ZEAL Network SE (TIMA) Earnings Call Transcript & Summary

Good day, and welcome to the ZEAL Q2 Results 2022 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jonas Mattsson, CFO please go ahead, sir.

Thank you so much, and good morning, and welcome to ZEAL's earnings calls. I have to start to say that we are extremely sorry for this delay, but it was due to technical problems for our service providers to admitting participants to the call. And even now, there are 1 or 2 investors or participants waiting, but we felt like it's better to start now and then we will catch up with them later. So let's start. I hope you have the presentation. And if it's not, it's accessible on our home page under the Investor Relations section as we always publish the report. On 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. After that, we will move on to our guidance before we're finishing off with the key takeaways. After the presentation, we will give you the opportunity, as we always do, to ask questions. I will now hand over to our CEO, Helmut Becker.

Good morning, everybody. Welcome to our first 6 months earnings call. So let me summarize what's happened in the first half of this year. We've reached an important milestone. Lotto24 received a new commission for lottery brokerage in Germany. It is valid for 7 years until June 2029. And it is our first permit under the new gambling state treaty. We've also successfully grown our business year-on-year. Our business model once more turned out to be very stable based on the loyalty of our customers and the unbroken popularity of online lotteries. Unlike many other e-commerce and consumer businesses, we have so far not seen major negative impacts from inflation and reduced consumer confidence. In the first half year, we were able to grow our billings by 8%. The jackpot situation, always a big influence on our business. During that time was average, but better than last year's jackpot situation. In May, Lotto24 broke the biggest jackpot win in German history. It was EUR 110 million, won by a Lotto24 lottery club from North Rhine-Westphalia. That lottery club or these kinds of lottery clubs are one of our unique home-built products. They allow customers to buy a fraction of a large number of lottery tickets. We've also raised our level of profitability significantly. We grew our EBITDA by more than 50% compared to last year. And the protection of our players in the prevention of gambling addiction is a top priority for us. We therefore entered into a cooperation with a Danish company Mindway AI and with the Hamburg-based start-up called Nect to make gambling even safer in the future. As part of the cooperation, artificial intelligence will be used to identify potentially addictive gambling behavior. Finally, in the proceedings, pending before the federal fiscal court, the Bundesfinanzhof, by the Hanover Tax Office against MyLotto24 Limited regarding a possible VAT claim, the oral proceedings took place on August 3. A decision by the Federal Fiscal Court is not yet available, but we expect it to come shortly. Now let's move to Page 4, and let me give you an update on regulation. As I've just mentioned, we are now operating under the new Glücksspielstaatsvertrag. And I've already talked about the extension of our broker permission until 2029. So let me go straight to the games license application or the virtual slot machine license application. In July 2021, at the beginning of the application phase, we, Lotto24, submitted its application for a permit to operate virtual slot machine games. The application is still being reviewed by the authorities. According to our information, the reason for the delay is that there is uncertainty amongst some federal states, the 16 federal states or some of them, as to if and how state lotteries may also offer virtual slot machine games on the same website as the lottery games that they operate. This uncertainty is currently slowing down our application process for commercial brokers like us. The gambling authority told us that they will be working on a solution or are working on a solution over the next couple of months and ask us to be patient. The legal situation is clear. The law is very clear. And there is no reason not to grant Lotto24 such a permit. So with that, over to you, Jonas, to take us through the financial section.

