ZEAL Network SE

Good morning, ladies and gentlemen, and welcome to today's earnings call of the ZL Network SE following the publication of the half-year figures of 2024 earlier this morning. I'm delighted to welcome the CEO, Dr. Helmut Becker, as well as the CFO, Sebastian Bielski, who will speak in a moment and guide us through the presentation and the results. After the presentation, we will move over to our Q&A session in which you will be allowed to place your questions directly via audio line to the management. So I would say let's jump straight into the numbers. So Mr. Bielski, the stage is yours.

Thank you very much and good morning to everybody and welcome to the earnings call for the first half of 2024 for Zeal Network. I hope that you can all see the presentation, but if homepage. The agenda for today is as follows. Helmut will give a short summary, then I will guide you through the financials. Helmut and I will give an update on progress and on our guidance, and Helmut will close the presentation with some key takeaways. Over to you, Helmut.

Thank you, Sebastian. Good morning from my side. Let me summarize the first We acquired an unprecedented number of new customers in the first half of 2024. This was driven by a very good jackpot environment as well as marketing improvements that we have systematically implemented over the last 12 months. The volumes as well as the continued strong efficiency are a result of those improvements. We've grown revenues by 40% year on year. This is a result of strong billings growth combined with a margin expansion to 13.6%. Our EBITDA grew by 46% at an even higher rate than revenues and billings. And finally, as announced previously, we've just launched our new charity lottery, a dream house raffle in August. Back to you, Sebastian.

Thank you, Helmut. As you all know, when you have been following Zeal for some time, the jackpot environment is very important for us, both for our top line growth, but also for the acquisition of new customers. In the first half, we had a very good jackpot environment. We had six peaks in Euro jackpot, but we had also no peaks in Lotto 6 of 49. That compares to two for Lotto 6049. In terms of the average jackpots, the first half was 36% lower for Lotto 6049, but 23% higher for Eurojackpot when compared to the last year. As Helmut has already said, very strong revenue growth of 35% in the first quarter. We accelerated our growth further and we hit 45% revenue growth in the second quarter. Overall, we grew our revenues by 40% for the first half. When looking into our products, the biggest part of our revenue still comes from lotteries. In the lotteries business, we saw 33% revenue growth, which was driven by 23% growth in billings. and as Helmut has already said, a stronger billings margin. Our new games business, which we started in the second half of last year, contributed 4.5 million in revenue for the first half. On the cost side, our personnel costs increased by 38%. This was partially driven by 16% more FTEs compared to last year, but especially also due to higher STI and LTI provisions, and the good performance of our share price this year. We also saw some salary increases which are flowing through our numbers. In terms of the new employees we hired, especially in our new business areas like games and social lotteries, but also in our marketing team. Our marketing costs increased by 5.5 million or 28% compared to last year. We made very good use of the strong jackpot environment, obviously, especially in January when we had four peak jackpots for Euro jackpot in a row, but also in the second quarter where we had two jackpots. We saw a very efficient CPL, which decreased 26% year on year, but we increased the number of new customers that we acquired by 70%. Our direct operating costs grew by 59%. mainly driven by an overall increase in billings volume. When looking at more detail, we saw a higher share of PayPal, which is more expensive than direct debit. We onboarded a large number of new customers, which we had to KYC. And we also, for the first time, had some direct cost in relation to games, especially commissions for external game developers. The indirect operating expenses grew by 40%. mainly external legal and consulting expenses, which are connected with the launch of our new businesses. For example, when we had to apply for additional licenses for our new businesses, external service providers, and also recruiting as we invest into the business growth. As I said, EBITDA increased by 40% for the first half to 20.1 million euros. What is really interesting is when you look at the EBITDA for the two quarters separately. As you may remember, for the first quarter, our EBITDA only grew by about 1%, but for the second quarter, our EBITDA grew by 141%. So this really highlights the scalability and the fixed cost regression effects that we can see when scaling our businesses, especially because in the second quarter, 2023. When you look a little bit deeper into our P&L, you will see that we have a positive tax result. This was due to the initial recognition of tax loss carry forwards following the announcement of the squeeze out at lotto 24. We booked some of that in the first quarter, but some of that in addition to the first quarter, also in the second quarter, we had another look at our tax position together with our tax advisors from KPMG. And we also decided to capitalize some tax losses in relation to a internal group transfer of intangibles, which happened in 2019. As I already said, our cost per lead was very, very efficient in the second quarter. We had a cost per lead of 33.22 euros. This was only slightly higher than the first quarter, even though we only had two jackpots in the second quarter compared with four jackpots in the first quarter, and it was 35% lower than a year ago. As you may remember when you've been following us for some time, we had two quarters in the last year, Q2 and Q3, where we saw a significantly higher CPL In the second quarter of last year, this was due to a temporary increase in competitive pressure in online marketing, especially in search and marketing, and in the third quarter due to the launch of a big offline campaign. But as you can also see on this chart, the green is prevailing and we are seeing now CPLs in line with historic averages or even lower than the historic averages. As I'd already mentioned, our billings and lotteries increased by 23%. This was driven by a 21% increase in the number of monthly active users and a 2% increase in the billings per monthly active user. The increase in the number of MAUs was driven by both an increase in the customer base. We were acquiring a lot of new customers, but also due to quarters and years. As Helmut has already mentioned, our gross biddings margin increased to 13.6%. This, by the way, excludes a big win in our Traumhaus Lotterie. This was driven by a change product mix and also the rollout of some price optimization measures. I will go more into detail a little bit later. As Helmut has also said, we had of registered customers, a record level, and a 70% increase versus the first half of last year. And as I have already mentioned, at the same time, we were also able to decrease our CPL by 26%. Helmut will now give an update on the status of strategy execution versus our original goals for 2024. Thanks, Sebastian.

