ZEAL Network SE

Good afternoon, everyone, and welcome to this call. I do hope you have access to or can see our presentation. If not, it's accessible on our web page as normal. Today, we will talk about the preliminary result for 2022. We will then provide a business outlook and finishing off with presenting our guidance for the year, followed by our dividend proposal as already announced on Friday evening. With this, I want Helmut to take us through the highlights of the year.

Thank you, Jonas, and welcome to our webcast.

Despite the macroeconomic headwinds and the uncertainty for consumers that we saw last year, we look back at a successful year. We reached our ambitious growth objectives. We've successfully invested into efficient customer acquisition. We expanded our online market share to 41%, demonstrating the strong value proposition that we offer. We won the BAT case and give back 56 million euros to our shareholders in form of a special dividend. We're expecting continued business expansion, both in our core brokerage business and in our games business going forward. We were able to extend our broker license until 2029, providing the solid and predictable foundation for our business going forward. And we've continued to manage our cost rigorously. And thanks to this, we've been able to grow EBITDA by 14% year over year. Back to you, Jonas.

Thank you very much. So let's move to slide three. On this jackpot slide, you can see the development of our two main products, Lotto 6 out of 49 on top and Eurojackpot below. For Lotto 6 out of 49, the jackpot situation improved versus last year, especially in the first half. But as you can see, the second part of the year was rather unattractive. The key difference between the two years is the four peak jackpots we had in the beginning of the year while in 2021, we had none. As you know, it's in the peaks that is most valuable for our acquisition efforts and also to drive buildings. For Jiro Jackpot, we reached a record level of 120 million three times, which is the same number as in 2021, albeit that then the maximum was 90 million and it's now 120 million. The average jackpot has been better as you can see from the table to the right. In total, we had seven peak jackpots in 22, where nine would have been the statistical average. Peak jackpots are particularly relevant for customer acquisition. So the fact that we are able to outperform the customer acquisition target in 22 gives us confidence that we continue to ramp up our efficient marketing investment. In summary, A better jackpot year than previous year, average jackpot slightly better than the statistical expectations, peak jackpot slightly lower. Let's go to the next slide and zoom in on some of our most important KPIs and financial metrics. We grow billings by 16% to $758 million, thanks to improved jackpot situation, but also for efficient marketing activities that added new player and customers. Our revenues grow even more, increased by 21%, supported by a favored product mix, meaning proportionally more sale of high-margin products, like our successful lottery clubs. EBITDA grew by 40% to almost $32 million, and this despite the significantly additional marketing investment we did last year, so quite an astonishing achievement. Cross-margin rose by 0.7 percentage point to 12.9% due to the better product mix. This is very much in line with what we told you already back in 2019 when we were below 12%, that we would constantly work on improving the margin. Even if our assumption is to improve this number further, it will be a gradual improvement, for example, when games are live and charity products are scaling up. We also increased the number of new registered customers almost by 30% and signed up more than 700,000 new customers. The drivers are the successful acquisition activities coupled with a more favorable Jackpot environment than we had the year before. We also spent significantly more than the previous year to take advantage of this favorable situation. And this is how we manage marketing expenses. We scale up when the efficiency is expected to be higher and vice versa. Let's now move to slide seven to talk about the preliminary condensed income statement. Revenue increased by 21% due to the product mix that we had in combination with higher volume. Total cost operation increased by 26% compared to previous year. So let me break this down a bit for you. Personal expenses were flat despite having cost inflation and slightly more people since we were able to accept this by lower incentive provisions related to our employee share-based incentive program. With the hijacked situation, especially in July and November, we took advantage of the situation and increased marketing expenses for the year by almost 12 million. These investments led to strong customer acquisition numbers as I just explained. Direct operating expenses is perfectly in line with the higher billings numbers or the higher transaction volume. We had an increase in indirect operating expenses of 33%, mainly due to several special effects. A one-off effect in the same period of 2021 when we released the provision for a legal dispute of close to one million. We had this year an increase in consultancy costs and freelancer hold millions. we increased our travel training and payment cost of half a million. And we had some special insurance costs related to our charity products of roughly 400,000. But all in all, this led, as I just explained, that EBITDA for the year rose by 14% to almost 32 million. Let me also talk about some numbers from our market share. We're indeed very happy to see all the work to further improve our marketing activities and acquire more customer paying off. We are undoubtedly the market leader of private brokers in Germany, now with 41% online market share, growing from 39% the year before. In addition, we saw the German online market share increase to 23%, still below many other European countries, but it's moving in the right direction. Let's now talk about the business outlook for the year. So back to you, Helmut.

