ZEAL Network SE

Good day and welcome to the ZEAL Network SE Q3 2021 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Johannes Mattsson, CFO. Please go ahead, sir.

Thank you very much. I hope you all can hear me loud and clear. And good morning and welcome to ZEAL's earnings call. I hope you also have access to the presentation. If you don't, it's accessible on our homepage under the investor relations section. If you go to slide two, you will see the content slide where you'll find today's agenda. And we will start off with a summary or highlights of the first nine months, followed by a financial update. We'll then talk about the updated guidance for the year before we're finishing off with the key takeaways. After this, we will give you the opportunity, as always, to ask questions. I will now hand over to our CEO, Helmut Becker, to take you through the summary and regulatory situation.

Thank you, Jonas, and good morning, everybody. So, let me start by giving you a little bit of context first. Our environment has changed. The corona pandemic has become less of a factor, as most countries, including Germany, have lifted their lockdowns on the back of the vaccination campaigns. Instead, a weak jackpot environment has characterized the last quarter and this year to date. This has a direct effect on our billings that we make with our existing customers. High jackpots drive billings, low jackpots suppress billings. But a weak jackpot situation also impacts our customer acquisition. We manage the efficiency of our customer acquisition very carefully. Therefore, we dial up marketing spend in good jackpot environments and dial it down in low jackpot environments. Longer term, as jackpots are simply a function of statistics, this does not really make a difference. Short term, it does. So, despite the jackpot environment, billings and revenue have increased in the first three quarters of this year. We have significantly improved our profitability. That's the result of our efficiency-optimized marketing approach, our cost control, and the synergies between Lotto24 and TIP24MZO. Other highlights include a successful delisting of Lotto24 to reduce complexity and associated costs, We've run a vaccination lottery based on 3S Plus to support the vaccination campaign of the government. We made one person very happy, a record winner we had. A Ziel customer won almost 50 million euros. That was a Eurojackpot win. And, that's my last point, based on the trends I've just explained, we adjusted our guidance. And Jonas will go into more details later in the presentation. So before we go into the numbers, let me quickly talk about regulation. The new gambling state treaty took effect on the 1st of July this year. It will run at least until 2028. We have so far seen no adverse effects of this new state treaty on our business. We do see new business opportunities for us in games and potentially sports settings. The opportunity we are focused on right now is to launch games. The technical term in Germany is virtual slot machines. We will offer games to our customers that are tailored to our lottery player target group. We know from past experience, as well as from international lottery markets, that this is a good opportunity. Technically, we are ready to launch. We're only waiting for our license, or it's a permit to be precise, to be issued. The authorities issuing that permit have recently come out with a statement in a media publication. They said that they may issue the first permit in Q4, but will certainly issue the first ones in Q1 2022. And finally, we will apply for an extension of our broker permit, brokerage permit. This will be a very straightforward exercise. So, with that, over to you, Jonas, to take us through the financial update.

Thank you, Helmut. So, let's now move to the financial section that starts on page six.

Okay.

