ZEAL Network SE

Good morning and welcome. Thank you for your interest and for joining the call. I hope you can hear me loud and clear. I trust that all of you have access to the webcast link, which should have been distributed to you. But if not, it's also available on the SEED website in the investor relations section. Additionally, you will find a link for you that you can download this presentation. On slide two, you will find today's agenda. highlighting the main areas I will cover before giving you the opportunity to ask questions. We will start off with a summary of the first nine months, followed by a financial update and our revised guidance before we're finishing off with the key takes away. Let's start with the summary, and I will now hand over to our CEO, Helmut Becke, that will take you through slide four.

Thank you, Jonas. And good morning, everybody, also from my side. Let me summarize our first three quarters this year. Our billings are up 42%, but we are comparing apples with oranges still with this number. To interpret this number, you will have to consider a number of one-off effects. So the ZIL nine months number for 2020 includes lotto 24 and tip 24 billings the um zeo nine months 2019 only includes lotto 24 from the second half of may onwards when we started to consolidate lotto 24. Second effect is that the TIP24 billings were influenced by the business model change, the loss of customers and products that we experienced in October 2019. So to give you a number that is more apples with apples, let us just look at Lotto24 and compare the full nine months 2020 with the full nine months of 2019. And there we actually see a relatively similar growth number. So we see 38% billings growth for lotto24. We have improved our gross margin also in comparison or in comparison with lotto24 from last year by adding and selling more premium products. We plan to continue to grow our share of premium products We can use that extra margin to either boost our short-term profitability or to acquire more customers and invest into our future. Again, in Q3, we managed to acquire a high number of new customers efficiently, even though the jackpot situation was worse than in Q1 and Q2. And based on the progress we made, we've again raised our guidance for 2020. We'll get back to that later in the presentation. Let me hand back to Jonas.

