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Edited Transcript of CATME.ST earnings conference call or presentation 18-Nov-19 8:00am GMT

Q3 2019 Catena Media PLC Earnings Call

SLIEMA Dec 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Catena Media PLC earnings conference call or presentation Monday, November 18, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Erik Edeen

Catena Media plc - Interim Group CFO

* Per Hellberg

Catena Media plc - CEO

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Conference Call Participants

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* Christian Hellman

Nordea Markets, Research Division - Director of Small and Mid Cap

* Erik Moberg

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

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Presentation

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Operator [1]

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Welcome to the Catena Media Q3 Report 2019. (Operator Instructions) Just to remind you, this call is being recorded.

I'll now hand the floor to our hosts, CEO, Per Hellberg; and CFO, Erik Edeen. Please begin.

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Per Hellberg, Catena Media plc - CEO [2]

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Thank you very much, and good morning, everyone. Can I have the first slide? Yes, please. So welcome to this third quarter presentation of 2019.

The next slide, please. The presenters is myself and Erik Edeen. He is our interim CFO. And if we go to next slide, we're going to show you the agenda for today's call, which is that we will start with the quarterly highlights of this quarter, followed by a business update, followed by the financial, and then we'll be looking to a bit about the strategy and outlook in order to explain you what actions we are taking right now in order to further the business going forward. In the end, we will finish off with a Q&A where you have the possibility to ask your questions and we will respond to accordingly.

Next slide, please. So if you look at the quarterly highlights and then the next slide, Slide 5, please. We're happy to announce that after 3 consecutive quarters, we have been able to do a turnaround of our business. It's actually the third best quarter in the history of the company. And the trend shift is a result of a couple of things, which I'll go through a bit later, but predominantly, that we have good trends from the U.S., from some casino products, we also performed very well in Asia. On top of that, we have also managed to stop decline in the European casino business that we've been working hard for the past 3 quarters in order to level that out and start to see some improvement there as well. So in total, that made us grow with 11% from the second quarter, but also to a healthy in -- an establishment of a growing profit margin again.

Next slide, please. Based on the results as we have had 3 quarters of declining business, it comes as no surprise that still, we are tracking below last quarter, the quarter -- 2 quarters -- 2018, that is. We managed to conclude revenue of EUR 26.4 million this quarter, EUR 11.5 million of EBITDA and we had a healthy improvement of the EPS, but that also, as Erik will mention a bit later, will -- as a result also of the revaluation of the bond for this quarter.

Next slide, please. And further on slide, we will then take you into the third quarter business details. We kind of decided to put them in a plus and a minus section here. Some are actually a bit between, so let me take you through this. The U.S. market is growing very nicely. We have had good trends. We are actually having a business now that represents 17% of the year-to-date business. It's really generated by the U.S. market. What we could see here is that the -- in the quarter, we had a couple of different activities depending on what states we're looking at.

Let me start with New Jersey. We had a typical business where we started it very strong last year. It was the first data online with sports betting. It was in time for the NFL kickoff season, meaning the American football season, and had a massive inflow of customers to join that. We forecasted it to be a bit below this year as there was such a huge demand and news last year. It more or less came in according to our plan, but still, that is still a very good result for us. And the market share and the position we're maintaining in New Jersey is very, very strong.

The other news for this year that helped the business to grow as well was Pennsylvania opened up business in a little bit before the quarter, but that we could actually have it running full speed here in the quarter for the NFL kickoff. But the difference here was that there were very few operators online at the time for NFL kickoff. In our case, we need a lot of operators in order to get the bidding volumes and the bid prices in our traffic up to optimized levels. And with few operators, we could not maximize pricing, meaning that we came out a bit below our own assumptions for the revenues for the third quarter. But still, considering that this is incremental business, we're very satisfied with the quarter. So that said, there are, obviously, more things that we can look forward to in the future.

And also, we started to drive casino traffic in Pennsylvania. Even though not as large as sports, it also helped us to incrementally grow that market. And also, we have increased our investments in the pay-per-click advertising in casino -- sorry, in sports, with casino to open a bit later, [that we also contracted with it]. And then we managed to do a satisfactory margin in that field as well.

And traveling to the other part of the globe, looking to Japan. We had a very nice quarter there as well, with all-time high revenues, strong growth, good margin, and as you can see by industry news, there's a lot of focus on the Japanese market now to continue to grow. And we're very happy that we have good presence there, especially also, as we've mentioned a bit later that we are now up and running with AskGamblers there as well to make sure that we utilize our efforts there as much as possible.

Talking about AskGamblers, we managed to do an all-time high in terms of both revenue and generated NDCs in the quarter, and I will come back with a couple of more details about that business in -- on next slide. But before that, our European casino products that has been struggling so far and somewhat, as mentioned in the last quarter and the one before that, we have applied a lot of resources to try to turn this around by rebuilding the sites, by improving the quality, put more resources to do that to build a stronger future. And we're happy to announce now that the business has leveled out and some key [personnel] are now starting to grow back traffic and revenues as well. So the actions there seems to be working nice.

Then if we look at the maybe not so good, but some of them actually that will be good things, one example is Italy. As some of you may know that for almost 1.5 years ago, it was announced that Italy will apply new marketing bans in Italy based on in July this year. Italy was supposed to completely stop any form of advertising. In the end, that came in with some opportunities, of which affiliation was seen as one of them. And we have, of course, adopted our sites accordingly to make sure that we are in line with their local regulations. But when this happened in the beginning, the revenues went down very low, and followed by in August where we managed to improve the business and also September growing it back. And today, we are more or less operating on the levels we did before the ban was applied, so it's going back. But it had a short-term impact in the third quarter, but not we're not foreseeing it to continue.

When it comes to France, we also said that we are in the mid mark, revamping that business, rebuilding due to some regulatory issues presented in Q2. Those are going on, and the sites are now basically going to be up here a bit later in this quarter. In the meantime, we have [shopped this out] meaning that currently, we don't drive level revenue to level, but we'll do so as a we start it up again.

