ZEAL Network SE (TIMA) Earnings Call Transcript & Summary

Good day, and welcome to the ZEAL Network SE Full Year Results 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jonas Mattsson. Please go ahead, sir.

Thank you very much, and good morning, and welcome. Thank you for your interest and for joining this call. I hope you can hear me loud and clear. I trust that all of you have access to the webcast link, which should have been distributed to you. If not, it's also available on the ZEAL website in the Investors section. Additionally, you will find a link if you want to download this presentation. On Slide 2, you will find today's agenda, highlighting the main areas, Helmut and I will cover, before giving you the opportunity to ask questions. We will start off with a summary of last year, followed by business update and some recent developments. We will then talk about the numbers and some relevant KPIs. We will continue with an outlook for the year before we are finishing off with the key takeaways. Let me now hand over to Helmut, our CEO, that will take you through the summary of the year, our ESG initiatives, as you know, you are aware -- keen to hear about and, of course, the business update section. Helmut?

Thanks, Jonas. Good morning, everybody. Let me take you through a summary of 2020, which you will find on Slide 3. All in all, it was a great year 2020. Billings were up 40%. Our high marketing investments led to a record level of 918,000 new registered customers. We've also shown an improved gross margin in the German segment of 12.3%, that was 11.7% in the previous year. And this development was also helped by an exceptionally good jackpot environment. So with 6 EUR 90 million jackpots and Lotto 6 out of 49 product change, which was essentially a 20% price increase. After our business model change and the merger, we have proven the strength of our business model and already shown some of its upside potential. We've been able to launch a completely new and very successful charity lottery called freiheit+. Besides that, we fully implemented the targeted cost synergies already in the fourth quarter of 2020. We delivered what we had promised. With our brands, Lotto24 and Tipp24, by the way, Tipp24 for the first time after the business model change in the full year accounts, we were able to further expand our online market leadership, with an online market share of now 41%, coming from 35% in the previous year. So thank you for believing in us and helping us to reach a market cap of EUR 1 billion for the first time in 2020. And something that is not mentioned on this slide, but we will come back to this a little later in the presentation, we confirmed our dividend policy and will propose an attractive dividend for our shareholders despite corona. Finally, our business is also giving money to good causes. In 2020, we provided a total of EUR 246 million to important social and community projects with our activities under the brands Lotto24 and Tipp24. So let's move on to Slide 4. We are very aware of the importance of ESG for us as a company with the responsibilities we have and, of course, also for you, who are already invested or want to invest. This actually may be our secret superpower. We can today only give you a brief summary of what we do, but you will find more details in our new nonfinancial report, which is actually part of our annual report 2020. We care for society. Corporate social responsibility is built into our business model. 40% the state lottery stakes and 47% of the social lottery stakes, for example, from our new charity lottery freiheit+ are donated to good causes. So our activities provided EUR 246 million of support to important social and community projects in 2020, money that is vital for the funding of numerous projects in welfare, sports, culture, conservation and environmental protection. We care for our customers. As a provider of Germany's most popular lottery games, we help our customers to play responsibly despite the low risk of addiction in lottery products. We have, therefore, developed a variety of measures. For example, our multi-stage age verification process that ensures that people under 18 do not have access to our products and we offer players the opportunity to exclude themselves from playing. And we care about our employees. At ZEAL, we work as flexibly as possible. In the corona crisis, this has already paid off. Since March 2020, the entire ZEAL team has been working from home. During this time, productivity has been very high, and the motivation of our staff has even increased. So as soon as the corona restrictions are removed, we will start our new normal working policies and conditions. For example, variable office days, of course, aligned with the teams and the people managers. And we live in value diversity. We've attracted talents from all over the world and walks of life. We have 25 different nationalities in our team, and 20% of our team work part-time. And finally, we care for the environment. That's something that affects us all climate change and sustainability, which is why we want to play our part. As an e-commerce company that sells digital products, we already have a pretty light environmental footprint. Nonetheless, we do what we can to further reduce it. We procure certified equipment. We give retired hardware second life, donating it to schools. And at our headquarters