ZEAL Network SE

Good morning, ladies and gentlemen, and welcome to the quarterly statement as of 31st of March 2020 of Zeal Networks SE. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Dr. Helmut Becker and Jonas Madsen. Management Board of Zeal Networks SE. Please go ahead.

Thank you very much and welcome to this conference call and thank you very much for your interest and for joining the call. This is indeed an interesting time for all of us and we now have our second virtual earnings call and I hope you can hear me loud and clear. I hope you also have access to the presentation, which should have been distributed to you this morning. But if not, it's also available on the SEAL website investor relations section. Moving on to slide two, you will find this presentation highlighting the main areas that I will cover before giving you the opportunity to ask questions. We will start off with a summary for the first three months of 2020. and then a financial update for the same period followed by our guidance for this year before we're finishing off with the key takeaways. On slide three, you will find a quote that I was taking from our Q1 release and allow me reading it out. We are in a good way to reach our goals. even if some steps of the transition such as the complete technical integration of LOT24 are still pending. I believe it's a fair summary. We have had a very promising start and we now taking the final step of the full integration that we have ahead of us. Helmut will talk about that integration in just a few moments. So let's now go into the summary which you will find on slide 5. And then I will also hand over to our CEO, Helmut Becker, that will take you through next slide.

Thank you, Jonas. Good morning, everybody. My name is Helmut Becker. Let me summarize what we've achieved in the first quarter 2020. We have had a promising start to the year 2020. We've seen a good development of billings. We have improved the gross margin, that's the revenue margin, of our German business. We have acquired a high number of new customers. Towards the end of Q1, we've launched a new social lottery called Freiheit Plus, thereby expanding our product portfolio. And we have continued to be focused on type cost control, and have realized the majority of the planned cost savings. And last but not least, we continue to make good progress with our integration process, post-merger integration process between Ziel and Lotto24. In addition, we have reorganized our reporting segments to create full transparency on the business that we focus on, which is the German core business. So going forward, we are differentiating between Germany and others. We have reiterated and are reiterating our guidance and dividend policy. And we have recently received news that ZIL has been readmitted to the Aztecs. With that, I'll hand back over back to Jonas.