Finally, U.K., we have done a lot of improvements there as well, and the team have worked very hard for that. We're driving more traffic in the operator sides. But so far, we have seen a lot of that traffic that's come from customers already having an account, which means that we cannot charge for them. Again, we are revising that a bit in order to improve, et cetera. So our sites are working good, but the traffic is, so-called old traffic, so we're doing what we can to maximize that, but also have a lot of other actions that we will apply for those markets, which I'm coming back to a bit later in the presentation.

Next slide, please. Before leaving the business update, I'd like to mention a couple of extra words about our hero product, AskGamblers. For those of you who don't know, it's one of the -- probably the largest and most listed casino affiliation sites in the world. And we're very happy to see that the efforts we've done here, both in improving technology and other measures to make it even better during the summer, has made us grow it quite quickly and taking a bit of an all-time high growth in revenue and NDCs. We have also, during this time, made sure that not only that we can run the full site, including all the features for existing markets in Europe, but also launched it in 3 new languages, which is Japanese, Portuguese and Spanish. The also interesting thing is that even though that we see in U.K. is -- the market are facing some issues, it's worth to mention that when it comes to local dedicated traffic, U.K. is the largest market followed by Germany. But the biggest volume on this side are basically dot-com volume, meaning English from around the world. But still, in English and U.K. is doing fairly well on this site and actually showing good trends there. So, [AskGamblers] seems to be looking nice.

Japan, showing good progress since launch. It's a very new market. But on the other hand, we would like to see how it index itself in the search volumes and rankings. It's progressing very good, still a small traffic build, but it shows the right signs in order to grow into a large product in the future.

And finally, we have kicked off some retention business for AskGamblers where we're helping operators to turn on some of their old customers, turn them back on again so that we can come back to that, and if we do that, probably, we will get some extra fees for doing so.

And by that, I would like to change to the next slide and hand over to our CFO, Erik Edeen.

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Erik Edeen, Catena Media plc - Interim Group CFO [3]

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Good morning, and thank you, Per. Move over to Slide 11, please. As you can see here in our revenue growth, we have a trend shift here in the third quarter of 2019. Our search revenue increased by 14% from the second quarter here over to the third quarter, paid revenues stayed in line, and our subscription revenue went down from 0.7% to 0.5%, primarily related to the French market and the changes that I just mentioned there.

Slide 12, please. If we look down into our revenue streams, we increased our cost per acquisition here during the third quarter. That is primarily driven by the growth that we've seen in the U.S. here during the quarter. And as a result of that, our revenue share in percent of total revenue went down to 42% here in the third quarter. Fixed fees is at 13% and subscription revenue at 2% of total revenues during the third quarter.

Slide #13, please. So looking to our EBITDA movement and our cost development. We have increased our costs in absolute terms slightly here during the third quarter as expected. Our pay-per-click investments direct costs increased somewhat here during the third quarter, primarily related to further investments on the U.S. market here. We increased our margin from 40.1% to 44.4% here in the third quarter, an increase of a bit above 4%.

Operating expenses increased slightly. Other than that, no major fluctuations here in the third quarter other than that we'll strengthen up the margin. Costs were in line with expectations from our view.

Page #14, please. Looking into our segment performance. And as you can see here on this page, we have decided to increase our transparency in terms of how we report the business. Now breaking down our iGame segment into 2: sports betting and casino. And during this third quarter, our casino segment stood for 62% of total revenues and had a margin of 56%. Our sports betting segment represented 33% of revenue in the third quarter with a margin of 26%. And our financial services represented 5% of our total revenue here in the third quarter, and that corresponds to a margin of 9% in that segment, ending at an adjusted EBITDA of EUR 11.5 million to a margin of 44%.

Slide #15, please. So if you look into our financial costs here during the quarter, we had the EBITDA of EUR 11.5 million adjusted corresponding to EUR 11.4 million reported with some minor one-offs, nonrecurring items related to some reorganizational costs during the quarter. Our EBIT at EUR 7.8 million in this quarter, and the financial cost, as you can see here, we have a positive effect here, quite substantial now from the revaluation of the bond during the third quarter of EUR 6.8 million, helping our EPS developing positively, ending at EUR 0.20, end of the quarter.

Page 16, please. When we look down into our new depositing customers, and as you can see here on the graph down on the left-hand side, we continue to increase our revenue per NDC here during the quarter as revenue increased compared to the second quarter and we stayed pretty much in line when it comes to NDCs during the quarter, meaning that we've stopped the declining trend, and we continue to focus on increasing the value per NDC here. And we also can see that the U.S. values and the values we see in average over there and also in Asia is higher compared to Europe, in line with the growth we also see in the U.S. market.

Page #17, please. If we look down into our balance sheet, we had total assets of EUR 368.5 million here end of September. Our borrowings at EUR 148.3 million end of quarter, of course, including the fair value of the bonds here in the balance sheet. We have amounts committed to an acquisition rising to EUR 23.4 million end of this quarter, and I will come back to that here in the next page. We have an option to set up to approximately 60% of the assets committed to win acquisitions with shares.

Next slide, please. Going further down into our asset purchase commitments, as you can see, the trend from Q4 2018 where we had EUR 81.9 million, we have decreased those values here over the year. Now, end of the third quarter, we are down to EUR 23.4 million in the balance sheet, and that is updated with the latest performance estimates end of September as due to the -- following the accounting regulations. We had a leverage of 3.4x end of this third quarter, and that is broadly related to the cash payments that we announced here during the second quarter and the renegotiations with the BayBets, related to the BayBets acquisition. This is in line with our expectations, and we continue to be compliant towards our maintenance covenants. We have our midterm financial target of being between 2.5x and 1.5x in leverage midterm, and that is our target and we continue to work against that.

