ZEAL Network SE (TIMA) Earnings Call Transcript & Summary

Good day and welcome to the ZEAL Network SE Quarter 2 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonas Mattsson, CFO. Please go ahead, sir.

Thank you very much, and good morning, everyone, and welcome to this call. I hope you have the access to the presentation. And if you don't, it's also accessible on our home page under the Investor Relations section. If you go to the content slide, you will find today's agenda, and we will start off with a summary of the first 6 months, followed by a financial update. We will then talk about our guidance for the year before we are finishing off with the key takeaways. After this, we will give you the opportunity to ask questions. So let me start by giving you a summary that you will find on Slide 4. The world is starting to recover from the pandemic, and vaccination rates are picking up in most European countries. Last year, a big part of the economy got digitalized in just under a year. We have probably never seen such a big change in user behavior with new IT solution that was quickly adopted. In our industry and in Germany alone, the online penetration went from 14% in 2019 to around 20% in 2020, a remarkable uplift last year. As ZEAL is only operating online, this shift was welcome to our business. Being an e-commerce company, we are set up to deal with remote work when so much work is -- so much is moved to the cloud or at least accessible from wherever you are and still being able to serve our customer. Other external factors like the general economy in the first half of 2021 has been strong, but this has limited or no effect on our business. In fact, our business is very resilient to any changes in the general economy, even in a very weak economy. Of all external factors, the biggest driver is the overall jackpot situation, which has indeed been quite weak in most part of this year. Despite this, we have still been able to grow the business, which pleases me immensely. Both billings, meaning the transaction volumes, and revenues are up 6% and 2%, respectively. Gross margin is in line with last year, and the profitability of the company improved significantly. In the AGM, Annual General Meeting, all resolutions were adopted with stable majority as expected. As you probably have seen, ZEAL has also undertaken to make a delisting purchase offer to the remaining shareholders in Lotto24, and this process is ongoing, with the aim of completing the delisting mid-September. And last but not least, we have strengthened the Management Board by 2 senior members. Helmut, perhaps you want to comment on this before I take you through the financials.

Thanks, Jonas, and good morning, everybody. We're very happy that Paul Dingwitz and Sönke Martens have joined our Management Board. Paul has been in charge of technology at ZEAL for the last 5 years. Sönke has been with ZEAL for 7 years, leading our marketing and product management. Both of them have made major contributions to the success we've had, the business model change the tech and marketing integration and also capturing the merger synergies, to call out a few. But more importantly, as we focus on our future success, and our growth ambition at ZEAL, technology excellence and product capabilities as well as marketing and customer acquisition will be key drivers of our success. With Sönke and Paul, we have the right talent on board to take ZEAL to the next level. So back to you, Jonas.

