Hello, welcome to the Catena Media audiocast and teleconference Q3 2020. Throughout the call, all participants will be in listen-only mode, so there's no need to mute your own individual lines, and afterwards, there'll be a question and answer session. Just to remind you, this conference is being recorded. Today, I am pleased to present CEO Per Hellberg and CFO Peter Messner.
Thank you very much. Warm welcome to this Q3 presentation from Catena Media. Next slide, please. Our ambition today is to go through an interesting hour together, where we go through first the Q3 results and details about that, but also then update 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 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 what we're used to. What we experienced in the second quarter was a different quarter where we had a massive boost, especially in the casino business, when sport was down. Predominantly from U.S. and especially social casino. We had a big boost of that. At the same time, we also had very little other activities. In the end, we could do a record quarter. This quarter turned out very different. We had a good start if we look at the first month. We couldn't really catch up with the later part of the quarter. Why was that? Well, it basically coming from the European region, where both sport and casino was performing less than we thought it would do. I will come back to that during this presentation.
If we look at the result as such, we see a total revenue down 6% compared with last year. If we look into a bit more about the organic goal for to establish ourselves, it's also down but 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., an unfavorable Forex situation in the third quarter compared with previously, also impacted the result negatively. What brought down the total revenues more was the fact that we actually spent less in paid advertising. The paid revenue turned less during the quarter, mainly because there were few events to bet on given that sports were not yet back in full swing.
If we then look at other things in the core numbers here, we see that we managed to improve our margin, 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 with 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 compared to last year by 4%. 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, still we manage to generate more profits. Next slide, please.
If you look at the business highlights then for the quarter, what was the building blocks for this and where do we have our concerns? Obviously, this quarter did not play out as well as we wanted to do, I would like to explain why that is. First of all, we saw that, of course, sports started to go back in the third quarter. It's not yet back to the levels where we originally thought it would be, it's steadily increasing. I think something that we see here from the most 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 opening up, what we've seen is predominantly revenue 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% to the operator trends. When looking at our performance then for the quarter, we had a thing where we mentioned in the second quarter that there was the Google update where we initially didn't see a lot of negative impact. As time goes, 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 non-wanted 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 had 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 would have been through about the less paid advertising and also the unfavorable U.S. exchange rate, which has a certain impact. What was interesting to see, though, that even though some parts, mainly predominant legacy areas and existing markets in Europe, we could then see the key building blocks of our industry and where our business, U.S., AskGamblers in Japan, showing strength. We could also see Italy doing very well.
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 pre-season 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 19th, 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, as I 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. That has meant too that we are feeling quite sure about the building blocks, how 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&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 extra drive growth faster than cost. We have a nice trend coming out from there now, but especially will benefit that for the long time ahead. With that said about the business highlights, I would like to hand over to Peter, who will run through the financial highlights for the quarter with you, and then I'm coming 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. The organic search revenue declined by 3% year-over-year, and Per already commented on that, whereas total revenue declined by 6%. As Per also indicated, that 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 the very difficult second quarter, impacted by COVID-19.
As Per also mentioned already, sports is not yet back to the pre-COVID-19 levels as we expected, so we'll see good progress there. The NDC has declined less than the total revenue during the quarter, and that's due to the stronger uptake that came from the returning sports as compared to a decline in the casino segment. Versus the second 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 understood, with a record high casino share of 76% that we reported then due to the impact of COVID-19.
The third 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 second quarter 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-19 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 the 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 in terms of the adjusted EBITDA. As you can see in the graph, the adjusted EBITDA for the first nine 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-19 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-19 levels, but it kept its margin at the same level as last year.
Versus the second quarter, the sports EBITDA increased by 183%, quite tremendously. All in all, the third quarter margin increased from 44% last year to 48%, and that 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. The total cost remained fairly stable as compared to the previous quarter and represented 52% of total revenue or EUR 12.9 million. The direct costs, so we have three segments. Direct costs as a first one in the cost rows, steadily increased again during the quarter following the return of the sports and represented approximately 10% of total revenue, slightly above first quarter levels indeed, of this year.
Despite our continued investments in the U.S., the personnel expenses increased only slightly versus last year, that's the result of changes that we had, in comparison to last year in the management structures. 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 quarters, fairly stable. We saw 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-19 situation as well. Then again, as a result, our margin increased from 44% to 48%. Let's go to the next slide, please. The profit for the quarter.