Remaining as a purchase commitment, as I said here on the cost side, we can set approximately up to 60% in shares of those. And of the remaining part, the majority of the remaining part here is related to the U.S. acquisition where the actual payment settlement date will be here in the first half of 2020.

Page #19, please. Looking into our cash flow and cash generation here during the third quarter, we are a little bit down compared to the second quarter. We ended with EUR 9.1 million in operating cash flow and a cash conversion of 77%, of course, partly driven by the Q2, and that Q2 came out a little bit weaker now than we performed during the first quarter. So it's a result of that, primarily net cash generated here during the first half of the year, January to September, was 2% down compared to January and September 2018. We utilized currently EUR 12.5 million from our revolver with Swedbank, and our bond issue remains the same. We are currently utilizing EUR 150 million on that.

Page 20, please. And I will hand over again to Per to go into the strategy and outlook.

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Per Hellberg, Catena Media plc - CEO [4]

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For sure. Thank you, Erik. And the next slide, Slide 21, please. We thought we should start with an update about the U.S. market. We have mentioned some already, but I always know that there's a lot of questions about that, so we have decided to divide it in 2 parts, Q3 but also our view a bit on Q4.

I mentioned about Pennsylvania where the [year] started quite slow with a few operators. But you can also see here that by the end of the quarter, we had more available, meaning that we can send traffic more, meaning that we can charge more for the traffic. It's also interesting that West Virginia, that we launched a long time ago only to go back and then relaunch, are up and now into sports betting operators and we haven't sent them traffic from day 1. I talked about the supposed hangover effect from New Jersey this year, which we forecasted into our numbers. And I think that the interest you can see here is that I don't think it comes as news, but in total, if you look in all these markets here in U.S. that we are doing record levels this year compared with the past.

So what about Q4? More operators driving up CPA rates. Indiana launched on October 6 -- sorry, in October. And I think it's 6 months ahead of what we originally said, meaning that it's a trend we can see in some states today, that the evidence from the states that are online -- well, that means in terms of generated revenues, in terms of tax income, and also in order to try to terminate the previously illegal traffic in the states are working and helping states to take positions to push forward the launch dates, which I think, in general, is a very, very good example. And we have sites. We have been generating [under standards] and the most air traffic from the first day they went live.

Also interesting is that Colorado has now passed the betting referendum, and we don't know exactly yet when it's supposed to be live. But in terms of contribution, it's a state that is about 60% the size of New Jersey. And we're, of course, waiting that to go live as well and by then, having a size that will generate traffic there as well.

The most important thing is that we are expanding our sites and footprint into states that are going to regulate, according to our estimation, the coming 6 to 24 months ahead, meaning that we're building content with sites, local sites that will take good benefit from the day that the sales goes up. And on top of that, because, of course, also our nationwide brands that we're going to run as well. But especially now, we're investing quite heavily in creating content on the very local-based [scores] and very possible casino sites as well.

Next slide, please. To give a bit of overview here on Page 22, we are looking at the rollout, and this is more as a guide for you when you potentially look at this -- also works for summarize what has happened in this. I think the change from last month or last quarter is mostly highlighted by Indiana, that they come across or went live much earlier, but also that Colorado is now on the list of states confirmed that they will launch.

We believe, based on the trends we see in the regulatory process over there, that this should come live sometime this -- in second half of 2020. But if you look what we're doing business from today, and that the list of states about to go live in the second half, sometimes maybe in the first half of next year, we are very confident that we will have a continued very good year from sports and betting and casino in U.S. next year as well.

Next slide, please. So when looking at the strategy, it remain unchanged. What we said for the present time now is to focus on organic growth, I think we're showing that we're doing that, and that's where organic growth has been negative, that we have sought to level that out and sort of improve back again, and that's there and to continue. We mentioned that we should focus on geographical expansion with existing products, which remains our focus, and that we should continuously work with cost-efficiency improvements. So how do we then split that based on the kind of market saturation levels we're seeing out there?

If we first will look at, think of mature markets in our case, meaning markets been around for a while, that is not growing that fast and -- or take U.K., Sweden, for example, where we have regulatory impact, a lower-than-average growth rate year-on-year. Our focus here is, as we said before, to focus on a couple of core products, which have made loss to reduce costs and improve efficiency. And the key thing here is that we should improve the margin. I think this gross margin looks very low, but we have to remember that we have the team running these sites year-round. Of the revenues in Q3 is rather quite low, especially in the sports segment by many -- leagues will start by the middle or end of the quarter. That's why market is pushed down. But regardless, over time, on both casino and sports, shown these markets, our key mission is to improve margin but being more cost efficient.

Then look at markets that are growing, that are there today, that are growing very fast, like existing business in U.S. and Japan, Germany, some Southern European markets, et cetera, a language version of that, but also Central Europe, where we see medium to high growth. Of course, we want to push and invest in our products to take a larger market share. And by using the efficiency improvements we used for mature markets, also here to have a fast build, but also [improvement] good margin. But then there's also a day tomorrow and we see that there's a lot of things going on around the world. We just went through it. But in the U.S., we see a lot of new states about to open up. We know that things are cooking in Latin America, the steel business or the low CPAs still, but there are things happening. We know Colombia is large. We know that Brazil is coming up, and more states is probably to follow. Then we some also things happening in Asia. We want to be there. And we all want in some of these markets to build up our position, to invest in that, meaning that the business is quite low now, but we expect it to be very large in the future. And complete advice and [works] with our investments, we're investing now in order to have a good market share in the future and to have a high margin at that time, so this is more about nursing some of those key growth markets.

So if we then move to next slide, please. How do we then follow this strategy into some short-term actions and other activities that will impact the quarters to come? When it comes to sports betting in Europe, as we said, we are scaling down the focus. And this is predominantly products that are available in the U.K. and some other markets. We are scaling down the focus here to have more attention to less products. We have, as mentioned, also started to transfer our focus more from pay-per-click advertising that comes to quite low margin in the [home] generated traffic by -- call it SEO improvements. We are pushing to increase our subscription-based business because that's a different business model, but also can be sold in our -- in markets that there are regulations against sports betting because this is not sports betting advertising.

