ZEAL Network SE

Good morning, ladies and gentlemen, and welcome to today's earnings call of the SEAL Network SE, following the publication of the Q3 figures of 2024. I am delighted to welcome the CEO, Dr. Helmut Becker, as well as the CFO, Sebastian Gielski, who will speak in a moment and guide us through the presentation and the results. After the presentation, we will move on to a Q&A session in which you will be allowed to place your questions directly to the management. So I would say let's jump straight into the numbers. Mr. Bielski, the stage is yours.

Good morning, everybody, and welcome to the earnings call for the first nine months for 2024 for Zeal Network. I hope that you can all see the presentation. If not, you can also download it from our investor relations section on our homepage. What we will talk about is the following. We will give a summary of the first nine months, talk a little bit about the financial performance. Helmut will give an update on the strategic progress. We'll talk about our updated guidance and the share repurchase offer, which we announced this morning. And then Helmut will close with some key takeaways.

Helmut, over to you. Thanks, Sebastian. And good morning, everybody on the call. So in summary, ZEAL continues to grow while we achieve economies of scale. We have increased our gross margin significantly. Our customer acquisition is at an all-time high at good efficiencies. We've seen 41% revenue growth and even stronger EBITDA growth of 51%. we have launched a new charity lottery, the first DreamHouse raffle in Germany, and the results so far have beaten our expectations. As a result of the traction that we have seen in the first nine months of this year, we've increased our guidance for the full year of 2024. And this morning, we announced a share purchase offer at a offer price of 44 euros per share. Back to you, Sebastian.

Thanks so much. As always, we'll start with a look at the jackpot environment. As you all know, jackpots are quite important for us, especially in our lottery brokerage business. They drive both revenue, but also especially acquisition of new customers. Overall, for the first nine months, the jackpot environment was slightly better this year compared to last year. We had six peaks this year compared with five peaks in 2023. However, when you of the jackpot peaks, you'll see that we didn't have any peaks in Q3 compared with four peaks in the first quarter and two peaks in the second quarter. When looking at the average jackpots for the first nine months of this year, they were 33% lower for Lotto 6 of 49 and 17% higher for Eurojackpot compared with the last year. As Hammond has already said, we had a very, very good first nine months. Our overall revenue grew by 41% compared to the same period of last year. The main driver of that was a 36% revenue growth in lotteries, which was driven in turn by a 70% growth in underlying billings and also a very strong slightly, also driven by the DreamHouse raffle, which Helmut has already mentioned. In addition to the revenue from lotteries, we also had around 6.8 million revenue contribution from our gains business, which we started last year. When looking at the cost side, I'll start with the personnel cost. They increased by 54% compared to last year. that was partially driven by a 19% increase in the number of FTEs, but also by some other big effects. The biggest one of those is a higher provision for short-term incentive and long-term incentive payments. They're both due to the strong financial performance that we see this year and also due to the good share price appreciation, which I hope our shareholders have also noticed. In addition to that, we made some additional provisions for potential wage and sales tax liabilities, which are connected to previous years. And we also saw some salary increases. When looking at the drivers for the increase in the number of FTEs, we hired people especially for our new businesses, such as games and the social lotteries, such as the Dreamhouse Raffle. The next item is the marketing cost, which increased by 6.2 million euros or 20%. As you probably all remember, we made very good use of the very strong jackpot environment at the beginning of the year. So especially in Q1, but also during the two jackpots in Q2. But what we are also very happy about is that even though we didn't have any peak jackpot in the third quarter, we still had a record number of new customers coming in for a quarter without a jackpot. So overall, we acquired 807,000 new customers in the first nine months, which is an increase of 56% and a record overall for such a period. Looking at the direct operating costs, they're up by 45%, mainly driven by an increase in billings volume. Other drivers were a higher share of PayPal as a payment method, which is more expensive than direct debit, which is still our biggest payment method. a large number of new customers which needed to be identified, costs for games, especially commissions to games developers. Lastly, also looking at the indirect operating expenses, which were also up by 45%, the main drivers were higher external legal and consulting costs connected with the launch of our new businesses, as well as costs for external service providers and recruiting as we continue to invest into business growth. One thing to also count out is the transaction costs for the purchase of the first two houses for our new Dreamhouse raffle. As Helmut has already said, our EBITDA is up 51%. So EBITDA is growing faster than revenue, which again highlights the very good underlying scalability of our business model and the inherent leverage of our business model. As I already mentioned, billings are up by 17%. in the number of monthly active users, which in turn is driven by an increase in the underlying customer base. As I said, we have acquired over 800,000 new customers this year, but also an overall increased level of activity, which is a trend which we see continuing since about one and a half to two years. The gross margin has increased to some degree by a change in product mix. But the much higher driver of this is the price increase, which we rolled out in June 2024. And we'll have another slide on this topic a little bit later. We also had, as I said, super strong customer acquisition. It's the best nine months we ever had with a 56% increase in the number of new customers. And we continue to see very high levels of efficiency in our marketing. Looking at the distribution of the CPLs over the last couple of quarters, as you will probably remember, we had very, very low CPLs for the first two quarters, around 33 euros. As a reminder, again, Q1 had four peak jackpots. Q2 had two peak jackpots. So Q3 was a little bit different. We didn't have any peak jackpot in that quarter. On top of that, we also invested relatively heavy into brand advertising for Lotto24, which is something that also in terms of the efficiency that we see from that. So the investment is first and the efficiency comes a little bit later. And also the third quarter was the first quarter where we had D2C marketing for our two social lotteries, Homehouse by Losung, Supreme House Raffle and Fire Plus. D2C marketing means that we have marketing targeted directly as consumers. So not through Lotter24 platform, but we're actively promoting advertising for the two brands for these two social lotteries. Helmut will now give you an update on the status of execution versus our strategic plans for this year. Thank you, Sebastian.