Thanks, Jonas.

Let's look at page nine. People want to dream in good times and in bad times. Lottery business models have proven to be recession-resistant in the past in Germany and in other geographies. We were happy to see that this was confirmed during the multiple crises that we faced in 2022. We continue to see strong unit economics, high lifetime values based on the stickiness of our customers and strong and efficient customer acquisition. And we see further opportunities to invest into profitable growth. Let's start with the core business on page 10. We start from a position of strength. Our licensed foundation is secure. We are the market leader in online lottery in Germany. We also have a very scalable business model. More than 85% of every incremental revenue euro can be used to either grow short-term profitability or to be reinvested into long-term profitable growth. And we have these profitable growth opportunities. 2022 confirmed that we can efficiently ramp up our marketing investment to acquire customers at attractive unit economics. In addition, we see the opportunity to invest into games and charity lotteries. And we plan to take advantage of these investment opportunities. And given the nature of our business and our analytics capabilities, we can track the efficiency of our investments very well. We are aiming for double-digit growth over the next years and to grow our market share. The opportunity is there, therefore we plan to ramp up our marketing investments as long as we can stay efficient. We measure that in terms of payback period and return on investment. Given the high lifetime values of our customers and the good predictability of their behavior, we are confident that we can continue to see a return of more than three times on our marketing investments. This is supported by our continuous optimization of the customer lifetime value. For example, we have been increasing conversion rates, customer loyalty, and profit margins. We will also continue to test new marketing channels and expand our existing marketing channels. On page 12, we see two more opportunities to add further growth, and that's games and charity offerings. On games, we had built a successful games business in the past that we had to stop when we moved back to Germany and changed our business model of our core business. We now plan to build on that experience the data and the technology. Instant win games are a proven and successful categories in other markets and I will show a few numbers in a minute. Because we will operate these games ourselves, we expect to see attractive margins between 20 and 25%. Finally, this business should be profitable from day one as we leverage existing assets. And in addition, we can and will look for investment opportunities to drive games growth even further. On the charity lottery side, this is a category that we have already launched successfully. It also comes with good margins and therefore helps us to increase our customer lifetime value. We want to use it to build products that address the customer need of our existing customers or invest into acquiring new customer segments. So before the games launch is the games license. The new regulatory authority called the GGL has assumed responsibility for the licensing process in January this year. We are fully prepared to launch our portfolio of 50 games, and the steps are we have to receive our license first, then get the games approved. We are confident that we can launch this summer as planned. As mentioned earlier, on this slide, this is page 14, we see how successful the instant win-game category has been for lottery companies around the world. Instant win-games billings typically make up 30 to 50% of total lottery billings. In Germany, however, so-called scratch cards make up only 5 to 15% of lottery billings, depending on the state lottery. For Zeal, the percentage number of scratch card billings as a brokerage product is even lower, as some state notaries don't even offer scratch cards online. So there's definitely room for growth. What we also know from other markets is that it will take several years to exploit this potential, and that the size of the potential and the speed of the penetration may be influenced by regulatory boundary conditions. We will, of course, keep you up to date and update you as soon as we know more about the license. Now back to Jonas to talk about our guidance for this year.