Exceptional items, they account for the difference in our adjusted EBITDA to EBITDA. In Q3, such items amounted to EUR 200,000, they were related to a reversal of overestimated expenses in relation to our refinancing. There was an income in that respect between EBITDA and adjusted EBITDA. Depreciation amortization charges have been decreasing. 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. Due to certain office lease terminations in the summer, we recognized further reduction in amortization charges. As a result of that, the operating profit increased, including our improvements, of course, on the EBITDA side by 22% to EUR 9.4 million this quarter. Interest payable on borrowings, that relates to the existing bonds and our revolving bank credit facility.
Going forward, such interest will further decrease due to the repayment of those borrowings, which I will talk about on the next two slides. At the same time, there will be interest in relation to the recently issued hybrid capital securities that will be added. We had a first interest payment that occurred now in October. Other losses on financial liability, I commented on that during the first quarter and the second quarter calls as well. They relate to the change in the fair market valuation of our existing bonds. It's purely an accounting treatment. 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 bonds. It's important to note that this valuation movements, 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 EUR 800,000 in tax payments, where the comparable tax payments only occurred in the final quarter of last year. 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 EUR 49.5 million of the existing bonds that were prepaid to the bondholders. 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. During the quarter, EUR 5 million of our revolving bank credit facility has been repaid. In addition, following the rights issuance of our hybrid capital securities in June, the remaining cash proceeds that came in amounted to EUR 6.2 million.
They have been received during July, and EUR 7.4 million in cash proceeds have been received from the exercise of warrants during the first two exercise windows that we had during that quarter. As a result, our cash and cash equivalents amounted to EUR 45.4 million at the end of the quarter. Let's turn to my final slide, and take a look at the company's debt position. 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 EUR 67.4 million, 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 EUR 150.8 million, and of course, the result of our successful refinancing that occurred this year.
The leverage ratio, which is the net interest-bearing liabilities over adjusted EBITDA, amounted to 1.32. Improving from the 1.68 from the previous quarter, and of course, considerably improving versus the last year. We are continuing our trend towards 1.0 in that respect. Looking a bit ahead into the fourth quarter, what we already announced, we will voluntarily prepay EUR 6 million in nominal value of the existing bonds, and the entirety of the existing bonds have an outstanding nominal value of EUR 100.5 million. We also will repay the entire remaining balance of EUR 7.5 million 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 EUR 13.5 million, they are stated as borrowings in the current liabilities, and for that just impact 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. 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. 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 U.S., we are currently live in nine states operating traffic, and obviously it has been a very positive journey for us since the company acquired its business over in December 2016. We're coming up to about four years of Catena controlled 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 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 built up, that was a bit later than originally, in compared to last year.
We also saw that some markets in this case had a big bit of a kind of hangover like Pennsylvania, because last year was the first NFL season, now it was a bit different. Yes, there were more operators, but in general, they didn't perform as strong as us 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, and the customer base can 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, in Illinois, short-term open up, not that many operators available to launch that quickly, but it helped building incremental revenue for us. As we state here, is that U.S. in the third quarter represents 30% of our iGaming business. 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. If you look the next slide, please, which is the U.S. short-term rollout.
Here is a slide I've always showed 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. 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're sending them on to do land-based business, and we charge for that. That is something we're estimating to be an incremental business for us in states not yet going live on online base.
If you look at that, the buildup of states, if we look at the states that are coming, how do we foresee this to play out? What's around the corner for the short term next year, but also in the longer term? Let's change to the next slide, please. Here we try to put together and show you a bit about the potential. Currently, if you look at it, the states that are up and running today, those states represent 39 million in population. Of course, we foresee a big trend on continuous reach into those markets because online gambling is still a recently new business there, and we see that the penetration into the states continues. We will foresee continued growth on those states.
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 by its history that it takes some time until some states get their act together, while some states also sometimes launch earlier than planned. All in all, we see that is a great injection for our upcoming business next year. We have about the rest. What do we foresee on the long term? We're trying to split them down and show 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 million in population. Most likely to come online in very different stages, but as you can see, it's a force not to be neglected in terms of general possible revenue generation. Hence, we are preparing many things for those states already, even if it can take many years ahead. Also we have a set of states mentioning at this, we'll say, what we call larger than farther. Those are all states with more than five million population that together represent close to 90 million. In the end, we have the smaller states, one to five million people, about another 40 million. What we're trying to show with this is that there is incredible potential in the U.S. Timing is unknown, but for sure the potential is there.
