Earnings Call: Q3 2020

Nov 19, 2020

Hello, and welcome to the Cucina Media Audiocast and Teleconference Q3 2020. Just to remind you, this conference is being recorded. Today, I am pleased to present CEO, Per Hellberg and CFO, Peter Missner. Please begin your meeting. Thank you very much, and warm welcome to this Q3 presentation from Katina Media. Next slide, please. Our ambition today is to go through an interesting hour together where we go through first Q3 results and details about that, but also then updating you on the recent strategic review we have done where we also come up with some more numbers about our future plans and financial targets. Our agenda today, as you see in front of you, quarter reports, business highlights and financials made by Peter Messner, and then I'll come back to you in the outlook as such. Next slide, please. This quarter brings a lot of different numbers, and I think different is the name how we internally and I think also external will try to communicate this quarter. Obviously, the world is quite different from what we're used to. And what we experienced in the Q2 was a different quarter where we had a massive boost, especially in the casino business when sport was down, then predominantly from U. S. And especially social casino. We had a big boost of that. At the same time, we also had very little activities, but in the end, we could do a record quarter. This quarter turned out very different. We had a good start if you look at the 1st month, but then we couldn't really catch up with the later part of the quarter. Why was that? Well, it's basically coming from the European region where both sport and the casino was performing less than we thought it could do. And I will come back to that during this presentation. So if we look at the result as such, we see a total revenue down 6% compared with last year. But if we look into a bit more about the organic growth of Libervantis to establish ourselves, it's also down by then 3%. The reason for that downturn is even though U. S. And Asia are up, we have the European business being down. We also have, considering the size of U. S. And impacted negatively. What brought down the total revenues more was the fact that we actually spent less in paid advertising. So the paid revenue turned less during the quarter, mainly because of a few events to bet on given that sports were not yet full in back in full swing. Now if we then look at other things in the core numbers here, we see that we managed to improve our margins 48% from 44% last year and that we went down in debt leverage from 3.42x last year to 1.32x this year. How is that possible? Well, obviously, we're operating a much stable business today. We've done a lot of actions to stabilize the cost base on the company and constantly bring it down and improve efficiency, which actually allowing some shifts here, resulting in increased profits this quarter to compared to last year by 4%. And I think what is important to bear in mind here that this is still even though we have invested quite considerably higher amounts into both U. S, Asia and Latin America and still we managed to generate more profits. Next slide, please. If you look at the business highlights then for the quarter, so what was the building blocks for this and where do we have our concerns? Because obviously, this quarter did not play out as well as we want to do, and I will now try to explain why that is. So first of all, we saw that, of course, sports start to grow back in the Q3. It's not yet back to the levels where we originally thought it would be, but it's steadily increasing. I think something that we see here from the lost peers in the affiliation and lead generation business is that our trend trajectory is a bit different compared with operators. Once the business starts over again after market now opening up, what we've seen is predominantly rev share activities based by existing customers, while the new acquisition has been a bit slower. That's why we see our kind of trends not really correlating 100 percent to the operator trends. But when looking at our performance then for the quarter, we had a thing where we mentioned in the Q2 that was the Google update where we initially didn't see a lot of negative impact. As time grows, but also after some further actions made by Google, we could actually see some sites being negatively impacted, and especially in Germany in our case. We saw in some other areas also traffic going down, but on the other hand, we also saw deposit levels going up from those customers remaining, meaning that it was nonwanted traffic, so to say, that disappeared. All in all, this made that for the quarter, in the middle of the quarter, up until the last parts of it, we have a negative impact on certain sites, which we rectified by a lot of actions, and we could then see by the end of the quarter and also now into October, those sites starting to increase up again. I've only been through about the less paid advertising and also the unfavorable U. S. Exchange rates, which has a certain impact. What was interesting to see though that even though some parts mainly predominantly legacy areas and existing markets in Europe, We could then see the key building blocks of our industry where our business U. S. As Gamblers and Japan showing strength. We could also see Italy doing very well. So we have those markets really helping us to balance the short term and the shortfalls we see from other markets. In U. S, as predicted, we saw that the revenue would start a bit later, and the reason for that was the fact that the key betting event over there and revenue driver for us, the American Football League NFL, started to generate business a bit later because there were no preseason games. On top of that, we had a delayed college football, meaning that the revenue peak started very much late in the quarter. In terms of other sports, we also saw that European sports, in this case, we had German football starting quite late by September 19 in order then to come out in the end of the quarter in more full swing than it started. What we've done in the company as well is we haven't changed our focus on building a bright future. We have continued our investments into the key markets, Sai also will come back to a bit later, being U. S, but also in Asia and Latin America, where we injected more investments compared to previously, also during this quarter. And that has meant to that we're feeling quite sure about the building blocks out to build the future for us. And hence, we're also coming back later to our strategic review and the financial impacts that might have to the company. Another thing we started with, which I think is super important for the future, is that we started to restructure our tech and R and D, but also our data and BI sections in the business where we brought in a lot of new people and restructuring that because even though we have had good work output coming from that, we wanted to increase the execution but also use that actually drive growth faster than cost. And we have a nice trend coming out from there now, but especially will benefit that from a long time ahead. So with that said, about the business highlights, I would like hand over to Peter, who will run through the financial highlights for the quarter with you, and then I'll come back with the outlook. We can turn to the next slide. Thank you very much, Per, and good morning and a warm welcome to our Q3 results call from my end as well. Let's go further another slide to revenue and NDCs. So the organic search revenue declined by 3% year over year, and Per already commented on that, whereas total revenue declined by 6%. And as Per also indicated, that the main reason in that, apart