Earnings Call: Q1 2021

May 7, 2021

Good day, and welcome to the ZEAL Network 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 Mattsson, 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'll find today's agenda, and we will start off with a summary of the first three 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. Let's move directly to slide four. 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 first quarter, and actually continued to be weak also in the month of April. We have still been able to grow the business, which actually pleases me. Both billings, meaning the transaction volume, and revenues are up 17% and 19% respectively. Gross margin increased, as a result, also the profitability of the company improved significantly. 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. 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 likes, meaning a quarter in 2020 where we operated 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 will be found on slide six. 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 our 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% to EUR 4.6 million. Net profit after taxes are now at EUR 2.5 million. Let me now give you a bit more insight on some of the KPIs that you will find on slide seven. As I said, our billings grow by 17% to EUR 163 million, which is very satisfying considering, as I also said earlier, the jackpot situation we have experienced in the first quarter. 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 product. I do expect this to normalize on a slightly lower level, though, when the draw product, the normal lottery products, get a higher share of the total volume. On slide eight, we have highlighted net cash and new registered customers. Net cash is now at EUR 68 million, 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 I 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 million-EUR 23 million. Let me now talk about acquisition of new customers. We continue to invest in marketing, 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. As we know, it's always easier in a more favorable environment. On slide nine, you will find further performance indicators. In this quarter, we have continued investing in marketing, this has led to lower efficiency and higher CPL, cost per lead. The value this customer brings is typically higher since we acquire customer that really want to play the lottery and not only the jackpot hunters. You then look at the return on investment of this customer, it's still very high number. 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 million 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 too 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 EUR 700 million, revenues of at least EUR 95 million, and an adjusted EBITDA of at least EUR 20 million. As you may recall, last year had a very favorable jackpot situation, which drove activity. For this guidance, we of course can only assume statistical average outcome for the future months, plus the outcome that we have to date. We also expect to continue investing in marketing and grow our market share. The planned marketing spend for the year, similar to last year, of more than EUR 30 million. 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 EUR 20.2 million this year, which is 12% more than last year and more than double what we paid out the year before that. This corresponds to EUR 0.90 per share, and our intention is to increase to EUR 1 per share in 2022, leading then to payout of approximately EUR 22 million. Let me now briefly talk about the upcoming AGM, annual general meeting. On June the 1st, 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, these also have a special item, which you will see as number 6 with a small arrow to it. I would like to explain this in a little bit more detail. According to our latest annual financial statement, ZEAL has a restricted capital reserve in the amount of EUR 259 million. 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 is a technical step, we want to enable an efficient equity management in line with capital market requirements, and in particular, create conditions for a much more flexible dividend policy going forward. We would 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. In Q1, we had a poor jackpot situation, yet we drove good billings, 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, that's going ahead as expected. We now have the Lotto24 app in the Google Play Store, which gives us an opportunity to acquire more customers. That's the summary of Q1. With that, I think we should go straight into Q&A. Thank you. If you would like to ask a question on today's call, please press star one on your telephone keypad. That's star one to ask a question. We will pause for one moment to allow everyone to signal. Again, that's star one. We can now take our first question from Marius Fuhrberg from Warburg Research. Yeah. 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 product in Q1. Could you guide us a little bit through how the development, especially for freiheit+ was and how the billings developed for this product? The second one is, are there any changes or any proceeds or any development in your plans of establishing instant win games now with the ratification of the ? The last one, you told us that you're confident with regards to the VAT case. Any news of this, or is it still that you're not sure on neither the timing or the outcome? Thank you. 