Earnings Call: Q1 2021

May 7, 2021

Good day, and welcome to the Zeal Networks SE First Quarter 2021 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jonas Matshesen, CFO. Please go ahead. Thank you very much, and good morning, and welcome. I hope you all have access to the presentation. If not, it's also accessible on our homepage under Investor Relations section. On this content slide, you will find today's agenda, and we will start off with a summary of the first 3 months, followed by a financial update, our guidance and the upcoming AGM before we're finishing off with the key takeaways. After this, you will have the opportunity to ask questions. Let me start with a summary. So let's move directly to Slide 4. The world continues to suffer from corona even if there is hope in sight with the ongoing vaccination. As discussed before, being an e commerce company, we are set up to deal with the remote work when so much is moved to the cloud or at least accessible from wherever you are. Other external factors like the general economy has been strong, but this has limited or actually no effect on our business. Our business is very resilient to any changes up and down in the general economy. Of all external factors, the biggest driver is the overall jackpot situation, which has indeed been weak for both our main products throughout the Q1 and actually continued to be weak also in the month of April. But we have still been able to grow the business, which actually pleases me. Both billings, meaning the transaction volume and revenues, are up 17% 19%, respectively. Gross margin increased. And as a result, also the profitability of the company improved significantly. And we are now in the Google Play Store, which is something we and the entire industry have strived for since many years. This allows us to have our brand visible in the Google Play Store, and we can use this as a good acquisition tool. And we'll come back more to this at the end of the presentation. Speaking about financial update. We can now, for the first time, compare like for like, meaning a quarter in 2020 where we operate as a broker with a quarter in 2021 where we also, of course, operating as a broker. This is helping everyone now to analyze our business performance in a much simpler way. Let's now look at the financial in greater details, which you will be found on Slide 6. This is our income statement, a condensed version. This year has started off very nicely with revenue growth of 19% despite the low jackpot environment. This is slightly better than the billings growth, which is then supported by a more favorable product mix, meaning more premium products sold. Staff costs are mostly in line with last year since the majority of the people synergies were already included in last year numbers. We have continued investing in marketing even in this low jackpot environment. This has led to fewer but still with high customer lifetime values. Regarding direct operating expenses, this is mostly driven by the higher volume that is to be seen as a variable cost and then some one offs related to a switch in payment service provider. The latter will allow us to have more efficient process, lower fraud and better charges going forward. All this has led to our main KPI adjusted EBITDA as a recent 61 percent to 4,600,000 and net profit after taxes are now at €2,500,000 Let me now give you a bit more insight on some of the KPIs that you will find on Slide 7. As I said, our billings grew by 17 percent to EUR 163,000,000, which is very satisfying considering, as I also said earlier, the jackpot situation we have experienced in the Q1. Gross margin, which is telling us how much we keep what turns into revenue, have improved the margin to 12.7%, which, as I said, is driven by the higher share of premium products. I do expect this to normalize on a slightly lower level though when the draw products, the normal lottery products get a higher share of the total volume. On Slide 8, we have highlighted net cash and new registered customers. Net cash is now at $68,000,000 up 4%, mostly thanks to the earnings we made in the quarter. We have a healthy net cash situation, which is why we afford to pay an attractive dividend to you, which Ayur will come back to shortly. As I said before, even if we are confident to ultimately win the VAT case, we have indicated the remaining VAT cash exposure, which is approximately EUR 22,000,000 to EUR 23,000,000. Let me now talk about acquisition of new customers. We continue to invest in marketing, and we have acquired close to 160,000 new registered customers despite the jackpot situation. We clearly want this to be higher, especially when comparing to last year when we had record in new customer. But as we know, it's always easier in a more favorable environment. On Slide 9, you will find further performance indicators. In this quarter, we have continued investing in marketing, and this has led to lower efficiency and higher CPL cost per lead. But the value these customers brings is typically higher since we acquire customers that really want to play the lottery and not only the jackpot hunters. If you then look at the return on investment of these customer, it's still very high number. So what I said last year that cost per lead is an indicator but not the guiding metric holds true. Monthly active users increased to close to 970,000, and the €1,000,000 mark is clearly what we want to have, which I expect will happen in a better environment. Average billing