ZEAL Network SE

XETRA:TIMA

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the ZEAL Q1 Results 2022 Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Jonas Mattsson. Please go ahead, sir.

[Jonas Mattsson, executive]

Thank you very much, and good morning, everyone, and welcome to ZEAL's earnings call for the first quarter. I hope you have received the e-mail, including the presentation. And if you haven't, it's also, of course, accessible on our web page in the Investor Relations section.

If we go to Slide 2, you will find the content slide. And there, we have outlined today's agenda. We will do is to start off with a summary of the first 3 months, will be followed by a financial update. And after that, we will move on to our guidance and planned dividend for the year, before we're finishing off with the key takeaways. After the presentation, we will give you the opportunity, as always, to ask questions.

I will now hand over to our CEO, Helmut Becker.

[Helmut Becker, executive]

Thanks, Jonas, and good morning, everybody. Let me summarize our first quarter that we grew -- we grew our business. Billings and revenue are up 11% year-on-year. Our profitability continues to rise due to scale effects in our business model and good cost control. And we've launched our second Traumhauslotterie product, the German Dream House Lottery or Deutsche Traumhauslotterie. It's early days, but we hope to attract a slightly younger, slightly more female group with this product.

Now on the next page, let me go straight to the 2 licenses that we are expecting to receive in Q2. The first one is a games license or virtual slot machines license. The regulator has issued the first and, so far, only games license on May 5. That is good news because we know that they have started to issue licenses.

We expect them to now swiftly work through the other license applications. We're confident to receive our games license in Q2. We will offer games that are tailored to the needs of our customers. And we know from past experience as well as from international lottery markets that this is a good growth opportunity for us.

The second license is an extension of our brokerage permission. We expect to receive the extension of our brokerage permission also in Q2 this year.

So back to you, Jonas.

[Jonas Mattsson, executive]

Thank you, Helmut. Let's now move to Page 6, and I will start describing the jackpot situation for the first quarter since it has such an impact on our business performance.

On this slide, you will see the development for our 2 main products, 6aus49 and Eurojackpot. So the development has been better than last year, but more in line with what we expect for a normal year. Comparing with last year, we see that the average jackpot for LOTTO 6aus49 is actually 3.5x higher, and we had 2 peak jackpots in the beginning of this year. And as I have explained before, it's in the peaks we acquired the most customers and where the billings are outperforming the predictions.

Regarding Eurojackpot, it's actually slightly worse than last year with no peak jackpots. So in summary, slightly better jackpot than last year but more in line with an average year so far. And just to repeat what I've explained before, high jackpot is attracting new customers and acquisition becomes easier with increased volume as an outcome, which then leads to higher future growth rates.

The old customers, but also the new ones, they will start to spend or spend more those weeks when the jackpot is high and our billings increase as a consequence. The opposite is, of course, true for low jackpots.

Let's now move to the income statement that you will find on next slide, Slide 7. As Helmut already said, we grew revenue by 11%, which was a consequence of the higher billings that was and boosted by the higher jackpot situation versus the terrible last year. At the same time, we have continued to be very careful with our spending, and total costs are down by 20%. Even if this may not reflect the full year, I'm satisfied what we have been able to manage the cost side so well despite the situation with inflation that we are in.

Personnel cost is down 20% or EUR 1 million in the quarter, but this is mostly driving -- driven by the low share price and which is the base when accounting for employee long-term incentive plans. Marketing expenses are slightly higher. And it was in the late January, we did a big push when Lotto had its peak.

Direct operating expenses are positively impacted by the lower credit losses and efficiency in the entire payment processes. Indirect expenses are also down by 15%, thanks to lower consultancy fees and the use of external staff. Combined, this has led to an EBITDA that is double versus last year and is now at EUR 8.9 million. This equals to a 35% EBITDA margin.

You may note that we have removed the word adjusted simply because we have no more adjustments, and we don't foresee any adjustments in the near future. And finally, EBIT is up almost 200%, and net profit after tax is now at EUR 5 million, twice as much as last year. So quite successful first quarter.