So before I dive into the financial, let me share some insights of the jackpot development, which is a good theme for the numbers to come. What you see on this slide is the average jackpot versus last year in the two graphs. The top one is 6 out of 49, and the bottom one is zero jackpots. What one can read from the slide is that the average jackpot for the case of 6 out of 49 is only marginally lower than last year. while 4G jackpot has a 6 million lower gap. This adverse variance is important, but not the main drive. The main drive is indeed the peak jackpot. And what is interesting is that in 2020, so last year, we had nine real peaks, three from 649 and six zero jackpot peaks, while this year we only had three. And it's in the peak we get the real buzz in the markets. And people get more excited and want to be part of the draw. Some customers are just waiting for the peaks to happen. What does all this mean to us? A hijack that is attracting new customers and acquisition becomes easier and with increased volume as an outcome, which then leads to higher future growth rates. The old customers, but also the new ones, they all start to spend or spend more in those weeks. why our billings increase as a result. The opposite is, of course, true for low jackpots. And a final remark is that since we're investing less in customer acquisition, meaning marketing, when the jackpot is low, we will see low number of new customers, and at the same time, the spend makes the profitability to bump up. Let's now go to slide seven, where you find the condensed income statement. Revenues are up 1% versus last year, despite an, in comparison, terrible jackpot situation this year. Staff costs fell by close to 13% or 2.1 million, driven by two factors. Firstly, we have slightly fewer people, and secondly, the re-evaluation of the employee's long-term incentive plan. The latter is the major driver for the decrease. We have continued to invest in customer acquisition. but temporary on a much lower scale. This is important to understand. We just don't invest the same amount every month, but instead always optimizing the amount and channels depending on the circumstances to have the maximum efficiency. This has led to fewer customers, but still with high customer lifetime values. Once the situation is more favorable yet, we will dial up acquisition marketing. This also demonstrates the underlying profitability of our business model, so once the growth investment are more moderate. Regarding direct operating expenses, this is mostly driven by the higher transaction volume that went up 5%, so see this as our variable cost. Indirect operating costs have been reduced by more than $3 million due to cost savings in service providers, external staff members, and release of early-made provisions. All this has led to an adjusted EBIT, which has literally gone through the roof with a 156% increase and now at 17.7 million euros. Net profit after tax are 7.3 million, also this a very solid number. But in comparison to last year, we have reversed interest income for the pending VAT case in line with a decision from Federal Constitutional Court And we also have this more normal tax charge. Let's now give you a bit more insight of some of the KPIs that you will find on slide 8 to 10. Our billings grew by 5% to $493 million, which I'm satisfied with, considering the low jackpot situation we experienced. We have not met the double-digit growth that is our aim, But looking at the history, it seems like we're having a great jackpot year every other year, like we had in 2018 and 2020, followed by weak years in 2019 and also this year. And just as a comparison, between 2018 and 2019, a lot of 24 were flat in billings just for this reason. Cross-margin. which is telling us how much we keep or what turns into revenues if in line with last year or 12.2% for the nine months. As I explained before, we believe it's going to normalize this year around this level. Our gross margin also have a strong correlation to the jackpot situation since we are in high jackpots able to sell more high margin or premium products. In other words, Margin tends to be higher when the environment is favorable, and the other way around when the jacket is low, like it is for this year. On slide nine, we have highlighted net cash and new registered customers. Net cash is up to 65 million euros, up 30%, and this is mostly thanks to the earnings we made this year. And I just want to call out that if you're purely looking at our cash flow situation, This is a bit misleading in this quarter, since we received 49 million euros for a big winner that Helmut talked about from the state offer just before the month end, but transferred the same amount to the customer in the first days of October. And you can see this liability and other financial liabilities in our balance sheet. So not impacting net cash, but the cash position is inflated for this reason. As I said before, even if we are confident to ultimately win the VAT case, we've indicated that the remaining VAT cash exposure is approximately 23 million. Also in line with the high court ruling, we have reduced the interest income that we have been booking from 6% to 3% with a corresponding 2 million adverse impact in our profit and loss statement for the period. Let's now talk about acquisition of new customers. We continue to invest in marketing, but temporarily and deliberately at the lower level to match the current jackpot situation. This has led to fewer but still close to 450,000 new registered customers. This is not the level we want it to be. We're always exploring new channels, but the main driver is once again the jackpot situation, especially if you compare it to last year. And as I said before, A key activity for management is to scale up and down marketing and use different channel mix for every unique situation to create the maximum value for every marketing investment. This, of course, has impact on the profitability level. On slide 10, you will find further performance indicators. The CPL, or cost per lead, is at largest level of 27.6 euros. This lower level had been supported by the vaccination campaign when we got a lot of free, so to say, customers. So this explains the drop from last quarter when we have a more normal CPL level. We are seeing an increase in Google and Facebook-related acquisition costs. Therefore, I expect this to drive up the CPL as soon as we start to increase our investment again. And just to repeat what I said before, the customers we do acquire in low jackpot situations are often more loyal, and the value those customers bring is typically higher since we acquire customers that really want to play the lottery and not only jackpot hunters. And if you look at the return on investment on these customers, it's still very high numbers. So what I said last year, that CPL is an indicator but not a guiding metric for us, still holds true. Monthly active users is just shy of 1 million, and I expect this to be ticking up once we get a more favorable jackpot situation and more customers start to engage or becoming more active. Average billing per user is very high at 56 euros, which indicates that the customers that do play spend a lot every month. But this is also supported by the price increase in 6 out of 49 that we had last year. Let's now talk about the outlook for the financial year that you will find on slide 12. As you probably saw from our announcement, it changed the guidance in light of the jackpot development that we in the short term won't reach aggressive top-line numbers, but thanks to strict cost control and low marketing spend, we have actually increased our EBITDA guidance. So the new guidance is Billings of around 650 million euros, revenues of around 86 million, and adjusted EBITDA of around 25 million euros. And all this is based on average jackpot for the remaining two months and average marketing investments. On slide 13, we talk about the expected dividend payments. and showing in the bar chart how dividends have developed over time. As you can see, we have increased the last year's dividends by more than 10% every year, and we'll aim for another 11% increase in 2022, leading to one euro per share already next year. This will be equivalent to that we'll return 22 million euros to shareholders next year. Over to you, Helmut, to bring this home.