So this slide on page 12 shows our strategic goals for 2024. We have significantly grown our margin In Q3, the billings margin for lotteries was actually at 16.8%. Like Sebastian said, this is mainly the result of an increasing of our service fees in June this year. In addition, we are successfully promoting high margin products like, for example, lottery clubs. Our brand marketing works and we continue to optimize our marketing mix. We've successfully taken advantage of peak jackpot situations, especially in the first half of the year. Even in low jackpot environments, we've been able to improve our customer acquisition and the successful launch of Dreamhouse, the Dreamhouse Raffle, gives us another jackpot independent tool to acquire customers. We currently have more than 200 games live, 18 of those are softer, lower RTP, and therefore higher margin instant win games. That's still not enough games. But games is already a profitable business, and the current player base shows good unit economics. Our aim is to expand the player base. This is taking more time than expected. Our new charity lottery product, the Dreamhouse Raffle, has had a great start. The first house campaign that ended with the draw on Monday generated more than 8 billion euros in billings and we acquired more than 80,000 new users. Customs. With this product, we can also reach target groups that have not played the lottery before. Back to you, Sebastian.

Thank you, Helmut. As Helmut has already said, we can really see the impact of the price increase, which we implemented in June. So when you look at the third quarter, it's the first full quarter where you have clear visibility of the impact. You can see that the billings margin has improved by almost this year to the last year. And as you can see, basically 90% of that is coming from price optimization. So the implementation of the price increase in June. We had guided for the second half to a billings margin of more than 15%. So the 16.6% that we can see is even exceeding the guidance that we had previously given. As we said, even though we didn't have a peak jackpot in the third quarter, it was still a very successful quarter for customer acquisition. It was actually the best quarter we ever had. For a quarter without a jackpot, we acquired more than 200,000 new customers. The highlights were that we continued to invest into brand marketing, which is, as Helmut has already explained, going pretty well for us. Social media. remains a very attractive performance marketing channel. Performance marketing is especially important for us during peak jackpots, but social media is a little bit of an exception because it also works for us very well outside of high jackpots. As we said, we have started the D2C marketing for Traumhaus Verlosung and for Choir Plus, and especially for the DreamHouse Raffle, the Traumhaus Verlosung, we can also already see very good marketing efficiency And back to Helmut to talk about games and Female Threat.