Thank you very much. Let's now take a look at the numbers in greater detail, so please move to slide seven. What you see on this slide is a summary of our income statement, and I will explain part of this in even more detail in the coming slides. So let's start by talking about the revenues. Revenues are at 19 million, and that indicates a promising start of the year and taking advantage of the positive marketing environment that we have seen in the first quarter, but also of course the full inclusion of Lotto24. As I explained in previous call, if you compare with last year, the revenues are impacted by our business model change and the lower end revenues should not be read as anything worrying in our business, just a natural evolution of now operating with a more sustainable business model. some of you have asked about comparison to lotto24 standalone so let me provide a bit clarity even if lotto24 wasn't formally part of the seed group a year ago so revenues for lotto24 company in the first quarter was 8.6 million and the broker revenues this quarter is 70 million which means that we have doubled the broker revenues with inclusions of tip and even if you exclude tip from the revenues we are still a 40% increase with a lot of 24 brands year on year. The total cost base we have been able to reduce the cost by more than 8 million euros. This is particularly interesting since this year we are including costs for both companies while the comparison numbers that you see is only including Zeal. We have also invested 1.4 million more in marketing taking advantage of the strong jackpot situation that we saw especially for euro jackpot in in march and the purpose is obviously to acquire more customers which i come back to in in a moment in terms of headcount full-time equivalent we've been able to reduce this further and we are now at 172 people in the organization compared to our target that we have talked about of 200. And finally, we have had a strong adjusted EBITDA of 2.8 euros. As expected, and as communicated to you so many times before, previous year, we did operate a different business model, so we shouldn't compare year to year. Let me now give you a bit more insight on some KPIs that you will find on slide eight. Group billings have grown by more than 100% since last year, which is truly amazing to see. And of course, driven by the inclusion of lotto24, but also, as I just said, the positive market environment. If we take a step out and look at lotto24 standalone, billings were at 70%. 76 million in the first quarter of 2019. This means that if we exclude the TIP24 brand, we rose the billings 27% year on year. And if you do the same comparison for revenues, we have a 37% increase versus last year. In terms of seed gross margin for the Germany segment, We are in the first quarter at 12.1% thanks to the strong sales of our premium products like the lottery clubs. For better comparison, we have included in the gray bar in the chart, the gross margin for Lotter24 standalone last year, which were at 11.4%. Then you can see the increase. On slide nine, We have highlighted net cash and new registered customers. Net cash has been reduced by 65 million or 35% since we made a payment to the German tax authorities of 54 million euros in January. The reason, as I have explained, is to earn interest and avoid penalties. So we have said this many times and we are confident that we're ultimately going to win the case But we have disclosed the remaining VAT cash exposure, which is now standing of 22.8 million euros. And in terms of new registered customers, it has been a very great first quarter in terms of acquisition. We can proudly report 260,000 new registered customers in the Germany segment. And if you compare this with Lotto24 standalone from last quarter, they acquired 86,000. That means an amazing 240% increase from that number. On slide 10, you will find further performance indicators. Cost per lead is reduced by 4% if you compare with Lotto24 standalone. And that is thanks to more efficient marketing channels that the entire group now have access to. Monthly active users is now getting closer to 1 million. Last quarter of 2019, we have 925,000 monthly active users. So we're able to even increase this on a quarter-on-quarter basis. Average billing per user, meaning how much the customer is spending on our product, just shy of 50 euros. This is a decrease from last year but last year we were operating a secondary lottery operation with a very different product offering. Let's now talk about the guidance for the financial year that you will find on slide 12. We hear a read about a lot of companies reducing the guidance or simply stop providing an outlook for these uncertain times we are in. However, I'm pleased to say we are reiterating our guidance and confirming this outlook, which is billings of 550 to 570 million for this year, revenues of 70 to 73, a gross margin in the German segment around 12%, an adjusted EBITDA of 5 to 8 million euros and then a CPL lower than last year and more than twice as many or near less twice as many customers that we acquired last year. Moving to slide 13, we are also reiterating our dividend policy. We are going to propose this to our AGM, the upcoming AGM on June 19. As you may recall, we are proposing to pay out almost 18 million euros this year, which is more than double what we paid last time. This corresponds to 80 euro cents per share. And our intention is to increase this to one euro per share in 2022. Let me now hand back to Helmut and he will take you through the key takeaways that you will find on slide 15.

Thanks, Jonas. As you can see, with our numbers and also with the outlook for this year, we have had a promising start of the year. We are not seeing any material adverse impact of the corona situation. We've not seen an impact on our operations. Our people are working from home. Our projects are running on time. And our business has responded well to this new situation. The acquisition has been strong in the first quarter. Our integration is on track and we are delivering the synergies that we promised. Type cost management continues to be in our focus. The segment reporting has been improved to help you better understand our business and the drivers of our business. And with that, We conclude the presentation and we open up the floor for questions. I give back to the operator.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. Please state your name before posing your question. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, please press star 1 to ask a question. We will pause for just a moment to allow everyone the opportunity to signal. We will take our first question today. Please go ahead. Your line is open.

Hi, it's Patrick from Warburg. Hi, gentlemen. Congrats on the results, especially on your strict continuous cost measure reductions. But a couple of questions for me, if I may. So could you tell us a little bit about your other segments in that you were guiding for 3 million revenues? and break even for the full year. What is driving that you already reported 2 million in that segment and do you still expect to break even or may that even contribute positively to your figures at the end? And then secondly, could you talk a little bit about your marketing costs or strategy in the sense of how you acquire new customers and make sure that they land on one of your websites if they want to play lotteries? For example, do you offer or can you offer discounts and take the difference as marketing expenses, for example? Overall, how do you steer your marketing budget? Do you monitor basically your CPL and keep spending until it hits a certain benchmark? How do you track the quality of your customers? Some insights there would be great. Your guidance looks rather conservative to me. You already reported 2.8 million in EBITDA, so adjusted EBITDA, and you're looking for 5 to 8. I'm sure you will spend a bit more marketing, especially in Q2, but shouldn't then your top line grow significantly stronger? Thank you.

