ZEAL Network SE

XETRA:TIMA

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the ZEAL Network conference call regarding the Q1 results 2023. [Operator Instructions] The floor will be open for your questions following the presentation. Let me now hand the floor over to Jonas Mattsson.

[Jonas Mattsson, executive]

Thank you so much, and good morning, everyone, and welcome to ZEAL's earnings call. I hope you will have access and can see the presentation on the webcast. But if not, it's also accessible on our homepage under the Investor Relations section.

So on the content slide, you will find today's agenda. And we will start off with a summary of the first 3 months of the year, followed by a financial update. We will then reiterate our guidance 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. Good morning. So first of all, we are happy that we received the games license from the German regulator. I will touch on the games business plan in a second. We've also made a good start in 2023 with double-digit top line growth. We have increased our EBITDA compared to previous year.

Furthermore, the World Lottery Association, the WLA, has accepted ZEAL as a member. This is a great signal towards our key stakeholders, our partners and potential partners in the industry. As the German market leader for online lotteries, we take our responsibility in the areas of compliance, security and risk management very seriously and attach great importance to social commitments as well. So we are pleased to be part of that important organization.

Two days ago, ZEAL was able to hold again a physical general meeting in Germany, first time after 9 years. Among other things, the dividend proposal of EUR 3.60 was approved. The payment of the dividend will start next week on May 17.

So on Page 5, let me give you an update on regulation. As you know, we are now operating under the new Glücksspielstaatsvertrag, and we've already talked about the extension of our broker permission until 2029. Let me go straight to the games license or virtual slot machine license, which is probably the most interesting for you. As I already mentioned, at the beginning of April, we received the permission to operate virtual slot games. This is an important milestone in our business strategy. The permit is valid for 5 years. After that, we have to apply again for the continuation of that permit, which should most certainly be an administrative act.

I'll now jump to Slide 6 to tell you a little bit more about the games business. We expect our games business to go live in May or June this year, however, with a smaller number of games than originally expected as the regulators simply cannot keep up with the flood of games submitted by all providers that require approval. Nevertheless, we will be the frontrunner in the lottery segment with our brands. In the second half of the year, we expect a rapid expansion of our games portfolio, adding a lot of games in 2024 and constantly refreshing the games portfolio.

Let us now go to Slide 7. Looking at other markets that already offer virtual Instant Win Games, it becomes clear what a great potential our new business field offers in terms of potential and perspective going forward. In other markets, in Instant Win Games already account for almost half of total lottery revenues. By the way, this is also very much the case for our ONCE business in Spain. Therefore, the German market has a lot of catch-up potential in this area, in combination with a significantly higher gross margin than our brokerage business. However, there are regulatory limiting factors that make it difficult to predict the speed of the ramp-up and probably will limit the total size of the potential somewhat compared to the leading markets.

Back to you, Jonas.

[Jonas Mattsson, executive]

Thanks, Helmut. Let's now go to the next page, and we will start describing the jackpot situation for the year. And I'm now on Slide 9. As you can see, this is the jackpot development for our 2 main products. 6aus49 is on top and EuroJackpot graph is below.

For LOTTO 6aus49, the jackpot situation has been weaker than comparable time last year. The average jackpot is slightly lower, but more importantly is that we did not have a single peak jackpot in this quarter. But as you can see, we at least got close at the end of March. And this, to compare with last year, we actually had 2 peaks. And this has, of course, an impact on both customer acquisition and billings number for the period.

For EuroJackpot, it was in parallel with last year. The average jackpot was a bit high, but no period experienced any peak jackpot. But at least, we got close with EUR 104 million in late January. So in summary, a slightly weaker jackpot compared to last year and also to mention is the lack of true peak jackpot for the quarter, which is actually below the historical statistical average.

Let's now move to the income statement that you will find on the next slide. We grew revenues by 6% despite a lack of good jackpot development. The revenue growth is somewhat lower than the corresponding billings growth that I will talk about in a moment, but basically it's due to less favorable product mix in the quarter. Total costs followed the revenues and increased by 7%. Personnel costs have increased as a result of higher provisions for our long-term incentive schemes. We also had 4 more headcounts in the company, but that has lesser impact.

Marketing expense is slightly down versus last year and in line with the jackpot situation. Direct operating expenses are in line with the increase in the transaction volume, the 11%. Indirect operating expenses are up 7%, with the main driver being more consultancy costs for the quarter. Combined, this has led to an EBITDA that is 4% higher than last year and now at EUR 9.3 million. This equals to a 35% EBITDA margin for the period. And finally, EBIT is up by 5% while profit after tax was 12% lower due to more tax charges. The latter is explained by the reversal of deferred tax asset that has an impact on the tax charge for the quarter.

In the coming 3 slides, we will look closer at some KPIs. So let's go to Slide 11. Our billings grew by -- to EUR 201 million or by 11%. This growth is supported by the strong customer acquisition as of last year. Gross margin of 12.4% is down versus last year but due to a less favorable product mix, as I have mentioned. This is, however, nothing that worries me since the product mix is always changing over the course of the year.

On the next slide, we have highlighted net cash and new registered customers. Let's first talk about net cash, which is up 45% since last year and now standing at EUR 100 million. This is mainly due to the strong operating profit, in combination with the inclusion of the EUR 56 million VAT receivable, offset by the last year dividend payment of EUR 48 million. Regarding acquisition of new customers, we are 7% below last year, which is explained by the higher acquisition number we have in the beginning of '22 when 6aus49 reached its peak 2 draws in a row.