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. With this incredible potential, we definitely see U.S. to have the potential to revenue the same or even more revenue than the entire Catena Media does today. 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 can expect from us. Hence, we have done and performed a strategic review. If you switch to the next slide.
During the autumn, the board and management of the company has spent considerable time to look through the strategy going ahead. I can happily inform that we haven't changed the strategy that much. What has become very clear is that the focus points we looked at, meaning U.S. will be the core driver. We will continue investment in Asia because we see nice growth trend, high player 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 Asia are right now, but growing fast and we're seeing a very high increased demand of that. 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 existing markets in Europe, or some being called legacy markets. The work continued there actually to turn them around. The COVID came in between a bit, which had made us refocus a bit short term to maintain good business. The work has really restarted again, especially looking at what we do for sports to take out costs, 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, remain unchanged. We want to establish a profitable double-digit growth on an annual basis. We also want to operate in a net interest-bearing debt, versus adjusted EBITDA , of a range of 0 to 1.75.
As we already informed earlier, we are below that threshold today. We are currently operating at 1.32. If you look 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 Latin, we can easily model the projections ahead of us and put a number to it. If you then look at that, means that based on these things and what we're planning to do in terms of investments, we foresee in the period between 2021 and 2025 to be able to generate a cash in the interval of EUR 300 million-EUR 370 million. 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 and our shareholders, rather than investing into our own business. Currently, we don't look specifically to anything. We'd 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. Interesting here, we also foresee to use the cash we generate to potential share buybacks, but also in terms of allowing dividends going forward. As we mentioned here, the board is currently looking in to eventually propose a dividend ordered as soon as in the later part of next year of an interval of SEK 0.65-SEK 0.75 per share and quarter.
With that said, and with 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 are doing is to restructure the business that is somehow holding back the full potential, to come into a normal phase and also have to start at some time to generate positive outcome of that as well. All in that, together with the refinancing of the existing bonds next year, we believe that we will be an even stronger and well-positioned company than we are today.
Over the last year, we've done big improvements from very high debt ratios to controlled ones now, and a good underlying fundamental business growth from 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. The key takeaways of this presentation is the fact that, yes, we had a short-term revenue disruption, but because of explained reasons and controlled 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 reasons, we see now that it's coming back to the stage also to match a bit more what we see in the operator market, even though we foresee us not growing as fast in terms of sport initially as they do.
We previously seen the negative impact on casino sites, but because of the work of our own work to mitigate the Google update, but also the fact that we see the player behavior returning to more normality, we see that business segment also 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 market here, U.S., which allowing us to go out with what we believe a very positive financial future for the company as discussed in strategic review. With that said, as the quote says here, yes, we have seen short-term disruptions, but it will not change our long-term focus. On the other hand, we actually are more confident about the long-term business now than we ever been.
With that, I would like to shift to the last slide of this presentation. Just remind you about the upcoming events, which is the year-end report on 24th of February, then we start to present the first report of 2021 on the 29th of March. Then you also see the AGM date that has been set. That's it for me and Peter, and we now open up for questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name's announced, you can ask your question. If you find it's answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Erik Moberg of ABG. Please go ahead, your line is open.
Morning, gents, and thanks for taking my questions. First one, Better Collective 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. Basically, as I explained, with sports growing back faster, if you have larger sports in your portfolio, you're probably going to grow quicker. We have decided this time not to go out with a number because we did it in Q2 report because it was a very different quarter. In the end, we saw the quarter coming in differently. What we see is that we see a growth trend, compared with Q3 now going into Q4. Exact details we will not inform this time because we know that we cannot even predict really what next week will bring to us. Not to show too much guidance, we've decided not to show this time.
All right. 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 PA started good on a year-over-year basis for you as well?
Well, I cannot go in and comment specific states and 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 a U.S. state, 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. The only thing I can say that is that U.S. starting to perform strong, but advise you that we cannot directly correlate the sport operators handle with us because we get our revenues before even the handle starts.