Thank you, Helmut. Let's now move to the financial update. As for the first quarter, we could compare like-for-like, meaning quarters with the same business models. This is helping everyone to analyze the business performance in a much simpler way. Let's now look at the financial in greater detail, and they will be found on Slide 6. And here, you see a summary of our income statement. We had a solid start of the year, with revenues growing by 2% despite this low jackpot environment. And please remember that the second quarter of last year had an extremely strong jackpot situation, especially for EuroJackpot. And by the way, this product is up to EUR 90 million in tomorrow's draw. It's going to be exciting for us. Staff costs fell by more than 8% due to fewer people and revaluation of the employees long incentive plan to match the current share price. We have continued to invest in marketing but temporarily on a lower level to match this weak jackpot environment. This has led to a few, but still with high customer lifetime values. Our job is to managing this marketing spend to create the most value, which usually is to invest more and select the most efficient channels in favorable times and invest less and potentially select other channels when the environment is poor. This is key to understand and also something we control and should and must be managed well. Regarding direct expenses, this is mostly driven by the higher volume. This to be seen as our variable cost. Indirect operating cost has been reduced by more than EUR 2 million due to savings in service provider costs and external staff members. All this has led to one of our main KPIs, adjusted EBITDA has gone through the roof, with a 228% increase and now at EUR 10.7 million. Net profit after tax were at EUR 5.7 million, also this a huge increase from last year. Let me now give you a bit more insight on some of the KPIs that you will find on the next slide, Slide 7. Our billings grew by 6% to EUR 333 million, which is very satisfying considering the low or poor jackpot situation we have experienced during this year. Gross margin, which is telling how much we keep or what turns into revenue, is in line with last year. But just to remind you that in [indiscernible] we had a higher margin. But then I told you that I expect it to normalize around this half year number. If we move to the next slide, Slide 8, we've highlighted net cash and new registered customers. Net cash is now at EUR 58 million, up 90%, mostly thanks to the earnings made in the year. However, this is down for the first quarter since we have made a EUR 20 million dividend payment just a month ago or 2 months ago. As I said, even if we are confident to ultimately win the VAT case, we have indicated to you the remaining VAT cash exposure, which is around EUR 23 million. Let's now talk about acquisition of new customers. We continue to invest in marketing but temporarily at a lower level to match the current jackpot situation. This has led to a few, but still close to 300,000 new registered customers. This is not the level we want it to be, and we are always exploring new channels, but the main driver is the jackpot situation, especially if you compare with last year, that was pretty extreme. As I have said, it's a key activity management to scale up and down marketing and use different channel mix for every unique situation to create the maximum value of every marketing investment. On the next slide, Slide 9, you will find further performance indicators. We have seen an increase in Google and Facebook-related acquisition costs and as a consequence, driving up the CPL, cost per lead. This has led to slightly lower efficiency. But the value this customer brings is typically higher since we acquired customers that really want to play the lottery and not only jackpot hunters. If you then look at the return on investment of these customers, still very high numbers. What I said last year that CPL is an indicator but not the guiding metric still holds true. Monthly active users is just shy of 1 million, and I expect this to be ticking up in line with more favorable jackpot situation. Average billing per user is very high at EUR 57, which indicates that customers that do play, they spend a lot every month. Let's now talk about the outlook for the financial year, and you'll find that on Slide 11. I can confirm that the guidance that we announced end of March is still our best estimate for the future. So allow me to reiterate the numbers: billings of at least EUR 700 million, revenues of at least EUR 95 million, and adjusted EBITDA of at least EUR 20 million. As you may recall last year, we had a very favorable jackpot situation, which drove activity. But for this guidance, we, of course, can only assume statistical average outcome for the future months, but of course, the outcome to date added to that. On slide, we talk about the dividend policy. And we have just paid out EUR 20 million in June, and we are aiming for an 11% increase to EUR 1 per share already next year. This means that we will return EUR 22 million to shareholders in 2022. With this, over to you, Helmut.

Thanks, Jonas. Let me summarize the key takeaways. We have good billings and revenue development despite a poor jackpot situation. We significantly increased our profitability. We have the new German State Treaty, the new regulation, gambling regulation that came into force on the 1st of July. That was a lot of work for us to get prepared for it. We've done this. Now we can focus on other things. And we have strengthened our Management Board. So thank you very much, and let's now open up the floor for questions.

[Operator Instructions] We can now take the first question from Marius Fuhrberg from Warburg Research.

Actually, I have 2 [indiscernible]. The first one would be in connection with the delisting of Lotto24 and the offer you made. Do you expect any further extraordinary costs of that? Or is this rather insignificant? And the second one would be on the Glücksspielstaatsvertrag and also the Instant Win Games. How is the progress going for applying for this license? And do you already have any feedback from the state departments? Or is this still ongoing and you're still waiting for any feedback there?