per user is very high at EUR 56, indicates that the customers that do play spend a lot every month. Let's now move to the outlook and the guidance that you will find to on Slide 11. I can confirm that the guidance that we did announce end of March is still management's best estimate for the future. Let me reiterate the numbers. Billings of at least SEK 700,000,000 revenues of at least SEK 95,000,000 and adjusted EBITDA of at least SEK 20,000,000. As you may recall, last year 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 plus the outcome that we have to date. And we also expect to Slide 12, On Slide 12, we talk about the dividend policy, and I'm just confirming what we have already told you about and what is actually going to the AGM for approval. We are proposing to pay out €20,200,000 this year, which is 12% more than last year and more than doubled what we paid out the year before that. This corresponds to €0.90 per share, and our intention is to increase to €1 per share in 2,002, leading then to payout of approximately €22,000,000 Let me now briefly talk about the upcoming AGM Annual General Meeting. On June 1, we On June 1, we will hold our AGM virtually also this year. The invitations with the registration documents were sent out at the beginning of this week to our shareholders. In addition to our usual items on the agenda of this AGM, this also have a special item, which you will see as number 6 with a small arrow to it. And I would like to explain this in a little bit more detail. According to our latest annual financial statement, Seed has a restricted capital reserve in the amount of SEK 259,000,000. We, the management board and the supervisory board, propose to convert the majority of this restricted capital into free capital reserve. With this technical step, and I underline this as a technical step, we want to enable an efficient equity management in line with capital market requirement and, in particular, create conditions for a much more flexible dividend policy going forward. We will therefore be pleased and encourage you to register and vote as a shareholder at our upcoming AGM. Now I will hand over to Helmut that will take you through the key takeaways. Thank you, Jonas. So in Q1, we had a poor jackpot situation, and yet we drove good billings and also we've seen a good revenue development. We've been able to increase our profitability. We have seen that, as expected, the new gambling treaty in Germany has now been ratified in all 16 German states, so that's going ahead as expected. And we now have the LOTTO 24 app in the Google Play Store, which gives us an opportunity to acquire more customers. So that's the summary of Q1. And with that, I think we should go straight into Q and A. Thank you. We can now take our first question from Maris Furberg from Warburg Research. Yes. Thanks for letting me on. Actually, I have three questions. The first one is with regards to the product mix. You told us that you have obviously lots of more premium products in Q1. Could you guide us a little bit through how the development, especially for Friar Plus was? And how billings developed in for this product? The second one is, are there any changes or any proceeds or any developments in your or do you plan of establishing instant win games now with the ratification of the British South Passover? And the last one, you told us that your confidence with regards to the bad case, any news of this? Or is it still that you're not sure on either on the timing or the outcome? Thank you. So let me start with the product mix and the VAT, and then I will hand over to Helmut to talk about our plans for the games and in light with the new book book, so the product mix is right to point it out. When I meant the premium product, I meant products like 5 plus that has been very successful. We don't typically talk about billings per product, but we can clearly say that our shares of 5 plus has been better than last year, which is driving. And we are operating as an operator here, so obviously coming with a higher margin. So we have recently launched with our 1 to 1 partner site. We in last quarter last year, we launched it on the Lotto24 brand. And 1 year ago, we launched it on the in March, actually last year, on the Tip 24 brand. So the big delta is really the Friar Plus, but we also had a good development of lottery clubs, etcetera. In terms of VAT, unfortunately, I have no more information. We are assuming that the case will be in a statistical average, so the lead time between the 1st court decision until the 2nd and the highest court in terms of financial matters. So that's in 2022. But I'm only basing that on the statistical average fleet. There has been no discussion with the tax authority nor the court in the meantime, and I don't nothing happened this year. But it's freed by just my speculation when they will have worked through all the cases that are before us in the Q. So Helmut, maybe you can say a few things about games and the Glick's Buses that that is applicable from the second half. Yes. So there will be a new regulation for games. The technical term in the law is Wirtu Ele Automatspielle. And we are planning to launch Instant Win Games on our sites going forward. However, we need to apply for a license first, and then we need to get a license. The authorities have said that they are going to be ready to take applications on the 1st July, and then we don't know how long it will take them to work through those applications. We don't