Thank you, Helmut. Let me now take you through the numbers in greater detail. So let's move to slide six. What you see on this slide is a summary of our income statement. And I will explain part of this in more detail also in the coming slides. Revenues at 63.9 million indicates healthy first nine months of this year, in which we have taken advantage of the positive market environment, but also the full inclusion of Lot24. As explained in previous call, if you compare with last year, the revenues are impacted by the business model change, and the lower revenues should not be read as anything worrying in our business, just a natural evolution of now operating in a more sustainable business model, the brokerage 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 in the first four and a half months of 2019. But it will nevertheless give you an indication how the business has developed. So revenues for Lot24 AG, the company, was approximately 28 million in the first nine months last year. This means that we have more than doubled the broker revenues to 58 million euros with inclusion of the tip business. And if you would exclude the tip, meaning only selling the Lotto24 brand, the revenue would have been approximately 41 million, a 49% increase. From my perspective, this is an amazing growth we have seen in the broker business. It makes me even more confident about this decision to change business model as we did last year, as well as the great performance by the company. Let me now move on to costs. We've been able to reduce the cost by nearly 14 million. It should also be noted that a lot of 24 costs were not yet included up to the first four and a half months of last year. So the cost savings would have been correspondingly higher compared to previous year. Having said this, it's clear that the synergies as we are and were committed to deliver are mostly already realized. On top of this, we also invested 9.2 million more market in marketing to take advantage of the positive marketing environment with relatively high jackpot throughout the year. The purpose is, of course, to acquire more customers, which I will come back to in a moment. And finally, an adjusted EBITDA of 6.9 million euros. As expected and communicated to you, it's below previous year, but at that time we did operate a different business model. I'm very satisfied with the result, especially considering the marketing investment the company has undertaken this year. With a lower marketing investment, EVDA would have been naturally much higher. But it indicates the strong first nine months we have experienced when being able to absorb such a big marketing investment and still delivering a good profit. Just as a final note, the non-recurring income is mainly related to the stamp duty reserve tax that we recently got back from the UK Tax Authority. Let me now give you a bit more insight on some of the key performance indicators that you will find on slide seven. Group B links. Group B links, which is showing the transaction volume we are handling, have grown by 42% to $472 million, which is truly amazing for SEAL, and of course, driven by the inclusion of Lotto24, but also thanks to the successful customer acquisition we have seen this year. This indicator is of significant importance since our business is highly dependent on economies of scale, and we clearly have the scale. Even if Lotus24 was not part of the SEAL group for the full 2019, let me still provide a bit of clarity how the development would have looked like. If we look at Lotus24 standalone, its billing amounted at $241 million in the first nine months of 2019. And in 2020, billings rose by 38% year on year. And including TIP, meaning what volume goes through the Lot of 24 company, we almost doubled that volume. Once again, this is important in science matters in this broker business. If you do the comparison, the same comparison for revenues, we have a 49% increase, as I just mentioned. In terms of SEAL gross margin for the Germany segment, we are in the first three quarters at 12.3%, thanks to strong sale of our premium products like lottery clubs and supported by the market launch of our social lottery triathlons in March this year. This is giving us confidence that the margin can be further increased in the medium term. For a better comparison, we have also included the gross margin of Lotto24 as a standalone company from last year, which were 11.4%. So we're clearly making improvements here. On slide, we have highlighted net cash and new registered customers. Net cash is now at 58 million euros. down 55% due to the payment we made to the German tax authorities of 54 million in January this year. And the payment, as probably you know, was made in order to earn interest and avoid penalty. We have also paid dividends of 18 million to our shareholders, as I'm sure you're all aware of. But even if we are confident to ultimately win the case, we have indicated that the remaining VAT cash exposure is 22 million. To summarize this part, we're optimizing the cash situation of the company to either gain a risk-free return or as close risk-free you can get on the excess cash or return to shareholders in line with our dividend policy. Let me now talk about acquisition. It has been a remarkably strong first nine months in terms of acquisition. In fact, the best ever in the history of seed. We can proudly report 787,000 new registered customers in the Germany segment. And if we compare that with Lotto24 standalone for the same period last year, they acquired 27,000, which means 174% increase year on year. So what we see is that the 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 an interesting future when these customers continue using our services. As we've explained previously, the customer that ultimately sticks are very loyal for many, many years. On slide nine, you will find further performance indicators. Cost per lead is reduced by 2% if you compare with lot 24 from last year. This is thanks to more efficient marketing channels that the entire SEAL group now have access to. But I also want to call out that the target is not to reduce this to the lowest level possible, but to continue the best in marketing when we get a good payback time and a healthy return on our investments. So a lower cost per lead is, of course, nice, but needs to be seen in a wider concept and not a target, let's say. The average monthly active user for the first nine months of this year is close to 1 million. The sharp increase that you can see on the slide is due to that level 24 was not part of the first four and a half months, but also thanks to the growing business we have had this year. From next year onwards, this number will be much easier to analyze since we would have better and fairer comparison data. The last KPI on this slide is average billing per user is at healthy 53 euros. This is a decrease from last year, but please remember that we were operating a secondary lottery operation with a very different and wider product offering, so nothing to be worried about. Let's now talk about the guidance for the financial year, and you'll find that on slide 11. I'm very pleased to announce that we have raised our guidance again, and after the strong first nine months, you will see the new guidance, which is billings in the range of 610 to 630 million euros, revenues 80 to 83 million, adjusted EBITDA in the range of 8 to 10 million euros, And we expect the gross margin for our German segment slightly above 12% where we are now. The CPL cost per lead is lower than previous year, which we are already tracking as we speak. And the new registered customer we expect now to be around 900,000. Please note that if one would optimize for the short term, EVDA could have, of course, been significantly higher without this additional marketing investment that we're doing. But the long-term profitability would then suffer, while growing the business is key and fully in line with our strategy. This would also create the most shareholder value to all of you. Let me now hand back to Helmut, and he will take you through the key takeaways that you will find on slide 30.

Thank you, Jonas. As you can see with our numbers, but also with our guidance for the year, we've had a strong first nine months. The customer acquisition has been particularly strong. The integration of Lotto24 is on track, and we are delivering the synergies faster than we promised. The cost focus is still top of our minds. As a result of the good business development, we raised our guidance again. With this, I'd like to conclude our presentation and we are now opening up for questions. Hand over back to the operator.

Thank you. If you would like to ask a question, please signal by pressing star one 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, that's star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to queue for questions. We will now take our first question from Marius Feuerberg from Warburg Research. Please go ahead, your line is open.

Yeah, thanks for taking my question. Actually, I have three. First of all, if we look at marketing spending, what's up quite significantly, which makes definitely sense to gain more customers. But yeah, in light of Q4, what should we think of it going forward? So also with regards to your EBTA margin, would you kind of risk your margin in terms of, or at the cost of more customers, so increase your marketing spending in Q4? or would you rather limit it? And the second one, I guess more important even, is the newly signed Blixbus Startvertrag by the chief of the German countries. What does this mean for you, especially with regard to instant win games going forward? When would you consider offering those and do you need a special license for this and what potential would you expect from this side for the next couple of years? And more generally speaking, with the GlickSpeed Starter Track, do you need more additional licenses which you are applying for, or is this quite a straightforward topic?