Thank you, Helmut. Let's now move to Page 6, and I will start describing the jackpot situation in the first half of this year. What you see on this slide is the jackpot development for our 2 main products Lotto 6aus49 and EuroJackpot. The jackpot environment with the German lottery lot of Lotto 6aus49 was better in the first half of 2022 than during the very weak jackpot period of last year. For example, the mandatory payout of EUR 45 million was reached twice and for actually 2 consecutive draws, which did not at all occur last year. The jackpot development for EuroJackpot was more mixed. Although the new maximum jackpot raised from EUR 90 million and EUR 20 million was not reached a single time, while in the last year, it was reached 2x but then at the lower level at EUR 90 million. However, the former limit, meaning the EUR 90 million, was almost reached once when we hit EUR 89 million and then exceeded that for the first time in May with EUR 106 million. But the most advantageous situation for us is the jackpot actually reaches maximum meaning the EUR 120 million. So in summary, we had a slightly better jackpot situation than last year, but more in line with an average year. And just as an early observation regarding jackpots, Q3 started off really strongly with EuroJackpot reaching EUR 120 million twice in July. And we will come back to that in the earnings call for the third quarter. Let's now move to the income statement that you'll find on the next slide. We grew revenues by 11%, which were driven by the high billings that in turn got a boost from the better jackpot environment. We also have more sales of high-margin product that turns into higher revenues. At the same time, we have continued to be very careful with our spending. Personnel cost is flat despite the slightly higher amount of headcount. If you compare quarter-over-quarter, we took higher incentive charges in the second quarter. Marketing expenses, our biggest discretionary spending are also in line with previous year. Direct operating expenses are positively impacted by the lower credit losses and efficiency in the entire payment process. Indirect operating expenses were up by 16%, which is mostly related that we have positive one-offs in the comparable period last year and slightly higher insurance costs this year related to our charity product. So the years are not fully comparable on this line item. Combined, this has led to an EBITDA that is more than 50% higher than last year and is now at EUR 16.4 million. It's equal to a 33% EBITDA margin. And finally, EBIT is up almost by 100% and net profit after tax is now at EUR 9.4 million, 66% up from last year. In the coming 3 slides, we'll look closer at some of the KPIs. So let's move to Slide 8. Our billings growth of EUR 358 million or by 8% with even stronger growth in revenues, as I just mentioned. But interesting is that if we only look at the 2 main products, 6aus49 and EuroJackpot, we grow them 11% while the state lotteries, offline and online combined, grow the same product only by 2%. As I mentioned before, Jackpot in the first 6 months were mediocre, but we have continued to develop the business stronger. This should also be seen in the light of the changes in the geopolitical and economic environment, which negatively impact customer confidence, not only for us but for the entire retail sector. This shows the resilience of the lottery offering despite these uncertain times we're all facing. Gross margin has also improved, thanks to comparable more sales of high-margin products like the lottery clubs and is now at 12.8%, 4% up from last year. On the next slide, we have highlighted net cash and new registered customers. Let's start talking about net cash. If you exclude the dividend payment of EUR 47 million, net cash is up 41%, thanks to strong operating performance. With the current net cash of EUR 35 million, we have implemented a step towards optimizing our capital structure. As in previous quarter, we have reported a continued liability of approximately EUR 23 million to EUR 24 million. Let's move to acquisition of new customers. With almost the same amount of spending, we require the same amount of new registered customers, 292,000. This is a good number, but not that great. And with improved peak jackpot, we should be able to increase this number further. Moving on to Slide 10. Here, you will find some additional KPIs. The cost per lead is showing a nearly increase 5-year increase, but you should not worry. The increase is, to a large extent, attributable to freiheit+ campaign that we have to expense, but will support acquisition in the coming months. If you exclude the special campaign, the CPL is only slightly up versus last year. Still, we do see increased pricing, especially in social media and search, but our business model is quite tolerant to changes in CPL since our customers' loyalty is remarkably high, allowing us to solve this quite easily over time. Whether this price increases lasting price effect, it's too early to tell, but the whole online industry reports similar dynamics. The monthly active users have improved and continues to be about 1 million for the year. The driver is the better jackpot situation, especially the peak in Lotto that we had in January and April. Average billing per user is still very high and slightly higher than last year. We're now at EUR 58 in average spend per customer. And I do want to point out that this is the average, a lot of customers also spend significantly more. Let's now move to the next slide and talk about the recent dividend payment. As expected, the AGM approved a dividend payment of EUR 47 million, which is a step in improving our capital structure. The dividend consisted of a basic dividend EUR 1 and on top, a special dividend from EUR 1.10 per share. And this has all been paid out in early July. Perhaps this goes without saying that we are constantly reviewing our dividend policy in line with the financial performance of the company, and we will inform you later this year about the dividend policy for next year. Let me also reconfirm the outlook for the year that you will find on Slide 14. Despite the turbulent and uncertain environment we are all facing, we are quite optimistic about the future, and we still expect double-digit growth. This resilience in the industry is impressive, especially when the jackpot is high. So we confirm once again the guidance for this year, which is billings of at least EUR 750 million, revenues of at least EUR 105 million, EBITDA of at least EUR 30 million. All this is based on average jackpot for the rest of the year and the marketing investment of around EUR 30 million. With this, back to you, Helmut, to bring this home.