from the markets, is also the decrease in the paid revenue, that's a 29% decrease versus last year, because we significantly simply also spend less in direct costs, which contributed very positively to the improved gross margins. The paid revenue, as you see, increased versus the previous quarter by 33%, and that was to a large extent due to sports having eventually returned after a very difficult second quarter So we'll see good progress there. The NGC has declined, So we'll see good progress there. The NGC has declined less than the total revenue during the quarter, and that's due to the stronger uptake that came from the returning sports compared to a decline in the casino segment. Versus the 2nd quarter, sports NDCs increased by 100%, whereas casino NDCs decreased from really a peak NDC contribution, particularly from social casino as well from the U. S. In the second quarter. Let's go to the next slide, please, and take a closer look at our segments. Casino represented 64% and Sports 30% of total revenue this quarter, following a very different situation in Q2, as you stood with a record high casino share of 76% that we reported then due to the impact of COVID-nineteen. The 3rd segment, financial services, has been stable at 6% of total revenue. Casino normalized after the previous quarter's all time high, particularly but not only in the U. S. And year over year, casino only slightly declined by 2% after this peak in the Q2 now. With sports having returned after Q2, the revenue grew by 49% versus the previous quarter, but again, it has not yet reached the pre COVID-nineteen levels and therefore, has still been below previous year's numbers as well. When you take a look at the source of our revenue, the revenue splits between what we gain from revenue share, cost per acquisition, CPA and fixed fees. That has been fairly stable in its entirety. There was a shift from CPA to both revenue share and fixed fees versus previous quarter, and that also has been mainly a result of returning sports. Let's turn to the next slide and take a look at the segments and total quarter results then in terms of the adjusted EBITDA. As you can see in the graph, the adjusted EBITDA for the 1st 9 months collectively is in this year is well ahead of last year. That's an increase of 23%. In Q3, our adjusted EBITDA grew by 4% year over year, while it declined versus the previous quarter, which again enjoyed a very positive margin due to the impact of a strong casino performance and the COVID-nineteen lockdowns that affected sports. Both casino and also the financial services segments increased their EBITDA contributions as well as their margins. The sports segment's EBITDA declined year over year, again, as a result of not yet having returned to the pre COVID-nineteen levels, but it kept its margin at the same level as last year. And versus the Q2, the Sports EBITDA increased by 183 percent quite tremendously. So all in all, the 3rd quarter margin increased from 44% last year to 48%, and that's despite the slight decline in total revenue. Let's go to the next page. And let's have a look how the cost development that is, in fact, responsible for that margin increase has developed. So the total cost remained fairly stable as compared to the previous quarter and represented 52% of total revenue or €12,900,000 The direct costs, so we have 3 segments. The direct cost is the first one in the cost rose, steadily increased again during the quarter following the return of the sports and represented approximately 10% of total revenue, slightly above 1st quarter levels indeed of this year. Despite our continued investments in the U. S, the personnel expenses increased only slightly versus year, and that's the result of changes that we had in comparison to last year in management structures. And there also have been certain accounting effects now between the second and the third quarter in relation to U. S. Payroll and generally vacation periods and such accruals there. The other operating expenses were kept on a level of the previous quarter, so fairly stable. So a significant decrease versus the last year due to our reduced spend in, for example, outsourcing, marketing as well as office and travel related costs and all due to the ongoing COVID-nineteen situation as well. And then again, as a result, our margin increased from 44% to 48%. Let's go to the next slide, please. And the profit for the quarter. So exceptional items, they account for the difference in our adjusted EBITDA to EBITDA. Now in Q3, such items amounted to €200,000 and they were related to a reversal of overestimated expenses in relation to our refinancing. So there was an income in that respect between EBITDA and adjusted EBITDA. Depreciation and amortization charges have been decreasing. In fact, they have been steadily decreasing since roughly the last quarter of last year as a result of previously acquired assets that have been fully amortized by now. And also due to certain office lease terminations in the summer, we recognized further reduction in amortization charges. And as a result of that, the operating profit increased, including our improvements, of course, on the EBITDA side by 22% to €9,400,000 this quarter. Interest payable on borrowings, that relates to the existing bonds and our revolving bank credit facility. And going forward, such interest will further decrease due to the repayment of those borrowings, which I will talk about on the next two slides. And at the same time, there will be interest in relation to recently issued hybrid capital securities that will be added, and we had a first interest payment that occurred now in October. Other losses on financial liability, I commented on that during the Q1 and the Q2 calls as well. They relate to the change in the fair market valuation of our existing bonds. So it's purely an accounting treatment. So last year in Q3, there was a significant gain as you see here. And this year, there was a loss, and that is purely related to the fair market value of such bond. It's important to note that this valuation movement, they do not have any cash flow effect though. As a result, the profit and the earnings per share were affected in that respect negatively by that just mentioned revaluation loss. If you would take that negative impact of the revaluation of the existing bonds out of this quarter and also the positive impact out of last year's quarter, the profit for the quarter would have increased actually slightly. Let's turn to the next slides then and talk about cash and our very strong cash position. The net cash generated from our operating activities decreased by 9%, but it has been negatively impacted by €800,000 in tax payments where the comparable tax payments only occurred in the final quarter of last year. So it's not necessarily a like for like comparison in that respect. As a result, the cash conversion was 70%, below the peak in Q2, but overall following the seasonal pattern as was seen during the last year as well and as you see here in the graph on the left hand side. During July, we had €49,500,000 of the existing bonds that were prepaid to the bondholders, and that was a mandatory prepayment that I talked about during the last quarter result as well, following the amended terms and conditions of the bonds that we agreed on in June this year. Also during the quarter, €5,000,000 of our revolving bank credit facility has been repaid. And in addition, following the rights issuance of our hybrid capital securities in June, the remaining cash proceeds that came in amounted to €6,200,000 They have been received during July and €7,400,000 in cash proceeds have been received from the exercise of warrants during the first two exercise windows that we had during