ZEAL Network SE

Thank you so much, Aaron, and good morning and welcome everyone to SEALs Earnings Call. I hope you will have access to the presentation. If you don't, please zoom into the IR section on our webpage. Let's move to the content slide, and there you will find today's agenda. We will start off with a summary of the first nine months, followed by a financial update. Then I would like to elaborate on our recently launched share buyback offer. We will then move on to our guidance before we finish off with the key takeaways. After the presentation, we will give you the opportunity, as we always do, to ask questions. I will now hand over to our CEO, Helmut Becker.

Thanks, Jonas. And good morning, everybody. So let me summarize the first three quarters of 2022. We had a record 120 million Euro jackpot in July, and we used that like we always do to invest in customer acquisition. So in the last quarter, we achieved more than 200,000 new registered customers, creating another big customer cohort with stable and high customer lifetime value. We're happy. that the highest financial court in Germany confirmed our position that certain services that we provided until the business model change that was in 2019, that they were not subject to VAT in Germany. And that means that 54 million euros VAT that we paid in the past plus interest will be refunded to us in the near future. In August, we expanded our B2B partner portfolio and entered into a cooperation with the German news portal NTV. So NTV users can now buy our lottery products on the NTV website. This is a part of our growth strategy. So besides acquiring customers directly into Lotto24 and Tip24, we want to go where the customers are. So our portfolio now includes NTV in addition to the one-on-one portals, WebDE and GMX, which are very big portals in Germany. Overall, we achieved further growth in the first nine months. Unlike many other e-commerce and customer businesses, we have so far not seen major negative impacts from inflation effects or reduced consumer confidence. We see that online lottery continues to be popular and we see strong customer loyalty. Apparently people want to dream or need to dream even in tough times. In the first nine months, we grew Billings by 10%. We grew EBITDA by 25% compared to 2021. And last but not least, we expanded our games business internationally We're now cooperating with the American full-service lottery provider, Park Renew Gaming, and they will integrate our online games into their video lottery terminals in Argentina and their online platforms in Peru. Let's go to the next page. That's page five. And let me take you through the current regulatory situation. And I would go straight to the games license or the virtual slot machine license, which is probably the most interesting topic for you. Unfortunately, that procedure has still not been completed. So let me just explain what's happened in July, 2021. At the beginning of the application phase, we applied for a permit to operate virtual slot machines. 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 as to if and how state lotteries, not us, but state lotteries may also offer virtual slot machine games on the same website. Unfortunately, this is also currently slowing down our application process. So we assume that this issue will be resolved by the gambling supervision or gambling regulatory authority within the next few months, and that the corresponding permits will be issued. The legal situation is clear, and there is no reason not to grant us, Lotto24 AG, such a permit. So back to you, Jonas, for the financial updates.