in Hamburg, we procure electricity from 100% renewable sources and reduce it where we can as part of our employee-driven Green ZEAL initiatives. I hope that you can see that we're already doing a lot and that was what we wanted to share with you today, and we'll continue to work on this and report on this. Let's now move on and provide you with a business update, that's beginning on Page 6. So the online market -- the online lottery market in Germany has grown from EUR 250 million in 2013 to around EUR 1 billion in 2019. Last year, this online trend continued, and we are now approximately -- at approximately EUR 1.6 billion in online sales. We've continued to grow our market share from 35% in 2019 to 41% last year. Our long-term ambition is to have 50% of the online market. Let's move on to Slide 7 and take a look at the development of the online market. The online penetration in the German lottery market is still comparably low. In 2019, Germany had 14% online penetration compared to 30% in the U.K. or even 46% in Sweden or 63% in Austria. Last year, the online penetration in Germany grew to approximately 20%. That's a good trend. However, other digital goods industries like music, tickets or banking typically have a much higher online penetration of 50% or even more. This is our #1 growth opportunity. We want to take advantage of the rising online penetration in the German lottery market. The total size of that market is EUR 7.9 billion, and that's just for the state lottery. It's EUR 9 billion, including all other lotteries. Long-term, we believe the online market will move towards 50% of the total market, and we want to own 50% of that online market. Let's move on to Slide 8. I would like to give you an insight into why our customers are so valuable. You can see the activity rates of our new customers after we've acquired them. You can see that actually a significant part of newly acquired customers stopped playing within the first 1 or 2 months. However, you can also see that after 6 months, about 25% of our new customers are still playing and have become extremely loyal. On the next slide, you can see how this leads to us building out our very loyal customer base, cohort by cohort. So on Slide 9, which actually looks a bit complicated, so I will explain it. What it shows is the billings development for each cohort of customers that we have acquired in past quarters. In our business, we spend once for customer acquisition and then monetize these customer cohorts for many, many years. This creates a strong and highly predictable customer lifetime value. The slide also shows our strong customer acquisition track record has led to strong billings growth year-over-year. And you can see in this slide, how our high jackpot situation leads to a peak in billings and it actually boosts our customer acquisition in that situation as well. So let me drill into 4 of these cohorts that you can see on this slide -- on the next slide. So here on Page 10, you can see the billings development of 4 randomly selected customer cohorts. For the cohorts from the quarters Q1 2014, Q1 2016, Q1 2018 and Q1 2020, we have shown the respective payback periods. The payback period is the amount of time required to earn back our customer acquisition costs. So in the Q1 2018 cohort, for example, EUR 4.6 million were invested in marketing. This customer cohort took 18 months to earn back the marketing cost. After that point in time, this cohort of very loyal customers become profitable and has been and will be providing a positive cash flow for ZEAL for many years. So it's slightly -- over simplified terms, we spend once for customer acquisition and then monetize for life. So let me now talk about a few recent developments that we believe are important for you to know about. So on Page 12, we want to quickly point out 3 things. One, the German Federal States have agreed on a new gambling state treaty, and that will take effect on the 1st of July of this year, 2021. Already, 11 of the 16 federal states have ratified this new state treaty. For lottery brokers, like us, the brokerage permit will remain valid for another year until 30th of June 2022. By then, we will have to apply for an extension of that permit. This will be a very straightforward exercise. We do not expect any significant impact from the new regulation on our business model. The biggest change for us will be that we can apply for an online games' license. So that's called a virtual slot machines license and a sports betting license. Both could become valuable additions to our product portfolio. Right now, we are looking into how and when we can obtain a games license to then serve games to our customers that are tailored to our lottery player target group. The coronavirus restrictions and lockdowns have not had a negative impact on our business model. People in Germany continued to play, so the jackpots continued to build up to attractive levels, which is important. And then finally, Google, has recently changed their Play Store policy and announced that they will accept gambling apps for licensed products and providers in Germany with effect from 1st of March 2021. We are in the app approval process right now. The launch of our apps in the Google Play Store will support our growing share of mobile usage and give us additional customer acquisition opportunities. So with that, I'd like to hand back to Jonas.

