Welcome to this call. Today I'm going to try to answer two questions. The first question is, what happened in the third quarter, a nd the second question is, what do we do going forward? So if you have any questions, please post them online, and I'll do my best to answer them in the Q&A session after the presentation.
So I'd like to start today by providing a snapshot of Adtraction. So Adtraction has been around for a while. We started a company in 2007. We launched the service in 2009. In 2014, we thought it would be a good idea to start business outside Sweden. So we went to the great country of Finland and established an office. That worked out really well, and we used that experience as a blueprint to start operations in 10 more markets.
So we would start one or two new markets per year for the next 10 years or so. Currently, we're locally present in 12 different markets. We have local office, local employees, local companies, and local everything. This is a core feature of our business throughout Europe.
In 2021, Adtraction was listed on Nasdaq First North. That was on December 7th, so we're soon celebrating our third anniversary as a listed company. We have around 112 employees, and this is exactly the team that we need in order to do what's next for Adtraction, which is get back to growth.
So that's the snapshot, but let's talk a little bit about the third quarter here. This is the short story of the third quarter. We've seen very weak markets for our customers, e-commerce companies, and consumer credit companies. This has resulted in negative growth for Adtraction.
As a matter of fact, I think that we've never seen markets this bad since we started the company. T he good news here is that Adtraction remains profitable, and we deliver a positive cash flow also in this tricky market. We have used this time to focus on our strategy and our positioning. That, in practice, means that we've worked a lot on our sales pitch, our branding. There's going to be a new site soon.
I think that the new site will hopefully be launched next week. Take a look at that. You will understand a lot more what I'm talking about when you see that. We've also made some organizational adjustments. So we're currently 112 employees. In the quarter, we decreased the number of employees by 10 or so. The main reason for this adjustment is that we want to have the right team.
Obviously, this will also lead to some cost savings longer term and some one-off costs short term. That is in this quarter. We started the fourth quarter by acquiring Adrecord, a Swedish/Nordic network, and now we're going to spend some time integrating Adrecord with our organization and welcoming their brands to our platform in a while.
The main focus for Adtraction is to get back to growth. I've said this for a while, and we're serious about this. This is what we want to do, so if you've listened to us before, you know that we are interested in three financial metrics. That's growth, profitability, and cash flows. We want growth because that drives profitability with our business model. We want profitability because that results in cash flows with our business model. If we get cash flows, we can pay dividends to shareholders.
We can acquire companies, and we can invest in our own business. We have done all of these three things over time, a nd clearly, the one aspect that's not working out right now for us is growth. Sales growth dropped by 18% in the third quarter. Gross profit dropped by 17%, a nd if we only look at the core business, that dropped by 11%. Clearly, this is not where we want to be.
The good news, though, is that we're still profitable. EBITDA was SEK 12 million, a nd yes, there are some non-recurring costs, but I'm not going to spend too much time on this. The big point here is that when gross profit decreases, EBITDA will decrease even more because of our fixed cost base. That's the sad news. The good news is that the opposite will happen once we start growing again.
So when gross profit grows, we expect EBITDA to grow even more. Cash flow was strong in the quarter, SEK 23 million. Yesterday, we paid a dividend. So if you've been a shareholder for a while or at least for a few days, then you should see some money in your bank accounts. So this quarter was not great. This is not where we want to be, but I think that we should take a step back and look at the bigger picture here.
So Adtraction has grown every single year since we started the company a nd I think that we know how to manage a growth business. I think that we know where to find growth a nd I think that we have a great business model and the correct positioning. W e just need markets to stabilize a little bit before we can get back on this growth path.
I think that we have a solid financial base. We have solid rolling 12 months. We have sales of SEK 1.2 billion. We have a gross profit of SEK 236 million, EBITDA of SEK 58 million, and an operational cash flow of SEK 56 million. That, by the way, is just an amazing cash conversion that we deliver.