Yeah. Fair enough. Still, there's been a massive growth on a year-over-year basis, and I would also assume that the penetration of the population that gambles have increased. That would still translate into CPA, correct?
Yeah. If the reach increase and we send the traffic, we should logically see more revenue coming out. How much that is, we don't comment on.
All right. 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 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. Exactly how that will play out is quite difficult to predict right now. Typically, more states helps revenue. Yet again, also we know that, for example, December is a much lower month than September and October. Depending when they fall in and the activities and bids different kind of revenue builds up. Obviously, all in all, new states is positive news for us.
Got it. In regard to Europe, how much did it decline year-over-year? Just looking at the numbers, it must have been quite drastic, both quarter-on-quarter and year-over-year. How did this part of the business start in Q4, and where exactly are you in the turnaround? When will this be visible in the numbers? Because we have talked about this for over one year now.
Yes, we have. As I also mentioned before, that we started reorganizing our costs. We then took a quite big step of exchanging the management in, for example, sports and casino, which started basically in February and March, and then came COVID, which we meant that we need to 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. 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 into is more organic driven by search traffic, and that takes quite some time.
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. 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 for 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 of starting to go back. It depends all about also traffic behavior.
When we see through search volumes, we're seeing that starting to work up again. Yet again, you need to add what's happening in a week or two from now on in terms of market shutdown. We hear now the markets are shutting down. That can have a tremendous positive impact to casino, it can behave different from last time. 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 change as much as we possibly can.
All right. Fair enough. There's some good flavor right there. 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. 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 took, that we should foresee a better quarter in Q4 than Q3? The answer is yes.
Got it. 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 one. We said that we should get close to one. Based on the trends now, obviously, we are working ourselves down towards being closer to one than where we are today.
Fair enough. 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 costs to grow? Should we expect the costs 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 one year out not growing and going back, in order to hit that kind of cash flow numbers and debt levels combinations. 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 more efficient. Then also at the same time, without any doubt, we're also going to dramatically continue to increase our investment in the key growth areas like U.S., et cetera, given the great opportunity with that. What that means in margin, et cetera, we normally don't guide a year ahead.
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. Your cash flow guidance is rather strong, to say the least. What does this mean for 2021? You mentioned that you will start paying dividends in H2 2021. I assume that you expect quite a significant uptick in growth from cash flow during 2021, 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. Looking at the growth trend there now, you will see that there is definitely room to do that dividends. Even if you only will continue this level, given the cash situation we have and what we benefit by 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. I think from just where we are today, adding the transparency , that makes that possible if the board decides to propose that. That is because it's not been officially proposed yet.
Yeah. Just overall, if you repay debt, could you still manage to actually pay out dividends? Just in general, in terms of the dividend strategy, do you expect dividends to grow with profits or over time, or should we just assume that it will be maintained at the level 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. That depends whether we take on debt to grow or not.
Taking on debt to grow means that there's a financial cost for this company doing so. The cash generation, less that potential debt, would still allow us to do this. We have the room to maneuver depending what we want to do, as long as we continue to add cash above the levels we're doing today.
Fair enough. Just to add on to the previous question here, if you start paying out dividends in H2 2021, as of where you are right now, at the earliest, when could you initiate the buyback program, do you think?
Well, we cannot comment on that.
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 his views in terms of valuation of your peers, et cetera. 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&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 any kind of scenario that will benefit the shareholders, we should not have the positions that we have. We always need to look at what is best for our shareholders long-term, and if that is buying, merging, doing other actions with the funds we have 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.
Hypothetically speaking, what are the most important factors you take into consideration when you evaluate a theoretical bid or a merger proposal?
Well, what do you normally do every time you want to buy something? You see whether it 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 the competition to be as strong as you want it to be. I think those are basic fundamentals, but we also know that one plus one doesn't always become two or three. That's why you need to be quite focused on this. 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.
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.
To add on that, in terms of your share price, it is 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 there in revenue.
I think if you're judging in the middle of this session that the trend of this company, which you now have a one quarter, 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 two years ago or three 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, not growing cost as fast as revenue? Yes, we prove that. Have we sorted out the debt level related issues we had because of that trend and that built 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. Do we believe that we can create a value? Yes, we have, which we also communicated in today's presentation by the cash flow that we initiated. I think that answers all those questions.