Thank you very much, Helmut. As I told you before, I've never been so convinced that switching business model was the right decision for ZEAL and for our shareholders. By leaving the legal uncertainties behind us, we can now instead focus on building, growing a sustainable business in Germany as we have done last year. Let's now talk about the implementation of the synergies, which I can report has to full extent materialized already last year, 6 months earlier than planned, and we're now on Slide 14. So in November 2018, we announced a takeover of Lotto24. On 14th of May 2019, we completed the transaction, and this is a starting point for our synergy implementation. In May 2020, i.e., 1 year after consolidation started, we've already achieved -- reached 91% of total synergies. And I'm delighted to report that in December last year, we realized for the first time the 100% achievement of our synergies, 6 months earlier than planned. As you all know, ZEAL's share performance performed very well in 2020, especially comparing to SDAX. Since the day of the business model change in October 2019, the share price has more than doubled. The market cap exceeded EUR 1 billion in December and have since fallen back a bit. As a result, the ZEAL's share was again included in SDAX in May '20. And in November, the same year also became part of the MSCI Global Small Cap Index. All this is a great testament that also the capital market appreciates the development of the company. Let me now take you through the numbers in greater detail. So let's move to Slide 17. What you see on this slide is a summary of our income statement. I will explain part of this more in detail and also in the coming slides. We had a strong 2020, in which we achieved EUR 87 million in revenue. We're able to take advantage of a positive market environment, but also had Lotto24 fully included in our numbers. As I explained in previous call, if you compare with last year, the revenue is impacted by the business model chain, and the lower revenues should not be read as anything worrying in our business, just a natural evolution of now operating a more sustainable business model, the broker business model. For next year, we will be able to compare like-for-like, which will simplify for each and every one of us, and I'm really looking forward to that model. But allow me to take a short detail and make a comparison with Lotto24 stand-alone to provide a bit clarity even if they were not formally part of the ZEAL group, the first 4.5 months of '19. But it, nevertheless, will give you an indication how the business has developed. So revenue for Lotto24 AG in the company was approximately EUR 43 million in 2019. This means that it almost doubled the broker revenues to EUR 80 million with the inclusion of Tipp business. And if you would exclude the Tipp brand, meaning only selling the Lotto24 portfolio, the revenue in 2020 would have been approximately EUR 52 million, a 50% increase. From my perspective, this is an amazing growth we have seen in the broker business, which justifies that changing business model was the right thing to do, also coupled with the great performance of the company last year. Let's now move on to cost. We have been able to reduce the cost by nearly EUR 14 million. It should be noted that Lotto24's cost was not included up to 14th of May of 2019. So the cost savings would have been correspondingly higher if we have included that. Having said this, all synergies that we promised have now been realized. On top of this, we also invested more than EUR 10 million more in marketing to take advantage of the positive market environment with relatively high jackpot throughout the year. The purpose is, of course, to acquire more customers, which I'll come back to in a moment. And finally, an adjusted EBITDA of EUR 12.7 million. As expected and communicated to you, it's below previous year, but at the time, we did operate a different business model. So I'm very satisfied with the result, especially considering marketing investment the company has undertaken. With the lower marketing investments, the EBITDA would, of course, have been naturally much higher. But it indicates the strong year we have had when being able to absorb such marketing investments. And you have some final notes. The amortization and depreciation include amortization of the Lotto24 takeover. We also have normal depreciation and the write-down, Lotto24's old technical platform that is now mostly retired. And the nonrecurring income is mainly related to stamp duty reserve tax of EUR 3.7 million that we got back from the U.K. tax authorities. Let me now give you a bit more insight on some of the KPIs that you will find on Slide 18. Billings, which is showing the transaction volume we are handling, had grown by 40% to EUR 653 million, which is truly amazing for ZEAL and, of course, driven by the inclusion of Lotto24, but also thanks to the successful customer acquisition and the high jackpots we had last year. This indicator is of significant importance since our business is highly dependent on economy of scale, and we clearly have the scale. Even if Lotto24 was not part of the ZEAL group for the full 2019, let me still provide a bit of clarity