So we are on page 12 now. We've shared this slide with you before. It shows our strategic goals for this year. Let me now take you through the progress that we have made. We have significantly grown our margin to 13.6% in the first half of the year. This is the result of building and promoting higher margin products and increasing our service fees on June 10th. We know from extensive testing that our customers are price insensitive. Therefore, the increased service fees have virtually no downside on our top line KPIs. We expect to achieve a billings margin above 15% in the second half of the year. Our brand marketing works. We can see the impact of our efficiencies across all channels, particularly in high jackpot situations. But even in low jackpot environments, we've been able to improve our customer acquisition. We have more than 100 games live now. 10 of those are softer, lower return to player and therefore higher margin instant win games. Overall, the portfolio is still small, but these new, softer games do what we expected them to do. We are actively managing the exposure of our games category to our customers. While we do face regulatory restrictions for cross-selling games, we have also not dialed up the exposure of games yet. Finally, we launched a new charity lottery product. It is a DreamHouse Raffle. This product is unique in Germany. However, the concept of DreamHouse Raffles has proven successful in multiple other markets.

Back to you, Sebastian. Thank you, Helmut. As already said, we increased the gross billings margin And when you look at the comparable period last year, we were at 12.5%. The biggest driver of the difference that you can see is a 0.8 percentage point difference coming from price optimization and 0.3% coming from a change product mix. As Helmut has said, we rolled out June to our customers. So when you look at the comparison of the second quarter of this year versus last year, you can probably see it a little bit better, the emerging run rate effect that this had. So when you look at the billings margin just for the second quarter, it actually stood at 13.9%. And you can see that the price optimization had a positive impact of 1.3 percentage point comparable period of last year. You will see the real and true effect in November when we present our third quarter results. And as we had mentioned the last times that we spoke, we still expect overall a billings margin of more than 15% for the second half of this year. As Helmut and I have already said, we had a very strong acquisition quarter again. It was actually the highest number of leads and the lowest CPL for a quarter with two peaks that we had since we changed the business model. What this especially also shows implementing in the last nine months work outside of special environments like we had in the first quarter. In the first quarter, we obviously had a great jackpot environment with six jackpots. Two jackpots in a quarter is still very good, but it's a little bit more normalized. But all the measures that we have been implementing work We saw a continued high share of branded and organic traffic on the back of our branding campaigns, especially in TV. We had very efficient customer acquisition in social media driven by insourcing and a change of the bidding algo. So this is a good example where, yes, we are hiring more people, so that increased like in marketing. And then lastly, we also made some changes in our app store marketing and we saw some really good increase in volume and efficiency there. So Helmut will now give an introduction to our new Dreamhouse Refill product and also an update on games.