foresee any issues there. We should qualify for a license. And then the plan is to launch these Instant Win Games once we have a license. Technically, we are ready to do this. And we are excited about this opportunity because we know from the past that games resonate well with our user base, especially when you launch if you launch the right games for lottery players. And we know also from other markets that instant win games are a successful product category. Okay. Thank you very much. We can now take our next question from Marie Therese Gruffner from HAIB. Please go ahead. Yes. Good morning, gentlemen. I have well, let's see, I didn't count them, but a few questions. When you say that the gross margin normalizes, of course, with the pickup in the more classical products, can you give us a kind of an idea where you want to land? I know you don't guide us specifically, but if you can give us a ballpark of where you would you could land on a normalized level after the high level of gross margin, very pleasing and high level of gross margin in the Q1. My second question, your D and A depreciation amortization charge for the Q1, is it to assume that it's just the 4th of the full year number? And 3rd and 4th are similarly the financial results line, is it fair to assume that we just multiply this by 4 or any special effects to be expected on the tax level as well, please? Okay. Thank you. I think I can take those. So let's talk about the gross margin. So last quarter, which we compare with, we are at 12.1%. We were slightly higher, 12.3%, 12.5% by the end of the year, depending on which months you're looking at, and now we're at 12.7%. This was fueled by especially the additional Friar Plus sales and the premium product. I think this will come down slightly. We don't guide on this, so this is not the guidance, but somewhere in the midrange of the 12%, so 12%, 12.3%, 12.5%, 12.5%, I think that's more realistic. So it's not a material decline, but I think we are on top. Obviously, our ambition is to grow this every month and every year, of course, by adding more premium products. But I think we need to be careful, and we do this in step. So slightly lower than the 12.7% will be my best estimate for the full year. Depreciation and amortization was your second question. And typically, this is 1 quarter. So it takes this time for you come to very close to the full year numbers. In this year, we have return of the subletting office in Asia and Hamburg and London. That's why we have a decline in this one. But I think it's fair to say that times 4 is not too different from the full year results. The third question, can you remind me about that? Yes. It pertains to your financial results. I think last year, some special effects from the interest on the tax payments fueling some of the interest income. This is why I'm asking if the results we're seeing now is something we can extrapolate. I think you can extrapolate them. We are obviously recording as a financial interest income. We're assuming we're going to win the VAT case. So the interest we will receive of this €54,000,000 that we paid more than a year ago, we are accruing that interest as we would have won the case. So that will increase in line with this quarter. So it's a fair assumption, yes. Perfect. And then the tax rate, also can we assume you can extrapolate that level for the full year? I think the tax level, yes, I would say, general, yes. The tax rate in Germany, as as I do, but we have loss carry forward. The tax rate is 32%, 32.5%. But we have tax losses carry forward. There are minimum taxation rules. So I think the 600,000 sorry, that was the interest. I think the tax rate is probably onefour that you can see in this number, assuming the similar profits. Okay. All right. Well, I think those are the questions I had. Thank you very much. Thank you. We can now take our next question from Jack Cummings from Berenberg. Just the one from me. I know that you only launched the Lotto24 app towards the end of Q1 on the Google Play Store. But I was just wondering if you could give any color or commentary on whether you have seen any trends since it's gone up onto the Google Play Store and whether there's been some impact for the products, etcetera, or something along those lines? Yes. Let me take that question. It's too early, really. We have very healthy with our customer base anyway. And some of that is through the mobile website and some of it is through the apps. And of course, as we provide more apps to the App Store, that part is growing. But what we really focus on is the acquisition opportunities. So what we are doing here is we are marketing and advertising the apps in the app store, in the Play Store. We are buying ads in networks. We're also using mobile advertising networks. Our goal is to drive installs and also find out new customers. And it's too early to talk about how much we can scale because we are right now in the process of scaling itself. That makes sense. Thank you. Thanks very much. There are no further questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks. So if there is any no more questions, I would like to take the opportunity to thank you very much for taking the time listening to this presentation and to be an investor in Seal. And of course, if you have any further questions, we are at your disposal. So please just reach out to our Investor Relations department. We'll be happy to guide you through your questions. Thank you very much and have a great day.