Thanks, Helmut. Let's now move to the next page, and I will start describing the jackpot situation for the year. On this jackpot slide, you can see the development for our two main products, Lotto 649 on top and Jurojackpot below. For Lotto 649, the jackpot remained at low level in the third quarter and did not exceed 25 million once, which is, of course, not what we hoped for. If you include the full nine months, it was better compared to the very weak jackpot situation we had last year. We actually, in the nine months, reached the 45 million mark that triggers the mandatory payout twice, which happened in January and April. And for those two times, also two consecutive draws, while in 2021, we had none. For Eurojackpot, we reached a record level of 120 million in July, but it didn't roll over a single time, which is statistically not what it should. It should roll over. And for the Euro jackpot has reached its maximum also only once compared to three times in 21. So it's clearly worse than last year. So in summary, slightly better jackpot than last year, but more in line with an average year. But I also just want to mention, until recently, Eurojacket has been below expectations, but with a nice development we had in late October and the beginning of November with EJ reaching its maximum of three times, we are now closer to a statistical average year for this product. Let's now move to the income statement, and you will find it on the next slide, which is slide eight. We grow revenues by 21%. But if you include the jackpot insurance income from the last year, and you should because it gives you a fair view, we still grow revenues by 14%. And this was supported by the slightly better jackpot situation, but also the higher share of high margin products. At the same time, we've continued to be very careful with our spending. And I deliberately now exclude marketing that I will come back to in a moment. Personal costs are slightly lower than last year with almost the same number of people. And the driver here is the weekly share price that in turn reduced the long-term incentive scheme provisions. Now coming back to marketing expenses, our big discretionary spending are more than 5 million above last year and more than 3 million more than the second quarter. This is entirely driven by the push we did when the EJ euro jackpot hit 120 million in July. As we mentioned already last year, this shows the correlation between jackpot, marketing investment, and then consequently the earnings we are reporting. Direct operating expenses are positively impacted by the lower credit losses and efficiency in the entire payment process. So despite the 10% increase in transaction volume, direct expenses only increased by 3% versus last year. Indirect operating expenses are up 24%, but it's mainly due to one effect in the same period of the previous year, as well an increase in insurance costs by 300,000. So nothing really to be worried about going forward. But just to complete the picture, we also had slight travel and training costs this quarter. Combined, this has led to an EBITDA that is up 25% from last year and now at 22 million. This equals to a 30% EBITDA margin. And finally, EBIT is up 40% and net profit after tax is up 65% and is now standing at 12.1 million. In the coming three slides, we'll look closer at some of the KPIs that we are tracking and would like to report on. So let's move to slide nine. Our billings grow to 544 million, or by 10%, with even strong growth in revenues, as I just mentioned. The growth is fueled by the strong July, but partly offset by two comparable weak months in August and September. Interesting is that if you would look only at these two main products, 649 and Euro-Japans, we grow them by 14%, while the state lottery, the TLTB, grow them, now I'm talking about offline and online, only by 5.8 percent this shows that we are indeed gaining market share versus the total market especially with high jackpot faces so even if the jackpot for the first three quarter were just average we continue to develop business strongly this should also be viewed 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 real resilience of the lottery offerings despite these uncertain times we're all facing. Gross margin of 12.8% is in line with previous quarter, but have improved 0.6 percentage point versus last year, and that's thanks to comparable more sales of high margin products like our famous lottery clubs. On the next slide, we have highlighted net cash and new registered customers. Let's first talk about net cash, which is up 45% since last year and now standing at 95 million euros. The main drivers are the strong cash generation, coupled with the inclusion of the 56 million VAT receivable that is now asserted as we won the case. This has been offside by the 48 million dividend payment we made in July. I do appreciate that this triggered the question what we will do with the high amount of net cash, which is clearly more than we need for normal operations. We are currently assessing to what extent it makes sense to use part of these funds in the coming years for operation purposes, including business expansion. And we will get back to you early next year, together with the earnings call at the latest, both on ordinary dividend policy and how to deal with this excess cash. Let's now talk about acquisition of new customers. In July, we had an extraordinary high jackpot when Eurojackpot reached its peak at 120 million. So the quarter low, we acquired 208,000 new registered customers, leading to an increase in the first nine months by 12% compared to last year. For the full year, we have now acquired 501,000. And as I already said, the quarter, in this quarter, we invested more than 10 million in marketing to capitalize on this favorable situation we had in July. Moving on to slide 11. The reported CPL, cost per lead, is showing an almost 9 euro 32% increase. However, this increase is to large extent by two special campaigns. Firstly, the vaccination campaign of last year that generated some free traffic and suppressed the comparison number. And secondly, the additional and experimental marketing investment for Friar Plus early this year. If you exclude these both effects from last year and this year, a fair comparison would be 34.6 euros in 2022 versus 31.2 last year. leading to a 11% increase year over year. And this increase is fully explained by the higher cost for social media, as well as some for the marketing push in July. The MAO, the monthly active use of having improved and continues to be about 1 million for the year. The driver is once again the jackpot situation that is better than last year. Average billing per user is still very high and slightly higher than last year. We're now about 58 euros, a 4% increase in average spend per customer. And the last quarter is slightly strong compared to the previous two quarters. Let me now give you some information on the recently launched share buyback program. So let's move to slide 13. As you probably have seen in the news flow, we've just launched a share buyback offer to our shareholders. So why are we doing this? As explained throughout the year, we want to improve our capital structure and return value to our shareholders. This has been done both by the special dividend we made in July and by this repurchase offer. Clearly, the current share price makes also the timing suitable for such a scheme. We announced the program on November 2nd, and yes, this is a document that is available on our website. The offer period started on November 9, meaning yesterday, and continues for three weeks until November 29. To make the offer attractive, we do offer a premium of close to 10% on the average price, which results in an offer price of 28 euros per share attended. The total amount we have allocated for this is 20 million euros, which is equal to approximately 714,000 shares, or 3.2% of the share capital. So even if we hope that our long-term shareholders continue to support us throughout our journey, this liquidity event gives you the opportunity to sell your seed shares without having the issue with the low liquidity on the stock exchange. Let me also touch on the outlook for this year that you will find on slide 15. So despite the turbulent and uncertain environment we're all facing, we are generally quite optimistic and still expect double-digit growth in this year. The resilience of our business model is robust. That's why we reconfirm our guidance for 2022, which is billings of at least 750 million, revenues of at least 105 million, EBITDA of at least 30 million. We do acknowledge the guidance looks somewhat ambitious. But we still believe this is possible, depending on how the jackpot develops and the marketing investment develops in the coming two months. As you know, high jackpots lead to high marketing investments, and this guidance was based on approximately 30 million in marketing, and we invested around 25 million in the first nine months. Over to you, Helmut, to bring this home.