Thank you, Jonas. Let me share our key takeaways for the first half of the year with you. So let's go to Page 16. Profitability rose strongly, with EBITDA up by more than 50% and EBIT up almost 100%. We returned EUR 47 million in dividend to our shareholders. We've extended our broker license for another 7 years, laying the foundation for many profitable years to come. And despite the turbulent times, our business is remarkably resilient and we continue to pursue our goal to continue to grow the business and to gain market share. That brings us to the end of our presentation. Thank you for listening. And I think I now hand it back to the operator, and we start the Q&A.

[Operator Instructions] We will take our first question from Marius Fuhrberg from Warburg Research.

Actually, I have just two. The first one is on the effects from the prior cost campaign. Are you quite satisfied with what you see so far with regard to customer activity after your campaign or new customers? And also with regards to freiheit+, you mentioned that you had more other operating income due to the insurance payments, but it's the -- or it's only the insurance payment in the other operating income and the remainder of the billings in the revenue. So that brings me to my second question, the stronger revenue growth over the billings growth. The product is due to the positive product mix, as I've learned. Is this related to mostly lottery clubs? Or is this predominantly due to the additional products like freiheit+ and [indiscernible]?

Thanks for your questions. So let me highlight a few things. So the freiheit+ campaign, we did in the beginning of the year. We haven't seen the full effect of it. So it's a little bit too early to say we are satisfied or not. We will see that in the coming months. We see the customer coming in. Of course, you always want more. But it's going okay. It's not a smash hit yet, but I think it's too early to give you any precise number on this one. The insurance is fairly small. It was a 200,000 more than the last year. But you see on these numbers, it has a huge effect when you call the percentage. So it's nothing to worry about. But it was 200% more -- 200,000 more than we paid last year. In terms of the product mix, it's basically the lottery clubs that went really well in the first 6 months. freiheit+ was more or less in line with the previous year. So I can't give that the credit even if we have that, and that improves our margin, clearly. But if you compare half year with half year, it's more the lottery club that drove the higher percentage of the margin.

Okay. And maybe one follow-up on the general development of freiheit+ and [indiscernible] lottery. Do you want to grow this even higher so that you are starting marketing campaign for it? Or...

So...

Yes. Jonas, go ahead.

Okay. Sorry. So yes, clearly, we think these 2 product categories and actually probably several other charity products have a huge product market fit in the German market. So we want to clearly grow these products and in the future, also launch other charity products. They have a good market fit and also comes with a higher margin, and that's something that I think we can add value into the market. Anything else from you? Moderator, I think we can take the next question.

[Operator Instructions] There are currently no questions in queue. Thank you.

If there is no more question...

Yes.

Let's wait a couple more seconds. And then if nobody wants to ask another question, we'll end the call.

[Operator Instructions]

Since there are no further questions, if you have any, feel free to just reach out to Frank Hoffman or myself. I'm happy to explain any of the numbers. But we would also like to thank you for taking time and listening to this presentation. And once again, so sorry for the technical problems we had in the beginning to admitting people to the call. I wish you a very good day, and speak soon again. Thank you very much.

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