Ladies and gentlemen, thank you for standing by, and welcome to the Asetek Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question and answer session. To ask a question, please press star and one on your telephone keypad and wait for your name to be announced. I must also advise you that the conference is being recorded today, Wednesday, the 23rd of October, 2019. I'd now like to hand the call over to your first speaker today, Peter Madsen. Please go ahead, sir.
Very good. Thank you, operator. Welcome all to this Q3 2019 earnings call. Our board, they met last night, and they approved the report that we issued out this morning. We, of course, have this quarterly presentation available for you also. My name is Peter Madsen, I'm the CFO. I have with me here our CEO and founder, André Eriksen. Good morning.
Morning.
The way we will do this, as usual, is that we go through the presentation, and at the end of presentation, we will have a Q&A session where I'll hand back the microphone to the operator. You can also, if you prefer to do so, type in your questions in the application that you are using to view this presentation. With that, I'll hand over the microphone to André for the presentation.
Looking at the quarter a little bit, our revenue for the quarter ended up at $10.4 million, compared to $17.4 million the same quarter last year. A gross margin of 42%, pretty much same as last quarter, a big improvement for the first nine months of last year. Our adjusted EBITDA came down to $32,000 versus $3 million same period last year. We do expect our revenue to go up next quarter compared to this quarter. Still, and as expected and reported, we expect it to decrease compared to the same quarter last year. On top of that, there will be a non-eventful gross margin decline simply due to the fact that we are cleaning out an inventory for a final sell-off for an end-of-life product.
You could say the flip side of selling cheaper would be to have it in inventory, and then it would have to be written off later. It's just normal common sense. Yes, we maintain our guidance for the year. As you already know, we have two business segments, Gaming and Enthusiast and the Data Center. As typical up until now, it has been the Gaming and Enthusiast business driving the lion's share of the revenue. I'll get back to that a little bit. Yes, as you can see, and as already reported, the quarter is unnormally low. As a matter of fact, we have to look some three years back to get to the level where we are now. There's no doubt about that we have taken a hit.
If we look a little bit deeper into the Gaming and Enthusiast first, there's no doubt we've been buffeted by the macro and industry headwinds blowing against us right now. The unresolved China trade issue is still an issue for us. The Brexit uncertainty is definitely not helping. It's influencing this segment, both on the Chinese side, but also on the European side. On top of that, we have one larger customer that is declining more than the other customers. We are not always privileged to this kind of information of what's going behind on their scene, so to speak. We can only speculate that it's indicating changes to the product they are selling, the vendor they're using, or larger than average inventories and/or a mix of these things. Personally, I believe it's a mix. For sure, it all influences us.
Just to carve it out a little bit further, if it's unclear. On our customer side, so on the OEM, the cash flow effect of paying 25% U.S. tariff on all China imports is obviously massive. It would be and is for any business. Of course, their ability to internally absorb this becomes slimmer by the day. I think it's also pretty obvious that the incentive to build up an inventory is not really there. Of course, it's impacting the business confidence that what's going to happen is the tariff going to go up? Is it going to go down, or is it going to go away? For the end user, it has a spillover effect, obviously. The sum of all this is that it obviously impacts us. It changes the forecast. It changed the way the people are forecasting.
It changes our, let's say, confidence in the forecast we are giving. For sure, the forecast we have gotten has been reduced in the second half of 2019, as already disclosed. Obviously, it's also what's already reflected in our revenue guidance. Yes, that's how it is right now. If we look at the more positive side of the story earlier this year, as you know, we started to focus more on bringing our brand forward. Why did we do that? Historically, our brand became more and more anonymous. The fundamental problem with that is that the end user would not necessarily know which liquid cooling product he actually ended up getting. We wanted to change that. We have spent some resources on it, and we are continuing to do that.
The idea is really to get our own brand out there. On top of that, we are also going to introduce, let's say, some new and high-end products that will definitely carry the Asetek brand and get people excited. If we look at the strategic development of what I just said, the goal here, of course, is to continue dominating this market. There are different things, different levers and different knobs we are turning on and adjusting on. If you look at R&D, as you'll see when Peter gets to the numbers, for sure, we are investing more in R&D in the Gaming and Enthusiast. We are not only listening to our direct customers and asking what they want, and then we go build that.