that quarter. So as a result, our cash and cash equivalents amounted to €45,400,000 at debt position. So as mentioned on the previous slide, debt has been heavily reduced during the quarter due to the partial prepayment of the existing bonds and the repayment of parts of the revolving bank credit facility. The net interest bearing liabilities amounted to €67,400,000 that Per also mentioned on his first slide at the end of the quarter, which is a significant improvement as compared to last year's €150,800,000 and the net interest bearing liabilities over adjusted EBITDA, amounted to 1.32, again, improving from the 1 point 68 from the previous quarter and, of course, considerably improving versus the last year. And we are continuing our trend towards 1.0 in that respect. Looking a bit ahead into the Q4, what we already announced, we will voluntary prepay €6,000,000 in nominal value of the existing bonds. And the entirety of the existing bonds have an outstanding nominal value of €100,500,000 And we also will repay the entire remaining balance of €7,500,000 of the revolving bank credit facility in December as has been agreed with our banking partner. If you take a look at the balance sheet, you will see that these two items together, the voluntary prepayment for the bonds and the entire repayment of the revolving bank credit facility amounting to roughly €13,500,000 they are stated as borrowings in the current liabilities. And for that, it just impacts the working capital movements here. Both measures will, of course, further reduce our debt and as a consequence, the interest that we are to pay going forward. And with that very promising look at our reduced debt levels and the further improvements I talked about, I will hand back to Per, who will continue with the outlook and our very bright future. Thank you. Thanks, Peter. So next slide, please. It's time for the outlook, and therefore, we jump yet another slide to the U. S. Update slide. When we're looking at the U. S, we are currently live in 9 states operating in traffic. And obviously, it has been a very positive journey for us since the company acquired its business over in December 2016. So we're coming up to about 4 years of container control business in the U. S, which have taught us a lot, but also then because of that makes us now with the latest trend better simulate and protect or simulate the future for us and what we believe that could bring. Hence, also later, we're coming back to the strategic review. When it comes to this quarter, obviously, I've been through the reason about the revenue build up that was a bit later than originally when compared to last year. We also saw that some markets, in this case, had a bit of a kind of hangover like Pennsylvania because last year was the 1st NFL season. Now it was a bit different. Yes, there were more operators, but in general, it didn't perform as strong as it was like for last year, for example. Even though that I mentioned that social casino went down, it's still larger than it was last year. That's because of the COVID situation, we managed to maintain some of those customers. Once the land based casinos open up, they could maintain in the customer base and provide continued value for us. The good thing also was that the states that has recently launched showed a good process, but we also saw that we had some additional states opening up in the quarter, where we also had, for example, the Illinois short term open up, not that many operators available to launch that quickly, but it helped building incremental revenue for us. And as we state here is that U. S. In the 3rd quarter represent 30 percent of our iGaming business. And in that case also that brings us up that we are according to our understanding and measures that we are the dominant number one affiliate in the iGaming industry in the U. S. Today. So if you look at the next slide, please, which is the U. S. Short term rollout. Here is a slide I've always show you to better understand how and what markets that are online and what we see ahead of us with some comments to make your understanding of the U. S. Rollout a bit easier. We see here in what states that if affiliation is okay to perform, and we see also where we are live. For the trained eye, we can see actually that we marked, in this case, Iowa, which actually is allowing affiliation but not yet for registration. But here, we're doing a trial where we're actually sending traffic to land based operators where they can sign up on our page. We send them then on to do land based business, and we charge for that. So that is something we're estimating to be an incremental business for us in states not yet going live on online base. So if you look at that, the buildup of states, if you look at the states that are coming, how do we foresee this to next slide, please. Here we try to put together and show you a bit about the potential. So currently, if you look at it, the states that are up and running today, those states represent 39,000,000 in population. Of course, we foresee big trend or continuous reach into those markets because online gambling is still a reasonably new business there, and we see that the penetration into the states continues. We will foresee continued growth on those states. But if we then look what we see here to be launched within this quarter even, but also up until the end of next year, we see states coming on board that represent almost a doubling or actually more than a doubling than today's penetration. Timing for those, in some cases, are unclear. Everything is in the works, but we also know widespread history that it takes some time until some states get their act together, while some states also sometimes are launched earlier than planned. So all in all, we see that, that is a great injection from our upcoming business next year. Then we have about the rest. What do we foresee on the long term? Well, we've tried to split them down in showing you a bit where our focus lay as well. We have the giant states, which are New York, Florida, California and Texas, together representing almost 100,000,000 in population. Most likely to come online in very different stages, but as you can see, it's forced not to be neglected in terms of the possible kind of revenue generation. Hence, we are preparing many things for those states already, even it can take many, many years ahead. But then also we have a set of states mentioning at this Oksy where we call larger than farther. But those are all states with more than 5,000,000 population that together represents close to 90,000,000. And then in the end, we have the smaller states, 1,000,000 to 5,000,000 people, about another 40,000,000. What we're trying to show this is the incredible potential in the U. S. Timing is unknown, but for sure, is there. And if we look at this, basically, we foresee that based on the history we have in data collection, revenue and performance and player value, we foresee that maintaining our dominant position, even though that we foresee payments per player over time, long term, probably going to decrease. But with this incredible potential, we definitely see U. S. To have the potential to get the revenue the same or even more revenue than the entire Catena Media does today. So the potential is there. We're in it. We know how it works. And therefore, I think it would be very wise then to put that into numbers what that means for our shareholder long term base what you could expect and the market could expect from us. Hence, we have done and performed a strategic review. So if you kind of switch to next slide. During the autumn, the Board and management of the company has spent a considerable time to look through the strategy going ahead. And I can happily