ZEAL Network SE

Good morning and welcome to SEALs Earnings Call. I hope you all have access to the presentation. And if you do not have it, it is also accessible on our homepage under the Investor Relations section. If you go to the content slide, you will find today's agenda. And we will start off with a summary of the last year, followed by a business update. I will then take you through the important work that we have carried out regarding ESG. We will continue with the financial update section. And after that, we'll move on to our guidance and plan dividend for the year before we are finishing off with the key takeaways. After this presentation, we will give you the opportunity, as always, to ask questions. But I will now hand over to our CEO, Helmut Becker.

Thanks, Jonas. Good morning.

2021 was a good year. especially considering the jackpot environment. Let me quickly explain how jackpot levels influence our business in two ways. High jackpots and peak jackpots in particular drive billings with our existing customer base as well as acquisition volumes of new customers. In 2021, we had three peak jackpots, all of those in Euro jackpot. and no peak jackpot in six out of 49. That compares with 10 peak jackpots that we would have expected statistically and 11 peak jackpots that we had in 2020. In such an environment, we've kept our business stable and strongly improved our profitability in 2021. The post-merger synergies and the optimization work of the last 24 months have become fully transparent in 2021. We've also made our customers happy with record numbers in customer satisfaction overall, and one customer happy in particular who won the highest price payout ever at Veal, almost 50 million euros. 2021 also was a transition year. We prepared ourselves to expand not only our core brokerage business, but invested into additional future growth opportunities. We launched our second charity lottery, the Dreamhouse Lottery. We applied for a games license. We launched our first B2B deal with the state lottery in Germany, a partnership, for instance, games with Lotto Hessen. We successfully renegotiated our contract and deepened our relationship with our Spanish partner, ONCE. And by the way, we made all the necessary adjustments to the new state treaty in 2021. That was a big effort, and it is now out of the way.

So what is our ambition?

We are combining our intimate knowledge of the customer with more than 20 years of experience in Lottery. And we look at ourselves not only as a Lottery company, but make e-commerce excellence the benchmark for our ambitions and for how we operate. That's how we aim to define the future of Lottery. We understand that we are not only selling a ticket where our customers can pick some numbers in the most efficient and comfortable way, but that we let our customers dream. We let them imagine what they would do if they won a huge amount of money or any other dream prize. And don't forget, we contribute substantial amounts to society every year. I will now provide you with a business update starting on page seven. In 2021, we launched our second charity lottery, the Dreamhouse Lottery, together with our charity partner, Bildungschanz. It's a weekly draw. A ticket costs €4.40. One euro per ticket goes to good causes. And the jackpot prize is a house worth 1 million euros. We built this product based on our user and market research. We know that house ownership is one of the strongest dreams that people have and that it is hard to realize for many. With this product, we address a slightly younger and more female target group than with the other lotteries that we are selling. We've started to use this product also in customer acquisition and plan to double down on this opportunity.

In September last year, we went to the state lottery, Lotto Hessen.

We started with 14 games. That's a mix of home-built games and third-party games that we can integrate. And we will refresh and grow the games portfolio over time. But most importantly, the integration and cooperation runs very smoothly and produces strong results for Lotto Hessen.

I mentioned the impact of jackpots earlier in the presentation.

This has also influenced our market share development. At high jackpot times, we gain market share. At low jackpot times, we sometimes lose a little bit of market share, partly because our internet customers adjust their playing behavior more than offline customers, partly because we adjust our marketing spend more radically to the jackpot situation than the state lotteries do. We do that on purpose. to optimize the efficiency of our marketing spend. Over the long run, our goal is to grow our market share. However, in 2021, we saw a small drop in market share from 41% to 39%.

Let me also give you an update and outlook on regulation.

The new Gambling State Treaty took effect last year on July 1st. It will run at least until 2028, and we see some new business opportunities for us in games and potentially sports betting. The opportunity we are focused on right now is the games opportunity. We expect to receive our games license in Q2 this year. We will offer games to our customers that are tailored to our lottery player target group. We know from past experience but also from international lottery companies that this is a good growth opportunity. Finally, we are applying for an extension of the brokerage permit. We expect to receive this extension of our brokerage permit also in Q2 2022. And with that, over to Jonas to update us on ESG and on the financials. Jonas.

Thank you, Helmut. Let's now talk about the work we're doing regarding ESG, environment, social and governance, which important has grown over the last years for many of US investors. This presentation is longer than normal, but hopefully it gives you a better insight to the topic. We really do care about sustainability. Therefore, we have conducted an extensive and structured materiality analysis this year. With this approach, we're already complying with the requirement imposed by us from the US taxonomy and the corporate sustainability reporting directive. But let me start thanking all stakeholders present in this call that have contributed to this ambitious strategic approach. We were really delighted by the great willingness of our stakeholders that has participated. So what have we done? The analysis made its basis for our strategy and the intention is to anchor sustainability into our business model. We are in the middle of the process of forming the strategy. The core aspects are visualized in the center of this chart. At the heart of our model stands, we care. This slogan is intended to express that not only the individual, but the community can win through our business activities. We ensure this gains through three major topics. At the top is the safe and attractive gaming experience. Even though our product only have minor risk potential, we take this topic very seriously. We already have very good social content comprising of variety of measures that address the risk of addiction, fraud, manipulation and crime and prevent the social harmful effect of gambling. The foundation of our model is sustainable growth together with a product portfolio that comprises a significant added social value. Just as an example, we were able to contribute 246 million euros for good causes just last year. And we expect this number to increase in line with the increase in overall volume of our ticket sales. To achieve sustainable growth, our employees are very important. They are the ones who ensure player protection by undergoing appropriate training and help us to continuously develop and improve our process, technologies, and products. I will now show you two charts with initial targets and measures that we have been developing based on the materiality analysis. You will learn a lot more in the coming report from this year, especially in the next year. And we do this, of course, for the benefit of our customers. Our matrix comprises 28 material topics, most of which relates to the area of product stewardship. The topic of product responsibility is so important because lottery offerings are amongst the most popular gambling products in Germany. We were able to reward price money for 1.3 million customers, totaling 293 million euros last year. We've already done a lot with regard to product responsibility in the past and have developed a system that protects our players from problematic behavior through a combination of stewardship and AI supported control mechanism. And we do this with some focus actions. For example, our terms and conditions are easily accessible on our web page. We inform our customers on the gambling history. We have spending caps that could be set individually. And we, or the customer itself, can block themselves And of course, we're making sure that minus cannot play. Last but not least, I would like to talk about the work we're doing regarding climate and environmental protection. Environmental issues are a hygiene factor from the point of view of our stakeholders. We have learned that our leverage here is relatively small, but that we're expected to be active and do a lot. We're proud that we can inform you that we have halved the energy consumption over the last three years. And we have increased our share of renewable energies up to 98% of our office site and 100% at our data center. We're reducing our waste, especially by further digitalizing our processes. And we carefully select our hardware to be more energy efficient And we donate the older computers to schools, for example, to extend their lifetime and support others who are in need of IT equipment. With this, I would like to move to the financial section that starts on page 16. Before I dive into the financial, let me first share some insight of the Jackpot Development, which is a good scene setter for the numbers, and they are very much in line with what Helmut just talked about in the beginning of this course. But what you can find on this slide is the average jackpot versus last year in a two graph. The top one is 649 and the bottom is zero jackpot. What one could read from the slide is that the average jackpot for both products are several million lowest than in last year and way in the year before. The adverse variance is quite important, but not really the main driver. The main driver is indeed the peak jackpot and what is interesting is that in 2020 we had 11 real peaks while last year only three. And it's in the peaks we get the real buzz in the market 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 high jackpot is attracting new customers and acquisition becomes easier with increased volume as an outcome, which then leads to higher further growth rates. The old customers, but also for the new ones, they all start to spend or spend more in those weeks, and our billing increases as a consequence. The opposite is, of course, true for low jackpots. And then the final remark is that since we're investing less in customer acquisition, meaning marketing, when the jackpot is low, we'll see lower number of new customers, But the low spend is at the same time bumping up our profitability as you will see this year. In fact, the average monthly user could vary up to 300,000 customers depending on the Jackpot level.

So quite volatile. Let's now go to slide 17 where you find a condensed income statement.

Revenues plus income from jackpot insurance are flat in spite of a terrible jackpot situation last year. But let me explain why we now have combined the revenues with income from jackpot insurance. Technically, and in line with IFRS, the insurance income is booked as other operating income, but that would be misleading for you as investor since we haven't assumed a reduction in revenues when providing you with a guidance. This means that combining these numbers as I call it adjusted revenue number, gives a truer picture. On the cost side, staff cost fell by 13% or 2.8 million, driven by two factors. Slightly fewer people, but more important, the re-evaluation of the employer's long-term incentive plan to, of course, match with the current share price. We've continued to invest in customer acquisition, but... compared to previous on a much lower scale. This is important to understand. We just don't invest in the same amount every month, but instead always optimizing the amount and channels, depending on the circumstances, to have the maximum efficiency. This led to few customers, but still with high customer lifetime values. Once the jack has been normalized, we will dial up the acquisition markings. like we did January this year. This also demonstrates the underlying profitability of our business model when the growth investments are more moderate. Direct operating expenses is reduced by almost 12% due to determination of software license and saving telecommunication costs. Indirect costs have been reduced by more than 4 million due to savings in service provider, external staff, and release of early made provisions that we don't need anymore. All this with the cost savings that we have included, this has led to an adjusted EBITDA, which has literally gone through the roof with a close to 120% increase and now at 27.7 million. Net profit over taxes are 11.4. Also, this is a very solid number. In comparison to last year, we have reversed interest income for the pending VAT case in line with this decision from the Federal Constitutional Court and have this year a more normal tax charge. And just to clarify, if anyone wonders, the tax in 2020 were largely impacted by rebates and corrections of the tax charge in the UK and it is resulting from the wind down of the business there. Now that the group is fully settled into German tax system, our effective tax rates are in line with tax rates applicable in Germany and, of course, in Hamburg. Let me now give you a bit more insight on some of the important KPIs that you will find on slide 18 to 20. Our billings grew by 4 million to 656 million, which I am satisfied with considering the low jackpot situation we experienced throughout the year. We have not met the double-digit growth that is our aim. But looking at history, it seems like we're having great jackpot years every other year, like we had in 2018 and 2020, followed by weak years, 2019 and 2021. 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, what turns into revenue is in line with last year at 12.2%. Our gross margin also has a strong correlation to the jackpot situation since we are in high jackpot able to sell more high margin or premium products. In other words, margin tends to be higher when our environment is favorable and the other way around when the jackpot is low, like for this year. On the next slide, slide 19, we have highlighted net cash and new registered customers. Net cash is now at 72 million, up 11%, mostly thanks to the earnings we made in the year. As I said, even if we are confident to ultimately win the VAT case, we have 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% that we had previously to the 1.8% with a corresponding 3.4 million adverse impact in our profit and loss statement for the year. 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 544,000 new registered customers. This is not the level we want it to be, and we're always exploring new channels, but the main driver is the jackpot situation as we talked about.

On slide 20, you will find further performance indicators.

The CPL, cost per lead, is at last year's level of 28 euros. The increase in social media costs that you may have heard about and we talked about last time is mostly offset with free customer that we got during the vaccination campaign. And just to repeat what I said before, the customer we acquire in low jackpot stations are often more loyal and the value of this customer brings is typically higher since we are a required customer that really want to play the lottery and not only the jackpot hunters. The monthly active users is slightly below last year at the level just under 1 million. As I've already explained, the bad jackpot situation has a significant interest on this. The number will rise again as soon as we have a more favorable situation. Average billing per user is very high at close to 57 euros, which indicates that the customers that do play spend a lot every month but also supported by the price increase that we had last year for the product 6 out of 49. Let's now move to slide 22, where you will find the company's proposal dividend for this year. As you may know, I'm keen to optimize the capital structure, and we have taken further steps to improve it. This year, we have shifted out even more cash, in fact, that we have doubled it to reduce the excess cash the company has without harming the growth initiatives. We are proposing to dividend one euro as a basic dividend and on top one euro ten as a special dividend. This will lead to two euros ten cents or 47 million that is returned to our shareholders. Of course, management undertakes to constantly review our dividend policy in line with the financial performance of the company and we will inform you about the next year's dividend policy later this year.

Let's now talk about the outlook for the financial year and you will find that on slide 24.

We're quite optimistic about the future and you will see double digit growth. The guidance for this year is that we will have billings of at least 750 million which is then at least 14% increase versus last year. Revenue of at least 105 million, which is then at least 21% increase versus last year. And EBITDA of at least 30 million, which is then at least 8% increase versus last year. But if you would normalize for the one-offs and the understanding in marketing, this would be equal to 60% increase versus last year. where you really see the economy of scale when the top line increases, also the bottom line increases. Of course, this is all based on average jackpot for the year and marketing investments of around 30 million. Over to you, Helmut, to bring this home.

Thanks, Jonas.

So what are the key takeaways? We have significantly increased our profitability in 2021. We are paying 47 million euros to shareholders as a dividend. We successfully delisted Lotto24. We are adapting our marketing strategies and measures to the market environment, the jackpot environment in particular. And we've been investing into future growth in 2021. So thanks, everybody. And with that, I think we'll go into Q&A.

We will take our first question from Marius Ferberg of Warburg Research. Please go ahead.

Hi. Thanks for taking the question. I actually have two. The first one is about FriHead Plus and also the partnerships with a lot of providers like Lotto Hessen. Could you give us a little bit of more detail or information about the revenue share, which is currently in place, and also the billing share, and how much billing is generated, especially? And for both fields, so your additional lotteries, also the partnerships, on what your expectations for the future are. So how big could those fields be or become? The second question would be on profitability. You just pointed out that the underlying profitability of the business is immense. Should we see Q4, which had an EBITDA margin of about 46%, if I'm right. Should we see this as a first glimpse on the underlying potential of the profitability? Or would you think that this could even increase further going forward once, yeah, of course, once your marketing spendings become a bit less important?

So thank you for the questions. So maybe trying to elaborate on this one. So the five plus partnership with Billings Johnson was launched one and a half year ago has been a very successful product. And it's a product that we own. So basically it comes with higher margin than when we do just the normal brokerage business where you get a brokerage commission from the state lottery. And that's why we are keen to promote this product it also doing a lot of good as you probably imagine today we don't really disclose every product in details but around five percent of our volume is the charity product and we see a small increase in this in the coming years and helmet also explained a lot of has indeed it is indeed a small deal but it's the first deal and i hopeful that we can get other state lotteries interested in similar deals, but this is a small deal. From the profitability, as you can see from our guidance, I think that is the best way to see this, not only on the quarter by quarter, because the quarters is heavily influenced how much marketing we are doing in that quarter. But if you see that the revenues are at least 105 and EBITDA of at least 30, then you can probably see the long-term But as I said, it will increase over time if we are able, which I am confident we are, to increase the top line. We don't have any, I would say, cost that is scalable except for small direct costs with increased volumes. You will see the EBITDA and the EBITDA margin go up over time.

Okay, thank you very much. That's quite clear.

At this time, we have not received any further telephone questions. I would like to hand the conference back to Jonas Mattson for any additional or closing remarks.

Thank you so much. And thanks for taking the time to listen to this earnings call. As you know, we are really keen to have a very strong and great dialogue with all of you as investors and analysts. So thanks so much for taking the time, and if you do have any further questions, feel free to reach out to Frank Hoffman or myself, and we are more than happy to respond to this. But once again, thank you for your continued support, and have a great day.