Thanks, Sebastian. We've launched a new charity lottery this month. The Traumhaus Verlosung, or in English, a dream house raffle. What is unique about this product? It is a raffle, hence there will be a guaranteed winner. And we can and will make use of that in our marketing. The jackpot is a real house. Actually, a fantastic house that triggers strong emotions with our target audience. We cooperate with great partners. First of all, the charity DKMS, who will receive the donations raised by this campaign. Deutsche Knochenmarkspende, DKMS. Secondly, Schöner Wohnen, who have helped us stage the house and also support our marketing. Both brands are strong trust We have seen success with house raffles in other markets like the UK, Spain, or Australia. We have good evidence that with this product, we can address new target groups as well as serve a different need of our existing user base. Please feel free to check out the product yourselves. Let's move on to page 16 and talk a little about games. Our games portfolio is slowly but steadily growing. We have more than 100 games live now while we are waiting for the approval of roughly 300 more games. Over the last months, we've added our first softer instant win games to the portfolio, 10 in total at this point in time. These are games that have a lower return to player and therefore a higher margin than the other games. This leads to different user behavior. These games produce lower billings because they are played less frequently, but higher margins and revenues. If you look closely, you can see these effects in the numbers, for example, in the increase of the billings margins. As we face regulatory restrictions with regards to cross-selling our games to our lottery customers, we expect a slow but steady growth of the games category as more and more customers start to play games. At this point in time, based on the overall size of the games portfolio and the number of softer games that we have live, we actively manage the exposure of games to our customer base. And with that, I'll give back to Sebastian.

Thanks, Helmut. At this point, we want to reiterate the guidance that we already gave at the beginning of this year. So we still expect revenue for 2021. a range of 38 to 42 million euros, which would mean a growth of between 16 and 28% versus last year. We also want to reiterate our midterm revenue growth guidance. We expect to see revenue growth in mid to high teens based on a starting year of 2023 until 2026.

Back to you, Helmut. Thank you. So the key takeaways of our presentation today are that we see an exceptionally efficient and extensive acquisition of new customers. We have strong revenue growth of 40%. We are further improving and we have further improved our gross margin. We see significant growth of our profitability, our EBITDA of 46%. And we've launched a new charity lottery just in August. Thank you very much.

Thank you so much for your presentation and the dive into your first half year and the outlook. So we will now move over to our Q&A session. And to keep this conversation engaging, we would appreciate it if you would ask your questions in person by audio line. To do so, just raise up your vitriol hand. And if you've dialed in by a phone, you can use the key combination star key nine to enter the queue. followed by pressing star key six to unmute yourself. And if you're not able to speak freely, you can also submit your questions in our chat and we will read them out for you. And we will start with the first question from Mario's fullback. So you should be able to speak now.

Yeah, I hope you can hear me. My first question is regarding the remaining lotto 24 shares and the offer that you have out now. How much extraordinary costs do you expect in this progress for Q3? um the second question is with regards to traumas for losung um is it correct or is my understanding correct that the costs of this lottery are basically fixed in form of the purchasing price of of the house and and further potential wins and then the margin and your income would be determined by the number of tickets that are being sold And the last question is with regards to your guidance. If I look at the top end of your top line guidance and the guidance of more than 15% gross margin for H2, that would imply some billings of around 493 million just to reach the top end and not even exceed it. And considering your strong customer growth in H1, this looks quite conservative. So can you give us some extra thoughts on that?

Yeah, I'll start with the guidance. Look, as you know, our business is driven to a large degree by external factors, being the jackpot environment. We obviously had a very, very good and conducive jackpot environment in the first half with six peaks, which is quite unusual. Unfortunately, we don't have a crystal ball, so we don't know how many peaks we'll see in the second half. So theoretically, it is possible that we see no peak in the second half. And so at this point in time, we feel very comfortable with reiterating the guidance. We look at the guidance, obviously, and the course of preparing for these calls. We feel very comfortable with it. But at this point, we just want to reiterate and we don't want to change the guidance. Your question on the letter, a lot of 24 shares. I have to admit, I wasn't quite sure what exactly you were asking for. Maybe you can explain the question again.

Sure. So any further legal costs that we should have in mind or any other costs related with the progress that would pop up in Q3 so that would drive extraordinary costs or other cost positions?