inform that we haven't changed the strategy that much. But what has become very clear is that the focus points we looked at, meaning U. S. Would be the core driver. We will continue investment in Asia because we see nice growth trend, high payer values, big demand from operators. We will also increase to take early strong positions in Latin America, where the player values aren't as high as U. S. And HRI right now, but growing fast, and we're seeing a very high increased demand of that. And we also know that the especially Brazilian market has a bright future ahead. We have therefore continued to invest in those that we said we're going to do. We have also worked very hard with our cost structure in the company. And for the kind of existing markets in Europe or some being called legacy markets, The work continued there actually to turn them around. Now the COVID came in between a bit, which had made us refocus a bit short term to maintain good business. But the works has really restarted again, especially looking at what we do for sports to take out cost and at the same time reinvest where we can to grow nice margins out from that business. All that in together means that the financial targets for the group, the official financial targets remains unchanged. So we want to establish a profitable double digit growth on an annual base. We also want to operate in the net interest bearing debt versus adjusted EBITDA of a range of 0 to 1.75. And as we already informed earlier, we are below that threshold today. We are currently operating 1.32. If looking at what this kind of action should bring to us, based on the proven data points, the revenue generation from predominantly U. S. But also Asia and now also that one, we can easily model the projections ahead of us and put a number to it. If we then look at that means that based on these things and what we're trying to do in terms of investments, we foresee the period between 2021 2025 to be able to generate cash in the interval of €300,000,000 to €370,000,000 What are we going to use that for? Well, we see a combination of things. We are not looking away from acquisitions. We will definitely possibly start the acquisitions if we believe that, that will add more value to us our shareholders rather than investing into our own business. Currently, we don't look specifically to anything. We rather look specifically to the great potential we'll have in the U. S. And the other markets because the return on investment for that we see is much stronger than acquiring something at high multiples. But interesting here, we also foresee to use the cash we generate to potential share buybacks, but also in terms of allowing dividends going forward. And as we mentioned here, the Board is currently looking to eventually propose a dividend order as soon as in the later part of next year of an interval of SEK 0.65 to SEK 0.75 per share and quarter. So with that said and what everything we're doing, we're very excited about being able to communicate this because it proves that the investments we have done, the focus areas that will turn around this business and generate the revenue growth is already performing well. What we now is doing is to restructuring the business that are somehow holding back the full potential to coming into a normal phase and also has to start at some time to start to generate positive outcome of that as well. So all in that, together with the refinancing of the existing bonds next year, we believe that we will be even stronger and well positioned company that we are today. And all that last year, we've done big improvements from very high depth ratios to controlled ones now and a good underlying fundamental business growth in the business based on the core markets I explained, we feel very confident that we can hit those long term targets as explained on this page. Next slide, please. So the key takeaways of this presentation is the fact that, yes, we have a short term revenue disruption. But because of explained reasons and control costs, we could still increase our EBITDA, adjusted EBITDA and margins as well. This even though we see that sports not yet back for explained reason, we see now that it's coming back to Garettospatial also to match a bit more what we see in the operating market even though we foresee us not growing as fast in terms of sport initially as they do. We previously seen the negative impact of casino sites, but because of the work of, a, our own work to mitigate the Kogel update, but also the fact that we see the player behavior returning to more normality, we see that business segment all start to come back to normality in especially Europe. U. S. Have been through that level we talked about, And we continue to operate very strongly in our core markets here, U. S, which allowing us to come up with what we believe a very positive financial future for the company as discussed in strategic review. So with that said, as the Kurt says here, yes, we haven't seen short term disruptions, but it will not change our long term focus. On the other hand, we're actually more confident about the long term business now than we ever did. So with that, I would like to shift to the last slide of this presentation. Just to remind you about the upcoming events, which is the year end report on 24th February. And then we start to present the first report of 2021 on 29th March. And then you also see the AGM date that has been set. That's it for me and Peter, and we now open up Our first question comes from the line of Erik Moburg of ABG. Please go ahead. Your line is open. Open. First one, your peer, Betco, reported similar organic numbers, and they guided a strong start here in Q4 with double digit organic growth. Do you see the same pattern? Or is your business behaving differently? I think our distribution, our revenues are quite different. So basically, as I explained, with sports growing back faster, if you have larger sports in your portfolio, you're probably going to go quicker. We have decided this time not to go out with the number because we did it in Q2 report because it was a very, very different quarter. But in the end, then we saw the quarter coming in differently. What we see is that we see a growth trend compared with Q3 now going into Q4. But the exact details, we will not inform this time because we know that we cannot even predict really what next week will bring to us. So not to show too much guidance, we decided not to show this time. All right. And in terms of U. S, is this part of the business having a good start or no? We're all interested in hearing how U. S. Has started giving the strong data from the U. S. In Pennsylvania, for example, tremendous growth. Does that state does PA started good on a year over year basis for you as well? Well, I cannot go in and comment specific states months. But as we explained before, I think what is always important to remind that as we are 100% CPA company in the U. S, we don't have any rev share yet as for previously explained reason that we believe that currently it's much better to do CPA. If the handle goes up a certain month in U. S. State, it does not correlate to our revenues. We see, as I mentioned, we had a late start of the quarter in sports with you that we will push something into the Q4. So the only thing I can say that is that U. S. Is starting to perform strong. I'd advise you that we cannot directly correlate the sport operators' handle with us because we get our revenues before even the handle starts. Fair enough. But still, there has been a massive growth on a year over year basis. And I would also assume that the penetration of the population at gambles increased. So that would still translate into CPA, correct? Yes. If the reach increase