Thank you, Helmut. Yes, let's talk about the guidance, and you will find that on slide 60. So our guidance for the year. We assume to have billings of around 800 to 830 million euros. Revenues of around 110 to 120 million and EBITDA of around 30 to 35, mostly depending on how much we ultimately invest in marketing. We are planning a step change and have assumed 34 to 39 million euros in marketing investments for the year. For games business, we have just assumed a low single-digit EBITDA impact for the year. Obviously, the business is expected to continue to grow in the coming years. The above numbers that I just talked about indicate a double-digit revenue growth, which is also our expectation for the midterm. And as always, all this is based on average jackpot for the rest of the year. As you saw on Friday, we have already announced our dividend proposal for this year. So let's go to slide 18, and I will take you through the proposals. As you can see from this chart, we're concerned to return significant amounts to our shareholders with a special dividend on top of a base dividend, both in 2022, but also now proposed for 2023. This will further improve our capital structure, which has been one of my missions for the last two years. We're proposing for this year to return 78 million euros as dividend, which consists of a base dividend one year per share, and a special dividend on top of €2.60 per share, which equals the amount we received back from the tax authority for the win in the VAT case that we just won. Just to add a bit of context, the VAT amount was set aside during our previous business model, but should normally have been returned to you as shareholders should we not have had this exposure for all these years. Since this exposure has now gone away, we think it's not more than fair to return this to our shareholders. And we see no reason to have fit on the cash that is not used for our normal operations. Would it harm our ability to grow? The answer is no. We are generating sufficient cash to be able to invest in growth and also have the opportunity to leverage the company should an opportunity present itself. Let me now finish off by reiterating why you should consider investing or staying invested in the seed stock. We are the number one online lottery in Germany. We're bigger than all state lotteries individually and almost equal in size if you take them combined. We have a strong, sustainable, cash-generating business model. We have outstanding customer loyalty, which is unique in the e-commerce world. Some customers have been loyal for more than 10 years and still counting, which creates a superior customer lifetime value. We have a huge growth opportunity in a still under-penetrated market when converting offline players to the online. And as I have said, we have an attractive dividend proposal by returning a large amount to our shareholders without harming any growth opportunities. This concludes my presentation, and we are very happy to take any questions. But before that, many thanks for taking the time and listening to our presentation. Thank you.

Ladies and gentlemen, if you would like to ask a question now, please press 9 followed by the star key on your telephone keypad. If you wish to cancel your question, please press 9 followed by the star key again. And the first question comes from Marius Fuhrberg, Warburg Research.

Yeah, hi. Thanks for taking my questions. The first one is you mentioned that you aim for double-digit growth for the years to come, so not only one year. Is this meant for lottery as a standalone product, or does it also include games and the charity products? A second question on the games business and the license. You mentioned that there is a new regulator in charge now. Have you already, I mean of course you have obviously, but what are the indications from your last contact to the new regulator and is there any wording you can share with us from that. And the last question is on the market spendings and the customer acquisitions. It appears that marketing might become a little bit more expensive, correct me if I'm wrong there, but can you share a little bit of details on what kind of customers you won there and are those customers showing the same characteristics with regards to gaming and lottery behavior or is there any difference and do you expect this to change with your new marketing efforts at any level?

Thank you for the questions, and I'm sure we can try to address them to our best knowledge. So let me take two questions, and Helmut will talk about the games license. So when we talk about double-digit revenue growth, we're talking for SEAL, for the entire group. Obviously, we will in the future see high growth rates, obviously, for games and charity because they're starting from zero or from a low scale. And also we expect customers that are spending today money on our normal brokerage product will partly cannibalize that into games, meaning that they have a wallet and either they spend on the brokerage product and or on the games product. The good news is that since games and charity have so much higher margin, that's a good what we call a cannibalization. But of course, we will try to acquire a customer also that is not using our core products. In terms of the marketing spend, as I said, yes, we are going to increase our marketing investments and trying to acquire more customers. The customer is very similar in behavior. We have changed some channels and increased pressure. But when we see unit economics and we break them down, they're very similar to the ones that we acquired in the past. Sometimes we can even see slightly higher spend on some of them, but it's in general very similar type of customer, type of customer cohort as we acquired in the past. The marketing mix may be slightly different In the past, we did, I would say, to the large majority, what we call performance marketing to acquire new customers. But also for the longer term, we need also to improve the brand of Lot24, which also supports the performance marketing. But it's very important to say we're shooting for the same efficiency here. So obviously, we will not start just spending unless we see the efficiencies. With this helmet, maybe you can talk about the games license. Yeah.