how the development would have looked like. If we look at Lotto24 stand-alone, its billing amounted to EUR 329 million in '19 and in 2020, excluding the Tipp, billings rose by 39% year-on-year, and including Tipp, meaning the full volume that goes through Lotto24, we doubled that volume. Once again, this is important since size matters in this broker business. And if you do the same comparison for revenue, we have a 50% increase, as I just mentioned. In terms of ZEAL's gross margin, for the Germany segment, we achieved 12.3%, thanks to strong sales of our premium products like lottery clubs, supported by the market launch of our social lottery freiheit+ in March last year. This is giving us confidence that the margin can be further increased in the medium term. And for better comparison, we've also included a lottery margin of Lotto24 stand-alone, which in 2019 was 11.7%. So we're clearly making improvement here with 0.6 percentage points higher than in 2019. On Slide 19, we have highlighted the net cash and new registered customers. Net cash is now at EUR 65 million, down by 46% due to the payment to the German tax authorities of EUR 54 million in January. As I told you before, this payment was made in order to earn interest and avoid penalties. We also paid a dividend of EUR 80 million to our shareholders in June last year, as I'm sure you're all aware of. Even if we are confident to ultimately win the case, we have indicated that the remaining VAT exposure is approximately EUR 22 million. To summarize this part, we are optimizing the cash situation of the company to either gain a return on excess cash or return to our shareholders, in line with our dividend policy. Let me now talk about acquisition. It has been a remarkable year in terms of acquisition. In fact, the best ever in the history of ZEAL. We can proudly report 918,000 new registered customers in the Germany segment. If we compare this with Lotto24 from the same period last year, they acquired 397,000. This means 131% increase year-over-year. What we see is that the additional marketing investments are paying off, and our ambition to grow and being the market leader is on its way. All this set us up for an interesting future when these customers continue using the services. As we have explained previously, the customer that ultimately sticks are very loyal for many, many years. On Slide 20, you will find further performance indicator. Cost per lead, or CPL, is significantly reduced if you compare with Lotto24 stand-alone last year. This is thanks to more efficient marketing channels that now the entire group have access to. But I also want to call out the target is not to reduce this to the lowest level possible but to continue to invest in marketing where we get a good payback time or good return. So lower CPL is, of course, nice, but not needs to be seen in a wider concept and not a target per se. The average monthly active user for the first -- for last year is close to 1 million. The sharp increase is, of course, due to the inclusion of Lotto24 but also the growing business that we have had. From next year onwards, this number will be much easier to analyze when we have better comparison data. Lastly, on this slide, average billings per user is at healthy EUR 55. This is indeed a significant increase from last year, thanks to more products, price increase, but also supported by higher jackpots, which drove frequency and spend. Let me now talk about outlook for the financial year that you will find on Slide 22. So the guidance for this year is that we will continue to grow and expand our business, especially in the profit level, which underpins my statement that this is an economy of scale business. We estimate billings of at least EUR 700 million, revenues of at least EUR 95 million, adjusted EBITDA of at least EUR 20 million. As you may recall, we, last year, had a favorable jackpot situation which drove activity. But for this guidance, we, of course, can only assume a statistical average outcome. We also expect to continue to invest in marketing and grow our market share. The planned marketing spend is similar to last year of EUR 32 million. And just to put this in perspective, Lotto24 spent EUR 30 million in 2019, EUR 15 million in 2018. So we are really stepping up the game here. And I can finally announce what we are planning to do in terms of dividend. And as always, subject to approval of the AGM, thanks to this sustainable business model that we have talked about, the increasing profitability we are planning to pay out EUR 20.2 million this year, which is 12% more than last year and more than double what we paid the year before. This corresponds to EUR 0.90 per share, and our intention is to increase this to EUR 1 per share in 2022. So let me finish off by summarizing. It has been a very successful year with a 40% growth in billings and close to 1 million customer acquired. All synergies have been implemented 6 months earlier than planned. We have launched new products, which have been very appreciated by our customers. And our market cap has been doubled. So 2020 was one of the most successful years for ZEAL. Thank you very much. Thanks for your confidence, and let's now open up for questions.