Thank you, Jonas. Let me take all of us through the key takeaways from this presentation. So profitability remains at a very high level with EBITDA up 25% and EBIT up 40%. We've seen strong customer acquisition, particularly in July. In economically difficult times, our business is remarkably resilient. And we continue to pursue our goal to grow the business and to gain market share. We've won the VAT case, supported by the VAT repayment. We are in a strong position with a strong balance sheet, which is providing us with great flexibility. And the acceptance period for the share buyback tender offer started yesterday.

Thank you.

So I think we give it back to the operator for questions and answers.

We will now take our first question from Marius Furberg from Warburg Research. Your line is open, please go ahead.

Yeah, hi everybody. A couple of questions from my side. I mean, the customer acquisition was quite satisfying with over 200,000 new customers. However, we saw the record jackpot of €120 million and the monthly active users barely increased compared to the first half of the year. It is due to the weak jackpot situation in 6 out of 49, or can you give us a little bit more color on that? Second question, on your marketing expenses, you just mentioned that in the guidance, there's included that you will spend 30 million on marketing as you already spent a chunk of that after 9M. And now looking at the Euroject points again, which reached 120 million, which was just dropped through this year, this week, do you still believe that these 30 million marketing will be sufficient or would you consider expanding that? The third one on the CPL, which used to be a little bit lower in past time, do you expect for the next years CPL to come closer to 30 years again or should we expect it to remain rather high?

So thank you for the question and I hope I can answer them. So for the customer acquisition, I think you're absolutely right, but also in one additional effect. So yes, the six out of 49 has been weak. So that is the offsetting, despite you reject, but then having this push in July with 120 million, which was really, really nice to have. But you also have to remember that this was July and then we had two very weak months. So August, September, So even if we calculate the average throughout the quarter, if you looked at July alone, we had higher monthly active users and you had lower in August and September. So the average will be around the 1 million mark that I reported on. Second question, guidance. Yes, we had a guidance included at 30 million in marketing investment for throughout the year. We spent, like I said, 24 for the first nine months. We can, of course, I mean, tell you that we spend more than the average in October because the Jirojax will build up, but it's too early to say how the coming two months. The coming two months could be very weak and then we save the powder, so to say, or if the months are very strong, then we will increase the marketing span. Now both products are reasonably low as of today, and I can't predict how they'll develop. And then lastly, the CPL. As you say, we have had this quarter and this year slightly higher CPL. I think it's reasonable, but that we come to somewhere higher than 30 years. I can't give you a precise number, but considering the higher social media costs that we are facing or have so far been facing, and that would be true for the entire retail or e-commerce sector, I think it's assuming slightly higher than 30 euros going forward.

Okay, thank you very much.

Next up, we have Henry Vendrix from New Waste AG. Your line is open. Please go ahead.

Hi, this is Henry from New Waste. Basically, all my questions have already been answered. Thank you.