We now have an authority, a full organization that's working on regulation and licensing processes five days a week. So I think that's important. Of course, we are in touch with the authority. They keep their cards close to their chest, but we know that they are working on the license.

Okay. one follow-up, if I may, on marketing. You mentioned that you will also do more brand marketing now and I wonder how you will proceed with that in terms of efficiency. So would you rather first do a step into brand marketing and spend some money and evaluate the measures thereafter and where would be threshold where you say okay brand marketing might not be that effective and we need to stop that again and focus more on performance marketing again or how should I think of it in terms of also how CPL should develop in the future?

So we have already done some brand marketing already this year. When I say this year, I mean 2022. Maybe you have seen the Sky Demand advertising on some of the TV channels. We will continue with these kind of things, but also doing other brands. What we say is that we have the same efficiency. So the normal payback period that we shoot for is 24 months. Sometimes we go up to 36 months, depending on it. But we analyze each and every cohort that we acquire. We follow them by day, by week, by month, and also by year to making sure that every activity is performing well. If they're not, we close them down like we do today with performance marketing. So actually, it's nothing different. We analyze, we look at the data, we analyze, and we continue to develop if we see that we can improve going forward further. So nothing has really changed. It's just that we add an important element to the mix that can have a boosting effect on our long-term growth rate.

Okay, thank you.

Okay, the next question comes from Henry Wendish, New Ways.

Hi, everybody. Thank you for taking my questions. I have a few ones. Maybe let's start off with the gambling authority. I read in the news that they are starting to enforce measures against Lotto Land. And I would like to hear your take on this, if you maybe are prepared once the ban should come into effect, if you are prepared to take on their customers. The second question is regarding the guidance. Is it fair to assume that you are guiding conservative people for billings and sales? and over guide maybe a little aggressive on marketing expenses in order to guarantee a guidance reach during a low jackpot year and if there's a high jackpot year you can maybe exceed the guidance in your view and the third question would be on your monthly active users and average billing for user for the full year 2022 if you have any numbers to share with us it would be great and On the dividend policy, one last question. You mentioned the double-digit growth, and should you reach the double-digit growth in the long term, is it also fair to assume that the base dividend is going to grow also double-digit? Thank you very much.

Start with your first question.

Gambling authority is taking a hard stance on Lottoland and we don't see them change that at all. I'm not sure I fully understood the second part of your question, but there's no change in their attitude and their conviction to regulate with regards to Lottoland and enforce also with regards to Lottoland. Jonas, maybe you take the other questions and I hope I've answered your question.

Sure. So your first or actually the second question was regarding the guidance and how conservative this is. As you know, everything we know today is building into our guidance. I wouldn't say that it's neither conservative nor aggressive. It's our best estimate for this year. The marketing spend is, as you know, our big discretionary spending. More or less everything else is kind of fixed or semi-fixed for the year. Marketing is the one that we can scale up and scale down. And that's why we also provide a range for it. So we expect this to be 34 to 39 million euros. It can be slightly more, slightly less, but this is the band where we believe we will end up. Obviously, short-term, that will have an impact on EBITDA. The less we spend on marketing is typically good for the year's EBITDA, but clearly not good for the mid-term or the long-term growth of the company. We're always trying to invest as much as we can efficiently. But clearly this has the variability, so that's why we wanted to give you the full information about the expected spend. You talked about the average monthly billings per user, the spend per customer. In 2022, and we will obviously detail all the questions related to this one when we send out the full package, but it was around 59 euros per month that the customer was spending. And we expect this to be stable for our core business, and then we'll see what happens with the gains. We assume it, as they say, is stable for a core business. And then your last question was about the dividend, if we increase that further. So we will only commit to what we do this year, and then I would like to come back, depending on the profitability for the company going forward. But clearly, if the companies continue increasing in profitability, there may be reasons to assume that even the return to shareholders will increase. But I cannot now commit to any precise numbers after 2023.

