ZEAL Network SE

Good day and welcome to the Zeal Network SE conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jonas Madsen. Please go ahead, sir.

Thank you very much and welcome and good morning to the Zeal conference call for the half-year report. And also thank you for the interest and for joining this call. I hope that you all can hear me loud and clear. I also trust that you have access to the presentation, which should have been distributed to you. But if you haven't, it's available on our website, the website in the investor relations section. Moving on to slide two, you will find the agenda for today's presentation, where we are highlighting the main areas that I will cover before giving you the opportunity to ask questions. So we will start off with a summary of the first six months. followed by a financial update, the guidance for 2020, before we finish off the key takeaways. Let's start with a summary you will find on slide four. I will now hand over to our CEO, Helmut Becke, that will take you through the next slide.

Good morning, everybody. Let me summarize the first six months of 2020. Please look at slide four. We've had a strong start to the year. Billings are up 75%. To interpret this number, you have to consider a number of one-off effects. First, ZEAL billings in the first half of 2020 include Lotto24 and TIP24 billings. ZIL billings in the first half of 2019 do not include Lotto24 billings, except for the second half of May and June 2019. Secondly, the TIP24 billings in the first half of 2020 were influenced by the business model change. So we experienced some customer loss and we lost some products when we made the business model change in October 2019. So if we look at just Lotter24 and compare the Lotter24 first half billings in 2020 with 2019, and that's probably the year-on-year comparison that's least affected by one-offs, we see a 41% billings growth. On margin, we've improved our gross margins. by adding and selling more premium products. We plan to continue to grow our share of premium products, and we can use that extra margin to either boost our short-term profitability or to acquire more customers and thereby invest into future profits. And that's exactly what we did. We did take advantage of the good jackpot situation, particularly the high Euro jackpot jackpots in April to invest more into customer acquisition and thus into growth and future profitability. As a result, we've registered a record number of new customers and already exceeded the original full year guidance on customer acquisition. and all of that at favorable acquisition economics. Fortunately, we have not seen a negative effect of the corona crisis, not on our operations and not on our business. On the cost side, we are realizing the cost synergies and the cost reductions after the Lotto24 takeover faster than anticipated. having already achieved 91% of the planned synergies. Based on all that progress, we've raised our guidance for 2020 on almost all metrics. Last but not least, we've paid out 80 euro cents dividend to our shareholders. Back to you, Jonas.