We have retention business, of course, that we're pushing and starting to push more as time goes by. But the key thing here is to do cost reductions and efficiency improvements, where we want to revise a lot our operating variable rates and how we do that so the people will have a more [generated invest] -- the most outcome of the presence in order to drive this business to better margins. We see this as a quite big project internally that should take 4 to 6 months as we did within casino in Europe as well, in order to come down to these new, higher-margin levels. In the meantime, of course, we should benefit from the seasonality in this business in order to drive results in the right direction.

Casino Europe. As I mentioned, we have a lot of ongoing work there. We can see the trend shift, but we haven't stopped there. We continue to invest in this. And in some cases, we have sites as actually -- being dubbed as too much of an effort to build the way, the nonbenefiting legacy in the product. So here, we're rebuilding products from scratch, which is an ongoing work we do. We are also restructuring our organization supporting these products to make it more efficient. So we're talking about how we market these in terms of visible marketing, if they get more efficient sell than that, but also how we run sales departments. And that is a thing that have been ongoing for a while but we see positive benefits from.

We're commenting that other markets in Europe, like Germany, et cetera, that have quite better momentum forecast for them, which I could come back to on the next slide when we come to that one.

But before that, some other actions we are doing. We are intensifying the global launch of new markets for AskGamblers. We will launch new markets here in the fourth quarter. I will not tell you which until we officially announce that. But also here, we are doing the retention business I mentioned before, and we want to increase that by having more operators onboarded also as we proceed forward. So we foresee some good trends for AskGamblers going forward.

If you look at U.S., we are intensifying and increasing our investments there for said reason. There are 2 things to spending money on: a, on the content craving for new sites, to make good positions; but also, as noticed by the markets, in the beginning of next year as well, we want to be able to do PPC advertising for Casino. So we're doing it for sports. We will do that as well because we believe that, combined with our position in the market, will help the business to go in the way we want.

On top of that, as I said, the content divestments were quite sustainable also to secure a dominant position also in the future. And then in general, in the company, we having started and we going to continue quite big review of the total overhead in the business in order to rework -- so get more efficient sale of the business, i.e., bring in the margin in the right direction.

Next slide, please. So if you look for the revenue outlook, not being able of course to guide on the number going forward, but see here now the ramp-up of PCs, things that have the potential to bring us forward and also where we believe that we should look a little bit careful about development until we can improve also internally or that the market is still the same.

Let's start from the top. U.S. As I mentioned, the market revenue numbers are forecast to be a bit lower compared with September which always been the peak. But in Q3, it's -- because September being strong; while in Q4, we had 4 -- 3 months that are relatively strong, meaning that the quarter in general should be on par or a bit better than the previous quarter.

If you look at AskGamblers, we're having a good inflow here and the -- should be triggered by the [relatively high] better seasonality. Also we're also doing some other activities to bring up revenue, so we have high hopes for a good quarter there as well.

Italy, as I mentioned, we had a very slow start in Q3 because we have the margin bank coming in and bringing in the business almost down to 0 the first month, only to repair itself in the end. And we foresee good numbers, helped by seasonality, also coming up in Italy. Of course, we have a lot of rev share in these markets as well, which can go up and down. But in general, the trends should be improving.

France, we will relaunch the sites later or during the quarter, meaning that we don't really foresee a basic growth in the market, but we will come back and work in ourselves to back previous history.

Germany, it's performing well. I think it's fallen the seasonality curves we're seeing. Also here, the team are doing, as always, an excellent job to benefit from that. So we should be helped by outcome there as well.

Japan. Typically, it's forecast to be little bit slow in Q4 due to seasonalities history we see there. But obviously, it's been growing quite nice from last year. And we expect also this quarter -- next quarter to be improvement from last year.

Casino Europe, steadily improving. We see some sites turning around, but also we're rebuilding in other sites. So we're basically looking at a slightly improved business here. One in sports betting in U.K., we have seasonality impact now but as I mentioned, we're doing a lot of rework here. How soon we can have an impact? I have to say -- but we're not forecasting a major improvements in the fourth quarter from that.

And last, the financial services. Rather stable because we are moving away from the business we have seen in Europe that is declining. We're looking at other parts of the world, so we're balancing the decline in revenues from Europe and other markets, but at the same time, we're working quite hard on reducing cost as well. So even though that revenue is going down, we are doing what we can to cut costs in order to improve margin, and that also -- another action that will take a couple of quarters until we're fully optimized. So all in all, we have a positive momentum in the business.

And if you stay in slides, we summarize. What we can say is that we have definitely stopped the declining trends in Casino. We are have good drivers out there. We have outstanders. We have U.S. We have Japan. We also have some of the European markets, as I mentioned, coming back on track. We also using some of those benefits of increased revenue and profitability into the company to invest [so that we have all stand] to have a great future in tomorrow.

So all in all, I think we're showing the momentum we want to know. We only know by the end of the quarter how far it takes us because, once again, we are very much depending on the revenue share. But so -- which we have taken a lot of actions in order to continue this trend shift in the right direction.

So by that, we would like to summarize. If you just go to the last slide, please. And we are then ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Christian Hellman of Nordea.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [2]

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All right. Per, Erik, just a question on the U.S., if we can start there.

You mentioned in the quarter that it's 17% of revenues year-to-date. Is it possible to give a number for Q3 or why is the reason why you choose to give a year-to-date figure on U.S.? Just to understand that better.

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Per Hellberg, Catena Media plc - CEO [3]

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Because the business is fluctuating very much quarter-to-quarter and we know that. So there is some others saying that is the year-to-date number.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [4]

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Okay. So it was less than that in Q3 then, I suppose?