Okay, thanks, Patrick. That was a lot of questions, so we tried to go through them one by one. The other segment, so what we have in there is a portfolio of businesses. Our Spanish business, the Onto business, is in there. And then a portfolio of startup businesses is in there. So, you know, we've said this before. It continues to be true. We have reduced our cost exposure in that part of the business very significantly. Some of these businesses in the portfolio are profitable, others are not. We are investing in some of these businesses. And as a result, you see a positive, you see a profitability in Q1. Our plan for this year is to carefully manage this portfolio and continue to invest in those businesses that show promise. And our aim continues to be for this year to hit a black zero in this business, part of the business, the other business. That's the first question. Second question on marketing cost and how we manage that. So the key question. performance indicator that we use for our marketing strategy and marketing investments is the profitability of our marketing and the a proxy a key proxy that we use for that is the payback period so we want to earn the money that we invest in customer acquisition back in 24 months or less that's how we steer our marketing which also means that if there is an opportunity to acquire customers at a very good profitability that matches the guidance that I've just mentioned, or maybe is even better than 24 months, then we take advantage of that opportunity to acquire customers. So, you know, in good jackpot environments, for example, we have an opportunity to efficiently acquire customers and we take advantage of this opportunity. Jonas, maybe can you comment on the discounts and the guidance question?

Yeah, I can indeed. There are certain restrictions on discounts, what we can do in marketing. We have now the access to every marketing channel that a licensed broker in Germany can do. And the most important is obviously Google and social media, Google and Facebook. So we take advantage of them. And acquiring customers through these means is typically cheaper than all of the marketing channels that the former tip or the former seed was able to make. So that's why we can have kept our cost per lead down to this level. In terms of the guidance, yes, it's very clear that we have had a very strong start of the year. We use the word promising start of the year. It's only three months. It has started off well. We see that the revenues and the billings are definitely on track for the full guidance and EBITDA is very strong. We will see how the coming months develops. We know that April had a very strong jackpot situation in Eurojackpot and more medium for 649 but we'll see how May and June develops and then we will come back to this. Today we are comfortable reiterating our guidance but we of course monitoring this carefully on a weekly basis.

Perfect. Thank you very much. Maybe just one follow-up on your other segment development. So do you think the revenue of $2 million will be sustainable, or are there any kind of one-time effects we should be aware of? I understand that you're looking for a black zero to break even, but maybe on the revenue side, is there some more you're looking for, or is that kind of one-off effected? Thank you.

No, maybe I can comment on this. There is no real one-time effects in this one. So revenue, you stated a too low number. We said that we're going to have in this segment a black zero, as you said, in the end of the year. We have more than 3 million in revenues, but obviously also have costs. And that's mainly for our own business. We get the revenues, but we have costs for marketing for them and for our people. And then we have the investment in our startup that Helmut mentioned. talked about in just before this question. So I think in the end of the year it's still reasonable to assume we are around a black zero by the end of the year.

Okay but the top line also we can assume the two million revenues each quarter so

No, not too different from that one. We have said somewhere between five and six million for this segment, which is basically coming from the answer segment or for the answer business. Okay, understood.

Thank you very much.

Thank you. Ladies and gentlemen, as a reminder to ask a question today, please press star one on your telephone keyboard. We now take our next question. Please go ahead. Your line is open.