Adtraction is indeed a stable business. Even if we faced a couple of rough quarters here, we're still very stable and a strong business. I think that fundamentally we're in a good spot. H ere, I'd like to, again, put things in perspective a little bit. We're facing the worst couple of quarters that we've seen since we started the company. There's no doubt about tha, a nd still, we're in a position to pay dividend, a nd still, we're in a position to do M&A.
Imagine what we can do when markets are a little bit better. I think this truly is a testament to the strength of our business model and how we do things that we can acquire and pay dividend in also in a difficult market. So before in these calls, I've spent quite a bit of time explaining our business models. Some of you will be happy to hear that I'm not going to explain my business model today. Instead, we will talk about two important insights that we have.
The first insight is that many brands rely too heavily on the big platforms, and the big platforms are Google in the Nordics and in many other markets. It's Amazon in the south of Europe, U.K., Germany, and so on. To some extent, it's Meta.
A lot of companies, in fact, probably most e-commerce companies rely too much on giant platform companies. That means that partner marketing is needed. To me, that's obvious, and I'm going to talk a little bit more about that in a minute. The second important insight is that partner marketing is a complex thing, and optimization is needed.
There's a lot of information flowing back and forth, and things change on a daily basis, almost in real time. That means that active partnership management is needed, and that also means that Adtraction is needed. So I'm going to talk about these things for a while. So again, this is an example e-commerce company that we've seen before. This company gets 50% of their traffic from Google, Google paid ads, and 10% of their traffic from Google organic search.
Clearly, it’s fair to say that this e-commerce company is dependent on a giant platform company. That’s Google. I think it’s also very fair to say that Google is a monopolist with a 90% market share on search in most geographies. Our view is that buying traffic from Google is fine until it isn’t. I think a lot of companies have experienced that. It’s really great to buy traffic from Google up until a certain point, up until you reach a certain volume where the click prices will increase at a lot quicker pace than the number of conversions.
So you hit some sort of ceiling, and then the marginal cost per sale or transaction really increases. I think that a lot of customers have also experienced that Google, without really explaining why, pauses campaigns, shuts down campaigns, and does all sorts of weird things.
I think that on the partner side, we've seen that Google decides that we no longer like this specific type of site or this vertical. T hen, even though some business has been up and running for 10 or 15 years, Google simply stops sending traffic there. T he point here is that Google is not a reliable business partner a nd to me, it sounds like a pretty risky proposition to get 60 or even 70% of your traffic from Google.
W hat's more, I think that other things have changed. I remember when Google launched, Google was just great in the beginning of the early 2000s because the user experience was so great. That's not the case anymore. So here, we've searched for a men's winter jacket, and this is what pops up. There's no organic search results. It's just a bunch of ads.
So what I'll probably do here as a user is I'll click around a little bit, then I'll click some more, and then I'll not buy a jacket a nd maybe someday I will buy a jacket. But the point here is that the user experience is not good for me, and the advertisers need to pay a lot more before the jacket is bought.
So what advertisers see is every year the bill from Google increases, but the traffic does not increase at the same pace or the number of sales. If I were head of sales at an e-commerce company and I saw this traffic acquisition pattern, I would say, maybe I'm a little bit too dependent on Google. Maybe I should work more with partner marketing and increase that thing to maybe 25% or so.
Just to be clear, a lot of our customers get 25% of their traffic or more from us or some other partner marketing company. This is just what brands should do. This is how you diversify your traffic acquisition and reduce risk for your company. To me, this is a no-brainer. If we agree that it's a no-brainer to do partner marketing, then we should take a look at how we do that. This is our second insight.
Partner marketing is complex, and optimization is needed. We don't need to say that this is rocket science in any way, but what we do say is that there's a lot of information flowing, and things change. Prices change, volume expectations change. In order to really optimize things, you need to sit in the flow of that information.