and we spend in that traffic, we should logically see more revenue coming out. How much that is, we don't comment on. All right. And in terms of Q4, if we assume that the whole business is flat year over year and then you add the new states, do they help you on a year over year basis? Or are they still too small to actually make any significant contribution? I think it differs a bit by states and what's going on there with the operator structure and what they do. In general, what we see, of course, with new states coming up, it always helps, of course. We also even might have a new state opening up already in Q4, if we're lucky. But exactly how that would play out is quite difficult to predict right now. But typically, more states helps revenue. But yet again, also we know that, for example, December is a much lower month than September October. So depending when they fall in and the activities and bids kind of bid different kind of revenue builds up. But obviously, all in all, new stage is positive news for us. Got it. And in regard to the Europe, how much did it decline year over year? Just looking at the numbers, it must have been quite drastic both Q on Q and year over year. How did this part of the business start in Q4? And where exactly are you in the turnaround? And when will this be visible in the numbers? Because we have talked about this for over a year now. Yes, we have. But as I also mentioned before that we started reorganizing our costs. We then took quite a big step of exchanging the management in, for example, sports and casino, which started basically in February March and then came COVID, which we meant that we need to lose let that guard down and fully focus on what we do to utilize work from based on COVID, which obviously in Q2 turned out very well. So when that was more in control, we could restart again. Turning around, for example, our sports business is a major task because a big part of the acquisitions that were made were based on paid acquisitions, PPC. What we're now turning around them to is more organic driven by search traffic, and that takes quite some time. So basically, what we have done, which is also visible in our numbers now, is more taking out cost and making that more efficient, using those investments to build up quite large investment in U. S, which we're benefiting from. So even though that you see that revenue has not yet come back from it in terms of cost transfer investment, you see that in the underlying numbers that we can still grow profits by still investing lots in future in the U. S. The sports work is a constant thing that will take a long time, but we're now seeing that sports are returning in Q4. We foresee better revenue from sports than in Q3 in Europe. Casino is the decline we see has leveled out, and we're starting to see good signs are starting to go back. But it depends all about those traffic behavior. When we see through search volumes, we're seeing that starting to work up again. But then yet again, you need to add what's happening in a week or 2 from now on in terms of market shutdown. We hear now that market is shutting down. That can have a tremendous positive impact to casino or it can behave different from last time. And that's why it's quite difficult to predict where the quarters will end up like currently. What we need to do is just to prepare, use the previous knowledge and try to benefit from those kind of quick changes as much as we possibly can. All right. Fair enough. That's some good flavor right there. But like all things equal, Q2 was a strong quarter despite no sports. Q3 was underwhelming, to say the very least. Based on where we are today, should we expect Q4 to come back to normalized levels? Well, to be honest, I think normal is quite different for what it used to be. So we need to define what normal is because is the industry fully normal? No, it's not. Do we foresee that based on actions we have done that we should foresee a better quarter in Q4 than Q3. The answer is yes. Got it. And are you still saying that you will end at or below a net debt to EBITDA of 1x at the year end? Is that still the target, so to speak? Well, basically, we never said that we should end at 1. We said that we should get close to 1. And I based on the trends now, obviously, we are working ourselves down towards being closer to 1 than where we are today. Fair enough. And in terms of the financial targets here, you mentioned double digit top line growth. Could you quantify a bit more specifically what you see for outlook for 2021 and where you expect cost to grow? Should we expect that the cost to rise, decline or stay relatively flat? If you could elaborate a bit on this, it would be great. Well, we cannot do that today. We don't guide on 2021 yet. Obviously, what we see here, and as you can calculate on these, that over the period, obviously, you cannot leave 1 year out not growing and going back in order to hit that kind of cash flow numbers and debt levels combinations. So do we foresee that we want to bring up revenues next year? Yes, I think what we explained today, we foresee that. What do we work in cost? Well, on the existing cost base, we're looking at ways to get it more efficient. And then also, at the same time, without any doubt, we're also going to dramatically continue to increase our investments in the key growth areas like U. S, etcetera, given the great opportunity we said. What that means in margin, etcetera, we normally don't guide the year ahead. But obviously, we believe that based on the strategy we have, we have a plan. And the only thing we can say now is that what we said in strategic review without going into specific year plan. Got it. And your cash flow guidance is rather strong, to say the least. What does this mean for 2021? I mean, you mentioned that you're paying that you will start paying in dividends in H2 2021. So I assume that you expect quite a significant uptick in growth from cash flow during 21, right? Well, if you look at it, we already have quite amount of cash in the company, adding another year at least at the same level or above. And then looking at the growth trend there now, you will see that there is room to do that dividend. If you just even if you only will continue this level, given the cash situation we have and what we benefit by that, that's the logic. If we then decide to do more things than that, spice it up over time with other actions, we have to see. But I think from just where we are today adding the trends we see, that makes that possible. If the board decides to propose that, that is because it's not been officially proposed yet. Yes. But just overall, if you repay debt, could you still manage to actually pay out dividends? And just in general, in terms of the dividend strategy, do you expect dividends to grow with profits over time? Or should we assume that it will be maintained at the levels you guided for there? Well, I think we have said that we want to operate a business that is generating a certain amount of cash. Depending where the business is, what these targets say is that we want to move within a room of 0, 175,000,000. That depends whether we take on debt to grow or not. Taking up debt to grow means that is a financial cost for this company doing so. The cash generation less that potential debt would still allow us to do this. So we have the room of maneuver depending on what we want to do as long as we continue to add cash above the levels we're doing today. Fair enough. And just to add on to the previous question here. If you sort of start paying out dividends in H2 2021, as to where you are right now, at the earliest, when could you initiate the buyback program, do you think? Well, we cannot comment on that. All right. And