Good morning, guys. James Letton from Berenberg here. Just a few questions from my end. The first one is on current trading. Can you give us an idea about what has happened in lockdown periods in March and April and what's happened to billings? Then secondly, of the customers you've acquired in the past two months, what's your anticipation of lifetime value? How many of those have subscribed? Do you have any predictions about whether they're more valuable than previous players or whether you think that might be the case? And then also, I wonder if you could just touch upon or dig into more detail about the 37% growth in the LOSSO24 brand. What was the driver of that? Where has that uplift in revenue margin versus billings come from? Thank you.

Thanks, James. To your first question on current trading. So it's still early days. The Euro jackpot rose to 88 million in the last week of Q1. And then we had a good Euro jackpot situation throughout April. And on top of that, we've had the corona situation. So what we've actually seen recently in the primary lottery is that the primary lottery didn't suffer as much as we heard initially, also from leaders of the primary lottery stating. So that's true for Euroject. That's also true for six out of 49. um uh you know what probably happened is that the ramp up of billings in that 90 million euro jackpot situation was a little slower in april than it was in previous ramp up situations like that what we've also seen is that our business has done well and responded well to the situation so the euro jackpot 90 million situation is always an opportunity for us to invest into customer acquisition and thereby into future growth. And we've seen a favorable advertising environment and we've seen an opportunity to make investments in this Euro jackpot environment. And we've seen a good response of our business to the Corona situation. Customer value. It's, Early days, I would say. So we have acquired customers in Q1. We are acquiring customers. I talked a little bit about our marketing strategy and how we think about it. This is special times. And obviously, we're not only looking at the payback period. We are looking at all kinds of health indicators with regards to our customers that we are acquiring. So far, these health indicators are looking good. But we're now in the second week after the euro jackpot 90 million situation. So we will continue to monitor those health indicators. And I think it's still early days.

Maybe I can then... Yes, maybe I continue to comment on your growth question, the 37%. What we're trying is to provide even more clarity, even if this is not really how we steer the company. But since we have acquired Lotto24 in the middle of last year, and it's very difficult for you to understand the real underlying growth. So by isolating only the Lotto24 performance in 2019 with the Lotto24 performance this year and only that brand, what we can see is that the billings have increased 27%. So this year we had 96 million euros in billings on the Lotto24 brand versus Lotto24 76 last year. That's a 27% growth. And if you do the same math, you will have revenues of 11.8 million euros this year versus 8.6 last year. That's a 37% increase if you just compare exactly like for like. Like I said, this is not really how we stay the company. We have two very, very strong brands in Tip24 and Lot24 and we invest not always equal. We sometimes invest more in the Lot24 brand. This is typically the stronger brand and especially in times of due reject. So that's how we stay the company to always invest where we get the highest return. But the 27% and 30% is trying to just isolate the effect of the last 24. So you see that the underlying business has actually grown pretty amazingly over the last year.

Okay, thanks for that. Just one follow-up. Do you have sort of an updated expectation of what the offline segment did in March and April now?

I'm not sure Helmut if you have any comment on this yeah so we've been looking at this carefully over the last weeks and months initially we got a lot of feedback sometimes anecdotal feedback from business leaders in the offline segment and the initial response was that the offline segment is suffering somewhat. We heard that from international markets a little less, but also in Germany. When we actually look at the data, we cannot see much of an adverse effect due to the corona situation. Like I said, If you look at the ramp up curves, so billings going up as the euro jackpot hits the 90 million maximum and continues to be at 9 billion maximum, we can see that the billings levels ultimately hit the same levels as they did on average in previous 90 million euro jackpot situations. If you look at it very carefully, you could see interpret the graphs such that the ramp up was a little bit slower than it was in previous situations. One could speculate that this may have to do also with the media situation. So in the media, the corona crisis was covered extremely broadly and there was probably a little less space compared to previous euro jackpot situations. to talk about a 90 million jackpot in the media. But that's speculation. So, you know, I think personally that this just illustrates once more how resilient the lottery market is in times of crisis. Okay, thank you for that.

Thank you. We move to our next question. Please go ahead. Your line is open.