Thank you so much. I think I can cover the first question, and then I will hand over to Helmut for the question about the license and the GlickSpeed Starter Track. So the marketing spend, as you see, we have invested a huge amount this year, taking advantage of the high jackpot situation. As you may be aware of, when the jackpot is high, it is very economical to invest a lot in marketing. And you have seen a number of spikes in jackpots, especially in April-May timeframe when the Eurojack was also high. That's why we took advantage of the positive market and invested heavily. In a normal jackpot situation, we will go down more to a normal level, which is around 1.5 million euros per month. So if you don't see any high spikes of jackpots in the coming two months, we will probably be more on that level, 1 million per month, 1.5 million per month. But it could scale up if we can take advantage. So we don't limit our marketing to specific numbers. we really take advantage when we see this opportunity in the market. Helmut, for the other questions, I hand back to you.

Yeah, thank you, Jonas. So to your question about the Glücksspielstaatsvertrag, so the new Glücksspielstaatsvertrag, which has now been decided, still has to be ratified by the states, but we don't foresee any issues there. So the new Glücksspielstaatsvertrag, first of all, gives us stability. stability for the market environment and the business model that we run but secondly it opens up new opportunities for us it actually makes marketing a little bit easier but also you know legalizes new forms of gambling and I think you alluded to games in particular and so that's a a new market that is going to be legalized in Germany according to the new Glücksspielstaatsvertrag. So it's too early to say what we will do with this, but we're currently looking into these potential product extensions. And we know from the past when we had games on the TIP24 side, that this is a good fit with our target group, mainstream lottery players, and that also in other markets, games are typically part of the portfolio of a lottery provider, and that cross-sell and up-sell works quite well. To your question, do we require a new license or additional license for that? The answer is yes. but that is still pretty straightforward. So the rules are clear. We would have to apply for a license and we don't foresee any hurdles there to not get a license if we wanted to get one.

Okay, thank you very much. Maybe one follow-up for me. especially as the SaaS attack comes closer with the next year or the ratification going forward, do you see any competitor of you, especially Northland, I guess, applying for this license or what do you think of their chances are getting a license and therefore transforming the business model as well into the more legalized area?

Yes, so according to some unconfirmed media sources and public sources, Lotte Land so far is the only company that we are aware of that might be applying for a permission in Germany. It's too early to say what... comes out of it. It's not really our job to deal with that application. That's what the regulator will do. We do think that they have to overcome some hurdles there due to their obscure holding structure and their unclear private ownership. and their financial structures will have to be – I mean, basically, you have to be very transparent, and a key requirement is to be reliable. So that's what the regulator will have to judge. In terms of if they would get a license or a permission, what would happen – Again, this is hard to guess because they are a privately owned company, but we believe that we are in a very strong market position. Their contribution would be limited by some factors. First of all, one can only sell the Germany-licensed products in Germany, and Lotto Land is selling a lot of other products as well. They're also, to a large degree, a casino games business. So we think with that strong market position that we have in the market with 40% plus market share in the online market, whether they receive a permission or not doesn't change the outlook for Zio much.

Okay, perfect. Thank you very much.

And just as a reminder, that is star one for any telephone questions. We'll now take our next question from Marie Jouvener from H&A Investment Banking. Please go ahead. Your line is open.

Yes, good morning, everybody. A couple of questions from my side. Can you maybe better explain what... where you see your gross margin actually maxing out in light of, as Mayos has highlighted, the instant win-game opportunity, for example. And also, on which mechanics were you actually able to generate higher gross margins on what you call the premium products, given that the market is, by and large, pretty regulated in terms of how much money one gets? Maybe explain the rationale on of the higher gross margin on some of the ancillary products you offer? And secondly, is the IT platform transition completed and how much one should expect in CapEx or IT investment in 2021? The second question. And then finally, more on the bean counting side, the one-off costs that are were announced to amount to a residual 2 million euros in 2020. Are we assuming that those are off the table and that you've managed to really complete the integration without spending more here?