[Operator Instructions] We will take the first question from Mr. Jean-Marc Mueller from JMS Invest.

Congratulations on a great result. Just 1 question from my side. I think in the annual report, you alluded a little bit what is possible midterm. Maybe if we can talk a little bit about the year 2025, just as a mid-term guidance range? Maybe if you can elaborate a little bit on what you write regarding goodwill and your assessment of the sustainability of the goodwill because there, you're rightly announced about an EBITDA of around EUR 100 million in 2025. Maybe if you can help us out on that number a little bit and how you see how you can get there?

So thanks for your questions, and I'm happy to elaborate on this one. So we are explaining how we justify the goodwill. The goodwill in our books is EUR 160 million and it's a big number. And of course, for you as investor, you need to make sure that we don't have any risk for impairment. That would obviously be not a good situation for the company. So we would like to fully explain how we come to a justification that this is supported. So if you look at our business going forward, you see that the online trend continues. We estimate that the online win in the mid- to long-term be 50% of the total market. We have ambition to have a 50% market share on this. And if you extrapolate everything, you will clearly see that we have already communicated to you that we expect double-digit growth from today and going forward. That will lead to significantly increase in billings, that is then dropping down to revenues. And then as I have said so many times that this is really economy of scale, and 80% to 85% of everything from the revenue line goes down to bottom line to EBITDA or are invested in further marketing. So I think this is an extrapolation. This is something that we think is reasonable, and we would like to clearly state our underlying assumption. It's not a new guidance. It's not a guidance at all for 2025. We only provide guidance for this year, but it's still giving you an indication. So you can assess the justification of the EUR 160 million that is put on our balance sheet.

We will take the next question from Marius Fuhrberg from Warburg Research.

The first 1 on the marketing of EUR 32 million in 2021. Do you expect also a comparable number of new customers coming from this? And for these new customer cohorts, what is your intention, how long the payback period should be? Next one is with regards to the guidance, how much is included from the new gamings business you should be able to be providing from July onward? And another one with regards to the tax loss carryforward, when are those using up so that you have to pay taxes in the future? And the last one is on the cost, as you point out that all of your synergies are included by now, should we expect the costs to be rather stable from now on?

Okay. So that was a lot of questions. I hope we remember all of them. If not, you have to remind us, please. So your first question was about marketing. So with that kind of investment EUR 32 million, we would hope to achieve a similar number, that's right. But you always have to take into account -- we always have to take into account the jackpot situation as well, right? If it's a great jackpot situation, it's easier to reach that number. If it's an average jackpot situation, it's what we're assuming for our guidance, it's already slightly harder. And if it's a terrible jackpot situation, it's actually -- then it becomes hard to reach that kind of number. But in principle, we are making this investment to reach similar numbers. On the payback period, so based on the data and the analysis that we have and also, I talked a little bit about how valuable our customers are, we've gained even more confidence in the long-term value of our customers. Our prediction models are very robust. We have lots of customer activity data, of course. So we can predict and model each and every cohort. And actually, we know relatively quickly after acquisition how good a cohort is developing. So based on that, in principle, our customer acquisition strategy remains unchanged, but we are a bit more confident to acquire aggressively on the fringes. So we may actually acquire a few customer cohorts this year with a payback period of above 2 years because we are so confident about the value of those customer cohorts that we acquire there, the long-term value of those customer cohorts. And then you asked about games at the July date. So what we've learned is that the new authority in Saxony-Anhalt is going to be ready to take applications on the 1st of July. But it's a little bit unclear to us and probably to them as well, how long it will then take from submitting an application to getting a license. So that can take a couple of months, we don't know for sure. So we will have to evaluate that situation as they build up the authority, and we will obviously try to talk to them as soon as we can.