You need to have access to a lot of information. We all agree that partner marketing is needed, and the core features of partner marketing is that brands only pay for results. There's no risk. You only pay for results. You don't waste any ad spend. Costs are predictable, and everything is good. The second reason is that you want to expand your reach. You can instantly access several hundred sites in whatever region or market you need to access.
This is really a great way of working, so let's say that I'm head of sales at an e-commerce company, and I have realized that partner marketing is the way forward, then I would consider the following three things before deciding how to work with partner marketing. The first question I would ask is the question of optimization.
How do I make sure that I pay the right price, that I get the right volume, and that I work with the right partners, have the right traffic mix? Do I go for a network which is self-managed, or do I talk to experts to optimize accounts? That's a big question. That's a big question because it really makes a difference. The second question is one of quality.
Do I want to work with a network that allows any partner into their network, or do I want to work with a network that really scrutinizes the partner base, constantly monitors that, and closes down, if you want to call it, bad partners? T he third question is distribution. Does this network have the relevant distribution in the market that I'm looking at? These are, to me, the most important questions a nd of course, Adtraction has some great answers to these questions.
So the core feature of Adtraction is active partnership management. So we will make sure that brands have the right traffic mix, they pay the right prices, and they get the right volume. I would argue that this is very, very difficult to achieve without talking to a network that has all the information.
The second thing is that Adtraction works with quality partners. We're not interested in low-quality partners, and we will shut them down from our network to make sure that we have a great delivery for everyone. The third question is, does this network have distribution and access to each market? O f course, Adtraction does because we're locally present. We're locally everything, and we have local relationships.
So to me, Adtraction sounds like a good choice for these reasons a nd because we believe in our business model, because we believe in our own ability, we have ambitious financial goals. We want to grow by 20% per year sales, and we want an EBITDA margin of 7%. M aybe this looks a little bit silly because we've just reported a drop in sales of 18%, b ut if someone says that, I would disagree. Again, I think that we need to take a step back and look at the bigger picture.
So this shows Adtraction sales growth 2018 to 2023, a nd I think it's fair to say that we've comfortably beaten our sales target over time. Y es, 2024 is challenging, but I'm convinced that we will get back to growth. So to explain a little bit what's going on in the third quarter, let's look at gross profit because after all, that's the thing that's the most important for Adtraction.
We've made a divestment of Klar that has an impact of around 6% on the gross profit in the quarter. T hen we've seen negative growth in existing markets of 11%. We don't sit idly by and watch this happen. Of course, we make adjustments to the organization. We've made some smaller adjustments really since second quarter 2023 a nd now we've taken some bigger steps in the last quarter.
What we did initially was to not replace people who left a nd of course, there were some terminations. T hen now in the third quarter, we've taken some bigger steps. The main purpose of this exercise is to make sure that we have the right team. We now have the right team, and we're ready to work to get back to growth.
Of course, a side effect here is that we also reduce the cost base going forward. What happened in the third quarter is that we had non-recurring costs of SEK 2.5 million related to the reduced in headcount or, sorry, the reduction in headcount. The cost base was SEK 43.5 million in the quarter, including those costs.
Of course, as a result of the reduction in headcount, costs will be lower going forward. I think we said around SEK 8 million in the report. That doesn't mean that the cost base in total will be lower because we will also hire people and do new things. So I think we should look forward to a relatively stable cost base going forward. The EBITDA margin was improving in 2023 while we were still growing a nd as soon as we stopped growing, we see a significant drop in the EBITDA margin.
The good news is that we're still profitable, and to be realistic here, we need to see a return to growth and gross profit before we can improve our margin. So let's dive into the particulars of the third quarter a little bit. Again, we saw an 18% drop in sales. That's due to the weak markets for consumer credits and e-commerce. Gross profit dropped by 17%, and the core business gross profit dropped by 11%.
That is the platform business excluding Klar. EBITDA decreased by 52%, and again, this is what happens when you have a certain fixed cost base and gross profit decreases. We expect costs to be stable again, and of course, we will get some more costs from Adrecord, so from that point, including the Adrecord cost, the cost base perhaps will increase a little bit.
