Adtraction Group AB

Hello and welcome to the presentation of Attraction's first quarter results. Today's presenters are Andreas Hagström, CFO, and myself. My name is Simon Gustafsson. I'm the CEO and one of the founders. As usual, we have received some questions in advance via email that we will try to answer. But if you have more questions from this point onwards, please use the chat function that you will find below the screen that you're watching. Andreas and I will try to address that. I usually start these presentations by talking about the state of attraction, and this is exactly what I will do in a minute or so. However, I first want to give some background to the report. I would say that in Q1, we have faced some very challenging market conditions in many geographies. I also think it's fair to say that management has spent A lot of time on integration and reorganization issues following the service merger. And a lot of tech resources have been spent on migration. So with that background, I think that our Q1 performance actually is acceptable. We still deliver on our key metrics, gross profit growth, profitability, and cash flows. And to me, this shows the strength in our business model. If we can deliver like this now in a challenging quarter, I think that we can do much, much more when conditions are more favorable. So I just wanted to give that background. And with that, I'll jump into the state of attraction, as I like to call it. So in Q1, we grew the gross profit by 9%. That is acquired growth, all of it, essentially. This, of course, means that we're increasing our gross margin. And what we're doing here is we're trying to focus on that, on improving our gross margin, and we're trying to close accounts that are not profitable, etc. And I think that the improved margin is a result of that work. Profitability is also increasing. We saw a 9% increase in EBITDA. from 9.7 to 10.6 million. And margin was 3.7. So the EBITDA margin is lower than we saw in Q3 and Q4. And there's essentially two explanations for that. First of all, it's a weak market and weak quarter. Secondly, there's some seasonality when it comes to the margins, which I will show in a minute. We're also generating cash, 2.7 million cash from operations in the quarter. This is lower also than in Q3 and Q4, but this is also part of seasonality. And Andreas has some very nice graphs illustrating these points, which he will show later on. We've started paying dividend again. The first tranche was paid a few weeks ago and the second tranche will be paid later this year. We have appointed Johanna Olsson as chief commercial officer. Johanna has a long background with attraction. She's been with us 10 or 11 years. She's been responsible for building the Swedish and the Nordic e-commerce vertical. And now she will be responsible for all sales and gross profit of attraction. Her focus is sales, sales process, sales training, and of course, international coordination. Further, we've seen e-commerce growth in most markets. Again, Andreas will dig down a little bit deeper into this, but we're not growing in all markets. I think the Swedish market stands out there, where we've had some very challenging market conditions. Also, it's the same story as we talked about in our last report, that the market for consumer credits has been weak. Klara Lohn has been divested. I think that we've talked a lot about that before. We've issued many press releases, so I will not spend a lot of time on that. I will just say this. Klara Lohn had sales of around 30 million in 2023 and an EBIT of around 1 million or slightly less than 1 million. Going forward, that will not be included in attractions reporting, and we will provide all data needed to do a proper analysis. But we will start with that in the next quarter. Our current focus is fairly simple. We need to go back to growth for teams with negative growth, and there are many ways of doing this. So of course, we're trying to win new accounts. We're trying to expand the partner universe. But I think above all, we're trying to activate our current portfolio of advertisers. So this is a strong focus for us now. Of course, we're also finalizing Project X, the one platform project, and I will give some more details about that later on in the presentation. So I think that this slide illustrates the fact that Attraction is doing well. We are growing our gross profit, rolling 12 months. We're growing our EBIT A, rolling 12 months. margins actually are fairly stable. This leads me into our business model. Why is it that our business model can deliver like this over time? I will now present this in a slightly different way than I have before, just to give you a new angle on things. Partner marketing involves three parties. It's the platform or the network, in our case attraction. It's the brand, or e-commerce company that want to increase their sales and ideally only pay for results. And it's the partners, which are sites or other digital services that want to monetize their traffic and content. So these are the participants in the value chain. You may recognize this picture, I've talked about it before, and now I will give an example. So let's say that we are Allermedia and we have a site called Elle. Mainly a female audience who may be interested in health and beauty products. So what Aller Media will do is that they will go ahead and create an account for Attraction. They will browse through Attraction's portfolio of advertisers and perhaps they will find Lyko. Lyko seems to be a good fit with Aller's audience. So they will go ahead and extract some tracking links for ads from Attraction's platform. They will present that on their site. user will come by, click on that ad or link and go to Lyko and buy something. Lyko will be happy because the sale was generated and Lyko will pay a commission for that sale. Lyko is happy because their marketing spend here was 100% efficient. They only pay for an actual order. The partner In this case, Aller is happy because they provided a good service for their users and they also made a commission. Attraction is of course also happy because we helped our advertiser and our partner reach some of their business goals and we also made a commission. So what Attraction does in our platform is we match advertisers and partners. We provide tracking that is which clicks result in a sale or an order. We manage payments and