Brokerage pivot hits Zeal Network revenue in 2019

19 February 2020

German lottery broker Zeal Network’s revenue and earnings declined in 2019, but the business said the year was still a success despite the acquisition of Lotto24 and move away from lottery betting affecting its financial performance.

In May 2019, Zeal completed the acquisition of its former subsidiary Lotto24 and moved its registered office from the UK to Germany. This came as part of a change in business model to focus on lottery brokerage services, rather than lottery betting.

The business said its 26.7% revenue decrease to €113.5m was due to a high prize pay-out owed to the old secondary lottery business and revenue dis-synergies resulting from the business model change.

The business’s revenue came on billings – comprising all stakes from customers, including brokerage stakes and associated VAT, net of bets – of €466.7m, up 57.5% year-on-year.

Other operating revenue came to €8.1m, meaning total operating performance (TOP), or the sum of revenue and other operating income, came to €121.6m, down 23.9% year-on-year.

Zeal’s personnel expenses came to €23.0m, down 20.1%. This was largely due to a planned reduction in the number of employees at Zeal from 350 after the takeover, to 190. Absorbed employees from the Lotto24 takeover cost Zeal €22.0m.

Other operating expenses decreased 17.0% to €69.5m, of which €22.1m were marketing expenses, up 12.2%. Direct operating expenses fell 33.6% to €29.4m, while indirect operating expenses declined 8.1% to €18.1m.

This resulted in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of €28.8m, down 39.6%.

The business incurred amortisation and depreciation costs of €8.8m, eight times the cost in 2018, and non-recurring expenses of €11.1m, up 33.7%. These non-recurring expenses were mostly due to the business model change, at €9.1m, plus a further €2.0m from the Lotto24 takeover.

Zeal’s earnings before interest and tax came to €8.8m, down 77.0%.

Zeal did not disclose its final result after interest and tax.

Jonas Mattsson, chief financial officer of ZEAL Network, said that although Zeal’s final result was lower than in 2018, it still represented a success due to the business model change and the costs of integrating Lotto24.

"We are aware that we could only reach the latest milestones in the history of ZEAL Group with the support of our customers, employees and shareholders," Mattsson said. "After leaving behind a long period of legal uncertainties and significantly improving our risk profile with the end of the secondary lottery business as the leading online provider of state lottery products, we can now fully focus on the continuously growing and socially valuable German online lottery business with two strong brands.

“Knowing the great value and high loyalty of our customers, we look forward to setting out on this exciting journey."

For the fourth quarter of 2019, revenue came to €20.3m, down 53.5% year-on-year. This came on billings of €134.2m

The operator’s total operating performance fell to €20.4m, down 55.3%.

Personnel expenses came to €5.8m, while other operating expenses totalled €14.5m. Marketing expenses came to €6.0m, direct operating expenses €2.6m and indirect costs of operations €5.1m.

This resulted in fourth-quarter EBITDA of €500,000, less than one-thirtieth of EBITDA in Q4 of 2018.

Zeal’s net result before interest and tax for the fourth quarter came to a net loss of €4.1m, down from a €9.2m profit in 2018.

Zeal Network also issued its guidance for 2020, with billings projected in the range of €550-570m. Revenue for the year is expected to come in between €70m and €73m, with EBITDA to fall between €5m and €8m.