We are also investing in our own innovations and our own things that will come forward during 2020. That's one of the things we're doing. On the branding and marketing side, we have done several things, and we are doing several things. For example, we have co-branding agreements in place with six of our customers, and there will be more rolling out. We are connecting directly with gamers and enthusiasts via our CoolNation forums and our gaming CS:GO tournaments. Then on top, we are widening our customer base. We currently have 25 OEM customers, and we added Gigabyte and Falcon Northwest with the new Talon PC here in Q3. We do expect more new customers to come. Obviously we want to sell more, but we obviously also want to get less dependent of one or more large customers.
Of course, we will always have larger and bigger and better customers than others. That's the definition of how it is. It's better to have five large customers than to have one large customer. For sure, we are looking into that big time. On the CoolNation side of things, we started out softly with a, let's say, national tournament in Denmark. After we launched this strategy in March 2019, we have launched the CoolNation forum. We have launched the CoolNation Masters Counter-Strike: Global Offensive tournament, and it's already on the way. There's 39 Danish teams subscribed and competing. Weekly, we have more than 250 individuals gaming under this tournament. We are streaming it live, obviously, on YouTube, Twitch, and Mixer.
Yeah, the picture you can see here on the slide is actually from a little bit more than one week ago here in our Esports Academy from the semifinals. On the adding new OEMs, I am not going to read out loud this nice quote about us, but I am going to mention that Gigabyte is a big fan in the Gaming and Enthusiast side. They came to us, and we launched this great cooler with them. Just a sign that we are adding more customers. If we look at slide 12 here, just some very brief and short stats. As you know, 95% of our revenue is from Gaming and Enthusiast, and we have top five of our customers representing 85%. We have, from most of our larger customers, received positive feedback to our new strategy.
They like the fact that their customers know who we are. The trick is not to turn our customers into an Asetek reseller. That's not the point. The point is to help our customers build products based on Asetek technology. That's the goal. They endorse that, most of them anyway. I think it's no big surprise if you look at our top five customers in alphabetic order. It's Alienware, ASUS, Corsair, NZXT, and Thermaltake. If you look on the right and say, "Okay, how is it actually going spreading out revenue on more customers?" There has actually been, on most of the customers, you can see, let's say, an offset in what they used to buy and what they're buying now. Again, here, the trick, of course, is not to turn three customers to zero just to change the graphs here.
The point is to make all of them successful at the same time, but from an Asetek perspective, from a revenue distribution where we are not as vulnerable as we have been. Talking a little bit about the product developments that are going on, I think it's timely, and I think it's appropriate to re-mention and restate who our core customers are. We get a lot of questions about gaming, obviously. I think if you look in the middle here, if you have the whole blue big circle, that's all the gamers on the planet. It's not correct to assume that they are all addressable to Asetek. Number 1, there are a lot of gamers who are not using a PC. Number 2, there are a lot of gamers who are gaming, and that's it. They don't really focus on what's inside their PC. They are just gamers.
Our lighter blue circle is our core market. That's hardware enthusiasts. As you can see, this is not a science, but as you can see there, the main part of the hardware enthusiasts are also gamers. It's dangerous to make the opposite logic. The core people we are going after are really hardware enthusiasts, where most of them are also gaming. For sure, when NVIDIA, AMD, Intel, and so forth comes out with new and exciting technologies, that is driving demand on our side. I got a question yesterday saying that, "Well, the PC market is going up. Why is gaming PCs and Gaming and Enthusiast market not also going up?" There's a simple explanation for that. The PC market is huge, but it's commodity PCs being sold to corporate users who are now upgrading because a new Windows operating system is on the market.
That's why they upgrade, but it has really nothing to do with our core market. Again, that's a dangerous comparison. Because of new hardware platforms are coming out, it will drive demand. Of course, with the product development that we have going, and as I mentioned before, that will fit in nicely with that. Looking a little bit on the Data Center side of the story, from a revenue perspective, there's actually not been that much going on, as you're already aware of. I would say that personally, I am probably spending more time on data centers right now than I have been for a very long time, in fact.
Although it's not seen in the numbers, I can say that as of the week before last, I was personally in Brussels, where we had set up a number of meetings with both politicians from the European Parliament, also a lot of commissioners from the European Commission and a lot of officials down there. Just as a very low-key indicator, in one of the meetings we had set up, on a very high level, actually, we had expected to see one guy, but there were nine persons in the room from, I think, seven different countries. The interest of what we are doing here is significant. I have been positively surprised how well we have been received and how easy it was to set up three days of meetings nonstop. At the same time as they were actually voting for the new European Parliament members.