Thank you, Helmut. Let me now take you through the numbers in greater detail. So please move to slide six. So what you see on this slide is a summary of our income statement. It's a condensed version. And I would explain part of this in more details in the coming slides. But let's start with the revenues. Revenues at 43.3 million indicate a strong first half of this year, in which we are taking advantage of the positive market environment but of course also the full inclusion of a lot of 24 business. As I explained in previous call, if you compare with last year, the revenues are impacted by the business model change and lower revenues should not be read as anything worrying in our business, just a natural evolution of now operating a more sustainable business model, the broker business model. Some of you have also asked about comparison to Lot24 standalone. So let me provide a bit clarity, even if they were not formally part of the seed group for the first four and a half months of 2019. So revenues for Lot24 AG, meaning the company Lot24, was $18 million in the first six months of 2019, which means that we have more than doubled the broker revenues to $39 million with the inclusion of TIP business. If you exclude the tip brand, meaning that we're only selling the Lotus 24, the revenues would have been approximately 28 million, still a 54% increase. From my perspective, this is amazing growth we have seen in the broker business and make me even more confident about the decision that we took two years ago to change the business model that we affected last year. Let's move on to costs. we have been able to reduce the cost by almost 7 million. And it should be noted a lot of 24 costs were not yet included up to 14th of May 2019. So the cost savings would actually have been correspondingly higher compared to previous year. We have also invested 7.3 million more in marketing than last year, taking advantage of this positive market environment that helped just explained, especially for Turo Jackpot. The purpose is of course to acquire more customers, which I will come back to in a moment. And finally, an adjusted EBITDA of 3.3 million. As expected and communicated to you, it's below previous year, but at the time we did operate a different business model. So I'm very satisfied with the result, especially considering the market investment the company has undertaken this year. With a lower investment, EBITDA would of course naturally be much higher, but it indicates the first six months has been very, very strong for us. Let me now talk about the implementation of the synergies, which in fact goes faster to implement our internal target. Let's move to slide 7. On November 19, we announced the takeover of Lotto24. On the 14th of November 2019, we completed the transaction, and this is the starting point for our synergy implementation. Today, or more precisely in May this year, one year after the consolidation started, we've already achieved 91% of the total synergies. And this is approximately 6 million more than our target that we announced. Our full target of 100%, or the 57 million, is to be achieved in May 2021, and we are good back to reach this level. And just to correct myself, I said November 19 we announced the takeover. We announced it November 2018. Sorry for that. Let me now give you a bit more insight on some of the KPIs that you will find on slide eight. Group billings have grown by 75% since last year, which is truly amazing for us. And of course, driven by the inclusion of Lotter24, but also the positive market environment in the first half. And this measure is of significant importance since our business is highly dependent on an economy of scale And now we truly have the scale. Some of you have asked about comparison to lots of 24. So let me provide a bit clarity, even if this was not part of the C group for the full 2019. If we look at lots of 24 standalone, it's billing amounted to 157 million in the first half of 2019. And in 2020, excluding the tip business, billing rose by 41% year on year. And including TIP, the volume that goes through the lot of 24, double the volume. Once again, this is an important, concise matter in this business. And if you do the same comparison for revenues, we have a 54% increase, as I just mentioned. In terms of the sealed gross margin for the Germany segment, we are in the first half at 12.4%, thanks to the strong sales of the premium products, like lottery clubs, and supported by the market launch of our social lottery, Friar Plus, that we launched in March this year. This is giving us confidence that the margin can be increased in the medium term. And for better comparison, we have also included the gross margin for Lotter24 Standard Loan for the first half of 2019, which were 11.5%. So we are clearly making improvements here. as this is evident. On slide 9, we have highlighted net cash and new registered customers. Net cash is now at 49 million, which is down 56%, which is due to the payment to the German tax authorities of 54 million euros that were made in January this year. This payment was made in order to earn interest and avoid penalty in a worst case scenario. We've also paid dividends of 80 million euros to our shareholders in June, which I hope some of you have already received. Even if we are confident to ultimately win the case, we have indicated on this slide that the remaining VAT cash exposure is 21.6 million. And to summarize this part, we are optimizing the cash situation of the company to either gain a return on the excess cash, risk-free of course, or return to shareholders in line with the recent dividend policy. Let me now talk about acquisition. It has been a strong first half in terms of acquisition. In fact, the best ever in the history of SEAS. And we can proudly report 593,000 new registered customers in the Germany segment. And once again, if you compare this with a lot of 24 standalone for the same period, they acquired 190,000. This means a remarkable 212% increase year over year. So what we see is that additional marketing investments are paying off and our ambition to grow and being the market leader is on its way. All this sets us up for a bright future when these customers continue to use our service. As we explained previously, the customers that ultimately stick are very loyal for many, many years, and we can continue monetizing those.

On slide 10, you will find further performance indicators.

TPL, or cost per lead, is reduced by 5% if comparing with Lotto24 from last year. This is thanks to more efficient marketing channels that the entire group now have access to, but also to the positive market environment that drove the CPL down. I also want to take the opportunity to call out that the target is not to reduce this to the lowest level possible, but to continue investing in marketing where we get a good payback time or a good return on our investment. So lower CPL is of course nice, but needs to be seen in a wider concept and not a target per se, but still, of course, an important indicator for all of us. The average monthly active user for the first half of the year is now over a million, a quite important improvement versus what we had with TIP last year. If we break this down into quarters, we had 942,000 in the first quarter of this year, and we were able to increase activity significantly to 1,065,000 in the second quarter, leading to the average around 1 million. Average billing per use is 52 euros. This is a decrease from last year, but please remember, we're now operating a different business model. Last year, we had a secondary lottery operation with a very different product offering.

Let me now talk about the guidance for the financial year that you will find on slide 12.