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 would do wrong if we're not looking at that opportunity. Whether then it's beneficial for us, given the effort it takes, whether the timing is right or wrong, it's something also we evaluate. If we conclude that, no, it's not good for the company, we won't do it. If we conclude that it is, we will then continue our investigation and decide timing for that. Obviously, nothing that is in works right now.
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 you would be able to absorb the costs of being listed in the U.S. as of right now?
No. We cannot comment on that.
Fair enough. Well, that's all from me for now. Thank you very much, guys.
Thank you.
Thank you. Our next question comes from the line of Mikael Laséen of Carnegie. Please go ahead.
Hi guys, thanks. Not a question, Per, I have a few more. On this cash flow trajectory or cash flow target that you announced today, that means roughly EUR 60 million in cash flow per year, well, EUR 15 million per quarter. That's easy to understand, how do you see this developing ahead, the trajectory into 2025?
Yeah, I think if you look what we present today about, of course, key drivers, 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. It depends very much when we believe those states will come live and what they can do. Obviously, we look later in that period, 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. Would we have a static EUR 60 million or whatever it might be over the time? No, it won't. It would be less in the beginning, more in the end because of the market movements.
Okay. How do you define operating cash flow? What's included in that?
Peter, would you like to elaborate on that?
Well, it's the cash flow from operating activities as per the standard, simply stating.
Leasing cost, investments in intangibles, and so on, right?
Yeah. 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. Yeah, of course. All right, great. In terms of Germany, you commented a bit on that in the report. Approximately how large is that country for you in Q3?
I cannot mention in Q3, but what we said historically on this, that we have a set of markets that are operating between 10% and 15% of our revenue, of course, U.S. being larger, where Germany is in the top segment of that. That will logically mean that if top segment is 15%, it's around that.
You already saw impact from this legislation already now, right? And how much of that revenue?
Yes.
Okay. how much of that is the sports and the casino? It'd be great to understand also, approximately.
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 resources to prepare, because on the 15th of October, we went into a period over there where everyone needs to adapt to the new way of operating based on the regulations that will be in place in July next year. 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 on the 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 been 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 in Germany next year, because from July onwards, it will not be allowed with revenue share anymore. You cannot sign in new customers for revenue share, but also all historical revenue share will be canceled. If you're sitting in Germany having been part of revenue share, you need to really do a lot of actions to gain back from that. We have now, since these discussions started, work on a lot of actions to circumvent that.
One action was to establish ourselves in Latin America, another one in Canada, and in other areas, grow Italy more, focus on AskGamblers growth in other areas 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. Of course, we're a bit curious here how much of Germany is stemming from rev share today. 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. We have to remember that without saying too much, that we don't believe that share representing by revenue share today all will go, that would be reprogrammed to other things. We have to remember that operators, because of these new laws, with less spend by player, means far much more players. What we're now looking at also by remaining traffic, that after this year, still Germany is pronounced to grow quite lot in terms of CAGR the coming five years. We need to build a different kind of business there with different flow of customers with different behaviors. 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. When it comes to Japan and Italy, you mentioned that those two countries perform 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?
Yeah, I think there's none of those markets that is less than 5% of our revenue today. If you look typically at Italy as such, it has not a strong kind of market growth trajectory as Japan has. If you look at Japan has a far higher player value than Italy. 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. Even though that we have those regulations going, we're going to do record year in Italy, meaning that we find ways to work together with legislators to create legal traffic to operators. That's why also we're feeling quite good about that we'll be able to do that in Germany and other country doing it as well.
Now, for Japan, obviously there's a big demand because, there's 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. Both of them have surpassed 5% of our total revenue today and growing fast.
Okay, great. Thanks. When I look at Q3, it seems to be a lot of moving parts, of course. Google changes in May are still impacting and the sports start here in Q3 after lockdowns and so on, seems to be a bit mixed. How temporary or should we expect these things to be? It should be quite temporary phenomenons, right?
Yes. I think you need to split it down in two things. 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 was a quite strange or different update that we then need to work with. 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. That will always be around for anyone involved in search traffic out there. Of course, it didn't just hit us. It hits a lot of companies 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 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 again, then, and world goes back to normal, whatever will be.
