Strong second quarter and new product launch; estimated change

Strong lottery business: Lottery turnover reached €261 million, +24% year-on-year (eNuW: €252 million), better than expected, thanks to a favourable jackpot environment (2x peak jackpots). Lottery sales grew disproportionately to invoices by 37% yoy to €36 million(eNuW: €33 million) thanks to a better than extended billing margin of 13.8%, +1.3pp year-on-year (eNuW: 13.0%).

Improved game stats, but rollout is being held up by regulator: The slower than expected rollout of the full Games portfolio (~200-300 vs 115 currently due to slow regulatory approval) has led to ZEAL focusing less on MAU growth (18k vs eNuW: 28k). Nevertheless, user metrics have improved sequentially due to a shift towards higher margin games. ARPU was thus €40.5 (eNuW: €35.8). Consequently turnover amounted to €2.3 millionan increase of 5% quarter-on-quarter (eNuW: €3.0 million).

Dynamic topline continues:Q2 Sales rose better than expected 45% yoy to €40.7 million (eNuW: €37.5 million) after a strong first quarter. H1 thus showed a remarkable 40% annual sales growth thanks to the tailwind of the lottery and we expect Sales growth in the second half of the year is expected to increase by approximately 30% due to billing margin improvements of over 15% as of June 10, ’24. Thus, even in the case of muted jackpots, strong growth should be maintained throughout H2. Potential strong jackpot environments should therefore serve as an additional sales boost.

Significant EBITDA growth: EBITDA in the second quarter came to €10.7 million, +144% yoy (eNuW: €10.2 million; H1: €20 million, +46% yoy) due to lower marketing costs of €12.1 million, -7% year-on-year (eNuW: €11.6 million), but also taxed by (1) 53% year-on-year increase in personnel costs And (2) legal, advisory and recruitment costs (indirect costs: +51% yoy). Note that although Q2’23 was burdened by a strong marketing push (€13 million), operational leverage Yet, the key features of ZEAL’s business model are clearly visible, as ZEAL’s revenue has grown disproportionately to its operating costs.

High marketing efficiency maintained: Despite only 2x peak jackpots in Q2, ZEAL maintained its excellent marketing efficiency. Cost per Lead (CPL) increased only 1% quarter-on-quarter to €33.4 (eNuW: €38.0), better than expected. Compared to last year (exorbitantly high CPLs in Q2 and Q3), CPLs decreased substantially by 34% yoy in Q2, showing that the improved algorithm and thus higher conversion rates increased marketing efficiency in a sustainable manner. – continued –

Strong user influx: ZEAL has added 272k new leads (+31% YoY), clearly indicating an improvement in marketing efficiency and exceeding our user intake estimate of 200,000. Consequently, Lottery MAU grew 20% year-on-year (3% quarter on quarter) to 1.37 million in Q2 (eNuB: 1.37m; H1: 1.35m).

Guidelines confirmed, but not yet ambitious: Based on increasing monetization in the lottery (and with no negative change in user activity or churn rates expected) for H2, sales support from €140-150 million (eNuW: €157 million; eCons: € 150M) doesn’t seem ambitious nowIn addition, we are positioned at the top of EBITDA guidance from €38-42 million (eNuW: €42 million; eCons: €42 million) despite expected increased marketing spend of €48 million (53% of which has already been incurred in H1).

New innovative product launched: In addition to the constant addition of new games, ZEAL also has a new lottery of the raffle type “Traumhausverlosung”, which should yield a margin of 26-33% (versus 13-16% for Lottery). Main advantages of lottery type lotteryare, in our opinion, a) a tangible prizefor example an existing home, which increases the emotional bond as opposed to an intangible lottery win and more importantly B) the illusion of higher opportunities As with lotteries, there is always a winner, but the odds are unknown in advance, which increases the player’s desire to participate, because he underestimates his chances. Against this background and with ZEAL’s very experienced and heavily budgeted marketing power in mind, this product looks set to be successful. Although still below par, this first lottery of its kind in Germany has not only potential to become a positive EBITDA contributor in the medium term, but could also serve as a blueprint for additional lotteries offered by ZEAL (e.g. cars, boats, etc.). We also like that ZEAL does not do this product to gain market shares, but to enlarge the market. This once again emphasizes the innovative power it has within the regulated lottery market of Germany.

FCF positive again: After unfavorable WC fluctuations in Q1 (FCF: € -3.6 million), FCF is back to normal levels (Q2: € 16.2 million; H1: € 12.6 million) due to the WC fluctuation returning. With increasing profitability, we also expect commensurate increases in FCF going forward (conversion of 60-90% FCF/EBITDA).

All in all a strong release. ZEAL shows that it unites value and growth while it is also highly resilient to macro developments. Therefore, We reiterate our BUY recommendation And ZEAL’s position in NuWays AlphaList with an unchanged PT of €54.00, based on DCF.