One of the days we were there, I think it was the French candidate that got rejected. There was a lot of resources being spent on that, but still, they had time to meet with us. I'm not naive and think this is going to turn into legislation in a short time because it will not. It simply takes time. I can say that the interest is really significant, and a lot of them really understood why we were there, what we were doing, and what we were trying to achieve. I would also say from a timing perspective, I think it's also important to see things in the helicopter perspective once in a while instead of just on a quarterly basis. It's no secret that we have been pushing this Data Center story for a while without the desired outcome yet.
I would also like to say that now that I have been in Brussels, had we been there five years ago pushing for this, we would have gotten no interest. I think we are, fortunately, if you want to be a market leader, unfortunately, if you're looking at short-term revenue, I just think we have been out too early, and I still believe that's the case. I still believe it'll turn. I still believe it'll come, but it is hard work, and it is back to what I said at the Capital Markets Day early in 2019, without legislation or regulation, I do not think we will hit the goal. Yeah, to put it short, there is a significant interest from the guys who are actually dealing with this on a daily basis, and as well the politicians.
With that, I will turn the mic to Peter to talk about some numbers.
Very good, sir. Thank you. Q3 was to some extent, actually quite uneventful. Of course, the revenue were not where we had hoped for them to be, but some of the other components in the financials are actually quite positive. We're starting here on the top line. The revenue came in at roughly 40% lower than Q3 of 2018. For the year as a whole until Q3 here, we are 24% below 2018. For the year as a whole, André will come back to that, but we are aiming at a number 20% lower than 2018 as the full year. Gross margins are good this quarter. We came in at 42%, which is quite similar to the year, last year. We have a rule of thumb in-house here saying that if we are above 40, then we are happy.
We are, by definition, happy this quarter, and we've been so for actually quite an extensive period of time. I'll come back to that on the margins just in a slide from here. Shifting down to operating expenses, you will see that we are quite flat compared to last year. We have been helped a little bit by the US dollar being in our favor this year. Let's take it as a flat. It's actually a little bit lower due to an accounting policy change or rule change where it moved around $140,000 down to depreciations every quarter. Just staying a little bit at the operating expenses, the interesting news here is that we are successfully carrying out the strategy that we laid out earlier in the year where we're transitioning our efforts from Data Center to Gaming and Enthusiast. It's very deliberate.
How should I say it? It's a big task, of course, and it's being done with a great level of interest from everybody in the company. What we do is simply scaling down the R&D, mainly in Data Center, simply because we came to a point where we did not need many new products to support the market as we see today. Then of course, instead we're scaling up over on the Gaming and Enthusiast side, and there is almost no limit to what we can list of new options or possibilities over there. Continuing down through the P&L here, depreciations, as I said, also flat a little bit higher than last year due to this accounting rule policy change. Coming down to the EBIT at a meager $69,000 versus $3 million the year before or 0.7% versus 17.3%.
In the Gaming and Enthusiast segment, the 15.6, of course, that's lower than where we would like to be, but that is, you can almost backtrack up to the revenue that is due to the revenue component being significantly lower than what we are used to in this segment. That brings us down to the HQ portion of our expenses. They are a little bit higher or somewhat higher than last year due to litigation expenses being high. We have seen quite a lot of activity in that segment. In Q2, three months ago, we received a settlement income of $750,000 roughly. We have not had the luxury of booking such a settlement income in this quarter. We have good attorneys, but they're not that good. That brings our headquarters cost to $1.3 million versus $1.1 million a year ago.
The other HQ expenses, there is a little bit of periodization involved there where we have to charge a one-off expense in this quarter versus spreading it out over time. That brings us to the EBIT total of $1.2 million in the negative, versus $1.9 million or almost $2 million in the positive last year. For the years as a whole, this year we are $115,000 in the negative versus $3.2 million in the positive a year ago. I'm not showing it here, but I know that we had good help on the finance line in Q3 also. I think we booked around $600,000 of mainly foreign exchange related income from that line. Margins, I promise to come back to that a little bit.
The way this slide here is structured is that the bold black and blue lines on the left-hand side is the group gross margin and the Gaming and Enthusiast gross margin, respectively. Since Gaming and Enthusiast is almost, I think it is 95% or more, it is of the revenue. Those two lines are very similar to each other. As you can see, they are quite flat over the last five quarters here. We should add to the story that in early 2018, Q1, two, and three, our gross margins were at 36%, where we then, by definition, were not happy. Since we brought it above 40%, that is another scenario than we were a year ago. The thin gray line on the left-hand side is the gross margins from the Data Center. It varies up and down quite a lot.