Yeah. Okay. Just a final one. The U.S., 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. As I mentioned before, we had a dominant being casino, then sports started to come up. Of course then for this year, we had a big boost coming from second quarter, which was enormous. 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, it's from the line of Hjalmar Ahlberg of Kepler Cheuvreux. Please go ahead. Your line is open.
Thanks. Just a few more questions. Maybe one on, in the Q4 outlook, you have stopped giving an indication of the start of a quarter. How should we view volatility in general over months? Of course, this year has been different. What do you think over time, will you have 10%, 20% swings month-over-month? Should this business be more stable over time?
I think impossible to say, to be honest. What we need to base on is the fact, there are a couple of underlying things, and then there are things that change in based on how COVID plays. 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. With 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. We don't yet know what's happening tomorrow, of course. That's a difficult thing. That's why I think we need to be prepared that things will move up and down depending 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 word, even though we're through something bad from a pandemic point of view. I think that whatever card's been playing towards us, what we've been through, we have today an understanding how we should play those the best by our ability. I cannot give you what swings we can foresee because it's not up to me to decide what those could be.
Yeah, I see. Coming to the new targets here and the introduction of our potential dividend, why the timing here? Why not announce a dividend when you were actually ready to pay it, like second half of 2021? What's the timing with the new target?
Well, obviously this year 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, our old business in the company, so to speak, mainland Europe. We 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. 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.
When we coming up to a situation where we started to see what this could mean, and when we agreed 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. One more question on Germany. You mentioned that the regulation puts a lot more demand on what affiliate needs to comply. 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 enterprises the churn rate of those kind of 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. As in any jurisdiction, if you don't follow the local legislations, you might lose your license. That puts a certain quality assurance and compliance follow procedures from the affiliates to the operators.
With that in place, you will now 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 to leave, to maybe focus to a gray black market, while the ones that believe compliance is good for the future will stay and adapt to it. That means possibility for land grabbing, but obviously when it happens, it will be a shakedown like it was in Sweden, et cetera, and then it will gradually rebuild again.
Got it. Two questions on costs. The first on personnel costs, is it right to understand that they come down versus Q3, was this due to some one-off effect impacting positively, so Q4 should be higher again? On depreciation was also down quarter-over-quarter. Is that related to the lower revenue and should depreciation come up again with revenue growth, or is that more a fixed level?
Peter?
Maybe I answer that. It is amortization, particularly not the depreciation of fixed assets. You can expect that the amortization, 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. As Per also mentioned, we are continuously investing into building up our internal structures in particular in the U.S. Over time, naturally, the personnel cost will increase.
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 just me. Thank you.
Thank you.
Thank you. We have one further question in the queue. That's a follow-up from Erik Moberg of ABG. Please go ahead, your line is open.
Thanks. Just a couple of follow-up here from me. In terms of your financial targets, do you also expect Europe to grow within these targets? 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 going to work to make that happen because yes, this company has had a predominant income from Germany, U.K., and the Nordics, and there are much more markets there where we foresee growth. That's why we overall will 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. 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. Overall, the total areas here should be possible to grow over time, for sure.
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.
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. No, I can't help because I assume.
Any idea of the type of acquisitions you're 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 communicate via normal channels. What we said, Erik, is that we are positively studying whether that will be a way for us to go. With the cash flow we're foreseeing, the question what we always do is how we deploy that cash. 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 you should understand.
Just in general, in regards of the financial targets here, just so the market understands here, it is in a way a bit contradicting when you don't want to give any indication of the coming quarter, you then give guidance on 2025 cash flow. Why is it difficult to estimate next quarter versus cash flow for the coming five 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 guide on our next quarter in total.
No, just like giving any indication of the start of the next quarter. That's sort of what I'm trying to understand.
We decided not to comment that now. We will not comment it, which I'm being quite clear about.
All right. Just in terms of the M&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 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. If we should go out and communicate all discussions we have, or we look into what people propose to us, we wouldn't do any other thing. We don't communicate unless we need to do so according to regulations. That's what I'm saying.
All right. Fair enough. That's all for me. Thank you, guys.
Thank you.
Thank you. 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're taking. We're looking forward to coming back to you with further updates once we concluded the fourth quarter, and also later bringing more light into the path ahead of this company. Thanks very much, and talk soon again. Thank you.
Thank you very much from my side as well. Thank you.