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Per Hellberg, Catena Media plc - CEO [5]

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No or vice versa. But the thing is that it's such sudden -- so sudden a changes, so we expect it to move up and down like much in the coming quarters, as we put on business there, that's why we decided to move down the number. But -- and we wanted to show, of course, is that we -- it's becoming a substantial part of our business.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [6]

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Okay. All right. And on the U.S., Erik mentioned in the closing remarks that little bit Q4 versus Q3, you're saying that revenues from the U.S. could potentially be -- it could be up a little bit perhaps but it can also be flat, you say? And I'm just trying to understand that, because I just had a quick look at the -- I mean, we don't have that much number from the U.S. from last year.

But in New Jersey and making adjustment last year, I think revenues were up 30% or something like that. If you look at both sports and casino Q4 versus Q3, so yes, what's your thinking there?

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Per Hellberg, Catena Media plc - CEO [7]

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I think it's important to mention here that the revenues and the handling in U.S. have a completely different kind of game compared to [what we do] because when we get paid the first month when the customer's active, that customer continue to bet for quite some time.

And there, obviously, with more customers coming in all the time and more customers -- historic customers' bets has been to handle that is much faster-growing, then the affiliations, as we only do see playing and have no rev share, we will not follow much the handling for [urban] access. So that's why we see quite big difference from the [see pay] based business comparable or, for example, revenue share business would look like.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [8]

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Right. I understand that. But do you have a rev share license in New Jersey, don't you?

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Per Hellberg, Catena Media plc - CEO [9]

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We do, but we don't do rev share so far. Because basically, the operators don't want to do rev share there so far.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [10]

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Okay. So you're not doing the rev share anywhere in the U.S., basically?

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Per Hellberg, Catena Media plc - CEO [11]

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No, that's correct.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [12]

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Okay. All right. And then just to understand, sort of the -- more in the U.S. You just mentioned Indiana, which are up running. Colorado next year, et cetera.

What's your thinking about U.S. in terms of cost? What's the current cost structure that you have, the team that you have in place? Can they move from state to state or would you have to build more cost given what you know now about sort of the rollout in new states in U.S.?

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Per Hellberg, Catena Media plc - CEO [13]

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The cost predominance becomes -- there are 2 ways we can run product in U.S., either you have a nationwide site and then you put local covenants on that or you have the local base. And as far -- to our knowledge, those customers prefer sites that are very much localized, that's why we've been able to have a good position over there so far. So our strategy is to break into these states with very much local sites, coupled by also the nationwide sites. And the more states being launched, the more power the [nation sites]. But for now, I think combination of both is very, very strong.

So for us, what we need to do is to take the -- for example, the Play brand, where we play Pennsylvania, et cetera, and make a play in whatever states, Play Indiana. So but whatever starts you're looking at, to do, for example, that, and that means local content contributors. That you would need anyway ordering content for nationwide sites. So I think the combination we do here and what we predominately see increase, is keep on doing, call it, the content into this. You will have come -- have to have some account managers as well as there's always a couple of local accounts or accounts in the states you go into.

But I would say -- I would call the investment as very efficient going forward. We don't need that much as we have this there -- good foundation already in place. So I would say that the investment will not -- will be as high as the revenue potential they have. So we should see continued good margin from the U.S. market.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [14]

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Okay. And speaking of margins, if you look at the finance vertical, EBITDA margin, 9%. It's barely making any contribution to profit in terms of revenues. It also quite low [for the] goods. And what you're thinking about the finance vertical? Is it worthwhile keeping it round than low profit contribution? And obviously takes up some management time. And I'm thinking also...

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Per Hellberg, Catena Media plc - CEO [15]

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Of course. When the investments was made in the discount where the idea was not to have that margin. We have these assets now. What we've done here is where we are revitalizing their strategy in order to become much better.

Whether we keep some or whatever what we do with them or the program to becomes something else, is a decision we will communicate, if any, at some time. But in the meantime, what we do is that we are working hard to improve the margin and also making sure that we get traffic from the core where we can get that into the business.

But you're right, it's not the largest part of the business, and means we also need to do that by drastic measures, how we make sure that continues to be more contributor than a way of one.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [16]

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And if you are going to keep it around, sort of what type of margin would you be satisfied with the final vertical? Could you give something? Kind of a -- [outlook] But still particularly, is it seasonal but have then deferred some margin to the rest of the group? Or are there structure sort of...

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Per Hellberg, Catena Media plc - CEO [17]

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[No, no] involvement on right now, okay? Clear?

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [18]

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Okay, okay. And just a final question then for me.

In terms of revenue per NDC, which have a graph on Slide 16 in the slide deck. Could you just -- I mean, it's could come -- Europe, basically, so you follow it for the last couple of quarters, sort of 180, and it's now at 260.

Could you talk a little bit about that? What's your thinking going forward? I mean, obviously, it's being inflated by the U.S. and say, Asia as well, I guess, that's Japan.

What -- I mean how should an external sort of observer look at that graph and try to understand how it's going to sort of be in the future? He's going to come up or where is sort of a more normalizing?

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Per Hellberg, Catena Media plc - CEO [19]

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I think it's a valid question. The reason for that journey is that there's a lot of impacting factors here. A, as we know, we have had a declining business of the legacy markets in Europe. And when that goes down, you will have a mix of higher fee base because you're having a much higher fee base in U.S. and Japan, as you rightfully say. And predict exactly where it's going to be, of course, we cannot be that specific.

But if you [are in the practice], we believe that we will continue to see a higher-than-average CPA in U.S. We know that CPAs in Pennsylvania will be a bit less. The tax is there quite heavy and quite large there compared with other markets. That's still above your, I will say.

So the more U.S. goes, that's a driver to bring it up even though it might not be as steep as before as New York has probably the highest [C base] of all. Japan was a good player values, still not the largest, but we don't foresee that player value to decrease to the more of that kind of business and surrounding market, so we're there, we're landing in. That will also help if C payer levels goes up.

In Europe, we don't foresee C payer levels to go up. In the mainlands, just traditional market. While we -- if you travel a bit more East part in Europe, we can see a good journey there the more market it regulates.