In the coming 3 slides, we look closer at some of the KPIs. So let's move to Slide 8. Our billings grew to EUR 181 million or by 11%, which is, by the way, the same as our revenues. To me, this shows that we successfully can grow our business into a situation where we either have a normal or a good jackpot situation. The 11% is also in the range where we aspire to be, namely a double-digit growth company.

Gross margin has also improved, thanks to more sales of high-margin products, meaning a more favorable product mix in the quarter.

On the next slide, we have highlighted net cash and new registered customers. Net cash is up by 15% and now stands at EUR 78 million. This increase is mainly coming from the strong operating performance in the quarter. We have no news about the pending VAT case. But as I said before, we are confident to ultimately win the VAT case. But in line with previous quarter, we continue to report a continued liability of EUR 23 million.

Let's now talk about the acquisition of new customers. With approximately the same amount of spending, we acquired the same amount of new registered customers, 154,000. This is indeed good, not great, but still good. But with improved peak jackpots, we should be able to increase this further.

Moving on to Slide 10, you will find some additional KPIs. The CPL is showing 5 years increase, but you should not worry about this. The increase is fully attributable to a phase to a freiheit+ campaign that we have to expand, but we will reap the effect in the coming months. So if you exclude this campaign, which you should, when you calculate in the CPL, it's on last year's level.

Still, we do see increasing pricing, especially in social media and search. But our business model is quite tolerant since our customer loyalty is still remarkably high, and we will expect better margins over time. Hence, we could, in fact, easily swallow this effect.

Whether this price increase is lasting price, in fact, this is too early to tell, but I can say that the whole online industry reports similar dynamics. The MAU, the monthly active users, have improved and are now north of 1 million. The drive is the better jackpot situation, especially the peak jackpot in Lotto that we had in late January.

Average billing per user is still very high and it further increased by EUR 2 in the quarter to more than EUR 58 in the average spend per customer. And don't forget, this is the average, so a lot of our customers spend significantly more than this EUR 58 per month.

Allow me to reiterate the dividend proposal for this year, which you will find on Slide 12. We presented this with a full year's number, but let me remind us what would we propose and why. As you may know, I'm keen to optimize the capital structure. And with this proposal, we have taken further steps to improve it. We're planning to shift out even more cash, in fact, more than double versus the year before. The reason is to reduce excess cash of the company, but without harming the growth initiatives.

So we are proposing to dividend EUR 1 as a basic dividend and on top EUR 1.10 as a special dividend. This will lead to EUR 2.10 per share or EUR 47 million that is returned to our shareholders. Of course, management undertakes to constantly review its dividend policy in line with the financial performance, and we will talk about this in the coming quarters, and we'll give you a 2023 policy later this year.

Let me also confirm the outlook for the year that you will find on Slide 14. As you can see on this slide, we're quite optimistic about the future, and you see double-digit growth. The guidance for this year, as we explained in the full year, is that the billings of at least EUR 750 million, which is at least 14% increase versus previous year; revenues of at least EUR 105 million, which then is at least 21% increase versus last year; and EBITDA of at least EUR 30 million, which is then equivalent to an 8% increase. However, if you would normalize one-offs and the underspending in marketing that we had last year, this would actually equal to 60% increase versus last year. And then you see the economy of scales effect also taking part of this number. All of this is based on the average output for the rest of the year and marketing investments around EUR 30 million.

With this, over to you, Helmut, to bring this home.

[Helmut Becker, executive]

Thanks, Jonas. So what are the key takeaways? We continue to grow profitability. In fact, we've doubled our profitability compared to the first quarter last year. The pay back to shareholders 47 -- or pay out to shareholders EUR 47 million in dividends. And we've launched a new lottery product, Traumhauslotterie product, the German Dream House Lottery. Thank you.

Now we can start with the Q&A session, please.

[Operator]

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

[Marius Fuhrberg, analyst]

A couple of questions from my side. First one, with regard to the freiheit+ campaign you started in Q1, what would be -- or what is your assumption on the revenue effect for upcoming quarters out of this?

Second one with regards to the Eurojackpot, systematics that were changed end of March. Although it does not really affect Q1, but what is your observation of April, at least, and a little bit of May? So how -- or did this affect your revenue generation out of the Eurojackpot lottery?