Like I said, we have 200 games live at this point in time. This is still low in comparison with other competitors who had a head start on us because they received the license earlier. But we are continuously growing the portfolio and we've just received the approval for an additional 159 games. Unit economics are good. The APUs, average billings per user, are good. And we have a solid billings margin at 7.4% in Q3. And this is equivalent to a pay-in margin of 33%, because users play through their pay-ins multiple times. For the moment, our focus in games remains on rolling out new games, adding product features like free spins. Our focus is currently not on growing the games customer base. That is still our aim going forward. In 2024, we expect to make 9 million euros in revenue with an EBITDA margin of more than 40% with games. Sebastian already mentioned the greenhouse raffle. This is a new product. We're the first to launch such a product in Germany. It's a raffle, so it's like a tombola of a real house. That means we have a guaranteed winner with each draw. In addition to the ability to win a house, The house itself, we staged that using a partnership with Schöner Wohnen Kollektion. So the first draw started in August and has just finished a couple of days ago. We made 8.6 million euros in billings with that draw. And 40% of those billings came from the direct-to-consumer webshop. We had more than 400,000 active users and each user made an average billings of more than 20 euros. The most frequently bought ticket was the 10 euro ticket. And, and that's quite exciting, we acquired 83,000 new customers through our direct-to-consumer website. For the charity, we raised 1.7 million euros and the partner for this first draw was DKMS, Deutsche Knochenmark Spende Datei. The first winner that we reached out to, that was a fun moment, is a 61-year-old woman from Bavaria. The second draw has already started. It will be drawn, the second house will be drawn end of February, and it's located near Flensburg. We see good early traction from repeat customers. And this is how the model works. So the total ticket price, there is a service fee. So 28% of the ticket price is a service fee. marketing and sales that we do. And then the remaining part, there's 30% of the stakes that the charity partner receives. And another 30% of the stakes is returned to a player for the form of prizes to our customers. So that's the house, but that is also the interim prizes that we raffle off. Then there's a tax component, which is generated by a VAT on the service fee, and then a lottery tax on the stakes. And the remaining 23% of the stakes is used to cover operating costs of the lottery. Back to you, Sebastian.

Thanks, Helmut. As Helmut has already mentioned earlier, we're actually able, and this was one of the hypotheses when we launched the product, to attract a customer base which is outside of our core lottery player customer base, which is, generally speaking, an older customer base, customers 40 years plus. It's a relatively male-heavy customer base. And with this new product, Traumhaus Verlosung, we're able to attract a much younger audience. You can see that the peak in terms of the age distribution is early 20s, which is quite unique for a lottery product. And we're also able to attract a more female customer base. So for Lotter24, about 41% of the new customers this year were female for Traumasverlosung D2C, direct-to-consumer, it was 47%. were able to expand the addressable market in terms of lottery players, which were not attracted by the classic 6 or 49 or Euro jackpot. And this is actually moving to be correct. On the back of the very strong performance that we've seen in the first nine months, we have already announced that we're increasing the guidance for financial year 2024. We've done that about a week ago. The new guidance is that we expect revenues between 158 and 168 million and EBITDA between 42 and 46 million. This would be a growth of 36 to 45% for revenue and 28 to 40% of EBITDA. We still expect to continue to invest into marketing. So we still see about between 40 and 45 million in marketing for our German core brokerage business. As Helmut has already said, we expect about 9 million euros in revenues for the games business this year. All of this, by the way, is based on the expectation of an average jackpot environment. And we continue to expect mid Yeah, so another thing that I hope that you've already seen is that we announced a share repurchase offer with an offer price of 44 euros this morning. This means a premium of 10% on the reference price. The reference price is the average price in the closing auction on Xetra for the five days up to and including. Yesterday, we will purchase up to a total of 500 So the volume of the share buyback offer is up to 25 million euros. The acceptance period for this offer is starting on the 18th of November and is running until the 29th of November. We're funding this repurchase with a drawdown of debt from available credit facilities and all shares that we purchase will be canceled following the offer. Also, as we have announced this morning, the treasury shares that we had on hand already will also be canceled. So back to Helmut with the closing remarks.

Yes, so what are our key takeaways? We see an exceptionally efficient and extensive acquisition of new customers. We have strong revenue growth. We further improved our gross margin. That's leading to an even stronger EBITDA growth. We've successfully launched a new charity lottery and we have made a share repurchase offer at 44 euros per share. Thank you very much for listening.

Thank you very much for your presentation, Dr. Becker and Mr. Bielski. We will now move on to the Q&A session. For a dynamic conversation, we kindly ask you to ask questions in person via audio line. To do so, click on the raise your hand button. If you have dialed in by phone, please use the key combination star nine followed by star six. And if you're not able to speak freely today, you can also place your questions in our chat box. And we already have received three hands up. Mr. Fuhrberg, you should be able to speak now.