Adjusted net results per share decreased as a result of the falling EBITDA, and things have been challenging both for e-commerce and finance. We saw a 14% drop for the e-commerce vertical, and essentially, we are only growing in our smaller markets, and there's been some reports in the Nordics where claims are made that the e-commerce market is growing. I don't think that those reports are correct. I think that e-commerce is still slow.
Also, in finance, we've seen a drop. Again, four out of 12 markets are growing. It's mainly smaller markets that grow, and also Norway, actually. Klar has been divested. We talked about this many times before, and that results in a significantly lower gross profit for the vertical that we call Other. Nordics dropped by 20%. If we exclude Klar, the drop is 13%. Only Norway is growing in the Nordics.
In Europe, four out of eight markets grow. It looks a little bit better from a growth perspective. But again, it's mainly the small markets that record growth because it's easier to grab a significant market share there or win more market shares. So cash flow is interesting to us a nd cash flow varies greatly from quarter to quarter, as you can see in this graph.
Cash flow in Q3 was very strong a nd I think that this is more or less us recovering from slightly worse performance in Q1 and Q2. Normally, Q4 is our best quarter from a cash point of view. I think the important thing for us is that we, over time, have an ability to convert EBITDA to cash flow. This is our focus a nd of course, we constantly work with the cash flow also.
This chart or table summarizes what's going on from a cash flow point of view. In Q3, actually, there's not a lot going on from a cash flow point of view. We make an operating cash flow of SEK 23 million, and then we buy some furniture. That's more or less it. Obviously, a lot of more things have happened in Q4, and that's the dividend, and that's the acquisition of Adrecord.
This table is a reminder of Klar and the Klar financial performance over time. We divested Klar by the end of Q1 2023, and we will have Klar in our base numbers for two more quarters. As you can see, EBITDA was not great for Klar in Q4 last year and a little bit better in Q1 this year. We've sold Klar, and we've bought Adrecord.
Adrecord is a little bit bigger than Klar. So going forward, the net effect will be slightly positive when we look at the M&A activities. So I'm going to talk a little bit about what Adrecord is and then why we acquired that company. So Adrecord has been around for a while. They're a Swedish company, and they've been operating since 2010.
The company was founded by Jonny Elofsson. We've known him for a long time because he was a publisher with Adtraction, and then he went and started his own company. Jonny has built a very nice business. They're decent, honest, and transparent a nd I think that Adrecord has very similar values to Adtraction. I think that Jonny felt that Adtraction was always the natural buyer of his company.
I should also say that Jonny has not been working for Adrecord for four or five years or so. He's doing something else these days. Adrecord has around 10 employees, four developers, and the rest of them on the commercial side. They have an office in Örebro in Sweden. They have around 500 advertisers and around 1,000 partners. I f you've looked at the numbers, it's easy to conclude that they have many smaller advertisers.
So their average invoice is going to be lower than Adtraction's. So there's essentially no overlap between advertisers a nd this is a fundamentally different story from the Adservice transaction, where there was a lot of overlap. Here, there's no overlap. So we're essentially adding a lot of new revenue to Adtraction.
On the partner side, there is a significant overlap. So if you are a Nordic publisher, you will have an account with Adtraction, and you will have an account with Adrecord. O f course, Adtraction has many more publishers because we're a bigger network, and we're present in more markets. Adrecord has an in-house tech team, and they have their own platform a nd what we're currently doing is we're looking at that platform.
We're looking to see if there are some attractive features that we can bring to our platform. T hen we will make some smaller adjustments to our platform, and then we will welcome Adrecord's customer base to our platform. For all practical purposes, Adrecord is a Swedish and Nordic network. So 80% of gross profit is Swedish, and the rest is Nordic a nd there's an invoice or two sent to markets like Germany and so on. But for all practical purposes, this is a Nordic network.