Yes, good morning, gentlemen. How can offers in investment banking? A couple of questions. First of all, you mentioned a favorable advertising environment in Q2. Can you give us an idea of by how much prices are coming down on the channels you most use, given that a lot of companies obviously are cutting on advertising? That's number one. Secondly, I'd like to have an update on this whole VAT liability story. What happens if you win the case? You get all the money back. What's the timing looking like? What still needs to happen to declare victory in a way? And then last question is regarding the other segments. Are you going to sell these businesses down the line? And maybe a little comment there. Thank you very much.

So on your first question, we've seen a good advertising environment in Q1 and then also in recent weeks. You can see from our Q1 report that our cost per lead in Q1 was at 26. Just have to remind you that Q1 was still a pretty normal quarter. So in terms of jackpot situation, it wasn't an extraordinary quarter. And the Corona crisis really only started towards the end of Q1. So what we've seen in Q1, what we see in the data in Q1 is sort of our marketing results, our marketing KPIs. And the key one that we are reporting here is the cost per lead, 26 euros in a pretty normal quarter. And that's, I think, what we can comment on at this point in time. Sorry, I think I'm not sure. What was your second question?

Yeah, no, again, on the marketing, I was more interested. So you can't comment on the trends you're seeing now. I mean, we're well into the second quarter already. So there's nothing you can share with us in terms of if this 26 is coming down or not.

No, it's too early. Okay.

All right. Second question was, AT, the contingent liabilities, I mean, by paying a certain sum, aren't you basically acknowledging, I mean, to use an extreme word, guilt? I mean, why did you pay the sum? And then what happens if you win the case and what needs to happen that you win the case? If you win the case, you get all the money back and, yeah, just a little bit update on what's happening in the courts right now.

Yeah. I can probably expand on this one. So it's not a sign that we are worried about this one. This has been agreement with the tax authorities. So as always over the last couple of years, we have always been very confident that we have a very strong case, meaning that we have strong arguments and we believe we ultimately win the case. If we win the case, we will get everything back that we have paid plus the interest on this amount of money. And that's the reason why we paid in. We can actually earn money from the German tax authorities by far more than we can actually place on a bank account. In an unlikely situation, we're going to lose the case. Then we have an exposure of roughly 76 million euros. That are the VAT payment that could in theory be due. But like I said, we don't believe it's going to happen. So then we will actually have this on our own bank account instead. And we will earn interest on the 54 million plus we get the 54 million back. What needs to happen is the second question on this VAT. Nothing needs to happen right now until the second court have made their own ruling. So we won the first one back in November last year. This was appealed by the tax authorities as expected and that typically are two years out. We say that the general lead time is 18 to 36 months before the first ruling to the second ruling. So my expectation is that within a roughly two years time period we will know the second court ruling what they will come out with and confirming hopefully the first rulings that we had. In theory this could also be escalated to the European Court of Justice. This is outside the company's control. The court can refer parts of it or the whole case to the European Court of Justice and that will then add probably another one, two, three years because it's are obviously very busy we don't hope that can happen we hope we're going to have a ruling that confirmed the first one okay great I don't know what did I have yeah the other businesses are going to sell them down the road so the purpose is not to sell them the purpose I mean when we invest we invest in strategic opportunity and strategic business models and we're testing business and opportunities out on a smaller market or a smaller segment. Hopefully, these businesses will develop. They could either be then incorporated fully into the seed or they could be sold, but that's really dependent on the traction, how they develop, and that's why we have this small-scale VC approach that we invest a little bit and then we do milestones, as Helmut already explained, and when they meet the progress, we can invest further.

Okay. Yeah, yeah, I think I have a good feeling. Thank you very much.

Thank you. We have no further questions at this time.

If you have no further questions, we would like to close the call. We thank you for your participation and wish you a nice day. Our next regular call will be in August on the occasion of the publication of our half-yearly numbers, and we would be pleased to welcome you again Thank you again. Stay healthy and bye-bye. Bye-bye.

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.