I am very pleased to announce that we have raised our guidance after a strong first six months, which is billings in the range of 590 to 610 million euros, revenue 76 to 79, adjusted EBITDA of 7 to 10 million euros, and the gross margin for the German segment slightly above 12%, and CPL lower than previous year, which all the indicators are showing. and new registered customers around 800,000. And please note that if one would optimize for the short term, of course EBITDA could have been significantly higher without the additional marketing investment, but the long-term profitability would then suffer. By growing the business is key and fully in line with our strategy. This would also, in my mind, create the most shareholder value. And one final point, you may have seen in subsequent event section that we received a confirmation from HMRC, which is the UK tax authority, who are willing to repay a stamp due to reserve tax of approximately 3.7 million euros, which was paid by SEED in March 2014. So there has been a long discussion with them. But the repayment will be recorded as non-recurring income in the Q3 quarterly statement, meaning It will not impact adjusted EBITDA. With this, let me hand over to Helmut that will take you through the key takes away.

Thanks, Jonas.

As you can see with our numbers, but I think also in our guidance for the year, we've had a strong first half of the year. We're not seeing any material adverse impact of the corona crisis, rather to the contrary. The business is strong, our people are working from home, and our projects are running on time, the reunification of our tech platform being the most important project right now. The customer acquisition has been especially strong in the first half of the year. Furthermore, the post-merger integration is on track, and we are delivering the synergies faster than we promised. The cost focus is still top of our mind for us. As a result of the good business performance, we've raised our guidance. And with that, I would like to conclude our presentation and open up the floor for questions.

Thank you, sir. If you would like to ask a question, Please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

We will take our first question from James Lutton of Barenburg.

Good afternoon. Good morning, gentlemen. Thank you very much for the presentation and congratulations on the first half results. Just four questions from me, if I may. The first one is that we have a bit more data available. Do you have any better insight into how customers behave through COVID lockdowns? You said no negative effects. Does that mean that you're fairly neutral through the event or was there any increase in online penetration? The second was it seems like Eurojackpot has had quite a big impact on billings in the first half. Could you provide us a breakdown of the revenue split from that lotto and maybe also the 6149? The third question is you've spoken about some premium products you've introduced and you've mentioned gross margins can improve from where they are even now. Could you give us a bit more detail on both of those, where you think gross margins can go longer term and maybe talk about some of the products And then lastly, the new customer growth is very strong. How loyal are these customers? And do you have any insights on demographics or what age they are? That would be very useful as well. Thank you.

OK, let me or let us take those questions one by one.

Maybe, Jonas, you can think about the breakdown by product, which I don't think is data that we usually provide. To your first question, do we have any insights on the behavior of the customers? And is there a corona effect? So what we said earlier in the presentation is that there is no adverse effect that applies to our internal operations, but also to our business. I think on the billing side, the biggest effect we've seen is probably the Euro jackpot effect, plus maybe some corona effect. I think where we do see a corona effect is probably on the customer acquisition side, that there is maybe a higher affinity for customers to play online. We look at the 41% growth rate at Lotter24. Unfortunately, we don't have definitive numbers or published numbers from the state lotteries, how fast they grew their business. Online, I think they also saw some healthy growth, but I think we've outgrown them. On the third question, which is the question about margin, we've pushed forward with some products that we've already had, expanded our product portfolio there, and also exposed them to our customers even more strongly than in the past. And those products are clubs and instant win games, which provide a higher margin than our average margin. And on top of that, we've launched a product, a new product, where together with our partner, we are the operator, and that's the FIHAT Plus product. All of those things have helped to improve our margin. And then your last question was about the customer metrics and customer health. And we have so far seen very good customer health and customer metrics with regards to those customers that we have acquired in the first half of the year, including those customers that we acquired in April.

So nothing unusual there.

Thank you, Helmut. And then I can continue with a product split. Like Helmut said, we don't normally provide a split per product. We have quite a few products in the pipeline. But maybe James just to give a little bit of history on this one. In the past, 649 has always been the dominant product for TIP, roughly accounted for 50% as I communicated in the past. What we have seen now in the first six months and also when we now adding lots of 24, that has a strong Euro jackpot customer base. We can see they are coming closer and closer, but that has been jackpot driven this first six months. 649 has been, I would say, mediocre jackpots. White Euro jackpot in April was just fantastic when the 90 million rolled over and rolled over. So that was a phenomenal outcome for us. I would say still 6 out of 9 is the biggest product, if you also include the other product that is related to it. But I would love to see Eurojack, but it's picking up. But it has been a very strong also for them this first six months.