then overall, I assume that the board has been discussing quite a lot with you guys in regards of the various strategic alternatives in the last couple of quarters. For instance, one of the largest shareholders has expressed its views in terms of valuation of your peers, etcetera. How should we, at the outside of the boardroom, think about the reasons why you guys would decide to merge with another public or not public company? Historically, you have only acquired smaller assets. And now we also indicated that you're looking at M and A again. Would you and the Board be open to merge with another company? Or is this something that you're against in all scenarios? I think that being against the scenario that any kind of scenario that will benefit the shareholders, we should not have the positions that we have. We always need to look in what is best for our shareholders long term. And if that is buying, merging, doing other actions with the funds we have and in order to improve long term value in the business, that's what we need to look at. We are not against anything except doing bad decisions. What hypothetically speaking, what are the most important factors you take into consideration when you evaluate a theoretical bid or a merger proposal? Well, do you normally do every time you want to buy something? You see whether you can bring long term value to you. Long term value can be that you jointly, by merging an asset into your portfolio, that you can maintain revenue growth by taking out cost because otherwise you won't bring value or that you prevent competition to be as strong as you want it to be. I think those are the basic fundamentals, but we also know that 1 plus 1 doesn't all then become 2 or 3. So that's why you need to be quite focused on this. And based on the history in this company, we don't want to acquire business just to short term grow quarterly revenues. We want to do it in order to constantly improve the cash generation by being able to generate the kind of cash flow as we inform today. So as every time, every proposition comes up that we find ourselves that are contacting us, we will always review. And if it's interesting, we will follow local laws and regulations communicated. Otherwise, we just keep silent and continue what we're good at, driving our own business. And to add on that in terms of your share price, is it basically at the same levels as at the time of the IPO? You've changed CEOs a couple of times, and the share count has risen quite significantly over the years. Many investors that I speak with are extremely keen to understand whether you believe that the value of the business is worth much more than it is today, especially after this quarter when we saw a decline on a year over year basis here in revenue. Yes. But I think if you're launching in the middle of this session that the trend of this company opportunity over 1 quarter, I don't I wouldn't do that. Well, first of all, I don't comment share price. It's up for the market to decide. Do we believe today that the company is a different shape than it was 2 years ago or 3 years ago when the share price peaked? Yes. What was handed over after that share price peak is what we're still working with. Do we believe that we have a better cost base, cost structure today, decrease I mean, not growing cost as fast as revenue? Yes, we proved that. Have we sorted out the debt level ratios issues we had because of that trend and that build that share price? Yes, we have. Do we have a better opportunity ahead of us than we had at that time because that price was given by acquisition but not that much future looking. Yes, we have. So do we believe that we can create a value? Yes, we have, which was also communicated in the today presentation by the share but by the cash flow that we initiated. So I think that answers all those questions. And also one of your largest shareholders that also has board representation suggested that you could do separate listing in the U. S. What's your view on this? And could this be a scenario going forward? I think we're always looking at ways to make our share reach as much interest as possible. Considering where we are in the U. S, I think we will do wrong if we're not looking at that opportunity. Whether then it's beneficial for us giving the effort it takes, whether the timing is right or wrong, it's something also evaluate. If we conclude that, no, it's not good for the company, we won't do it. If you include that it is, we will then continue our investigation and decide timing for that. But obviously, nothing that is in words right now. And just hypothetically speaking, you guided how large U. S. Was in terms of revenue. But based on EBITDA and how much cash flow it generates, could you perhaps give us some flavor if it would if you would be able to absorb the costs of being listed in the U. S. As of right now? No, no. We cannot comment on that. Fair enough. Well, that's all for me for now. Thank you very much guys. Thank you. Thank you. And our next question comes from the line of Mikael Lafien of Carnegie. Please go ahead. Your line is open. Hi, guys. Thanks. A lot of questions there, but I have a few more. On this cash flow trajectory or cash flow target that you now take, That means roughly SEK 60,000,000 in cash flow per year and well, SEK 15,000,000 per quarter. That's easy to understand. But how do you see this developing ahead, the trajectory into 2025? Yes. I think if you look what we present today about, of course, key driver, as was mentioned in the report and in the presentation today, is our U. S. Position. That's going to be one of the core drivers for all this. So it depends very much when we believe those dates will come live and what they can do. Obviously, we look later in that period if we have a larger amount of states, larger population probably going to be reached. Hence, we also foresee a larger cash generation later in the period as we are in the growth stage. So would we have a static SEK 60,000,000 or whatever it might be over the time? No, it won't. It will be less in the beginning, more in the end because of the market movements. Okay. And how do you find how do you define operating cash flow? What's included in that? Peter, would you like to elaborate on that? What's the cash flow from operating activities as per the standard? So leasing costs, investments in intangibles and so on, right? Yes. Through the investments in intangibles, if you think of acquisitions, no. If you would think of doing capital expenditures as part of the normal business, yes. Okay. Yes, of course. All right. Great. And then in terms of Germany, you commented a bit on that in the report. Approximately, how large is that country for you in Q3? Well, I kind of mentioned in Q3, but what we said historically on this that we have a set of markets that are operating between 10% 15% of our revenue, of course, U. S. Being larger, while Germany are or is in the top segment of that. So that will logically mean that if top segment is 15%, it's around Okay. But you already saw an impact from this legislation already now, right? And how much of your data revenue okay. And how much of that is the sports and the casino? It would be great to understand also approximately. Well, we haven't gone out with what the impact is. I think the largest impact now is that it has been taking a lot of operational resource to prepare because on the 15th October, we went into a period over there where everyone needs to adapt to the new way of based on the regulations that will be in place in July next year. So you need to adapt what you can say, can't say on the pages, what language you can use, what games you can promote and not. A lot of actions you need to do here, both from