ZEAL Network SE (TIMA) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the ZEAL conference call regarding the publication of the preliminary figures 2019. [Operator Instructions] Let me now turn the floor over to your host, Mr. Jonas Mattsson, CFO of ZEAL Network SE.

Good morning. Good morning, everyone. I'm happy to have the opportunity to speak with you. I hope you have all received the presentation that I will take you through in today's presentation. If you have access to it and you can more easily follow me. So what I would like to talk about is what you will find on the second slide, which is the content. So let me start by explaining the content for today. I will give you all a brief summary of the achievements in 2019. We will move on to talk about the preliminary 2019 numbers, followed by a brief summary of the German online lottery market. And then we will go into the guidance to 2020, where we expect [indiscernible] this year. And then we're going to do a deep dive in our future cost structure. So moving on to Slide 3. Let me provide you with a summary of the achievements in 2019. 2019 was an exciting and successful year for ZEAL. Not only did we reintegrate Lotto24, we also made a business model change from secondary lottery business model into brokerage model. And we did relocate the headquarter from London to Hamburg. And all this is leaving a lot of uncertainty behind us, and we can now fully focus on driving the German business and the German brokerage business to its success. Clearly, this is also improving the risk profile of the company with so many uncertainties being going on away. We will see or we have seen a rise in billings. And as promised, we have taken out significant cost in the business. Our adjusted EBITDA is in line with our communicated guidance. And we have further expanded our market share. Let's move on to Slide 4, where you see a preliminary profit and loss statement for 2019. So even though I'm very proud of the 2019 results, I have to say they are not an indicative or reflection of the future performance. 2019 was the year of change. You remember, the business model changed. You may remember that we acquired Lotto24 from a financial point from mid-May. So all these changes make the comparison with the future guidance or the guidance for 2020 very difficult, but let me briefly talk about the performance last year. Billings. An increase of close to 60% sounds like a phenomenal achievement and it was a good achievement. But clearly, the majority of this is coming from the inclusion of Lotto24. Total operating performance, which was a key performance indicator in the ZEAL world, was a decrease, and that is due to the switched business model and also the big payout we had in August. More exciting for us is the personnel expense and other operating expenses. So even though we were able to -- even though we are absorbing EUR 22 million of cost from Lotto24, the total cost base was reduced by EUR 20 million. That you can see, this was a significant cost savings. And if you break that down, you have that in personnel expenses, which is [indiscernible] a reduction, and we are now around 190 full-time equivalents in the company, coming from the early communicated 350 in the combined companies. Direct costs, also significant reduction, clearly coming majority from nondeductible VAT and the removal of hedging cost that was kicking in from 15th of October when we changed the business model. And then we also have some other cost of operations, and they are mainly more accounting related since we now are adopting IFRS 16 and all renting -- rent cost is coming below the EBITDA line. All this leads to an adjusted EBITDA of EUR 28.8 million, in the middle of the guidance that we provided, EUR 27 million to EUR 30 million. So that was the 2019 numbers. Let me now briefly, on Slide, 5 talk about the market leaderships that we have further extended. This is not all ZEAL numbers, but I still believe this provide a valuable insight for you. So start with 2013. Lotto24 on its own had 12% of the market. And in that year, we had only 4% online penetration in Germany. Moving into 2018, which was the last year where Lotto24 were a stand-alone company, they had a market share of 34% with a 13% online penetration. And in 2019, that has further been expanded to 35% of the total market. But please remember, in these numbers, we only have 2.5 months of Tipp24 in these numbers because the first 9.5 months, Tipp was in secondary and not counted into these numbers. And we have now, in 2019, reached a 14% online penetration. Clearly, this market percentage will increase over time when we include the full Lotto24 and Tipp24 sales in 2020. Now let's move on to Slide 6. And this is where I think we have had numerous discussions with you about this. I wanted to provide a guidance for this year, 2020. As I said earlier, 2019 is very difficult to compare with due to the change in the business model and the full year now we have with Lotto24. But the guidance for this year looks like, we will have billings in the range of EUR 550 million to EUR 570 million. Revenues, which then is a function of the margin, will be in the range of EUR 70 million to EUR 73 million. The gross margin, meaning the margin between billings and revenues, is approximately 12%, which is in line with the performance of Lotto24 stand-alone. The adjusted EBITDA is expected to be EUR 5 million to EUR 8 million for the year 2020. And cost per lead, now we're talking about the German businesses only, will be lower than the previous year. And here, we have a relevant comparison. It was EUR 32.50, which is a combination of both business models, but this would clearly be lower when we can take advantage of all the marketing channel and be more efficient in our acquisition. And then new registered customer that we also focus on or talking about the German business only, we're expecting nearly twice as many as we had in 2019. All this provide a good solid foundation for an interesting and successful 2019 for us. Let me then give you a more deep dive and a better explanation about the cost structure, which you will find on Slide 7. And what we're trying to do here is to reconcile the Lotto24 stand-alone where we now see the ZEAL Group will end up in the end of the year. So if you go from the left to the right in the chart, so Lotto24 stand-alone, adjusted for inflation and including some reclassifications, had an approximately EUR 22 million in today's cost value. We then have to add EUR 5 million on top of this for volume effect. So the bigger group has more billings, and obviously, has more direct costs, but also some marketing costs as well on top of this for more people handling a bigger volume. That accounts for EUR 5 million, and they are very scalable up and down. Platform investments. We are investing EUR 4 million more than the Lotto24 stand-alone. As you know, Lotto24 have had financial constraints. We believe that they have been underinvested for some year due to good reasons. ZEAL has always had opportunity to invest more, having more agile and future-proof platform. We think it's absolutely key and strategic decision to continue investing in our platform to making ensure that we always have the best-in-class platform. We are an e-commerce company, and this is one of the key success factors to fight the competition that is out there. On top of this, we're also investing roughly EUR 3 million to be able to add new products like instant-win games, like social lotteries to be able to spin up this new service and product as quickly as possible. The old platform that Lotto24 had was more for the broker business. We see opportunity in the market to expand this, have more versatile lottery clubs offering, instant-win games offering, social lottery offerings that obviously will come with an EBIT return in the future years. That's why we say it's key to have that functionality in being able to launch these products and services on top of the current platform. And then the transition costs. As we said originally or earlier, we will have 2020 also as a transition year. Of this EUR 5 million, I would assume that EUR 3 million will go away in 2021. We still have 2 listed company. We're still making sure that the platform in this year mainly will be united to one platform. So these EUR 5 million comes on top. But like I said, EUR 3 million will most probably go away in 2021. All this leads to a preliminary cost base for our German business of EUR 39 million. And when you look at the ZEAL Group, you will also have to add EUR 3 million for our international business. They are cost neutral or profit neutral, I should say, because the international business also come with revenues and EBIT. So all in all, you will see EUR 42 million, but the EUR 39 million is the German business where the focus clearly is. If we go further to Slide 8, we have also provided a chart how the cost structure is divided. So if you look at the left, you see the cost base of Lotto24, where I talked about the EUR 22 million, and then I'm also showing how much marketing spend was done, which was EUR 15 million. The way we see the cost breakdown, the EUR 39 million that we just talked about, is you have a personnel cost expenses of EUR 17 million; you have direct cost, which is a function of high volume, EUR 8 million; you have other costs of EUR 14 million; and on top of that, we're investing further EUR 6 million in marketing. And this is a strength that we now have with the bigger size of the company and a very strong balance sheet that we can invest further in growth, which obviously will have a payback time in the future. With all this, I would like to conclude this part, which is my presentation and open up for questions.