Thank you. So let me try to explain some of your questions. So the gross margin, what you have seen then if you go back from 2019 with a lot of 24 broker business going from 11.3% up to where we are today at 12.3%, what you see this has been a pretty nice development for our business. And what makes this possible is more sale of lottery clubs. So lottery clubs is a service on top. of the normal selling a ticket that you pool a customer together and that you can add a service fee on top of that one. So the more sale of these lottery clubs with a higher margin, then the blended margin will increase. But we also have other products like the Social Lottery Friar Plus that is coming with a higher margin. But you're absolutely right. There are limitations how much a Social Lottery can get, but it's higher than the underlying brokerage margin. So if the blended margin, we can be higher if we have more sales of premium products. So that was the first one question. And then obviously the instant win games will come with a higher margin when we launch this sometime next year, as Helmut explained in the previous question. I think I wouldn't say where it can max out. What we max out, what we have seen is that we have increased this from the 11% to now 12.3%. We can see a further slight increase. I would just be careful for you to model this too aggressively. We think in the medium term, we can increase this with a percentage point, a two percentage point, by adding these premium products. And that's how we deal with the business internally. Okay. In terms of your next question, the IT platform is, I say, almost complete. We are in the final stage of transferring the Lotto24 customer into our technical platform, which is called Alingde. And when all this is completed, we can retire the Lotto24 platform, which is quite similar to the TIP1 or the SEED1 because we're coming from the same origin. But there is a little bit of work still left. We expect the full IT integration project to be finalized in Q1 next year. Then we have, so to say, converted our partners, and we moved all the customers into one single platform, which will create a number of benefits for us. And in terms of capex, very little capex in our business. Most of our IT cost is related to people. And consultants, of course, but mostly people. There are a few CapEx costs we have, but it's low single-digit millions. I would say one or two maximum per year, and I would probably expect this to be even lower. We need to buy some servers and some computers, but technically this is not expensive. So it's low investment in CapEx. And to your last question, for the one-off costs, we have very limited one-off cost left. So what you see is that we have been able to realize the synergies with our expected range of one-off costs. So you shouldn't expect anything material more from this point. Could be a low amount of additional severance payment or lower additions of other costs, but it should be quite minimal.

Okay, thank you. And again, just as a reminder, that is star one for any telephone questions. We'll now move to our next question from Carsten Kinder from H&A. Please go ahead. Your line is open.

Yes, good morning, Helmut and Jonas, and congratulations to an outstanding result. A follow-up question from my side. On the price increase, how has that been perceived so far, especially on your brand? Tip 24, where you raised your ticket by 10 additional cents per field, how have the consumers reacted to that? And then the second question, on your reported unadjusted EBITDA for Q3 of 7.4 million, we have obviously two extraordinary factors to consider, 3.7 million tax refund, but on the other hand, a roughly $3 million above the run rate marketing spend. If I net those two one-offs out, I have maybe an adjustment of half a million to make of those 7.4. So let's call it $7 million. Is that the current run rate without any one-offs and special items for next year, excluding any growth, obviously? Thank you.

Yeah, let me take the first question, and then, Jonas, if you could take the second one. So with regards to the price increase, so we see what we expected to see, an increase in spend, although not the 20% or 30% that the price increased for lotto 24, lotto 6 out of 49 only, right? So that was where the price increase happened, 6 out of 49. What we've seen in the past, what we also expect to see going forward is that our customers will adjust their budgets over time. That's a long-term trend that we've seen in the past that we expect to see here as well. It sometimes takes 12 months for customers to adjust their budget, especially the subscription customers take a longer time to adjust their budget. Some of that uplift that we are seeing right now, we don't expect to retain forever, but some of it will slightly decrease. The TIP24 price increase, which was slightly different because we added another 10 cent per field to the price, that's actually had surprisingly little effect in terms of how customers reacted to the price increase. Jonas?

Yes. So coming back to your question, so what you can find is the details on slide six from the presentation, Karsten. So we have an adjusted EBITDA of 6.9 million. So I'm using that number because that takes away the tax, the stamp duty tax that I explained previously because this is a one-off. So you have a 6.9 million for the first nine months. And we have confirmed our guidance for this full year of 8 to 10 million. So I think we are well in that range. Going forward, of course, our increased volume will have a positive effect. But we will come out with a guidance for next year, early 2021, when we describe all the KPIs that we are guiding on. So let me come back on this when we do this properly.

Thank you.

And just as a reminder, that is star one for any telephone questions. Star one. It appears there are no further questions, so I'd like to hand the call back to our hosts for any additional or closing remarks.

Closing remark, thank you very much for taking the time and listening to us. As you can see from the numbers, we have made a very strong first nine months of the year. It looks very promising in the future. But thank you so much for taking the time, listening to us, and having your question answered. And we will speak to you shortly. And if there is anything in particular you want to have help with, don't hesitate to reach out to us, and we're more than happy to help you. Thank you very much.