operators and affiliates, to prove that it can operate under new regulations. That has meant tremendous amount of work from our team to update every site pointing towards Germany following the regulations in this case. It's more of an operational impact. Revenue wise, we don't see a large hit yet. Will we see a hit? Yes, I think I definitely want to mention that we will see a negative impact in the revenues of in Germany next year because from Lai onwards, it will not be allowed with revenue share anymore. So you cannot send in new customers for revenue share, but also all historical revenue share will be canceled. So if you're sitting in Germany having to be part of revenue share, you need to really develop actions to gain back from that. We have now, since these discussions started, worked on a lot of actions to circumvent that. One action was to establish ourselves in Latin America and other one in Canada and in other areas, grow Italy more, focus on mass to make sure that when this comes in place, we over the year won't see a large negative hit for us as a total even though Germany definitely will decrease value for us. Okay. And of course, we're a bit curious here how much of Germany is stemming from web share. Is it in line with the group average? Or is it a lot higher or a lot lower? Well, mixture, I would say, it isn't that much different from where we are today. But we have to remember that without saying too much that we don't believe that, that share share representing by revenue share today all we go, that would be reprogrammed to other things because we have to remember that operators, because of these new laws with less spend by player, needs far much more players. So we're now looking at also by the remaining traffic that after this year, still Germany is to grow quite a lot in terms of CAGR over the coming 5 years. We need to build a different kind of business there with different flow of customers with different behaviors. So it's not that easy to say that if we believe it's 50% today, 50% of that the revenue share, that disappears. That's not the simulation we see because we will reprogram some of that business to become something different. Okay. Got it. And when it comes to Japan and Italy, you mentioned that those two countries performed strongly. Can you say something more of the development there, how you're performing and approximately how large they are? Just to get a feel for the importance. Yes. I think both those there's none of those market that is less than 5% of our revenue today. If you look in typically at Italy as such, it has not a strong kind of market growth trajectory as Japan has. If you look at Japan, it has a far higher player value than Italy. But obviously, Italy is a very large community, and we've done a good job there. And actually, Italy so far is doing its record year since it was started. So even though that we have those regulations going, we're going to do record here in Italy, meaning that we find ways to work together with legislators to create legal traffic to operators, and that's why we also feel quite good about that we'll be able to do that in Germany and other countries doing it as well. Now for Japan, obviously, there's a big demand because a lot of operators want to have traffic there, meaning pushing up the pay for us. And we're doing whatever we can by further investment to get and increase our share of search traffic over there. But both of them are have surpassed 5% of our total revenue today and growing faster. Okay, great. And when I look at Q3, seems to be a lot of moving parts, of course. Google changes in May still impacting and the sports start here in Q3 after lockdowns and so on seems to be a bit mixed. But so how temporary or should we expect these things to be? It should be quite temporary phenomenon, right? I think you need to split it down in 2 things. If you look if you mentioned Google, when that updates, you need to work through it. Sometimes you have sites improving, sometimes you have sites being hit. And this time, it was quite strange or different update that I didn't need to work with. So will Google continue to update? Yes. Do you do good enough job over time? It should not hit you. But then you don't know about the direction of what Google is doing. So that will always be around for anyone involved in search traffic out there. And of course, it didn't just hit us. It hits a lot of company out there. Luckily, we have other geographical areas to still compensate for that. When it comes to the other part, we know that, that is based on COVID. There were some changes that we had in Q2 and Q3. How that will play, I think nobody really knows. The thing we know is that we're getting better and operate under those conditions and try to be as doing as good business as possible. Will it continue to be ups and downs? Yes, I think so. Until this is under good control, okay, then works goes back to normal, well, that error will be. Yes. Okay. And just a final one. The U. S, it would be interesting to hear to understand at least approximately how much of your revenue there is stemming from sports and casino? It's dependent when you look at it. And as I mentioned before, we had the dominant being casino. Then sports started to come up. But of course, then for this year, we have the big boost coming from Q2, which was enormous. So, so far year to date, the casino is the largest part, but sports is catching up. Okay. Thank you. Thank you. We have one further question in the queue. That's from the line of Jaimo Alba of Kepler Cheuvreux. Just a few more questions. Maybe one on, I mean, Q4 outlook. You have stopped giving an indication on the start of the quarter. But how should we view volatility in general over month? Of course, this year has been different. What do you think over time? Will you have like 10%, 20% things month over month? Or should this business be more stable over time? I think impossible to say, to be honest. But what we need to base on is the fact there are a couple of underlying things, and then there are things that change in place on how COVID plays. Now currently, we see that sports leagues are up and running. We've seen some delays of events here and there, but not major league shutdowns. Well, that gives us an indication that things will proceed a little bit more normal than we maybe saw in Q2 and Q3. That's why I also believe we can start stabilizing the business, which we saw indications of also in the end of the quarter. Now we don't yet know what's happening tomorrow, of course, and that's a difficult thing. That's why I think we need to be prepared that things will move up and down depending on what happens. Luckily, we have a base on that if we go into massive lockdowns, we tend to have things in our portfolio benefiting from that. If we can use that part even though we're through something bad from a pandemic point of view. So I think that whatever cards being playing towards us, what we've been through, we have today an understanding how we should play those to the best by our ability. But I cannot give you what Sweden's we can foresee because it's not up to me to decide what those could be. And coming to your targets here and the introduction of a potential dividend, why the timing here? Why not announce a dividend when you were actually ready to pay it, I mean, like second half of twenty twenty one? What's the timing with the new target? Well, obviously, this year and they have taught us a lot. What we saw in the beginning of the year is that we wanted to start the review of our existing business, where all the business in the company, so to speak, Mainland Europe. We then came into the COVID, which, of course, was one thing but also learned us a lot how we can