Ladies and gentlemen, once again, if you would like to ask a question, please press star 1 on your telephone keypad. We will now take the next question from Mary Terry Scribner from HAIB. Your line is open. Please go ahead.

Yes, good morning, ladies and gentlemen. Thanks for taking my question. I'm not sure. The 12.8% gross margin, is that something which we should consider as being on average, let's put it this way, a sustainable level? I mean, in terms of mix or Do you need maybe some more time, some more track record to kind of say, okay, it's going to be moving towards the 13% now?

Thank you, Maria, for this question. So I think it's safe to say that 12.8% is a good margin considering all the other products that we are selling. I think for the time being, the 12.8% is a solid number that we will continue to generate going forward. But I think there are rooms for improvement. The two or the three things that are actually increasing the margin going forward is when the jackpot is high, we sell more lottery clubs that comes with a much higher margin. When we sell more charity products, they also come with a higher margin. And then lastly, we, of course, waiting for the games license.

Of course.

And when that product comes, also coming with a higher margin. But this has been, if we exclude charity, exclude games, this year have been a statistical average year from Jackpot. So we are probably statistically sold lottery clubs and other products in average. So I would say considering where we are, 12.8% is a good starting point. but we hope to slightly increase that over the years to come.

Okay. And if I may, I had also another question. I'm sorry, I have to take another call briefly, but what's the question regarding NTV asked? The NTV partnership or not? If not, basically my question is, the NTV sort of the direct sort of customer acquisition, indirect customer acquisition route. Now that when you're adding the NTV website, you have one-on-one WebDE, GMAX. How are we to understand the economics of this distribution versus your own direct access to customers? And is this today something significant, let's put it this way, or in terms of your overall margin? I'm talking about presumably the 12%, or is there any significant revenue share coming from those and other subscribers you are getting through these routes included in your ads, in your new ads figure, which is above 200K for the quarter?

So I think we both will comment on this question, me and Jonas. So the reason we do this is that we want to go where the customers are. It gives us another channel or approach to acquiring customers. Like you pointed out, the economics are different because we don't pay for customer acquisition, but we do pay a revenue share. So it has a different sort of spend return profile also over time. It's nevertheless a very attractive, commercially attractive acquisition channel for us. It gives us access to incremental customer growth. And Jonas, maybe you can comment a little bit on how significant a contribution it is. All I can say right now is NTV, it's early days. We've just started this with one and one. That's United Internet, GMX and Web2E. We've been doing this for quite a while. And it is, you know, it is a very useful part of the business. But Jonas, maybe you can comment on that.

Sure. So like Helmut said, this is important for us and we think there are growth potential to find other similar operators that we can follow the customers where we don't reach them ourselves. From our total business point of view, they are in the low digits, single digits numbers of the total volumes and obviously provide slightly less margin because of course, We do share the revenues with these operators, but on the other side, we don't do the acquisitions. It's still a very good business for us. It's a small but growing business, and especially MTV will be smaller than the other one, but growing over time, and hopefully we'll find similar channels or media companies that we can work with.

Okay. Jonas, just when you say low-digit single volumes, what are we talking about? I mean, are we talking about thousands? Therefore, anything between 1,000 and 10,000?

What I'm saying is the total volume that we have, a couple of percentage points, is related to this one-on-one and MTV. The rest is what we acquire ourselves.

Okay. Volume of billings, you mean, then?

Volume of billings, correct.

Okay. Understood. And then, last but not least, I just had one comment regarding, you know, what you said with respect to the, or question rather, what you said with respect to the use of cash from the windfall related to the VAT. I mean, As you can see, the share is a bit selling off today, even though, you know, you're largely, you know, kept your guidance and you're largely operating in an increasingly favorable environment when it comes to jackpots operationally. Things are rather looking on the bright side. But I think the market is a bit... seems a bit disappointed, if I may use this word, as to the communication with respect to the use of proceeds. I just wanted to relay that. I mean, you announced the 3.2% share buyback. And I have the feeling the market is telling us that they would have maybe like to see a larger buyback program or something like that. or even, of course, a special dividend. I think you said that you would communicate on that with your figures early next year. Are we talking about the preliminaries or the final figures?