invoicing and also on top of all of this we provide services and the services are really about account optimization what is the right mix of partners and what are the right commission levels we know this because we're very experienced in this industry and this slide shows the different groups of partners i will not go into this in great detail i will just say that we're this is how we classify different partners. There's a wealth of partners depending on the advertisers need. I will say this though, the most important partner category for e-commerce is by far content marketing. And this is a category that is under constant development. I think this is a super nice way of showing the strength of our business model. So let's say that I am Lyko and let's assume that I need around 900 partners to achieve my business goals and generate the sales that I need. If I try to do this with attraction, I will of course need to set up 900 agreements. I will need to arrange tracking and payment solutions. And obviously this would be inefficient and time consuming. So what Lyko instead does is make an agreement with attraction and then they can immediately access 900 partners. I think this makes a lot of sense. And if you look at it from the other perspective, let's say that Allermedia wants to work with Not only Lyko, but many other advertisers. Then they could try and make agreements with all of those advertisers. Again, this would be very time consuming and inefficient. What they instead do is create an account with Attraction and they will immediately be able to access thousands of advertisers. And if we combine these two things, we get these beautiful pictures. So we did a little exercise last year where we looked at the number of one-to-one relationships between partners and advertisers. And it turns out that there are 130,000 connections between partners and advertisers. And if it weren't for attraction, we would need 130,000 agreements and 130,000 solutions for payments and tracking. Because we have attraction, things look a lot more beautiful. We only need 10,000 partner agreements and we need 2,300 agreements with advertisers. And then attraction will connect all of these partners to each other. I think that this model makes a lot of sense, and I think that this is a very good way of explaining what it is that we do. So then the question is, how does partner marketing fit into the marketing mix of a brand? And I think what's going on in Sweden, Nordics and actually most countries is that Many e-commerce companies are very dependent on Google and other platform companies, especially Google, actually. And what happens is that you can get a certain volume from Google at a reasonable price, but if you want to scale beyond that volume, the click cost will increase, the customer acquisition cost will increase. And this is what a lot of e-commerce companies have experienced. They're paying more to Google and other platform companies, but they're not getting more in return. And the solution for this is to work with partner marketing. It's possible to scale volume if you work with many smaller sites. And we have illustrated this at the bottom of this chart. And again, this looks a little bit complicated, but as I've just explained, if e-commerce companies interact with attraction instead, partner market is a straightforward and actually simple solution to some of their problems. Because our business model is great, we can also have ambitious goals. So we want to grow by more than 20%, and we want to have an EBITDA of more than 7%. And I have commented on our ability to reach those goals in the last quarters, and I will continue to do so. So if you look at this chart, Q1 does not look very encouraging. We're actually seeing a negative sales growth in Q1. Then the question is, what will happen over time? Personally, I think that of course we will And I think that we have a history that demonstrates our ability to deliver growth. We've seen some dips before, but on average, we're always beating our growth targets over time. And I also want to emphasize that we are prioritizing growth over profitability. This is the focus. This is what we want to do going forward. This is another way of illustrating that Attraction is a fairly stable company. This is the rolling 12 month sales. I think that some of you may remember that we saw an EBITDA margin increase in Q3 and Q4, and that resulted in an EBITDA of 5.5% last year. And this graph shows the EBITDA over the last five years. years or so. Of course, our ambition is to increase that to 7%, and we were not even close to 7% this quarter. As I explained before, there have been some challenges and the margin ended up at 3.7%. Now, this is again connected to some challenging market conditions, but it's actually also connected to seasonality. Margins in Q1 are typically lower than margins the other air quarters. That's just how it is. That's a feature of our business model. And our strategy to grow is based on a couple of things. So we still see some acquired growth from ad service. That's 10% gross profit growth. That is not sales. So 10% gross profit growth has been acquired. And in existing markets, we're not growing our gross profit. This is of course not satisfying, and our focus is to return to growth. At some point, we will obviously be helped by the markets also. This is a graph that I have shown for a while now, and I think this, because the number of employees is actually nicely correlated to the cost base, the number one cost of attraction is the cost of employees. So what has happened here is that we expanded massively for many quarters, then the markets have slowed down a little bit, and it made less sense for us to hire aggressively. On top of that, we have done some reorganizations following the merger with an ad service, and some people have left our group. We now have, I think, the right number of employees, In a couple of quarters, I would expect us to start hiring again when we feel that the time is right for that. In the Q4 earnings call, I said that the cost base would be slightly higher than in Q4. That is the cost base of Q1 would be slightly higher than in Q4. This is exactly what happened a couple of hundred thousand And this is also what we expect going forward, a relatively stable cost base. So with that, I will turn the microphone to Andreas, who will present the financial session section.