So maybe I can start with the first question, and then Helmut will take the second on the games question. So the delisting offer, I'm not sure I heard the entire question, but it was about our offer. So our offer to the lotto -- the official offer that we go out will go out to the shareholders very shortly. You have seen on the 21st of July the intention to issue this offering, and we will, of course, carry on with this one. The uptake rate is quite difficult to assess. We think it's a very fair offer from ZEAL. It's based on the law, the 6 months volume weighted average price. But like I said, the uptake and how many will tender the shares is, for us, very difficult to assess. We hope as many as possible accept this one because it's a good offer, and I think they will benefit from it, but it's in the end up to them.

Let me take the second question on the games. So we've done our homework. Our application has been submitted. I think we are one of the first batch -- part of the first batch that submitted the applications. And the authorities are working or started to work on the applications, but we have not received any feedback yet. So we are hoping to receive feedback during the second half of this year, and then hopefully, we can start the business. We are ready -- technically, we are ready to start the business.

Okay. And a follow-up on this one. Actually, you would probably like to start still in H2 already, right?

We would like to. We are ready to do that. But unfortunately, this is not in our hands, right? It's the authority taking the decision, and we don't have a time line, and they don't publish a time line. So we are in their hands, so to say.

[Operator Instructions] We can now take the next question from Marie-Therese Gruebner from H&A Investment Banking.

First of all, I would like to know if it is at all possible to give us a range of the cash outlay we can expect for the Lotto24 minorities take out. Secondly, in terms of the licenses, I was curious to know if any of the Instant Win Games or any other products that you will be able to offer once your license has been approved, if any of that is in your current 2021 guidance at all. And thirdly, if you could give us a bit of a trading update regarding Q3. Of course, the EUR 90 million jackpot is certainly very helpful to activity. And I was wondering if we could get at least first assessment of how Q3 is looking like.

Okay. So let me start. So the cash outlay is really depending on the uptake rate as you know. We have a price of approximately EUR 3.18 per share. So assuming that all shareholders of Lotto24 would tender their shares, it will be somewhere between EUR 40 million and EUR 45 million. And for that, we have secured financing, as I'm sure you have seen from our half year report. So the financing is fully secured. And then it's a question, and I can't really speculate how many of the shareholders that will tender. But we have obviously secured financing for the full amount. Whether that we will come up to that amount or a lower amount, I can't estimate. Trading update for the Q3 is also something that I would like to avoid. And the reason being, it's very volatile with the jackpot. So now on Friday, super happy that we have the EUR 90 million jackpot. Whether that will be won or not, nobody knows. So it's very difficult. What I can say is that for the full year, our guidance is still our best estimate. So no quarterly breakdown on this one. But like I said, I'm happy that we have a good jackpot situation, at least this coming week. And then I think you said something about the license and the games. Clearly, in our -- all our forecast, we are assuming a very, very conservative approach on this. We don't know when the license, like Helmut said, will be granted. So of course, we take a very conservative approach how much we can actually achieve this year. But clearly, our aim is to fully scale up during the next year and be fully up to speed. But this year, it's really out of our hands when the regulator will provide the license so we can start offering these products to our customers.

[Operator Instructions] We can now take the next question from Marius Fuhrberg from Warburg Research.

One follow-up for me on the question regarding the guidance on the Instant Win Games. You said that you took in very conservative approach there. Does it mean that you included a very low million digit amount in, let's say, revenues or billings from Instant Win Games? Or does that mean that you did not reflect Instant Win Games for the current year at all?

We have a very small part of the revenue and the EBITDA impact of this year included in our guidance. So just a small one. But we still have something.

[Operator Instructions] It appears there are no further questions at this time. I'd like to now turn the call back over to today's host for any additional or closing remarks.

So maybe I can summarize. Thank you very much for taking the time. This has been, like we said, a solid 6 months despite the jackpot environment. We are still growing the business. So we are fairly positive and satisfied with the performance of the company for this first 6 months. And obviously, we're looking forward for the coming 6 months and report back to you the numbers, both for Q3 and Q4. So I hope you stay interested and feel free to reach out to any one of us. So our Investor Relations department, we're happy to serve you with kind of information you may need. But thanks for taking the time, and have a great day.

Thank you. Bye-bye.

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