No. Generally speaking, we will probably be able to capitalize most of the costs in relation to the squeeze-out, like legal costs, for example, into the basically accounting for the purchase price, so we don't expect any extraordinary, or at least not in any meaningful way, extraordinary one-off costs. Obviously, we have the cost for the AGM in LOB24, where this is a normal cost, but nothing out of the ordinary. And then, Hamlet will answer your question on Dreamhouse Raffle.

On the Dreamhouse Raffle, yes, you're right. The cost is mostly fixed.

team the cost item that is not fixed of course is our marketing investment and yes the revenue is driven by the number of tickets sold okay thank you very much and maybe just a follow up on this one just gut feeling or experience from you mentioned other lotteries and other markets by how much usually revenues exceed the costs of those lotteries

We can't say at this point in time we've just launched the product, but what we see in other markets, it's a very successful and profitable product. And since you have a house as a price and as you build your marketing muscle and your brand, you should expect improving profitability, scaling profitability.

Perfect. Thank you very much.

Thank you so much for your questions. So now let's move over to the questions from Tim Kruse.

Yes, hi. Thanks for taking my question. Congrats on the good quarter. A couple of questions, maybe on the extraordinary effects you had in the first half. Would you concur that these were skewed more to Q2 in the indirect and the direct expenses of operations. And could you also comment on the impairment costs you had in Q2 or in H1? I'm struggling a bit to understand where you actually have receivable risk with your payment methods. Maybe you could just comment on that. That would be helpful. Okay.

I mean, when you talk about impairment costs, you mean like in relation to bad debts, correct?

Correct. Yes.

Yeah. So we offer a number of different payment methods and the biggest payment method is actually direct debit. So it is a thing that's quite unique to Germany. It is the payment method that our customers like the most. And so with a growing overall in the chargebacks that we see, especially when it comes to direct debit. So customers in Germany have the ability to charge back. Then we will go and chase them for some time. We actually have a kind of like a collections team that does that at some point. We will then also hand it out and set up the receivables. But this is the driver driven by a different business mix. So games customers are a little bit different at the moment than lottery customers in their behavior, and they have a higher chargeback rate. In terms of extraordinary effects that you mentioned, I mean, we wouldn't normalize anything at the moment, which is also why we didn't do any of that. So in terms of Q1 versus Q2, we probably have a little bit more in Q1 in terms of the indirect costs for consulting, for example. But I wouldn't necessarily classify it as extraordinary. It is a part of doing business. And when we launch new businesses, then we will have costs in relation to these. So I wouldn't necessarily classify them as extraordinary.

Okay, thanks. And then maybe one on the Traumhaus Verlosung. Could you comment on how you see the overlap with the Deutsche Traumhaus Lotterie? I mean, obviously, it's a different product. It's a raffle, but it is sort of the same kind of target group, I would imagine. And so could you maybe comment on how you see this, the Deutsche Traumhaus Lotterie going forward? Or is that something you might even discontinue?

Yeah, so we see a lot more potential in the Dreamhouse raffle than in the Traumhaus Verlosung from a brand perspective and value. And what we effectively are doing and will be doing, and you can see this already, is that we have taken Traumhaus Lotterie out of the shop and promote Traumhaus Verlosung instead.

Okay, so that does sort of answer the question that this is your target product, the Traumhaus Verlosung, going forward for this segment. Okay, yeah. And then maybe just finally on the game's development, I think you already, I mean, you already shed some light there in terms of your expectations. Q1 versus Q2 was rather flattish. I mean, you mentioned that you had sort of a product mix and a better margin, but is this sort of a level in the current advertising restrictions you still have we can expect for the next quarter? And maybe you could give an outlook in terms of when... when you are maybe expecting rulings or is there any timeline in terms of your legal procedures there? Thank you.

Yes. On the legal side, legal procedure side, this will take years rather than months or quarters. So it is a marathon and not a sprint, what we are doing here. We do see those restrictions. It also means that to some degree, But it's also true that based on the size of the portfolio and especially the number of softer games that we have live right now, and that's still not, the size is still not where we need this to be. We will get there. We are waiting for the approval of roughly 300 games. So that takes some time, but we will eventually get there. We have not yet dialed up the opportunities we have to gain. So I do expect growth, some growth over the years, but I don't expect a very fast explosive growth, but a slow and steady growth. The potential in gains we still believe in.