[Operator Instructions] And first up is James Letten from Berenberg Bank.

Just a few quick questions from me. Firstly, could you just give us an idea about where the customer churn ended up following the transition? I think you originally guided 25%. And also the revenue dissynergies, where that's ended up? Then for your top line guidance in 2020, what organic growth rate are you forecasting for that? And then lastly, I'm wondering, could you give us any comments on the state treaty in 2021? There's been a lot of news or rumors in the papers about it. And I'm just wondering if you have any internal opinion on what's most likely, whether you're likely to keep the lottery licensing system, whether that will remain in place. So those are my questions, please.

Thank you, James. So the customer churn and the revenue synergies is very much in line with what we have said to the market, around 25% to 30%. That number still holds true. So I don't have any new prediction. It's still really relevant to what I've said previously. The organic growth is somewhere around 10% to 15% in 2020. And lastly, the state treaty. We have had a number of discussions about this in the last couple of months. Honestly, we don't see this as a risk rather like an opportunity. As you know, the state treaty comes into play from 1st of July 2021. The early indication is there are some change. The majority of the change is for the sports betting and the casino and the roulette business. And there are certain limitations for how much player can bet on this side. We have already implemented this one. We believe there is also even more -- slightly more freedom in marketing. So all in all, we don't see any negative effects on this. But of course, we will need to see what finally will -- or ultimately will be decided. And then your question about the possibility of renewal. We take this for granted, it will be renewed. We don't see any risk. This has been renewed already several times in the past. So for us, this is, I say, given.