We're pretty comfortable with the level we are at this point. Cash flow, not so much to say here. We're cashing in from our quite successful Q2. You will also notice if you look in pretty much smack in the middle of the whole thing, there's a reducing trend, at least in our investing activities. We are simply spending less on both tangible and intangible fixed assets. That all brings us to a cash position at this point of $26.2 million, where we were at $18.6 at the end of Q4 last year. We are cashing in quite significantly.
I should add, by the way, that I do not have an update at this point on the ones who have been following us will know that we have a dispute, an issue with the U.S. IRS, U.S. taxation authorities, primarily over dividend taxes and how dividend taxes are sort of blocking us from paying dividends. It's only two months ago that we reported last time, and I do not have any update on that topic at this point. Balance sheet, very much as in use has been for the last two years or so. Strong cash position, low debt, and a balance sheet in total that allows, enables growth and financial flexibility. Let me just round off by re-mentioning our financial priorities as we laid them out also at the CMD early in the year. In the Gaming and Enthusiast market, it's about leadership.
I think we just used the word domination before. Product innovation, rebranding in order to reinitiate growth. You have seen us earlier, how we are actually carrying out a device diversification exercise. You have also seen how we are successfully protecting and optimizing our growth markets. In the Data Center business, which is the smaller one at this point. Wherever it makes sense, we are supporting OEM and end user adoption. Apart from that, it's more about ensuring an efficient operation within that segment at this point in time. The way we work with cost-based optimization is that we are quite frugal and cost-conscious. We have, of course, a very clear understanding of the fact that our revenue are lower than where we want them to be, and of course, that plays into how we are spending money.
We are quite frugal when it comes to our IP and R&D investments, because that's where things can actually move significantly. We are trying to run our manufacturing, both in-house and our third-party outsource manufacturing, as optimal as possible and make sure that we are optimizing there. All this bottom line, of course, needs to turn into cash conversion, and I think you've seen us do quite well on that topic also. With that, André, full year 2019 expectations?
Yeah. Well, there's only one quarter left. Unfortunately, we had to reduce our guidance for the year a little while back. It's not been an easy task to hit what we guided back then. We are fighting hard for it and working hard for it. We maintain our guidance for the year. Of course, we all would like to know how 2020 looks like. Unfortunately, we don't know yet. It's simply too early to talk about 2020. There are other persons in play than me who decides how that's going to look. The summary and outlook is really that, as expected, Q3 reflect the slowdown, which again means the profit situation is a reflection thereof. We are focused on doing what we do well, and that is to build liquid cooling for our customers. We are focusing on getting new customers.
We are focusing on getting our brand out there. Then, I at least is pretty confident that we will get back to where we should be. Again, without mentioning a lot about 2020, my job is to earn money for the company. If the top line does not grow as fast as it should, then obviously we have to do other stuff to make sure we are making money. That is a big priority for us. Again, it's simply too early. With that, I think we have reached the end of the official presentation. Peter?
Yeah. Thereby, we also go to the Q&A session, and you can either type in your questions in the app. I don't know how your app looks, but find the place where it says Questions, I would say. If you're on the phone, then I would now hand over the floor to our operator, Summer, who will conduct the Q&A session. Summer?
Thank you. Yep. Just as a reminder to participants on the phone, it is star and one on your telephone keypad if you would like to ask a question, and it is just the hash key to cancel. No questions have come through on the phones at the moment.
Okay. Let's give people just a minute more, Summer, while we do that, we can read out a question from Germany that I've got over here. Any view on 2020, how much of a solution in the trade war between U.S. and China could lead to a recovery of pent-up demand? Do you have anything to add, André?
Not really. It's anyone's guess. You can get my guess, and my guess is that, yes, for sure, if we got some political stability, both around Brexit and around the U.S. and China trade war, for sure, I'm rather confident that that would have a big impact on our business. To quantify it's simply impossible.
Very good. Summer, any questions that came in on the phone?
No questions have come through on the phone.
All right, I don't see any other questions online either. That means that we just have to point back to our website, our email address for questions, if you have any, investor.relations@asetek.com. We will do our utmost to reply to your emails with good answers, of course. With that, I'll just have to say thank you for your interest in Asetek. Have a wonderful day.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.