Thank you very much. Maybe regarding the first question, maybe I should word it specifically. I was wondering if the gambling authorities effectively ban lotto land, I would want to know if you're prepared for that to take on their customers, the customers of lotto land that now need another place to play lottery.

There's no plans with regards to that. I mean, we're always prepared to acquire customers that are looking for a place to play. And we're also always open to making an investment into buying a customer base. But, you know, that comes with a lot of cost as well and conversion losses. So that's something that we need to look at very carefully. Like I said, there's no plans to do this, and we have plenty of customer acquisition opportunity ahead of us by just scaling up what we've been doing successfully and also expanding our marketing channels and marketing activities. So we don't have to rely on other sources of customer acquisition.

Thank you very much. That is an answer to my question.

So at the moment, there are no further questions. If you would still like to raise a question now, please press 9 and the star key on your telephone keypad. And there is one question from Jean-Marc Muller, GMS Invest.

Yes, hello. Thank you for taking my questions. I understand that short term is, you know, when we look at 2023, I mean, the guidance on EBTA level is very dependent on how much you spend on marketing. Maybe if you could give us a little bit of an idea of how you see deal in 2025, how you expect instant win game to take off, what will be the contribution of instant win games? I noted that EBTA estimates for 2023 have come down quite a bit over the last 24 months. And that is mainly due to the fact that the instant win game license has been postponed and delayed. But if I look at old estimates, there was once the idea that maybe in a two year time you could produce some 20 million of EBTA with instant win games on two year horizon. Is this still valid when I look into 2025? Just to give us a little bit something to think about on the mid-term basis and not just on the short-term basis, that would be helpful.

Sure, Jean-Marc. So clearly we are as disappointed as anyone on the delayed games license. We were expecting this a year ago, but hopefully it's very imminent now. And you're absolutely right. The reasons for the EBITDA coming down since two years ago is that we expect it to be already live and probably pretty advanced in scaling it up already by now. So that is the big drive, but also that we are now planning to expand our market investment and to gain market share. In terms of what can we expect for gains going forward, So it's a number of things that we need to analyze. We need to have the license. We need to understand the conditions we get the license and analyze this one. But clearly, it's a big opportunity for us. As I said, we're only expecting low single-digit EBITDA contribution this year. But if we are launching now as we expected, we should significantly increase that for the following years, at least to low single-digit. to double-digit contribution from games. How big can this be? If you look at other European markets, it's a huge impact. I don't think Germany will get that far. But as you remember, we had games in our past business model that was quite successful that had no marketing restriction. We were free to do whatever we wanted. Now we have restrictions. I mean, the German gambling law will have a restriction, so maybe not go to that level, but still it will be a big contribution to our profit going forward.

Okay, but that means, I mean, if I understood you correctly, that you would expect some 10 million EBITDA move already going into 2024 from low single-digit to low double-digit.

That is correct, assuming that we launch on time and we get the license as we expect.

Yeah, but that's already helpful. I mean, it gives me a bit of an idea of what the trajectory might be. Thank you.

Okay, perfect. Thanks.

Thank you.

So, as there are no further questions, I would like to hand back to you, gentlemen.

Thank you very much. And thanks everyone for taking the time listening to this. And I'm looking forward to many more discussions, fruitful discussions that's also meeting in person. So thank you very much. And should you have any further questions, please reach out to Frank Hoffman and we will gladly respond to your question. Thank you very much.