Thanks a lot, Jonas. So what are the key takeaways? We've further grown the business despite a bad jackpot situation. We've significantly increased our profitability. We've delisted a lot of 24. And this is, the last one is a more general comment. We are dialing up our marketing investments and dialing them down based on the respective market and jackpot situation. Thank you very much. And I think we are now going into Q&A.

Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. We will now take a question from Marie Kupner from Hap Investment Banking. Please go ahead. Yes, good morning.

Do you hear me?

Yes, we hear you.

Hi, good morning, Jonas. Thanks a lot for the presentation. A couple of questions. First of all, I'm curious to... on a nitty-gritty side, in terms of the reduction in direct cost of 3 million euros year-on-year as per nine months, how much was the release and provisions playing a role? Because that's more of a one-off. That's the first question. So out of the 3 million euros decline, yeah.

Oh, sorry. Sorry, I heard the first question. Can you repeat the second one before I start answering?

No, no, it's one question. Out of the 3 million euro reduction in indirect costs as per the nine months, how much was the release in provision accounting for?

It was 900,000.

Okay, 900,000. And then I was wondering if you can give us an update. On two things, first of all, the VAT litigation, I think the review period is coming to a close. So what is the latest and greatest on that front? And then secondly, what is your thinking in terms of, you know, use of proceeds if you get that cash back, which is quite an important windfall?

Yeah. So unfortunately, I don't really have any news to give you. You're absolutely right. It should come up now. We don't hear any news from the court itself. They don't tell us when they will bring up this case. But as you know, it's getting closer and closer. And I'm just saying that the time is, it has to come sometime soon. But when soon is, if it's the first quarter, second quarter, third quarter, next, I cannot predict when. but it has to be soon in my mind. And then more importantly, which is what I can control, is the use of proceeds. This is something that I have discussed with probably most investors before. We will not have, so to say, an operation need for all this cash, assuming there is no M&A, big M&A opportunity. But if we take that off for the time being, I think the combination or any of a larger company special dividend or share by buy is not unreasonable to assume. Clearly, if we have this windfall, like you said, we don't need them for normal building up our business, normal marketing. So either M&A or a substantial giving back to our shareholders is reasonable to assume.

All right. Thank you very much.

As a reminder, to ask a question, please press star one. We will now take our next question from Markus Furberg from Warburg Research. Please go ahead.

Markus Furberg Yeah, hi. A couple of questions from myself as well. The first one is, throughout the changing systematics in the Euro jackpot, it's becoming effective in March next year. What do you expect from this one? Because I think it is quite substantial to your business. Second one, maybe more of a formality, but I assume that with the new lottery contract next June, that the underlying economics remain unchanged. Is that correct? And maybe a third one. Now, I mean, during the past year, you experienced quite a boost also from the offline to online development during the COVID lockdown, and people were not able to play offline. Do you think that this development remains intact, or do you see that people return somewhat to the offline shops and still play there, or do they remain online players?