And the third one, on your guidance or on your spending more specifically, you guided for -- or you still guide for EUR 30 million of EBITDA, and also your marketing investments are EUR 30 million are roughly in line with what we saw in Q1. However, Q1 had quite a good EBITDA and multiplying this before would probably be too easy. But where do you see the difference in the cost? Is it that you expect more personnel costs? Or what is your assumption on this?

[Jonas Mattsson, executive]

I think I can jump in here and take some of the questions. So the freiheit+ campaign, it's a campaign that we think we will reap the benefits in the coming couple of months. I can't give you a precise revenue forecast on those. But typically, the cost for acquiring customers that this will be included in will be slightly higher than normal. But because that's what we do when we acquire customer into freiheit+, they come slightly higher because the margin is so much higher. So they are quite beneficial for us. I don't have any precise revenue number for this one.

And on the Eurojackpot impact, the entire industry has always say that the second row will add a 20% volume increase. And we think that is believable, and we see similar numbers. Question is this cannibalized any other product. We haven't seen any material cannibalization. So we have seen uplift. And then obviously, since this has been known for a long period of time, this has been part of our guidance, of course.

We would argue this is good for the industry. This is good for the product because it builds up the jackpot situation much quicker. And we see now we are above EUR 80 million in jackpot. So I think this is good for the industry.

And to your third question about the guidance of spending, you're absolutely right, when you take 9 million times 4, that will be the EUR 36 million. If you go into your P&L, what you can see that the personnel cost is quite low, and this is share price-related. So every month or every quarter, we adjust our provision for long-term incentive plans in line with the share price, and the share price has gone down. If that is flat, then you will not have this positive effect in the future months. You could actually have the opposite one.

In addition, we had fewer consultancy costs that I think will happen in later quarters. So I think this quarter was a super strong quarter. Don't get me wrong, but maybe the cost side was better than the average quarter. That's why we still keep the guidance of plus EUR 30 million.

[Marius Fuhrberg, analyst]

Yes. Okay. Got it. I think keeping in mind your scalability of the business model. Yes. However, we will see through the remainder of the year. One follow-up, if I may. Could you remind us real quickly how the split in billings between Eurojackpot and LOTTO 6aus49 was in Q1?

[Jonas Mattsson, executive]

In Q1, I don't have the exact number in front of me right now. I can give it to you later. It's -- Lotto is the bigger product. And especially this quarter, it was even bigger because we had the peak in the end of January, and Eurojackpot has suffered, as I explained. So I think the product split is favorable -- clearly favorable to 6aus49 this quarter.

[Operator]

We'll now go to our next question from Henrik Paganetty from Jefferies.

[Henrik Paganetty, analyst]

So my question is also on the cost side. So you reduced personnel costs by 20%, direct operating cost by 11% and indirect operating expenses by 15%. Could you just say that again, like how much of that is sustainable? And for what kind of expenses we should see a bounce back in the other quarters? If you could like elaborate on that a bit, that would be super helpful.

[Jonas Mattsson, executive]

So let's start talking about the personnel expenses. As you see, it's coming down with roughly EUR 1 million for the first quarter, and that is predominantly driven by the lower share price. So there are some inflation and, of course, and they are slightly fewer head count. So we have realized even further synergies, but the majority of this is coming from the share price. So I would say that the personnel case expenses will jump up in the coming quarter, assuming a constant share price.

For the other one, it's minor. But if you take everything into account, there's probably a couple of hundred thousand that we have spent less this quarter that is planned to come in the other quarters. Of course, if we can reduce the consultancy fee, freelance cost even further, we will continue to be doing this one. But I would say a normalized cost structure is probably EUR 500,000 to EUR 1 million higher.

[Operator]

[Operator Instructions] It appears we have no further questions at the moment.

[Jonas Mattsson, executive]

Okay. Then I want to thank everyone that participated in our earnings call. And if you have any further questions, please reach out to us. We are more than happy to help you with any further answers. And thank you so much, and have a great day.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation. You may now disconnect.