Okay, thanks a lot. That's helpful. All the best. Thank you.

Thank you for your questions, Tim. So before we will move on with the questions from Henry Wendisch, let me quick remind you that it's still possible to ask questions via audio line or chat. And with this, Mr. Wendisch, you are able to speak now.

Hi, thanks, everybody. I hope you can hear me. Congratulations, first of all, on your astonishing results again this time around. I have a couple of questions. First, let's start with lottery, maybe. I've seen that you have increased the share from lottery clubs from 6% to roughly 7.4%, given that you also acquired your customers this strong outperformance in terms of other products that you still have. What is your goal or optimum there? Do you want to maximize this number or are you comfortable with that level so far?

The increase is a function of two effects. One is High jackpot situations typically lead to an increase of the lottery clubs business. And the other one is, of course, we are also innovating and building and marketing these lottery clubs. And we always aim to improve there. And they are sort of a derivative product with a slightly different user value proposition than a plain, let's say, 6 out of 49 Eurojet ticket. And we like these derivative products. Play With Friends is a similar one because they come with a higher margin. So, yes, our target is to grow the share of the So yes, maybe you call it maxing out, but our objective is to grow the share of these products. The limitation is that we're always looking at the predicted customer lifetime value of our customers. And so there's a limit to the sort of hard selling you can do of marketing these products the billing share of these products.

All right. Thank you. Then regarding H2, you said that you want to increase the lottery billing margin to above 15%. Is above like 16, 17, or is it like 15.1?

I think above means above 15%, right? So that's... I think, you know, you'll have a good read when you look at the Q3 numbers.

I see. Okay, then we'll be surprised. But also regarding the price increase and the ticket fees, do you, I mean, probably you've done some testing beforehand before rolling it out, but given that you're now a little bit more expensive than Lotto.de, do you like expect any churn or have you seen any effects on user activity whatsoever? Or is it just stable user metrics? Just that also you have increased the prices as well.

Yeah. Yeah. We we've done extensive testing, um, as you can imagine, um, for a long period of time. Um, we don't, we, we expect a stable user.

All right. And then the last question also on the, on the Dreamhost raffle, um, yeah, the, probably comes from one of your startup investments from the UK. They have a similar product. I've seen that maybe let's think that it's going to be quite a success. Do you also plan on expanding onto like other products, except other dream houses, for example, dream car raffle or dream boat raffles? Should it prove successful? Or is this like, so this is like your first kind of product in this raffle business and then you might want to start expanding the business for the proof it's successful, right?

Yeah, I think our focus is now on building and scaling that business and making that very successful. I think the observation that this is a very successful product in the UK is right. And by the way, there are early bird prizes to motivate players to buy tickets also in the months before So we will learn a lot from the DreamHouse raffle as we implement it and as we market it. And our focus right now is on making that super successful. And then if we show that we can build and grow successful new businesses, we take it from there.

All right. Perfect. Thank you.

Thank you for your questions. So now we will move over to the questions from Carsten. So you can ask your questions now. Unfortunately, we cannot hear you. So let me retry. So you should be able to unmute yourself now. Unfortunately, maybe you have not the right device. Carsten, you can place your questions in the chat so we can read them out for you. I guess we can wait a couple of seconds just to cover your questions as well. I'm sorry. So... That means by now it seems there are no further questions except them from Carsten. So I would say we will now come to the end of today's earnings call. So thank you everyone for joining and just showing interest in ZIL. So should further questions arise at a later time, you can ask your questions to Ms. Hoffman from ZIL, from Investor Relations. And a big thank you also to you, Mr. Bietske and Dr. Becker for your presentation and the time you took to answer all the questions. So from my side, I wish you all a lovely remaining day and hand back for some final remarks, which concludes our call for today.

Yeah, thank you everybody for your interest in zeal. Thanks for your questions. If anything else comes up, please reach out to Frank or myself. Also, if anybody is interested in a voucher to play the Traumhausverlosung, please also reach out to us. There are some vouchers available. It's a great product. Unfortunately, I'm not allowed to play it myself due to regulatory restrictions. And also, we wish you a very nice summer and talk to you very soon. Thank you.