Hi, I hope you can hear me.

Yes.

Perfect. So I have a couple of questions. First of all, congratulations on the results of the retreat. I have a couple of questions regarding trauma spilosum. Firstly, with regards to the marketing, do we or do you see similar CPLs for trauma spilosum or is it below the ones of the classical lottery business? And on top of that, just for clarification, the 8.6 million in billings, does this fully become revenue effective as well? And then the remaining cost items get loose further downwards in the P&L. And the last question here, I guess, is if we look at the revenue or the distribution of the billings, is it fair to assume that of your first 8.6 million in billings, roughly 43% remains with you to cover marketing and operating costs?

Yeah, thanks for the questions. So for marketing, the CPLs that we saw for the first draw were roughly similar to the CPLs that we are currently seeing in our core brokerage business. Let's see how that develops, right? So this was actually a much, much better outcome than we had pictured in when we started the product. We were very, very positively surprised. We will continue to scale marketing for this product because as Helmut has said, we are the first in the market for this. So there is, from our perspective, a clear product market fit that we saw in the first draw. So we will try to really grow this product and invest heavily into marketing. So let's see how the CPLs will develop specifically for Traumasverlosung. In terms of revenue recognition, we do not recognize like tax or charity contributions as revenue. So what we are recognizing as revenue is That is what we recognize as revenue. We can go into some technical details around revenue recognition under IFRS, which is a little bit more complicated. So the service fee is recognized a little bit differently than the cost recovery. Um, but overall in terms of economics, we, we, um, we recognize the service fee and the cost recovery and your calculation when looking at the slide was, was correct, right? So the service fee and the cost recovery is what we get as revenue to cover all of our operating costs, including obviously marketing.

Perfect. Thank you very much.

Thank you so much for your questions, Mr. Fuhrberg and Henry Wendish, you should be able to speak now.

Yes. Hi, everybody. You can hear me fine. First of all, congrats also on the Q3 results and also the upgraded guidance. It's running very well at your site at the moment. I also have one follow-up regarding the Dreamhouse raffle. I had the same question as Marius with the 43%. However, if we look at the cost recovery, which is probably on the side of the charitable subsidiary, and given that it's charitable, it cannot pay out dividends to a holding company. So on a consolidated basis, you see the sales effect, but you do not see the income effect coming to the shareholders effectively. Is that fair to assume or is there something I'm missing?

No, it doesn't matter that the cost recovery is flowing into the charitable subsidiary. the charitable subsidiary is able to have intercompany contracts with other parts of the ZEA group, right? Which act as operator of the lottery and to then pass on basically the cost recovery to cover the costs which are It's all the same, to be honest.

Okay. Okay. Thank you. And then also regarding the page 17, that 30% is going through prices. But if we now assume that you have double the billings, the price will stay constant, right? So the actual sales effect that you will receive, so the 43% that Marius pointed out, will actually rise with, I mean, double or three times the scale. That's also fair to assume. Or will you then, I don't know, buy bigger houses up to three, four, five million? That's something we can model or look at.

Yeah, so the 30% that are going to charity, 30% of stakes, that's regulated by... I mean the prices, so the house that you buy, not the charity part. Same for the 30% prices. So we must... pay out 30% of the stakes as prices. And so you're right, over time, and this can vary between draws a little bit, but over time, we have to make sure that we raffle off enough prices and at the right value to create 30% price payout.

I see.

That's stipulated by the law.

Yeah, that makes sense. Okay, thank you. And then maybe one technical question. You now have the houses that we will give away as inventory. Should we think of, if you then give it away, will it be an inventory write-off? Or how will this work out in the balance sheet?

No, I mean, it will obviously leave the inventory. You can think about it as working capital, to be honest, for us.

Okay, so no P&L effect whatsoever?

No. No. It's really working capital.

Okay. And then also on monthly active users, you acquired some 215,000 in the third quarter. Does that mean that 130,000 roughly is coming from the Lotto24 and the D2C 83,000 from Pramos Valoso? Is that the mix correct or is it like a separate thing? So the 83 is somewhat not in that number?