Why are we doing this? We have very good reasons to pursue this. Let's talk about that. First of all, I think it makes strategic sense. Adtraction is a platform business. If we can move things into our platform, that's good for everyone. If we can give partners access to more brands, that's great. If we can give brands access to more markets, that's great. We're simply creating network effects by putting more things in our platform.
Also, through this transaction, we consolidate our position as a Nordic market leader. We are the Nordic market leader, and this is the behavior of a Nordic market leader. I also think that this is a good deal both for the owners of Adrecord and for Adtraction. Whenever Adtraction is looking at M&A activities, we want to achieve a positive impact on the net earnings per share.
This will happen through this acquisition. This is how we think about things. Also, we want to be the fastest acquirer in our industry. We know how to buy companies. We've done that four times now. As far as I know, there's been four networks for sale in Europe in the past four years. That's Digital Advisor in Denmark. It's Connects in Switzerland. It's Adservice in Denmark, and it's Adrecord in Sweden. Adtraction has acquired all of them.
Whenever there's something for sale, we want to be there. We know how to run these processes. If you talk to any of the sellers, I think that they can attest to the fact that we know how to do this, and we behave very nicely in these M&A processes. We want to be the fastest acquirer in our industry a nd that means that we are very active when something is for sale.
So that's that. Let's look at the financials of Adrecord. They have sales of around SEK 70 million, gross profit of around SEK 14 million, very e-commerce heavy, of course, an EBITDA of SEK 4 million, and a net cash position of SEK 3.6 million. That means that the enterprise value is SEK 23 million or so.
We paid SEK 27 million, and that is market cap. That's including the cash position. So we're now looking forward to integrate with Adrecord a nd over time, we will migrate business to our platform, but we will only do that when we're sure that that's when we're certain that that's better for everyone involved. So that's Adrecord. Let's look at what's happening now a nd first of all, I'd like to comment on the M&A side of things.
So I've said in the previous presentations that we see some more M&A activity a nd what I meant was actually Adrecord. I think that M&A activity now is going to be fairly slow. T he reason is that people don't want to sell their businesses when the business is not growing. So Adrecord actually was growing.
Most networks in Europe are currently not growing, and that's not the time to discuss M&A. We are, however, talking to a lot of people, but I don't think anything will happen soon. But I also think that a lot more will happen once the market recovers, and then we are ready to participate in those discussions. So let us talk a little bit about Q4. So we know something about Q4 already because we have data for October.
I would say that growth rates, or not growth rates, but performance in Q4 is in line with Q3 a nd remember, we had negative growth rates of 11% for the core business in Q3. I n Q4, in October, we see the same development, or actually slightly better. O ther will perform just like in Q3. Then we will add Adrecord on top of this.
So the net effect of M&A activities will be positive from Q4 and onwards. It's also important to emphasize that we run profitable operations here. I would like to conclude by saying that Adtraction is strong. We have a great business model. We have a great team. We have a great positioning a nd we are ready to get back to growth.
A gain, I think our strength is demonstrated by the fact that we can acquire in probably the weakest year ever, and we can pay dividend in probably the weakest year ever. So this is how I would like to end the presentation a nd I'm now going to see if there are any questions that I can take a look at.
So I have a couple of questions here a nd the first one is, could you elaborate on what you've done to optimize your strategy and market positioning during the quarter? Why do you feel that your foundation is better than ever? Well, those are good questions. R eally, this is about more of the same. We focus on active partnership management, and we have spent a lot of time working on our branding and our positioning, new sales pitch, sales training, storytelling.
A lot of this stuff will be seen on the news site that you can take a look at probably next week. I would also say that it's really important that we have the right team, and I believe that we have exactly that now. There’s a couple of questions regarding tracking. Here's a question. What is your view on your competitor's new tracking initiative for the industry, and how important is that to you?