Okay. On the regulatory change to casino and sports betting, you've launched scratch cards recently. I think in 2018, you first launched your scratch cards. Does this change the longer-term business model here because, obviously, with that kind of repeat business, then maybe some considerable upside if you were to branch out into new verticals? Is that something you've been talking about internally, whether you do more instant-win games?

So clearly, we have been talking about this internally and adding instant-win games to our product portfolio is something that is key for us. Today, this is a small part of the business. And we hope that we can further grow this. We are not expecting anything similar to what the old ZEAL Group had, but we still believe this is very important addition because it's also improved our margin over time. The other thing, when we can, so the new state treaty also then most probably will allow that you can offer sports betting and other products on the same website. Would that be an opportunity for ZEAL Group? In the near future, most probably not. In the long term, we obviously will take a look at it. We believe that lottery product -- customers want to buy lottery products, and we want to be the best lottery company in the world when it comes to this one. But, of course, we don't exclude to offering partner solution in the future.

Next up is Patrick Schmidt from Warburg Research.

Thank you for taking the questions, and they are pretty similar, actually. But maybe you could give us some more detail on the base of 2019 in terms of your billings as there are, I guess, some changes in terms of some ZEAL old business model, some international billings are fading away and the addition, obviously, from Lotto24 for the first month coming in. So what should we think about base of 2019 that we can get a better feeling for what -- actually, the growth will look like looking into 2020? And I guess the marketing budget of EUR 20 million is kind of the indication you're looking for to add about more than 500,000 new customers for the CPL of 30 -- around EUR 30 per customer, I guess. And then also on the regulatory headwind for maybe secondary lotteries. What is your opinion? And do you see your churn rate affected or maybe the potential of other customers being turned away of Lottoland, for example, and joining your portfolios?

Thank you, Patrick. So let's start talking with the secondary headwind. Yes, we see very clearly that the secondary lottery business model comes to under severe pressure. We see in the market that marketing companies are not willing to do business anymore. We have discussions in the industry about payment blocking. The state lotteries have a number of competitive legal cases against secondary lottery providers. So I think it's very clear that the headwind is stronger and stronger. And to be completely honest, I've never been so proud of having taken a decision to switch to a more sustainable or a long-term sustainable business model. You remember, we talked about in the past how we can overcome the lower margin, but today, I have never been so sure that the decision that the company did to actually convert in or change the business model into a brokerage model is the right thing for the company. Whether Lottoland wants to go into brokerage, you probably have to speak with them. But clearly, Tipp or ZEAL made a decision that the secondary was no longer sustainable. I wouldn't be surprised if they would come to a similar decision, but you should really speak with them about this one and their ability to move back to the German, whether they are welcome and how they will do it. In 2019 numbers, so yes, it's very difficult to talk about this for the reason is that you have 7.5 months of Lotto24 in the books, and you have 2.5 months of ZEAL or Tipp in the books. So I would rather to give you better guidance on 2020, which is the relevant one, which is the EUR 550 million to EUR 570 million, which is growth if you just would take the 2 stand-alone companies together. But I think it's more in order to trying to build the bridge because it will not be relevant for you looking 2019 number. As you see, the 2019 number was EUR 467 million, but as a combination of secondary brokerage and so forth and so on. And obviously, we will provide even more details in the final reports that we publish in March. You will see all the breakdowns. But clearly, just to give you a little bit of insight, roughly EUR 37 million was coming from Tipp for the last 2.5 months, the rest was Lotto24 numbers.

Sorry, could you repeat that figure, I couldn't...

Okay. Sorry. So in the 2019 numbers, in the brokerage world, Tipp24 customer contribute with EUR 37 million, the rest was Lotto24. But as you can hear, this is very difficult for you to make the bridge because it's combining different business model. I think it's probably not the most relevant comparison. But EUR 37 million was coming from Tipp of the brokerage model for 2.5 months. And then you talked about marketing. And yes, we are planning to invest more in marketing, but it also has to be a little bit caveat on this one. This is very due to the jackpot situation. We are assuming an average jackpot situation, and this is the number we think is reasonable. Should the jackpot be as successful as it was in 2018, there are opportunities to probably invest even more. And if there are, we would gladly do so. Because when we do marketing investments, our payback time is always or below 2 years. So it's a good thing to do more marketing investment. Should the jackpot be very low, then obviously spending a lot of marketing will probably make less sense, and we'll probably scale it back. So this is, I'm not saying a fully variable, but we will scale it up and down depending on the market conditions.

The next question comes from Jean-Marc Mueller from JMS Invest.

I have a clarification question regarding the guidance. What you call revenues in 2020, the guidance of EUR 70 million to EUR 73 million, that compares to the EUR 113.5 million, but would it not compare to the top, actually, because I think the EUR 70 million to the EUR 73 million includes the sales from the international business and also the other operating income?