In general, I remind you is like this that we internal forecast a massive increase of this because we want to grow back business elsewhere in Europe in some part, and otherwise, in other places as well where the CPAs are lower than U.S.

So I'm happy to remain at this level, but the NDC amount -- numbers is going up instead, together with increased revenue.

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Christian Hellman, Nordea Markets, Research Division - Director of Small and Mid Cap [20]

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Fine. And then just final question for me. Now in terms of the absolute number of NDCs, it was flat now in Q3 versus Q2 at 100. Undertake -- what's going to be the figure from here going forward? I mean it's been coming down for a number of quarters, obviously on the back of Europe. But now it seems to be leveling out, so that stops -- when do you think we could see growth in this KPI?

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Per Hellberg, Catena Media plc - CEO [21]

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Well, let's break it down, and if we -- looking back what we said in the presentation is that if you look at the European market, it's always a big reason for the decline in NDCs.

The largest driver there has been the casino business, which is now leveling out. But in the quarter, we had obviously a need to do to the marketing [back half] it helped -- it reduces the indices quite a bit, but as I said, that is now repairing.

Germany is very low. A big part of this part because the league there is shutdown until the very end of [the year]. And then we also have problems where we have to stop -- shut down the site. So I think these -- without these, we've of course seen an increase in NDCs. So that's why we believe that, going forward, I'll start to repair these things. We hopefully see an increased level of NDCs going forward, taking everything else in consideration.

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Operator [22]

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Our next question comes from the line of Mikael Laséen of Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [23]

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Yes, I also have a question regarding the U.S. Can you talk about the quarterly variations, maybe in more detail, to help us a bit there? Was Q3 better than Q2? Or was it rough in line?

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Per Hellberg, Catena Media plc - CEO [24]

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So Q3 was better than Q2. If you look at the casino business, this is pretty much stable performance for normally for New Jersey, which is where we had the predominant number of -- numbers coming in from casino.

We know that we could then have casino in Pennsylvania. It started off quite slow due to the number of credits there as well, and it has lower C pay levels by player there due to taxation for casino especially.

But all in all, it helped to drive the business up. The big change, of course, is sports were: a, New Jersey was not as high in that sense as last year, so we had a little bit of a hangover there, but combined with Pennsylvania, we could have better numbers than previous years. So Pennsylvania compensated for a bit of the decline in New Jersey to give us a high number in total for the quarter.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [25]

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Okay, got it. I thought so. Can you also talk about Pennsylvania and the customer activity, [the] broad-based risk? And if you think that you will say similar type of customer activity, as you have seen in Pennsylvania and you have expected previously?

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Per Hellberg, Catena Media plc - CEO [26]

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Yes, it's a bit early to see exactly the -- how the consumer looks like because there's not been that much. But I think the -- we've been able to see also in any state going forward, that if you launch [en banc] for them without key costs for when it happens in the state, if it happened before, you will have that as a major acquisition period because obviously, all operators online will put marketing to the people to know that. And it's something -- again people normally knew this. But enough on that, but historically on -- through legal channels.

And this most likely means that revenues will be a bit up. And the second year of launch year, you could see a bit of this, what we call hangover.

But on the other hand is with Paris itself, from picking up again from that level, we're going to start to go with average business going forward. So everything goes normally when they launched the first year NFL, it can reduce a bit, and from that, obviously it starts to grow.

We have to remember that we've been online now with sports for U.S. for a year in 1, 1.5 states, more or less. It's quite early. Still, based on that, you see something that we believe is the future for all states going and but what we learn by every day.

But so far, in Pennsylvania, the patterns from the players seems rather similar to what we experienced in New Jersey.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [27]

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Okay. The direct costs also, if you can comment on that, in the U.S. I don't think the U.S. margins -- is this an activity that you will continue to do? Or was it just temporary levels drive traffic?

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Per Hellberg, Catena Media plc - CEO [28]

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No. We see it like this, like in everything. In every market we do have investments in DTC, we set typical margin leverage where we don't want to go below because DTC traditional comes with the big players.

But we also see that based on our sites we have, we understand what search words that people search in the other sites and that help us to normally to make bidding on those in an early and efficient manner, so we can get decent margin out there.

As long as that happens without terminating the total or recent total market in the company. We will invest there.

So we will continue with that strategy, but we also want to make sure that we don't invest too heavily in that because the key focus is still a good presence through traditional search engines, but supported by PPC to this level going forward.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [29]

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Okay. And I just want to clarify one thing on Page 25. The summary of all those comments and areas seems to be more or less flat to up, slightly sequentially from Q3.

Is that the correct summary of the slide? Or have I missed something?

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Per Hellberg, Catena Media plc - CEO [30]

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I think what we're trying to say here is that we -- if you consider the pieces that we noticed are the sequential ones to grow, if those are flatlining, but then that they have something else to be -- to move up with that, we have the potential to grow the business, we believe, in Q4. Because we don't foresee anything that will dramatically reduce the business that we've been seeing the previous quarters, rather more than flatlining and help it up a bit like European casino, et cetera.

Then if you take up our outstanding strong growth within sort of Italy, et cetera, we believe that we should be able to, well, program the business to be come up as we have done in Q3.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [31]

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Yes, okay. And couple bit more questions, if I may. So you've talked for quite a long time about improving the traffic website. Can you share some numbers on that, how they are developing?

It looks like revenue outside of the U.S. grew sequentially in Q3, I guess, that, that could be a sign.

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Per Hellberg, Catena Media plc - CEO [32]

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I think what you're looking at -- because if you put them together with our standards in Japan, et cetera, that is an assumption that you are rather correct in. Then of course, in this, when we do a change program, you always have some sites that are performing quite [figuratively] better, some that needs more work.