All right. Thank you. And I just want to start with saying that from this quarter is the last one that we will see acquired growth from ad service as the numbers will be fully consolidated from the Q4 in the comparison numbers. Let's start with the net sales. We have 290 million in the quarter. That's a 1% negative growth and 12% negative organic growth. Looking at the gross profit, it's 57 million in the quarter. That's 9% growth and 1% negative organic growth. As you can see here and Simon previously mentioned, that of course means that we have a higher gross margin in the quarter, mainly driven by a different product mix and high focus on higher gross margin clients from our perspective. Looking at the EBITDA, we have 10.6 million. That is an increase by 9%. We also increased the EBITDA margin from 3.3% to 3.7. Simon also mentioned that we have a stable cost base in comparing Q4 to Q1. That is also what we expect in the coming quarters. We will also see a slight positive a seasonality effect with the vacation pay in Q2 and Q3, which will be given a lower cost base as well, reported. And the adjusted net result per SEER is 0.5 Swedish kronor. That is a 13% increase. And the adjusted net result is also what we're talking about in our dividend policy, where we say that we're going to distribute 30 to 60% annually. Looking into the verticals, starting with the e-commerce vertical, it's 29.5 million in gross profit. That's a 5% growth, 1% negative organic growth. And as you can see here, we're growing on most of our markets. And what's holding the growth down a little bit in e-commerce is individual bigger markets that face more challenging market conditions. But we can also say something positive regarding the e-commerce vertical, and that is that we get more positive conversations with advertisers that actually want to get more business into their partner verticals as well. In the finance vertical, we see 24.3 million in gross profit. That's 15% growth, 3% negative organic growth. And we've been in this vertical for a long time, so we're used to see more volatility from this vertical. We feel secure in this, and we're very committed to this vertical. We will keep making good deals with advertisers and partners to help them grow their business. And we will also, when the market conditions change, be seeing good growth in the finance vertical. And in the other vertical, this is the majority of Clara Loan, and we have 3.1 million in gross profit, 4% growth. And what you can expect here going forward is and from the divestment of Clara Loan is more effect on the gross profit level than on the EBIT level. As Simon mentioned, we have had a 1 million more or less EBIT in Clara Loan in the full year of 23. Looking at the geographies, starting with Nordics, we have 42.3 million in gross profit. That's 7% growth, minus 4% organic growth, And as you know, we are the undisputed market leader in the Nordics that of course give us more challenges to grow in negative market conditions. But we also feel that we are very strong positioned within the e-commerce vertical that we all can agree on that we will see underlying growth going forward for many years. And if we also look historically at the finance vertical, that is also true for that. Vertical. Looking into Europe, where we are more of the challenger, therefore also see higher growth, we have 14.5 million in gross profit. That's 17% growth and 6% growth organically. Here we grow in most of our markets as well. Then looking at the cash flow, the operational cash flow is at 2.6 million. Here we have an effect from the partner payments, and I will show you that in the next slide. seasonality effects. Looking at the investing activities, we have a negative effect of 2.3 million coming from the divested Clara loan. And that is due to the written a vendor note that the buyer will pay over time. We have finance activities of minus 0.6 million. That is a dividend coming from a to a minority shareholder in one of our subsidiaries. That gives a total cash flow of minus 0.2 million in the quarter and a very strong net cash position of 117 million going out of the quarter. And I will also add here that we are free of interest bearing debt. So attraction has a really strong financial position. So this is the seasonality of our cash flow. As you can see here, the Q4 really sticks out. That's where we're generating most of our operational cash flow. This has to do with the fluctuations in our working capital and mainly due to our payment model. Typically, attraction gets paid from our advertisers before we pay our partners. And we also have a very strong Q4. We get paid in Q4 and then we pay the partners in January, February of Q1. So Q1 and Q2 are generally not so good from a cash flow perspective. Q4 is where we generate most of our operational cash flow. And then last time, we looked at the pro forma combined financials attraction and ad service. And as we previously mentioned, the gross profit has declined 1% to 56.8 million. And the slight increase in the cost base, of course, then gives us a slightly lower EBITDA.