Yes, we can clarify this one. So yes and no. So the first one, the revenue, EUR 70 million, EUR 73 million compares with EUR 113 million. The difference between revenue and top in the old world was that in the top, we also included hedging income. So if we had received an insurance payment or we've done a natural hedging, that will come in as other income and was included in total operating performance. The EUR 70 million, EUR 73 million include revenues from our international business, yes. So that's the total ZEAL Group revenue number, EUR 70 million to EUR 73 million.

Okay. Understood. And then on the gross margin, that will be my second question. Obviously, now around 12 percentage points, I understand that there is still plans and ideas how maybe that can be increased somewhat. Maybe if you can elaborate a little bit on that? And then my final question would be, if you could give us just a little bit an indication on like cash, net cash level at the end of 2019, so that we have a little bit of a feel for what the balance sheet looks like at the end of 2019?

Thank you, Jean-Marc. So let me start with elaborate about the margin. You're absolutely right that one key initiative the company has, and I think that has been very true for the last year also in Lotto24 is that we would like to see margin improvement. And there are a number of initiatives that we are taking. So we are further enhancing our lottery clubs offerings. We are adding products like instant-win games and social lotteries that typically comes with higher margin. All this looks interesting for us, but I still would like you to be a bit cautious and assuming too much higher growth rate in the margin. So clearly, we will increase over time. But from your modeling purpose, I would like to give you the evidence before you put it into the model, but there are clearly, in our own analysis, room for improvements from the 12%. And I think that's also true when you look at the Lotto24. They have done slight increases over the last years, and we think there is further opportunities. And the last thing is the net cash. If I believe the number in 2019 was around EUR 120 million. Don't forget, we did a payment in January 2020 for EUR 54 million to the tax authorities. I think you saw our ad hoc announcement and the reason was really to save interest on the potential VAT exposure and also get interest if we ultimately win this, which we believe we will do.

And next up is Andreas [indiscernible] from STK.

Jonas as you know, ZEAL had been famous for its high dividends 2 or more years ago. I would like to ask you, did you already develop a plan for a dividend payment in the future? And if so, how are you going to structure it? And what is your intention or even estimation for any dividend distribution for the years 2020 and 2021? These are my questions.

Thank you very much, Andreas. So what we have been saying is that we will come up and present to the market, together with our financial statement on March 26, our dividend policy for 2020. So I have to come back on this one.

No short statement possible today for you?

No, we will inform the market collectively how we will treat any potential dividend payments.

At the moment, there are no further questions. [Operator Instructions] And the next question comes from Berenice Lacroix from Kepler Cheuvreux.

Just one, actually. Could you give us some trend -- well, let's say, a bit more indication in terms of customer loss, which you noticed in Q4 following the discontinuation of your secondary lottery business?

So thanks, Berenice. It was similar question that we received from, I think, James. We have assumed, and that was what we communicated, that we will have a loss of revenues around 25% to 30%. I think that number still holds true. So I can't give you any more precise number, but I think this is a reasonable assumption that we have met our targets.

And the next question comes from [indiscernible].

I've got one last question from my side. Is in your revenue guidance, the increase of prices announced by the loto -- German Lotto and Totoblock considered or not?

So the price increase that the lottery organization have decided comes into play the last quarter of this year. So it has a very limited impact. We believe as in our statement that this is positive for -- especially for the product, 6 out of 49. We think that they will build up jackpots much quicker, and I think this is good for the product, especially when competing to other products like EuroJackpot that typically have much higher jackpots. So we believe this is good. In 2020, it will have rather small impact and everything is taken into account in our guidance. But like I said, it's only for one quarter, and the price increase from EUR 1 to EUR 1.20 per line.

And we have a follow-up question from Jean-Marc Mueller from JMS Invest.

Yes, just a very quick follow-on. If you look at Q4 2019, in terms of jackpot occurrence and the size of jackpots, et cetera, do you consider this an average quarter? Or was it a particularly good quarter or particularly poor?

So I think the last quarter was not an outstanding. We had some ups and downs. The 6 out of 49 didn't perform particularly well. Actually, it built up and the -- what I call a 30-month goal was actually won on was it 1st or 2nd of January. EuroJackpot had some ups, but I would say it's more an average quarter.

[Operator Instructions] There are no further questions. Over to you, Jonas.

Okay. If you have no further questions, then we would like to close the call. Thank you for your participation on this call. Our next regular call will be the publication of the annual report on March 26, and we hope that you will participate as well. Thank you very much.