I think what this question is referring to is an industry event in the U.K. called PI LIVE that occurred last week. Our competitor, Awin, talked about challenges related to cookie consent, privacy, and so on. They said that they would do a number of things. They would focus on server-to-server tracking. They would implement probabilistic tracking and a number of other measures.
We took a look at their list, and we said, "You know what? We're already doing all of that stuff." That doesn't mean that there are no problems here. So there are some problems. I think that consent and cookie consent has basically gone crazy recently, and that, of course, has an impact on our business and our ability to track.
N ormally, what we do when we see that there are consent problems and that the consent problems do have an impact on our tracking, we try to have a discussion with the advertiser and adjust the compensation to reflect whatever it is that we're losing. However, I don't think that's enough. I think that we need to do more, and we're currently working on an automated solution to compensate partners for traffic loss due to consent.
This actually relates to the third question that I'm getting here. Other networks have talked about partners losing several tens of millions in lost commissions due to insufficiently robust tracking methods. Yes, this is happening. To some extent, we are compensating for it, but not enough. That's why we're taking a look at this, and we will build automated solutions going forward. This is actually something that's happening right now.
With our business model, there's always going to be the case that it's not possible to track every single transaction. What we've seen in the last few quarters is that these problems probably have increased, and we are now taking measures to compensate for that in an automated fashion. There's a fourth question here. Could you elaborate on the customer acquisition cost for an affiliate lead versus a Google lead?
I guess that's fair enough. I do talk a lot about Google, so I'll comment on that. Of course, this is a long discussion, but I'll say some things. So first of all, Google is great in many ways. So with Google, brands pay for clicks. Then probably what they do is they add the cost of those clicks and divide by the number of sales, and then they get the cost per transactions.
I guess the question here is, what number of sales did Google really deliver? If you ask Google, they say, "Well, all of them." This is what GA4 says. So it's difficult if you're a brand to get a true picture of that a nd I think that a lot of brands have identified that.
But I think the core problem here with Google is that the marginal cost per transaction is increasing as the volume increases. This is what I talked about in my presentation. When a brand starts buying more traffic, then the cost per click will increase, and therefore the cost per transaction will increase, and therefore it's going to be more difficult to scale.
With Adtraction, you know what the cost is, so you know what the cost of scaling is. O f course, this is to some extent the simplification of things. Obviously, it's possible to get a lot of traffic from Google too. All I'm saying is that partner marketing and Adtraction is a great complement to Google and a great way to diversify traffic acquisition and reduce risk.
Then we have a final question here, which I think is fair enough also because this relates to what we've communicated before. So if you compare the booking status of campaigns towards this Q4 versus last year, what's your analysis? A lso if you compare it to the activity feeling during the previous quarters.
So last year, in the quarter report, we talked quite a bit about the bookings and the booking situation and so on a nd we have not done this year. T he main reason is that this whole process has been slightly slower. So it's taken a slightly longer time to get the bookings in place, and our data has not been complete. That doesn't mean that the bookings are not happening. I think they are.
I think that in certain key markets, for example, Sweden, we've already beaten what we booked last year, and that's going to happen also in some other markets. So to summarize, I don't have a full picture of the bookings that we made, but I'm not worried about it. It looks pretty good. Then the big question is, what will happen in Black Friday, Black Week, and so on? T hat, of course, is fairly difficult to predict.
Last year, Black Friday, Black Week was not great. It was okay a nd to be honest, we don't know yet. It looks pretty good when we just look at bookings, but the truth is that we don't know what the consumer will do. We get some sort of guidance from the start of Q4. In October, we performed slightly better than we did in Q3, both for e-commerce and finance.
But we are looking forward to do all we can in Q4, Black Friday, Black Week, and Christmas shopping to see if we can get back to growth. All right. Those were the questions. Thank you very much for listening, and see you in three months where we will, at that time, we will talk about what happened in Q4.
I will say that I remain optimistic about Adtraction. I think it's great news that we remain profitable and we generate cash flow in a very difficult market. Thank you very much. Have a good day.