It's different time periods. So the 83,000 is for the entire raffle. So that ran until the 4th of November. So there is a customer acquisition for October and November included in that number. So it's different time periods. Okay.

Thank you. Okay. Yeah, and then I saw that overall average pay-in per user was a little bit lower than the previous quarters. That is probably because of a mixed effect of no jackpot scenarios in the third quarter. But is it also maybe a little, little sign that demand is slightly going back following the price increases? Or is that something that you still see very, very constantly?

So it's basically two effects. So it's definitely not a demand effect. So it is what you said in terms of the first thing that you mentioned outside of checkpoint environments, we just generally see lower pay-ins. So also when you look back into former quarters, like going back into 2020 and so forth, like there is a little bit of volatility. And then the second effect is actually Dreamhouse, right? So the pay-in is really something more for lottery and for games. but with the dream house, you just purchase a straight ticket. Right. So it's, it's a, it's a different mechanic here.

Hmm. Yeah. Right. So basically pay a pay. Exactly. The dream house. Okay. Thank you. Yeah. So then the mix just goes down a little bit overall. I see. Thank you very much.

Thank you very much, Mr. And yeah, Tim Kruse, you should be able to speak now.

Yeah, thanks for taking my questions. Congrats also from my side. Yeah, a lot of questions already answered. Maybe on the lottery margin, you mentioned that it's actually a bit above your expectation or at least your guidance for the second half of the year. So maybe you could shed some light on that one. where that that came from and is this sort of the 16.5 for um for the for the main lottery uh the level you you expect for the next quarters and and was there even some other increases or some parts you haven't optimized yet or are you already finished with all the optimizing

Yeah, I mean, I think for the next couple of quarters, like we will see margins roughly where they are. So there will be a little bit of margin volatility as we continue to change the product mix, right? So, I mean, as you probably figured from the page that we included on Dreamhouse, that's a good margin product, obviously. But overall, we would expect that to be in the range, right? So, I mean... We tend to guide a little bit conservatively at the moment. We had hoped that we see the increase that we saw then in the third quarter. But overall, we're very happy with the price increase that we pushed through. But I mean, for the time being, we're also done in terms of further price increases in the way that we implemented in June.

Okay, thanks. And maybe last question on your market share. Can you shed some light in terms of how you're seeing development? Are you gaining traction? Is there any change in competitive environment? One of your competitors got the brokering license at the beginning of the year. So maybe you could comment on that. Have you seen any changes there?

Yeah, we believe that our market share has increased in the first nine months of the year. It's a little hard to measure because a lot of the numbers are not published on a regular basis and will only be published early next year. But from the intelligence that we gather, we believe that we have increased market share. Lotte Land has received a license and not in the market yet. They're pretty active in terms of marketing already, but they're not in the market yet.

Okay. Thanks a lot. All the best.

Thank you so much, Mr. Kose. And we go on. We have two more hands up from already spoken speakers. So I... Take the chat question from Mr. Gustav Gans. Thanks for your detailed explanation and congrats to your actual results. First question. May you please explain and describe how your regular CPL activity differs from CPL and jackpot times? Second question. May you please describe how AI gets into your operations physically and how your business model is influenced in percentage by AI within the last 12 to 24 months? And how is your expectation for the upcoming 12 to 24 months? And the third question, you described a backlog with CPL in the third quarter of 41 years. You are CPL. Which time do you see as backlog for return on invest? Is that a regular figure or does this differ within reported quarters? Is it in summer times less efficient on results and turnovers?

I'll try to answer the questions. I have to be honest that I'm not always sure. as to the core of the question. I think I'll start with AI. So AI is not really a driver at all of our business at the moment, to be honest, right? So we obviously use data science. We have a data science team. We have a very broad and deep database and we analyze that very, very actively and we derive data insights into customer behavior and how we interact with customers we use that for marketing for crm and so forth but what we do is is really data science it's it's not ai we're we're not an ai company we do use some tools that are ai based for player protection for example and also on the marketing side um but um it's not um it's not driving our business model yeah The first question with the regular CPL activity differs from CPL and jackpot time. I assume what the question is about how our marketing activity differs rather than our cost per lead. So what we do during jackpots is that we increase especially our performance marketing channels because they are very scalable. notice. So we will invest much heavier into search engine marketing, into display marketing, into social media, into affiliate marketing as well. So anything that is a more digital channel, we will ramp up during peak jackpot time, right? Because we can acquire customers well during these times. And then the third question, I'm not exactly sure what is meant by by the backlog, uh, we don't have a, we don't have a backlog for CPL. So maybe the question is more around the, um, the, um, the customer lifetime value maybe, or the quality of the customers that, that we see. Um, so the, the customer lifetime value for our customers has increased obviously with the increased billing margin that we see. Um, The payback period, if that's what it's meant by the backlog, the payback period doesn't really differ that much during peak jackpot and outside of peak jackpot. Like we overall have seen a decrease in the payback period. So our cohorts are getting better at the moment and since about one and a half to two years. And again, the core quality between the cost per acquisition and the customer lifetime has actually improved as well.