work more efficient where to grow. And now also we have a quite good picture about the rollout trends we can foresee in U. S. We got proof of how we want to operate and generate revenues from Latin America and what the ideas we have for Asia. Because of that, during the summer, we sat down with the Board and started project to refine. And when we're coming up to a situation where we started to see what this could mean and when we agree that this being the future look for the company, we have to go out with it. That's why we just concluded and hence we went out with it. Got it. And one more question on Germany. I mean, you mentioned that the regulation puts a lot more demand on what the affiliate needs to compliance being not comply with. Have you seen this impacting competition positively? Or is that something that could happen further out? What trends we have seen and also heard from operators is that small to medium asset prices are starting to the churn rate of those stand up operators and affiliates in the market has started to increase, meaning that they seek it's not being possible for them to really live by that. I think it also comes from large operators being much more clear on what kind of legislations and procedures you need to follow in order to do business with them. Because as in any jurisdiction, if you don't follow the local legislations, we might lose your license. So that puts a certain quality assurance and compliance follow procedures from the operators sorry, for the affiliates to the operators. With that in place, you will automatically, as you saw in Sweden, as you saw in many other countries, you will see a certain amount and type of operators and affiliates believe that maybe focus to a gray black market, while the ones that believe compliance is good for the future will stay and adapt to it. So that means possible for land grabbing. But always, when it happens, it will be a shakedown like it was in Sweden, etcetera, and that will gradually rebuild the gap. Got it. And 2 questions on cost, personnel cost. Is it right to understand that these were I mean, they can then what is Q3? Was this due to some one off effect in fact in post release, so Q4 should be higher again? And on depreciation, it was also down quarter over quarter if that's related to the lower revenue and should depreciation come up again with revenue growth or is that more a fixed level? Peter? Yes. Maybe I'll answer that. So the it is amortization, particularly not the depreciation of fixed assets. And you can expect that the amortization is not what it will eventually go up because we're further investing, of course, into asset developments on the intangibles, but it will continue that trend that you have seen during the year. On the personnel, it is fair if you take Q2 and Q3 together and take an average to take out the effects that we had on an accounting side during these two quarters to get a good understanding of where we are heading. But as Per also mentioned, we are continuously investing into building up our interim structures, in particular in the U. S. So over time, naturally, the personnel cost will increase. But as I also mentioned in the previous two quarters, we are controlling the cost in line with how we develop overall the business, so in order to have a good grip on our margins. Okay. That's it for me. Thank you. Thank you. Thank you. And we have one further question in the queue. That's a follow-up from Erik Moburg of ABG. Please go ahead. Your line is open. Thanks. Just a couple of follow-up here for me. In terms of your financial targets, do you also expect Europe to grow within these targets? And where do you see the cost base for the European business trending from 2021 and onwards? Yes, we expect Europe to grow. We will not ever mention how much by when. But overall, we're going to work to make that happen because, yes, this company has had a predominant income from Germany, UK and the Nordics. And there are much more markets there where we foresee growth. So that's why we're all we'll see that it happens. We will inject investments in some areas to improve our products, but we'll also take out some costs for some other areas, as I said. So the idea is that over time, we should not have a negative margin impact even though that in some cases, some quarter, we might invest to turn business around. But overall, the total areas here should be possible to grow over time for sure. And in terms of capital allocation, do you think at this valuation that you have given yourself the right to do acquisitions versus buyback and dividend? Yes. Both. If you just look at it, if you put these things together, I think you have an opportunity to do a lot on one place or a mixture of all. But why? If we just look historically, the DNA of the company has meant acquisitions, but it has resulted in problems down the line. Why do you think now you're allowed to do this when you both have buybacks and dividends as an option in terms of shareholder value? I'm not saying that we should do it now. I'm saying that it's no, I can't because I actually still assume Are you planning to make? No, I can't because as I said, we're studying. I will not comment things that we're looking at until it's a clear case. We will then communicate via normal channels. What we said, Erik, is that we are positively studying whether that will be a way for us to grow. With the cash flow we're foreseeing, the question what we always do is how we deploy that cash. And if we see that we can generate more cash by acquiring something, we will look into that. But I cannot elaborate more on that, which is sure to understand. And just in general in regards of the financial targets here, just sort of market understands here because it is, in a way, a bit contradicting when you don't want to give any indication of the coming quarter, but you then give guidance on 20 5 cash flow. Why is it difficult to estimate next quarter versus cash flow for the coming 5 years? I'm not saying that it's difficult to simulate next quarter. What I'm saying is that we don't go out to that because we never guided on next quarter in total. No, but just like given any indication of the start of the next quarter. That's sort of what I'm trying to do. We will decide not to comment that now. So and we will not comment it, which I've been quite clear about. All right. And just in terms of the M and A rumors, one of your largest shareholders was in the newspaper saying that he was not aware of any bids on the U. S. Business. Could you comment on if you have received any sort of feelers and proposals on this side in this part of the business? What I can tell you that we're spending a fair amount of time discussing a lot of things from all around the world. If there will be something here that according to Swedish regulations in Sweden how to do this, we will go out and communicate. But if we should go out and communicate all discussions we have, we'll be looking into what people propose to us. We wouldn't do any other thing. So we don't communicate unless we need to do so on call in regulations. That's what I'm saying. All right. Fair enough. That's all for me. Thanks, guys. Thank you. Thank you. And as there are no further questions at this time, I'll hand back to our speakers for the closing comments. Thank you very much for joining the call. Of course, a lot of questions coming up considering that it was a mixed quarter, but also because of the actions we are taking. So we're looking forward to coming back to you with further updates once we concluded the Q4 and also let him bring more light into the path ahead of this company. So thanks very much, and talk soon again. Thank you. Thank you very much from my side as well. Thank you.