Moving on to Slide 13. Here, you'll find some additional KPIs. The CPL, or cost per lead, is reduced by 3%. The main explanation is that we had some special campaigns last year which have increased the number for those periods. Besides this, nothing material has changed, but of course happy with the lower CPL. The MAU, or monthly active users, are up 6% for the quarter and now at 1.1 million monthly users. And finally, average billings per user is still very high and up by 5% to EUR 61. This is indeed very satisfactory, but I don't expect this to go further up until games are launched, which could have a positive effect, but we do also expect high level of cannibalization with this product.

Let me now reiterate on the outlook for this year that you will find on Slide 15. So our guidance for the year is that we expect the billings of around EUR 800 million to EUR 830 million, revenues of around EUR 110 million to EUR 120 million and EBITDA of around EUR 30 million to EUR 35 million, mostly depending on how much we ultimately invest in marketing. We are indeed planning a step change and have assumed EUR 34 million to EUR 39 million in marketing investments for the year.

For the games business, we assume a low single-digit EBITDA impact of this year. Obviously, the business is expected to continue to grow in the coming years. And the numbers indicated double-digit revenue growth, which is also our expectation for the midterm. And as always, this is based on the average jackpot for the rest of the year.

With this, I hand back to you, Helmut.

[Helmut Becker, executive]

Thank you, Jonas. So these are the key takeaways from our presentation today. We continue to grow the business. We have received our long-awaited games permission. Despite the turbulent times, our business is remarkably resilient, and we continue to pursue our goal to continue growing the business and gaining market share. With our approved dividends for the 2022 financial year, we have now returned approximately EUR 186 million to our shareholders in the form of dividends or share buybacks since the business model changed.

Thanks, everybody, for listening. We're now closing the presentation, and I think -- I give it back to the operator to take questions.

[Operator]

[Operator Instructions] And first up, we have Henry Wendisch from NuWays.

[Henry Wendisch, analyst]

Congratulations on the good results. You briefly talked about average billing per user, that it increased quite a lot and above my expectations, actually. What was, in particular, in Q1, the driver for that? If you could elaborate on that, would be really helpful. And also, I saw that the tax rate has increased to 30%, you also briefly touched it. But can we assume that kind of tax rate for the rest of the year? Those are my 2 questions.

[Jonas Mattsson, executive]

Sure. Thank you so much for your question. Let's start with the tax question. Yes, the future tax rate will be very normal. The tax expenses are mainly influenced by the reversal of deferred tax expenses. So going forward, you should just assume the normal German tax rate, and that will be approximately 32%. Obviously, the paid tax is less, but what we charge the income statement is more or less in line with the German tax rates.

On the average billing per user, yes, it's continued going up. And it has impact related to the jackpot situation. And as I said, games could actually positively impact that one. But we also know that games and money spent on games maybe be a euro less spend than other products. So we want to be a little bit careful that it will not continue too much but at least have a positive development over the years. And if you go back a few years, we were probably 10% lower than we are today. So it's a nice development we have had. I hope this explains the 2 questions.

[Operator]

Next up is Marius Fuhrberg from Warburg Research.

[Marius Fuhrberg, analyst]

One question from my side. Could you give us an update regarding the progress of the billings in your own lotteries? And how is your current strategy to increase those billings? Or are you actually in the progress of introducing new lotteries? So that would be helpful.

[Jonas Mattsson, executive]

So when you say own lottery, so let me try and to explain it. So we have -- the majority of our billings or our transaction volumes comes from the lotteries that we are brokers, that officially are owned by the state lotteries, meaning 6aus49, EuroJackpot and so forth so on. But we also have other lotteries that we ourselves, the operator, we have developed them like the freiheit+. We have also the Traumhauslotterie. So we are adding more lotteries to our portfolio.

These are relatively new. Freiheit+ was launched 2 years ago, the Traumhauslotterie was last year. And we hope that this also will take effect and becoming even bigger part of our portfolio because it comes with a higher margin. So that's why we want to push these lottery products to our customers as well as continue brokering our standard products. On top of that, we have the games, as we talked about, where we develop some games and other games we do in-source from third-party suppliers. Was that answering your question?

[Marius Fuhrberg, analyst]

Yes. I was a little bit more pointing in the direction of how your current strategy looks like of convincing more people of playing those lotteries. Or do you spend especially a little bit of your marketing spend, towards promoting those lotteries as they come with higher take rates?

[Helmut Becker, executive]

Yes. So we see potential to further grow these lotteries on our current customer base. We also are refining the product themselves and the value propositions of these lotteries. So we are learning as we are going. And yes, you have a point there. We do plan to also invest into customer acquisition with these lotteries, but this is something where we also are in test environment right now.

[Operator]

[Operator Instructions] There are no further questions.

[Jonas Mattsson, executive]

Okay. Then I would like to say thank you for everyone that participated and took the time to listen to our presentation. As we said in the beginning, it was a very good start for ZEAL and the group companies in the first quarter. And we expect a nice future as well. So thank you so much for taking the time. And should you have any more questions, please free to reach out to us directly, and I'm happy to support you with any kind of explanation. Thank you so much.