We said that the latest with the final figures, if we go out with preliminaries, I think it's safe to say that we will communicate also this one, how we're going to handle it. And clearly, we fully appreciate what you say, Marie-Thérèse, and we appreciate that. But We want to take this thoroughly, assess how much we should keep of the excess cash, and then we don't roll out anything, whether that is future share buyback program, dividends, or anything else. We don't roll out anything, but it's too early to commit to this already today, but it's still sitting there.

Of course. Okay. Excellent. All right. Thank you very much for all this, Jonas. No worries.

Next up, we have Henrik Paganati from Jefferies. Your line is open. Please go ahead.

Hi, it's Henrik from Jefferies. I have a couple of questions. I would take them one by one if possible. So the VAT lawsuit, when should we expect the cash inflow from that? In Q4 or rather Q1 next year?

I would hope it comes in Q4. We are waiting for the court's reasoning. They have, of course, informed us as we announced to the market that we want the case. We have not got the reasoning from the court. My expectation is that the tax authority that lost will read the reasoning and then once that is done, they will hand back the cash. That is, to my understanding, no reason for them to withhold the money. So I expect it to be in Q4. but I cannot guarantee this, but I just see no reason for any delay further.

Okay, perfect. That makes a lot of sense. And then in terms of the guidance for 2022, as you said before, it looks kind of ambitious. Like from my point of view, either jackpot development will be good and then you are able to reach your revenue guidance, but then you might spend more on marketing and then you have a problem on the EBITDA guidance or jackpot development will be not favorable and then you won't reach the revenue guidance but will be able to reach your EBITDA guidance. Is that a fair way to look at that or how do you think about that?

I think it's a very fair way to look at it. We have a middle scenario as well, which is that we continue with reasonable jackpot, not low and not super high. we will come very, very close, if not above the billings and revenues and still keeping the EBITDA. But the way you're thinking of it is absolutely right. And the way we do it is that if there is an opportunity to invest more, we do it because we know that we create long-term value for the shareholders.

Okay, perfect. And then maybe quickly on 2023 in terms of revenues and EBITDA, How should we think about that given that you have a delay in the gaming license? Is that significantly hurting 2023 or how should we think about that?

I will come back to the guidance for 2023 when we present our numbers for the full year. in March at the latest. But yes, it's disappointing. We were assuming when we started all this that we should be up and running already and scaling up the product. So that is disappointing for us. And clearly, we don't have the license as Helmut explained in the beginning of this call. And once we get it, we will scale up. So it will not come 1st of January. So it's disappointing. It will obviously not affect the long term. but the short term may be impacted. But I will come back to the full guidance and explain what we have had, what kind of assumptions we have for games when I present the guidance for 23.

All right. Super helpful. Thank you very much.

Next up, we have Marius Verburg from Warburg Research. Your line is open. Please go ahead.

That's one follow up question for me. On the personal expenses, which the incentive programs developed rather low in the current year. But looking forward, how should we think of this also in terms of operating leverage and also Assuming that you will be granted the games license in 2023, how would you expect in such a scenario, also when you're growing your business, personal expenses should develop for the next year?

A personal expense has been stable for quite some time. like I said, if we launch and scale up games, we may need a few more people. But generally, we have the organization that can deliver this one, should we then develop other businesses, then of course, that will come. But if we talk about the current scope, I think the the personal expenses are quite stable. But you have to take into account inflation that we're all facing and that people are expecting high salaries for next year, that you need to take into account. The big, I would say, variance is the share price, because we do have long-term incentives for a lot of senior employees in the company, and when the share price goes up, obviously the incentive plan goes up, and vice versa.

Okay, thank you very much.

Once again, ladies and gentlemen, please press star one to ask a question.

It appears that there are no further questions at this time. I would like to turn the conference back to Mr. Mattson for any additional or closing remarks.

Thank you so much, Sharon, and thanks for organizing this. But first and foremost to everyone that listened, thank you so much. I'm very glad that there was many questions and they were interesting in the business and you keep following on this one. Should you have any further questions, just reach out to Frank Hoffman or myself. We're more than happy to give you insights in any of the numbers throughout the day or in the coming weeks to go. So thank you very much for taking the time to listen to this earnings call and I wish you a great rest of the day and week. Thank you.