And then I continue with this. So what have we included in our guidance, it's a very, very small number because we have assumed that we will get the license sometime in that second half. We don't know yet. So we have just included a very small number that is mostly insignificant for the outlook. So the outlook is based on our normal product portfolio. You also asked about loss carryforward. We had a significant loss carryforward in Lotto24 for the buildup since 2012 until today's date. You know there are some minimum taxation rules in Germany. So we will continue to pay tax for a number of years, but we will anyway have the opportunity to offset the full tax with this loss carryforward. I expect this to last for another 3 to 5 years, depending on the profitability level of the company. And then lastly, on your cost side. So as I explained, we have now, in the last quarter of 2020, realized all the synergies that we announced and that we talked about. So I think there is some opportunity in the future, but I wouldn't say this immaterial. On the contrary, we also see opportunity to build new products. We just talked about games, but we also see other products. So I think now we will monitor, and we are very cost conscious, but it's not a lot of additional synergies that we should put in our models.

We will take another question from Marie-Therese Gruebner from H&A Investment Banking.

I think most of my questions were answered, but I would like to come back to what Mr. Becker was saying regarding, again, the gaming opportunity because you've highlighted it pretty early on, seems pretty important for you. Realized that it's not a huge impact in 2021. But can you give us more of a sense of what it could represent in terms of numbers, sort of revenues, maybe the margin? And also still have an outstanding question regarding the development of ABPU in 2021. We've seen a nice progress in 2020 already. What can we assume? Yes, these are pretty much the 2 questions I have.

Okay. Let me tell you a little bit about games and why we are going into this opportunity, and then Jonas is talking a little bit about the numbers. So we consider games in the lottery space a validated product. You can see this in many markets where games, or sometimes they're called instant win games, are a significant part and an established product in a lottery market. Lottery players are used to them. I mean, even in Germany with scratch cards, that's basically a game. They're already used to games. And we actually had games on Tipp24 in the past, and it was a successful product, strong growth year-on-year and lottery players liked it and adopted it. So that's why we believe in this games opportunity. Also, the economics of games are interesting. There will be some difficulty because the regulation in Germany is rather strict on how you can push and market gains. But we still believe that this is an attractive opportunity for us. And Jonas, maybe you can talk a little bit about the numbers and also the margin actually, which is also attractive.

Yes. So just going back a few years, if you remember that we launched this in ZEAL or Tipp at the time 2016 from scratch. And before we changed the business model, it represented roughly 15% of our volume. So clearly, our customer at that time, which is mostly the same as we have today, really like the products. We see this opportunity. A few other data points, in Spain, it represents more than 50% of the volume of, for instance, the [ ONCE ] business. And it's similar in many other countries. So clearly, we see a big, big opportunity in the medium term. But we should be a little bit realistic. In the short-term, there are -- like Helmut said, there are regulations in place. There are spend caps in place. We always have to be a little bit careful to not get carried away. So for this year, we have only included a minor, minor part of these games, but we believe this will be important going forward. Also, since we are the fact that the operator in these products, we will take some higher risks. I mean, nothing to worry about here, but still they'll come with higher margins, so more than just the broker business. But I think for giving you a better answer, let's move in when the license is in our hands, and we can fully estimate the future business of the games business.

Maybe one more addition about the type of games and quality of games that we are thinking about, and this is an important distinction. So we believe it's very important that the games portfolio that we provide to our customers is tailored to the mainstream lottery customer needs and that, that is a different type of game and different type of game portfolio than what you would typically find on a hard core gambling site. And that's actually something that we're very experienced with and which we believe is a strength of ours to understand those needs very well.

[Operator Instructions] We have a follow-up question from Ms. Marie Gruebner.

So the line was not open during the answering phase. But what about sports because you mentioned sports as well?

Yes. This is, I would say, a little less validated than games. So this is an opportunity that we're looking into right now. But it's a process that we have to go through, similar to what I just described for games. We have to make sure whatever we offer in terms of product is tailored and suited the needs of our lottery customers to ultimately increase customer lifetime value. And that's -- it's early days for sports betting. So we haven't really come to a conclusion yet if and what kind of sports betting product would do that trick. So games is the more concrete opportunity that we are planning to go after at this point in time.

It appears that there are no further questions at this time. I would like to turn the conference back to the speaker, Mr. Jonas Mattsson. Please go ahead, sir.

Thank you very much. Thanks for taking the time and listen to us. I really look forward to continue having this conversation on a quarterly basis with you. So thanks so much for taking the time, and we will, by that, conclude this session, and speak to you soon again. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.