And in this presentation, we're saying that we're not done yet. We continue to work, but we still have some sites that are not at needed traffic. But in general, for the casino business, we can say that in -- for the total group, we are regenerating better business today in casino. And actually, we did on same period last year. But that is then blended in with U.S., et cetera.

But for the legacy business, as I mentioned, we are -- we're seeing a trend shift. This haven't improved everything much so far. But the signs are there and people working on, we should be able to do so.

But yes, we don't see the same negative impact by the traditional business and the more in the brand.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [33]

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Okay. Great. Final question. On Slide 24, you talk a lot about cost improvement. Do you mean a reduction in cost or just to scale and capitalize on what you have? What's you mean with...

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Per Hellberg, Catena Media plc - CEO [34]

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Our idea is that we want to improve cost percentage more than revenue.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [35]

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So unchanged cost, basically, going forward? That's what you mean?

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Per Hellberg, Catena Media plc - CEO [36]

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Or I mean, improving -- basically be more efficient and cost costs where we can while not impacting the revenue growth.

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Operator [37]

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And our next question comes from the line of Erik Moberg of ABG.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [38]

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Guys, now going back to the U.S. again. In your remarks, you say that the U.S. will be up in Q4. Could you sort of help us with the magnitude, as it is one of the most crucial drivers?

Given that Indiana and Pennsylvania is opening up and you now have 3 strong months in New Jersey, so how should we perceive it? New Jersey will be growing, and then we're adding 2 states with better traction than in Q3?

So does this mean that revenue will grow by say, EUR 500,000 Q-on-Q? Or is it more up towards, say, EUR 1.5 million to EUR 2 million Q-on-Q?

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Per Hellberg, Catena Media plc - CEO [39]

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That -- those details we cannot give.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [40]

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All right. But if you could say you grow, how do you think about the margins Q-on-Q from the U.S.?

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Per Hellberg, Catena Media plc - CEO [41]

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I still see margins that still develop as to. We have -- of course, the thing that can change that is either whether we add a lot of costs in terms of staff, if we look at how much we do in PPC.

I think we should be able to run the business there that comes out with similar margin for us percent-wise than Q3. And as I mentioned, with these things, we have the potential to continue to grow that business in the quarter. But yet again, it all depends how Indiana now play out, because bear in mind that they also went live a bit after the NFL kickoff. So we need to see how that state develops after they are the ones that actually go on live at that stage. So there's a little bit of uncertainties for us exactly how it will play out.

But in general, I think that we should be able to continue a nice quarter in Q4 as well.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [42]

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Okay, fair enough. And then regarding your guidance regarding to the U.S. You communicated that its -- constitutes 17% year-to-date. But looking back at both Q1 and Q2, then does this mean that U.S. in Q3 was above 20% of revenue?

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Per Hellberg, Catena Media plc - CEO [43]

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That we cannot answer, as I said to Christian. But...

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [44]

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Is it like in -- oh, sorry by that. But just in Q3, U.S. was roughly like, 10%, 12%. And then in Q2, it was sort of flattish Q-on-Q. This should mean then that U.S. is about 20%, I assume, right?

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Per Hellberg, Catena Media plc - CEO [45]

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Yes. You're an analyst.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [46]

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Fair enough. But then again, if we assume that you have positive roughly 20% on top line and then we divide the business into 3 parts. You have the legacy business in Europe, you have AskGamblers and then you have the U.S. In that case, it means that the legacy business saw another decline Q-on-Q. Is that a fair assumption?

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Per Hellberg, Catena Media plc - CEO [47]

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No, not really. I think you need to divide it in a couple of things here what you look at because some parts, as I said, they did not increase a lot. But also you need to see the different parts of the things we have. Because I think that when you look at this, you're assuming now that U.S. is 20-something and that has to be your decision, right?

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [48]

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Yes.

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Per Hellberg, Catena Media plc - CEO [49]

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The thing we can say is that we are now starting to change the sites here that have declined a lot and starting leveling out. Some products are not leveling out yet, as I said, that's why we're doing revisions, while some are coming back quite nicely, just after we build again.

So more or less, legacy business more or less flatlining in that sense.

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Erik Moberg, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [50]

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Okay. But looking, seasonality, Q3, Q4, if we exclude U.S. completely, how much of seasonality give the legacy business, theoretically, from Q3 to Q4, given all 3 equal, all the changes and all [possibilities] et cetera, including that?

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Per Hellberg, Catena Media plc - CEO [51]

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Yes. We cannot give you precise number there, so we don't guide that detail because you can also have variations, of course, in manufacturers here. But I think you just need to look at the normal operator business here. In that part of the world, we have more blend of, obviously, revenue share. And as well, with the operators, seasonality difference could be in a quarter like Q4 to Q3, and I wouldn't say that we would do much different from that.

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Operator [52]

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(Operator Instructions) We have one further question coming through, and the question comes from the line of [Bill Radvar] of Clear Capital.

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Unidentified Analyst, [53]

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So 2 questions, if I may. Could you walk us through the reason behind the postponement of the U.S. earnout? And so why it changed? And I also assume that there were some changes to the terms of the earnout payment.

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Erik Edeen, Catena Media plc - Interim Group CFO [54]

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Well, the U.S. earnout hasn't changed. We are taking over the business and integrating till end of October, so it still remains the same. But we haven't earlier announced the payment date when those -- when that actually will be settled. And now we say that it will be during the first half of 2020. It's just us that haven't told the contract details before. So no changes.

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Unidentified Analyst, [55]

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I think -- because I think the previous press release you sent out last year suggests that you could pay up to 70% of the earnout in cash, but -- sorry, in shares. And the -- what you're saying now is 60%, right?

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Erik Edeen, Catena Media plc - Interim Group CFO [56]

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But we also say that majority of that amount relates to U.S. assets, and U.S. assets includes BonusSeeker as well not just the Eagle that we said in the press release could be paid up to 7%.

I think we said something else in the BonusSeeker press release. And there is also some other minor acquisitions in that amount of EUR 23.4 million, so that, all together, gives approximately [60%].

