software as a Service) business division was launched called “Powered by Jumbo”. This new division has few geographic boundaries, and addresses the need for a proven and robust software system for lottery operators with which to drive future growth. Jumbo’s vision is to lead a Jumbo’s new “$1 Billion Vision” – $1 Billion in ticket sales on the Jumbo platform by FY22. The growth for 2020 wasn’t so significant with a 9 per cent increase. I don’t think I will forecast another big growth as that was seen in 2019 but I think there will be a steady run into the future especially with a ten-year deal signed and market expansion into charitable lotto’s.

2019 saw a 106% increase in new accounts to 444,004 and also a 74% increase in active customers to 761,863. Essentially the new SaaS business, branded “Powered by Jumbo”, provides software to other lottery operators wishing to emulate the success of OzLotteries.com. The first two customers for “Powered by Jumbo” are Mater Lotteries (signed November 2018) and the Endeavour Foundation (signed August 2019). The agreements provide a full software platform capable of operating both online and offline ticket sales for a period of 5 years. These strong revenue streams showed a profit margin over the last four years ranging from 17% to 35%. There were a few factors that contributed to this, the merger of Tatts and Tabcorp in 2017, Jumbo Lottery Software Platform that went live during 2017 with advancements in software technology and new innovations such as Advanced Data Analytics, Artificial Intelligence and Machine Learning are making subtle but effective improvements to the App.

Let’s now look to see how the net operating assets stack up to the above success stories in growth and profit margins. I would also expect to see a positive return on Jumbo Interactive LTD net operating assets however this positive result wasn’t seen until 2020. There seemed to be a delay in high growth sales to an acceptable return on these assets. Jumbo Interactive net operating assets went from negative ninety-six thousand in 2017, a negative six million in 2019 to a positive seven million in 2020. This was due to the acquisition of Gatherwell Limited in the UK, the largest external lotteries manager in 2019 and the realization of intangible assets in 2020. It’s quite deceiving with all these positive enhancements to the company that the net operating assets could actually be in a negative state. By having these negative net operating assets really did mess with my happy positive trail. The net operating assets influences many ratio comparisons, two being the asset turnover ratio and the return of net operating assets. The asset turnover compares the sales / net operating assets to see the return generated on these assets. I really didn’t understand this ratio until the NOA became a positive figure.

The ratio seems to be going in the right direction and the high revenue sales for 2019 has offset the increased negative net operating assets with an improvement of results from the previous two years. Without this growth in sales, we would be seeing a different story with regards to asset turnover. The RNOA looks at the return from the operating income (OI) divided by the net operating assets. With the operating income being a smaller number, I was expecting to see a dramatic negative figure. The return showed the same pattern as the ATO with a positive return showing in 2020.

Despite the improving trend in the sales, returns and asset turnover I’m not expecting to see a positive economic profit. I originally had an economic profit showing in the first three years however with a negative RNOA I didn’t think this was correct. So, I added a negative sign to the formula. I am hoping that is correct. It wouldn’t make sense to me that Jumbo Interactive Ltd would have a positive economic profit with negative RNOA.

It’s really deceiving when you read through the annual reports with such positive growth and then see the above ratios. It’s telling me a different reality to all the buzz that’s in the annual reports. I find it quite difficult to comprehend the negative operating assets when Jumbo Interactive have an equity balance that has doubled in the last four years from forty-two million to seventy-eight million and none of it is funded by debt. The bulk of Jumbo Interactive Ltd operating assets are intangible assets which have also doubled in the last four years. I find it quite strange for a company that creates such growth through assets that aren’t physical and you can’t touch or see the physical shape of them. I think my forecast over the next five years will be modest with a little growth each year stemming from the economic and business drivers. These are to be discussed in my next post. Stay tuned….