Zeal grows billings but brokerage pivot cuts Q1 revenue

Zeal Networks has seen billings soar in the first quarter of the year, but its pivot to brokerage and away from lottery betting resulted in revenue figures suffering in comparison to the prior year.

The reduction in revenue that resulted from this pivot also saw earnings for the quarter fall sharply.

Billings – comprising all stakes from customers, including brokerage stakes and associated VAT, net of bets – for the three months to 31 March increased 107.7% year-on-year to €140.0m (£123.9m/$151.4m). This, Zeal said, was down to the inclusion of Lotto24, the former subsidiary acquired in May 2019.

Following that deal, Zeal has reorganised its reporting segments. It will now combine the Lotto24 and Tipp24 online lottery brokerage businesses in a Germany segment. Revenue from its B2B charitable lotteries business, ‘Other’ comprising its B2B charitable lotteries business, including the Spanish National Organization for the Blind (ONCE) and its venture capital arm Zeal Ventures, will be reported as other revenue.

For Q1 2020, the German segment contributed €139.7m, with 206,000 new registered customers by the end of the reporting period. While a figure for ONCE billings was not provided (due to contractual reasons), Zeal noted that the shut-down of lottery betting resulted in instant win games and betting on EuroMillions and the US’ Powerball lotteries being discontinued.

This impact of the lottery betting removal on Zeal’s Q1 revenue was more pronounced, with the total for the period down 47.8% at €19.0m. Alongside the removal of lottery betting, the prior year did not include revenue from Lotto24. German revenue accounted for €17.0m of the total.

Zeal recorded a further €414,000 in other income for the period.

Having already achieved a number of synergies through its acquisition of Lotto24, Zeal then further reduced its cost base in Q1, with personnel and other operating expenses (including marketing costs) down 33.2% to €16.7m.

This left earnings before interest, tax, depreciation and amortisation (EBITDA) of €2.7m, down 73.8% year-on-year.

In total Zeal expects to achieve total annual costs synergies of €57.0m of which 80% will be achieved in the first year post-acquisition, with 100% completed by the end of the second. Expenses related to achieving these synergies are expected to fall between €15.0m to €20.0m.

After increased depreciation and amortisation of €2.7m, resulting from the Lotto24 takeover, earnings before interest and tax amounted to €42,000, compared to €9.8m in Q1 2019.

After €1.1m in income from financial activities, plus €183,000 in financial expenses and a €1.1m loss on financial assets, and a €61,000 loss from associates, Zeal’s pre-tax profit fell to €188,000. However, a €340,000 income tax expense resulted in a net profit of €142,000 for the quarter.

Looking ahead, Zeal admitted that it could not conclusively assess the impact of novel coronavirus (Covid-19) on the business.

“On the one hand, the significantly reduced consumer behaviour could also have an indirect negative impact on e-commerce services – a closure of shops, such as lottery retailer outlets, could lead to a reduction of lottery sales and thus to decreasing, less attractive jackpot levels,” Zeal said.

“On the other hand, the restrictions on public life and the significant increase in the amount of time spent at home could also lead to a growth in online sales, especially for e-commerce business models such as online lottery brokerage.”

However, it still expects to strengthen its position as a leading lottery brokerage service provider via the Lotto24 and Tipp24 brands in 2020. Billings for the year are expected to come in between €550m and €570m, with revenue projected to fall between €70m and €73m.

EBITDA for the year, dependent on jackpot development, synergies and marketing investment to grow its customer base, should fall between €5m and €8m. For Germany alone, new customer numbers are expected to almost double in 2020.

“The Zeal Group has made a promising start into the fiscal year 2020,” chief executive Helmut Becker said. “We have grown our billings, successfully acquired new customers, further reduced our costs and achieved a strong gross margin.”

Finance chief Jonas Mattsson added: “We are on a good way to reach our goals, even if some steps of the transition, such as the complete technical integration of Lotto24 AG, are still pending.”