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 track. The product mix is, you're right to point it out. When I meant the premium product, I meant products like TraumhausPlus that has been very successful. We don't typically talk about billings per product, but we can clearly say that our shares of TraumhausPlus has been better than last year, which is thriving. We are operating as an operator here, so obviously coming with a higher margin. We have recently launched with our one-to-one partner site. Last quarter last year, we launched it on the Lotto24 brand, and one year ago, we launched it in March, actually last year, on the Tipp24 brand. The big delta is really the TraumhausPlus, but we also had a good development of lottery clubs, et cetera. In terms of VAT, unfortunately, I have no more information. We are assuming that the case will be in statistical average, the lead time between the first court decision until the second and the highest court in terms of financial matters. That in 2022. I'm only basing that on the statistical average lead time. There has been no discussion with the tax court nor the court in the meantime, and I know nothing happened this year. It's really just my speculation when they would have worked through all the cases that are before us in the queue. Helmut, maybe you can say a few things about games and the that is applicable from the second half. Yes. There will be a new regulation for games. The technical term in the law is virtuelle Automatenspiele. 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 of 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. The plan is to launch these instant win games once we have a license. Technically, we are ready to do this. We are excited about this opportunity because we know from the past that games resonate well with our user base, especially if you launch the right games for lottery players. We know also from other markets that instant win games are a successful product category. Okay. Thank you very much. As a reminder, if you would like to ask a question, press star one. We can now take our next question from Marie-Therese Gruebner from Hauck & Aufhäuser. Please go ahead. Yes. Good morning, gentlemen. I have, well, let's see. I didn't count them, but it's two questions. When you say that the gross margin normalizes, of course, with the pickup and the more classical products, can you give us 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 could land on a normalized level after the high level of gross margin, very pleasing and high level gross margin in the first quarter. My second question, your D&A depreciation amortization charge for the first quarter, do you assume that it's just a fourth of the full year number? Third and fourth are similarly the financial result line, is it fair to assume that we just multiply this by four or any special effects to be expected on the tax level as well, please? Okay. Thank you. I think I can take those. Let's talk about the gross margin. Last quarter, which we compare with, we are at 12.1%. We were slightly higher at 12.3%, 12.5% by the end of the year, depending on which month you're looking at, and now we are 12.7%. This was fueled by especially the additional TraumhausPlus sales and the premium product. I think this will come down slightly. We don't guide on this, so this is not a guidance, but somewhere in the mid-range of the 12%, so 12%, 12.5%, 12.3%, 12.5%, I think that's more realistic. 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. I think we need to be careful, and we do this in steps. Slightly lower than the 12.7% would be my best estimate for the full year. Depreciation and amortization was your second question, and typically this is one quarter, so take this times four, you come very close to the full-year numbers. In this year, we have return of the subletting office in Hamburg and London. That's why we have a decline in this one. I think it's fair to say that times four is not too different from the full-year results. The third question, can you remind me about that? Yes. It pertained 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 on this EUR 54 million that we paid more than a year ago, we are accruing that interest as we would have won the case. That will increase in line with this quarter. It's a fair assumption. Yes. Perfect. The tax rate, also, can we assume we can extrapolate that level for the full year? I think the tax level, yes, I would say general, yes. The tax rate in Germany, you know as I do, we have a loss carry-forward, that the tax rate is 32.5%. We have tax losses carry-forward. There are minimum taxation rule. I think the EUR 600,000. Sorry, that was the interest. I think the tax rate is probably one-fourth that you can see in this number, assuming the similar profit. 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. Please go ahead. Morning, everyone. Thanks for taking my question. Just the one from me. I know that you only launched the Lotto24 app towards the end of Q1 on the Google Play Store. I was just wondering if you could give any color or commentary on whether you've seen any trends since it's gone up onto the Google Play Store or whether there's been some traction with the product, et cetera, or something along those lines. 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. Of course, as we provide more apps in the App Store, that part is growing. What we really focus on is the acquisition opportunity. 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 tech networks. We're also using mobile advertising networks. Our goal is to drive installs and also sign up new customers. It's too early to talk about how much we can scale because we are right now in the process of scaling this up. 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. If there is no more questions, I would like to take the opportunity to thank you very much for taking the time listening to this presentation and being an investor in ZEAL. Of course, if you have any further questions, we are at your disposal. Please just reach out to our investment department or me, and we're happy to guide you through your questions. Thank you very much and have a great day.