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Unidentified Analyst, [57]

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Okay. And also, I know that you made an adjustment of EUR 50 million in Q3 versus Q2 besides the sort of actual payout paybacks. Could you elaborate a little bit more what those adjustments were?

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Erik Edeen, Catena Media plc - Interim Group CFO [58]

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Correct. So we've been down into the details in the disclosures of the report where you can something like EUR 14 million in change in estimates, as we call it. That is, of course, partly -- or a large part of it is related to the [payback] renegotiation that came out very positive for us.

The other part is change in estimates and change in estimates we do continuously, dependent on the underlying performance of the assets and what we believe at a certain point, and that is up on a quarterly basis.

And in some cases and in some of the agreements, there could be quite some fluctuations with minor performance adjustments. So therefore, we have some fluctuations in those numbers.

One is, of course, related to the U.S. And as Per mentioned here earlier, we expected Pennsylvania to open up earlier and we expected higher revenues from Pennsylvania compared to where we are today. That gives us changing estimate on that assets, for instance, and there are others as well.

So a lot of different aspects to put into that number and the changing estimates.

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Unidentified Analyst, [59]

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Okay. And then one final correction. So the bond matures in early 2021, right? And considering that you will have the final U.S. earnout payment in the first half of 2020, when can we expect you to present a new financing alternative to the bond?

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Erik Edeen, Catena Media plc - Interim Group CFO [60]

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That we do not comment to the market. No, not at this stage, but we will come back and update on that later.

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Operator [61]

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And we've had one final question come through. That's from the line of Mikael Laséen of Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [62]

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Yes. So was curious about the working capital increase you had in Q3. Was this related? I assume the U.S. increased late in the quarter. Should we expect that to reverse in Q4?

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Erik Edeen, Catena Media plc - Interim Group CFO [63]

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Well, very good question. I mean we don't guide on those numbers going forward, as it's very difficult to predict the cash flow.

But yes, you're making an assumption. There are several bits and pieces being part of that positive effect, as you can see there. And the U.S. is, of course, one part of it.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [64]

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Well, but nothing else has happened really in the business. Is there a struggle? Normal changes on a monthly basis, I guess?

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Erik Edeen, Catena Media plc - Interim Group CFO [65]

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Normal changes. And as you can see, I mean, of course, growing the business from the second quarter to the third quarter and gives a positive effect. And that is what partly what we can see here. Have I answered that?

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [66]

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Yes, got it.

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Operator [67]

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And as there are no further questions on the line, I'll hand back to our speakers for the closing comments.

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Unidentified Company Representative, [68]

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Yes. We do have a number of questions from the webcast. And we start with one coming in related to larger sites and assets.

How do you see on the write-down on smaller acquired American assets that now does not have financial benefit in future expectations they have before?

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Per Hellberg, Catena Media plc - CEO [69]

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Yes. I think the -- what we decided to do when we focus on the core is how we focus on investing going core sites for the future does not predominantly mean that the other ones will lose in revenue or in profitability, because what we do with the remaining ones we put in the so-called long-tail portfolio where we can run them very efficiently with less staff than we already have and update them. And so the idea is that we will maintain the revenue as long as we can and profitability from there.

If at some point in the future, we will decide to not have our orders up and down. But we will need to discuss our orders at backlog. But from now on, we don't have any information on this one when we do write-downs. Are there any more or no?

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Unidentified Company Representative, [70]

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And from the same questioner is, "How is the situation on the personnel side? Are you looking to put more key persons now like acquisitions in the past, or it's the same?"

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Per Hellberg, Catena Media plc - CEO [71]

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I think it's a very good question, which we need to elaborate a bit. When you acquire a site, you're extremely dependent on these key people because typically, they may not know the earnout scheme, meaning that they come in with their product, with their programming, with their customer relations to run the business and we will take it over.

In many cases, we need to bring that site from their technology platform into ours and when that have happened, the sellers' technical skills on running the platform as such is no longer valid because of different platforms.

They also then try to bring in the sales pattern into our key account management where we tend to go to operations sell and campaign some more sites than one. And of course, where there's a good accounts that they used to have some special focus, we're trying to maintain that. But otherwise, we sell them also in a different way. And with the sell scheme and the technical scheme change, it's a way where we then start to operate them more in term of the container portfolio rather than the old one. And in that case, we decide whether we believe that key persons from the seller side is the one to continue.

If we believe to have a good match, we try to do so, otherwise, we depart from each other and do that.

In general, we're trying to make less -- depending on less people going forward. History, we had too much, depends on certain key rules in the company were very hard always to have a good second-in-command. And also shift around, so we can operate it more on a kind of central base rather than mainly depending on some persons.

So yes, we are trying to reduce that dependence over time.

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Unidentified Company Representative, [72]

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Okay. Now there's a question related to product development and sort of -- he has mentioned in a sports book product like AskGamblers, but for [score] in a couple of quarters. How that's growing and what can we see-- when can we see the product in the market?

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Per Hellberg, Catena Media plc - CEO [73]

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Well, that will be released. We will not see for when still, but the reason why is that with the things that we have explained here is that we have a lot of things to improve in the common currency, and doing those adjustments and improving the margin in this as our key priority.

At the same time, we're of course working on tomorrow, I mean, what markets we should go into and what kind of price was launched there. But when and what we've going to release, nothing we can comment on right now.

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Unidentified Company Representative, [74]

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Okay. And when can we expect new markets for AskGamblers?

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Per Hellberg, Catena Media plc - CEO [75]

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We're -- coming back to the same thing, we will inform. But as I mentioned every time, to potentially roll out something in Q4 already.

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Unidentified Company Representative, [76]

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Okay. Thank you then. Okay. I think that was it with the questions on the webcast, and thank you for today.

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Erik Edeen, Catena Media plc - Interim Group CFO [77]

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Thank you very much.

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Per Hellberg, Catena Media plc - CEO [78]

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Thank you.