So, absolutely, I will try to expand on or elaborate on your question. So, you're absolutely right that GeoJackBit will introduce a second draw on Tuesday, end of March next year. We believe this is, of course, something positive, not only for the product, but for the entire industry. The more draw, the more time customers have to engage. So clearly, it has some cannibalization effect, meaning that it will not be 100% boost, clearly, because if you play on Wednesday on 6 out of 9, you may now play for the higher jackpot in your jackpot on a Tuesday. But we believe it will have a positive impact on our business. But I wouldn't exaggerate the amount yet. Let's see how the customer reacts, but it should be positive. The second question you had was any changes for the new license, if I recall your question correct, that is coming into place next year. So the new gambling regulation, the new state treaty, has already came into effect already this year, even if our broker license is already extended one year. But we have already adapted our system, and of course, we are already compliant with all the new regulation under the license agreement that we have with the regulator. So, there wouldn't be any negative or positive, so any additional effect from next year. You can just assume the business as we have it today in terms of our lottery draw. Maybe, Helmut, you can expand on the last question.

Yeah, sorry. I just meant the broker license, which is valid until June and is considered as a formality to be renewed. And I just wanted to check whether the underlying economics remain the same.

Sorry, Jonas just talked about the new state treaty and to your question, we assume that there will be no change or impact on our business from that renewal of the brokerage license. And then to your last point, the offline to online conversion. So it's hard to read, you know, a precise sort of interpretation into the data. But what we believe we might have seen here is actually a little bit of a corona hangover once the lockdowns were lifted. So we benefited from the lockdowns a great deal. Once the lockdowns were lifted, I think people had other things on their minds than playing the lottery. But it's hard to quantify that effect, to be honest. But you could read that a little bit into the data. We've seen, by the way, these kinds of ups and downs, also jackpot related or environmental related, sometimes weather related or football World Cup related in the past. They've never lasted. So it's always gone back to normal in the past. And yes, there may be a very small number, I would say, or a small number of customers that started to play online that are now going back to offline. But again, this is also not something that we are seeing in the data as a significant, let's say, data point.

Fair enough. Thank you.

As a reminder to ask a question, please press star one. We will now take a follow-up. We will now take a follow-up question from Marie Grubner. Your line is open. Please go ahead.

Yes, thank you very much. Jonas, one more question regarding the channel mix and marketing. Maybe can you just share with us your general thinking and how you allocate spend to the different channels depending on where the jackpot situation is, what you really privilege in low jackpot situation, what you privilege in high jackpot situation in terms of, of course, optimizing your conversion. And as a subsection, as a subquestion to that, you mentioned higher Google prices, if I'm not mistaken. And we've been hearing different things about pricing. into Q4 and the Christmas season, given that with all the supply chain bottlenecks, some of the large consumer good advertisers are pulling, you know, are shifting gears on marketing because the products won't be available. So how does that play out in terms of the pricing you're seeing currently?

Yeah, so this is exactly to your point, what we see. We have seen, if you compare to last year, that when we bid on the Google words, it's probably 10%, 15% up from last year. I think there has been an effect that a lot of companies did not do a lot of marketing during the pandemic. A lot of them just stayed more silent, and now everyone is going back. So that has driven up the price. around 10%, 15%. Whether that is sustainable or not, I cannot tell, but we assume it will be a slightly higher cost per acquisition. But this is not a driver for us because the return on investment on these customers will still be very, very high. In terms of the channel mix, as we discussed before, Facebook and Google are the two main channels and have always been the main channels. But sometimes we can see in low jackpots that one over the other one and also affiliate marketing or email marketing can play a bigger role. So actually, it's very difficult to say exactly, but we do look at every channel that we do. We make return on investment. We qualify each channel to always maximize this one. But when it's high jackpot, we are very much on Google and Facebook.

Okay, great. Thank you.

As there are no further questions at this time, I would like to turn the call back to your speakers for any additional or closing remarks.

So as a closing remark, thank you very much for listening to this earnings call. As you saw from the presentation or if you heard from the presentation, this has been a A good year, especially from a profitability standpoint, and we're really looking forward for the coming two months. And, of course, we are there to help you. If you have any further questions, reach out to me or Frank Hoffman, our investment relation manager, and have a good day. Thank you very much.

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