Thank you so much for answering. And we have two more hands up. Marius Vorberg, you should be able to speak now.

Yeah, one follow-up as well on the Thomas Verlosung. What do you think would be a a good estimate for a run rate for further rifles uh down the road like for 2025 2026 is it uh like the current runway points at like three houses uh with reference of like four months uh or would you like to see that to ramp up to more like five or six so um

Over time, we expect to increase the frequency of house raffles. And I would say a target state for us sometime in the near future would be six houses a year.

Thank you very much.

Thank you, Mr. Fulberg. And Mr. Wendig, you should be able to speak now.

Yes, thank you. One quick follow-up also regarding Lottoland. It popped into my mind. Google and Meta have a marketing policy that prohibits non-whitelisted companies to advertise lottery products. Why is it still possible for them, in your view, that they are running marketing here in Germany?

You're absolutely correct that according to the law and according to the policies and the regulation, including the authorities in Germany, that shouldn't happen. And it does happen nevertheless. So clearly, there's somewhat a gap in enforcement and I would say.

All right. Thank you very much.

Thank you, Mr. Wendig. And we have one more question in the chat box. The townhouse verlosung seems like a spin-off from Omaze out of the UK, where you are invested. How did that model help in the development? The margin in charities' lotteries seems better than normal lotteries. Therefore, are other charity lotteries planned or will you try to increase the customer base of Traumhaus Verlosung?

Look, I mean, yeah, we are a small shareholder in Omaze. Omaze is one of several house refills in the UK. So this is not a model which is unique to Omaze. It was around in the UK even before Omaze used that model. So we're, as you know, we used to actually operate in the UK. So this is a model that we were very well aware of before Omaze. So this is not something that we that we only are doing because we happen to be also a shareholder in a Mesa. This is something that we, as part of our ongoing scouting of market developments and other lotteries, saw for a very long time. We were quite interested in this model overall, and we did some market testing and customer interviews in Germany. We also launched a couple of years ago. So again, this is the second iteration that we're doing in terms of house lotteries, house happens to operate a relatively similar thing in the UK. But again, almost also didn't come up with that concept.

Thank you, Mr. Miller for your question. And we have one more hand up. Mr. Abed Jarad, you should be able to speak now.

Hi, can you hear me?

Yes.

Yes, thanks for taking my question and congrats on the great results. I was just wondering, given that the management had projected a mid to high teens growth annually through 2026, is there any changes in the projection given the outperformance in 2024?

No, for the time being, we continue to guide as we have before, right? So you could also see this on the slide with our guidance, the sentence that we included there, the bullet point is exactly as before. So at the moment, there is no change to that guidance.

Yep. Okay. Thanks.

Thank you so much. And in the meantime, we have received no further questions. We therefore come to the end of today's earnings call. Thank you for joining and this lively conversation. Should further questions arise at a later time, please feel free to contact Frank Hoffman from Investor Relations or us. And a big thank you also to the gentleman for your presentation and the time you took to answer the questions. I wish you all a lovely remaining week. And with this, I hand over again to Dr. Becker and Mr. Bielski for some final remarks.

Yeah, I mean, thanks very much. This was definitely the longest earnings call I took place in since I joined about a year ago. So it's really great to see the interaction. So thank you very, very much for being so interested in our business. We continue to be excited about our business. We continue to be excited about the opportunities that we have. Dreamhouse Raffle just being one of them that we're excited about at the moment. And yeah, we'll talk to you in a couple of months when we present the full year results. Thanks very much. Goodbye.