Okay, thank you. And maybe just one follow-up on the instant win games. Where are you offering these? In which states are you offering these to now? And how material is this in terms of company revenues?

So we're offering two types of instant win games at this point in time.

One is the scratch cards, which we broker, and that's a couple of states. I'll run down the list in a minute. And then we offer a second type of instant win game, which is 50 cent games. So that's a special regulation in Germany that you can offer 50 cent games without being regulated as a lottery. And that we offered on TIP24 already since the business model change and recently rolled this out on Lotto24 as well. So that happened in the first half of this year. The scratch cards, I think we now broke our scratch cards from Lower Saxony, from West Lotto. I have to come back to the full list to you. There's been a new state, I think, added recently. So we do that throughout the call. We get back to you on that list, okay?

Okay, brilliant. Thank you very much, guys.

We will now take our next question from Maria Thurberg from Warburg Research.

Thanks for taking my questions. I have just a few follow-ups. Actually, you explained well how your margin increased and what's the reason for this. Could you elaborate a little bit further on how we should think of the future development? I guess you want to increase your premium products even more and the penetration even more. Let's say two, three years down the road, Where should we think of the growth margins develop? I mean, we're currently at 12.4. Is it fair to assume that this develops more towards 13% or is it more likely to be stable? And second one, on the activity level of your new clients throughout the second quarter, Do you see a significant difference in activity behavior to previous quarters, especially since the situation in the lockdown was very special? People were not able to join or to do their lotto in offline stores. Do you see ongoing activities from those customers you gained during the lockdown?

So maybe I can cover these questions. So if you talk about the margin increase, so what we have guided you for this year is likely about 12%. We have a midterm objective internally. This is not a new guidance, but to obviously increase this one. As long as we are successful with the premium products, they are today a small part of the total volume, but the more we can be able to sell premium products, obviously the blended margin increase will increase. I hope we can increase this further. I wouldn't be too cocky or too optimistic on this one. I would rather be on the conservative side, but you should in the medium time see some improvements also on the margin, which is clearly our, I wouldn't say number one, but our top four or five KPIs that we are tracking and working on. You will see improvements here as well. In the activity level, so the typical customer, you see that they join our website, they play the first game, and then you have the declining activity rate. And after roughly six months, they stabilize, and then they continue on doing this one. So you have a sharp decline the first six months, and then they become very loyal for many, many years to come. We haven't seen any change in the behavior. I know it's very short term. We had this huge impact or increase of custom in April. These customers, we haven't seen any difference versus how they behaved in the past.

Okay, thank you very much.

As a reminder, if you would ask a question, please press star one. We will take our next question from Heinz Winken from ECOS.

Yes, good morning to you. Just a simple question. What is the total number of clients now?

I know we presented this in the past. Actually, we think it's much more helpful to present how many monthly active users that we have because that's how you can build a model. Instead of giving you a number of, let's say, a couple of millions, where some of them may be active and some may be dormant, meaning just being in the customer base. So in order to not confuse the investors, we have just stopped showing this number because we have also in our database customers that are dating back a long, long time ago and haven't been active. So we are rather talking about how many active customers we have, which is the one million that I reported on during this call.

Okay, thank you. Thank you.

As a reminder, please press star one to ask a question. We'll take another brief pause to allow everyone an opportunity to signal.

Yeah, we'll use that pause to answer James's earlier question. So right now we are brokering in the first half of 2020. We have brokered scratch cards from Lower Saxony, Saxony and North Rhine-Westphalia. And in Q3, we'll add Hesse. And with that, actually, we cover more than 50% of the German population.

Again, please press star one to ask a question. It appears there are no further questions at this time.

So I'd like to hand the call back over to your host for any additional questions.

or closing remarks.

I can just say thank you very much for taking the time and listening to us.

As we have said, and as Helmut explained, both in the key takeaways and introduction, it has been a very, very good first half of this year, and we are confident that the future looks also good, especially considering how many new customers we have acquired this first six months. But with this, I would like to conclude the presentation and thank you for the participation. And should you have any follow-up questions, of course, we are here to help. So just shoot Frank Hoffman in our investor relation manager an email or give him a call, and we are more than happy to support you in any kind of questions you may have. So with this, thank you very much.

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect.