ZEAL Network SE

Thank you so much and good morning and welcome to SEAL Learnings calls. I have to start to say that we are extremely sorry for this delay but it was due to technical problems for our service providers to admitting participants to the call and even now there are one or two investors or participants waiting but we felt like it's better to start now and then we will catch up with them later. So let's start. I hope you have the presentation And if it's not, it's accessible on our homepage under the investor relations section, as we always publish the reports. On the content slide, you will find today's agenda, and we will start off with a summary of the first six months, followed by a financial update. After that, we'll move on to our guidance before we're finishing off with the key takeaways. After the presentation, we'll give you the opportunity, as we always do, to ask questions.

I will now hand over to our CEO, Helmut Becker. Good morning, everybody.

Welcome to our first six months earnings call. So, let me summarize what's happened in the first half of this year. We've reached an important milestone. Lotter24 received a new permission for lottery brokerage in Germany. It is valid for seven years until June, 2029. And it is our first permit under the new gambling state treaty. We've also successfully grown our business year on year. Our business model once more turned out to be very stable based on the loyalty of our customers and the unbroken popularity of online lotteries. Unlike many other e-commerce and consumer businesses, we have so far not seen major negative impacts from inflation and reduced consumer confidence. In the first half year, we were able to grow our billings by 8%. The jackpot situation, always a big influence on our business, during that time was average, but better than last year's jackpot situation. In May, Lotto24 brokered the biggest jackpot win in German history. It was 110 million euros won by a Lotto24 lottery club from North Rhine-Westphalia. That lottery club or these kinds of lottery clubs are one of our unique home-built products. They allow customers to buy a fraction of a large number of lottery tickets. We've also raised our level of profitability significantly. We grew our EBITDA by more than 50% compared to last year. And the protection of our players and the prevention of gambling addiction is a top priority for us. We therefore entered into a cooperation with a Danish company, Mindway AI, and with a Hamburg-based startup called NECT to make gambling even safer in the future. As part of the cooperation, artificial intelligence will be used to identify potentially addictive gambling behavior. Finally, in the proceedings, pending before the Federal Fiscal Court, the Bundesfinanzhof, by the Hannover Tax Office against myLotto24 Ltd. regarding a possible VAT claim, the oral proceedings took place on August the 3rd. A decision by the Federal Fiscal Court is not yet available, but we expect it to come shortly.

Now, let's move to page four.

And let me give you an update on regulation. As I've just mentioned, we are now operating under the new Glücksspielstaatsvertrag. And I've already talked about the extension of our broker permission until 2029. So let me go straight to the GAINS license application or the virtual slot machine license application. In July 2021, at the beginning of the application phase, we, Lotter24, submitted its application for a permit to operate virtual slot machine games. The application is still being reviewed by the authorities. According to our information, the reason for the delay is that there is uncertainty among some federal states, there are 16 federal states, so some of them, as to if and how state lotteries may also offer virtual slot machine games on the same website as the lottery games that they operate. This uncertainty is currently slowing down our application process for commercial brokers like us. The gambling authority told us that they will be working on a solution or are working on a solution over the next couple of months and asked us to be patient. The legal situation is clear. The law is very clear. and there's no reason not to grant Lotto 2024 such a permit. So with that, over to you, Jonas, to take us through the financial section.

Thank you, Helmut. Let's now move to page six, and I will start describing the jackpot situation in the first half of this year. What you see on this slide is the jackpot development for our two main products, Lotto 649 and Juro Jackpot. The jackpot environment for the German lottery, lottery 6 out of 49, was better in the first half of 2022 than during the very weak jackpot period of last year. For example, the mandatory payout of 45 million euros was reached twice, and for actually two consecutive draws, which did not at all occur last year. The jackpot development for Eurojet jackpot was more mixed, although the new maximum jackpot raised from 90 million to 120 million was not reached a single time, while in the last year it was reached two times, but then at the lower level at 90 million. However, the former limit, meaning the 90 million, was almost reached once when it hit 89 million and then exceeded that for the first time in May with 106 million. But the most advantageous situation for us is to check what actually reaches maximum, meaning the 120 million. So in summary, we had a slightly better jackpot situation than last year, but more in line with an average year. And just as an early observation regarding jackpots, Q3 started off really strongly with euro jackpot reaching 120 million twice in July. And we'll come back to that in the earnings call for the third quarter. Let's now move to the income statement that you'll find on next slide. We grow revenues by 11%, which are driven by the higher billings that in turn got a boost from the better jackpot environment. We also have more sales of high margin product that turns into higher revenues. At the same time, we have continued to be very careful with our spending. Personal growth is flat, despite the slightly higher amount of headcounts. If you compare quarter over quarter, we took higher incentive charges in the second quarter. Marketing expenses, our biggest discretionary spending, are also in line with previous year. Direct operating expenses are positively impacted by the lower credit losses and efficiency in the entire payment process. Indirect operating expenses are up by 16%, which is mostly related to that we have positive one-offs in the comparable period last year and slightly higher insurance costs this year related to our charity products. So the years are not fully comparable on this line item. Combined, this has led to an EBITDA that is more than 50% higher than last year and is now at 16.4 million euros. This equals to a 33% EBITDA margin. And finally, EBIT is up almost by 100% and net profit after tax is now at 9.4 million, 66% up from last year. In the coming three slides, we'll look closer at some of the KPIs. So let's move to slide eight. Our billings grow to 358 million, or by 8%, with even stronger growth in revenues, as I just mentioned. But interesting is that if we only look at the two main products, 649 euro jackpot, we grow them 11%, while the state lotteries, offline and online combined, grow the same product only by 2%. As I mentioned before, Jackpot in the first six months were mediocre, but we have continued to develop the business strongly. This should also be seen in the light of the changes in the geopolitical and economic environment, which negatively impact customer confidence, not only for us, but for the entire retail sector. This shows the resilience of the lottery offering, despite these uncertain times we're all facing. Gross margin has also improved, thanks to comparable more sales of high margin product, like the lottery clubs, and is now at 12.8%, 4% up from last year. On the next slide, we have highlighted net cash and new registered customers. Let's start talking about net cash. If you exclude the dividend payment of 47 million, net cash is up 41% thanks to strong operating performance. With the current net cash of 35 million, we have implemented a step towards optimizing our capital structure. As in previous quarter, we have reported a continued liability of approximately 23 to 24 million. Let's move to acquisition of new customers. With almost the same amount of spending, we acquired the same amount of new registered customers, 292,000. This is a good number, but not a great. And with improved peak jackpot, we should be able to increase this number further. Moving on to slide 10, here we'll find some additional KPIs. The cost per lead is showing a nearly five-year increase, but you should not worry. The increase is to a large extent attributable to a five-plus campaign that we have to expense, but will support acquisition in the coming months. If you exclude this special campaign, the CPL is only slightly up versus last year. Still, we do see increased pricing, especially in social media and search, but our business model is quite tolerant to changes in CPL since our customers' loyalty is remarkably high, allowing us to absorb this quite easily over time. Whether this price increase is lasting price effect is too early to tell, but the whole online industry reports similar dynamics. The monthly active users have improved and continues to be about 1 million for the year. The drive is the better jackpot situation, especially the peak in lotto that we had in January and April. Average billing per user is still very high and slightly higher than last year. We're now at 58 euros in average spend per customer. And I do want to point out that this is the average. A lot of customers also spend significantly more. Let's now move to the next slide and talk about the recent dividend payment. As expected, the AGM approved a dividend payment of 47 million euros, which is a step in improving our capital structure. The dividend consists of a basic dividend of 1 euro and on top, a special dividend of 1.1 euro, 1.1 euro, 10 cents per share. And this has all been paid out in early July. Perhaps this goes without saying that we're constantly reviewing our dividend policy in line with the financial performance of the company, and we will inform you later this year about the dividend policy for next year. Let me also reconfirm the outlook for the year that you will find on slide 40. Despite the turbulent and uncertain environment we are all facing, we're quite optimistic about the future, and we still expect double-digit growth. The resilience in the industry is impressive, especially when the jackpot is high. So we confirm, once again, the guidance for this year, which is billings of at least $750 million, revenues of at least $105 million, EBITDA of at least $30 million. All this is based on average jackpot for the rest of the year and a marketing investment of around $30 million.

With this, back to you, Helmut, to bring this home. Thank you, Jonas.

Let me share our key takeaways for the first half of the year with you. So let's go to page 16. Profitability rose strongly with EBITDA up by more than 50% and EBIT up almost 100%. We returned 47 million euros in dividend to our shareholders. We've extended our broker license for another seven years laying the foundation for many profitable years to come. And despite the turbulent times, our business is remarkably resilient, and we continue to pursue our goal to continue to grow the business and to gain market share. That brings us to the end of our presentation. Thank you for listening, and I think I now hand it back to the operator and we start the Q&A.

Yeah, thanks for taking my question. Actually, I have just two. The first one is on the effects from the Friar Plus campaign. Are you quite satisfied with what you see so far, so with regards to customer activity after your campaign or new customers? And also with regards to Friar Plus, You mentioned that you had more other operating income due to the insurance payment, but is only the insurance payment in the other operating income and the remainder of the billings in the revenue? So that brings me to my second question. a stronger revenue growth over the billing growth due to the positive product mix, as I've learned. Is this related to mostly lottery collapse, or is this presumably due to the additional products like Friat Plus and Trauma Hospitality?

Thank you for your questions. So, uh, let me highlight a few things. So the five plus campaign we did, uh, in the beginning of the year, uh, we haven't seen the full effect of it. Uh, so it's a little bit too early to say we are satisfied or not. We will see that in the coming month, we see the customer coming in. Of course you always want more, uh, but it's going up. Okay. It's not a, um, a smash hit yet, but I think it's too early to, to give you any precise number on this one. The insurance is fairly small. It was a 200,000 more than the last year, but you see on these numbers, it has a huge effect when you call the percentage. So it's nothing to worry about, but it was 200,000 more than we paid last year. In terms of the product mix, it's basically the lottery clubs that went really well the first six months, right? Plus was more or less in line with the previous year. So I can't, Give that the credit, even if we have that, and that improves our margin clearly. But if you compare half-year with half-year, it's more the lottery club that draw the higher percentage of the margin.

Okay, thanks. Maybe one follow-up on the general development of ProHazardous and Thomas Lottery. Do you want to draw this even higher so that you are starting a marketing campaign for it?

Jonas, go ahead.

Okay, sorry. So yes, clearly, we think these two product categories and actually probably several other charity products have a huge product market fit in the German market. So we want to clearly grow these products and in the future also launch other charity products. They have a good market fit and also comes with higher margin, and that's something that I think we can add value into the market. Since there are no further questions, if you have any, feel free to reach out to Frank Hoffman or myself. I'm happy to explain any of the numbers. But we would also like to thank you for taking time and listening to this presentation. And once again, so sorry for the technical problems we had in the beginning to admitting people to the call. I wish you a very good day and speak soon again. Thank you very much.