So thank you, Andreas. I have a few more slides that I will go through before we go to the Q&A session. Project X is the one platform project. I would say that this has been very successful for us. We have a great tech team in Aarhus, Denmark, under the lead of Fyre Call Squad, who has been responsible for this project. we have done most of the migration. So two countries or so remain and we expect to finalize that process in the next few weeks. So when we start reporting Q3, we will be one company and one platform with the perfect alignment everywhere. And I think that Project X has been good for us. Because our tech team is so good, the main challenge has not been migration. The main challenge has been to find the appropriate strategy that needed to take a little bit of time. But now everyone in management and everyone else in the organizations are in agreement that this is the way to go. So what's happening now? Well, we have some indications about Q2. April was not an amazing month in any way. We saw small negative growth, basically in line with what we saw in Q1. We also know that we will continue to deliver profitability and cash flows. I think that there are some encouraging signs in the market. We see more positive dialogues with advertisers and a new advertisers win in the Swedish market, which has been a bit slow for a while for us. The project for us now is to finalize project X or the one platform strategy. This is of course super important. We're also very focused on getting back to growth and growing our market shares in Europe. So that message is relatively simple and straightforward, I think. So with that, we will jump in to some questions. And I will start by looking at some questions that we received via email. So the first question is this. What results do we see from the one platform strategy where we have already moved ad service traffic to attraction? I think it's a little bit early to answer that question, but I think that internally we've seen some very nice effects because we are now perfectly aligned. We are working towards the same goals and we know exactly which platform we will use for each advertiser. So I think that's helping us sort out some internal questions. Then there's a question about our current focus now that the migration has been or will be finalized soon. And I think I answered that. The main focus is back to growth. That's where we need to be. And we need to be much bigger in European markets. Then there's a specific question about the development in France, Italy and Spain. And I think that Spain looks much more encouraging now than it did last year. I think that We have a strategy now where we will try to grow also in e-commerce, and I think they're encouraging signs in the finance market. And just to be clear, Spain has always been a profitable and good market for attraction, but we've had some challenges with growth for a while. I think that Italy is developing very nicely. I expect that we will cover costs there fairly soon. And I think that we're also making good progress France with the great French team. I will not go to any more detail about those markets but I will say that we remain committed to those markets and they're very important for our overall strategy. Then there's questions about how we will report going forward because you know in throughout 2023 we talked a lot about ad service and made a report of that separately. Obviously we'll not do that going forward because there's simply no way to tell what is ad service and what is attraction. So what we'll do is we'll stick to our normal reporting. We'll report e-commerce, finance and other. And so you should recognize that going forward. Then there's Question, if we have anything new to report on the acquisition side? Well, not really. Obviously, we try to have dialogues at all times, but I think what we said before is still true. It always takes a little bit of time to close transactions. I would say that there are some interesting opportunities out there, but I don't have anything more specific to add there. Then we have a question about how's the company that's working with subscription services doing? That is Bundler. Bundler is doing great. Bundler is winning a lot of new merchants and a lot of new acquirers and we see month-on-month growth there which is very encouraging. What's even more encouraging is that They're doing business internationally, and they are building a very nice infrastructure of API connections. Just to be clear, Bundler is still small, and Bundler will not have an impact on Attractions Financials for a while, but I think that the future for Bundler is super promising and super exciting, and they have a great business model. Then there's questions about the number of employees. Would you like to address that, Andreas?

Yes. So the question is, you have an ingoing number of employees of 126, outgoing of 123, and then an average of 128. And the question is, could this be right? And yes, it is, because most of the employees worked the full quarter, and then we had some people ending employment at the end of March. So what we want to do with this number is to actually give an indication on the cost base for the coming quarter. That's why we show the outgoing number of employees to get an indication of which way cost base.

All right thanks Andreas. Then there's a question about the different verticals that we report if we will make that available for previous quarters, and I think it is available. If you just look in the previous report, you will find finance and e-commerce in each report for each quarter. Then there's a question about, is project A still a hurdle to focus on M&A growth? I would say no, because we're going to finalize this within a few weeks. We have learned a lot, and we're actually very confident about our ability to to migrate traffic from other platforms. So let's say that we do another acquisition, then we know exactly how the migration process should look like. So we've learned a lot. We've done this three times now. This is not to say that whenever we acquire a company that the right strategy is to migrate traffic to attractions platform. In a lot of cases, that is the right strategy, perhaps in most cases, which we've demonstrated because we've now done it three times, but that's not always going to be the case. We need to look at each specific case and then do what makes sense. So there seems to be no more questions. I thank all of you for listening and I'm looking forward to talk again in a quarter or so. So have a good day, everyone.